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Petar Sarcevic & Paul Volken eds., International Sale of Goods: Dubrovnik Lectures, Oceana (1986) Ch. 3, 55-110. Reproduced with permission of Oceana Publications.

Usages of Trade and Other Autonomous Rules of International Trade According to the UN (1980) Sales Convention

Aleksandar Goldstajn
Professor of Law, Zagreb

I.   Introductory Remarks
II.  Prerequisites of the Modern Lex Mercatoria
       1. Economic background
       2. Legal factors
III. The Content of the Law of International Trade - Lex Mercatoria
       1. Denomination
       2. The content of lex mercatoria
IV. The New International Economic Order and Lex Mercatoria
V.  Lex Mercatoria as Positive Law
       1. Lex mercatoria - transnational law of commercial transactions
       2. Lex mercatoria and positive law
VI. The Structure of the UN Sales Convention
       1. The contract
       2. Basic legal characteristics of the Convention
       3. Usages of trade and trade practices
       4. Hierarchical ranking of the sources of lex mercatoria
VII. Lex Mercatoria and the General Theory of Law

I. Introductory Remarks

The United Nations Convention on the International Sale of Goods (1980), although formally confined to contracts for the international sale of goods, contains provisions which could be applied to all kinds of international commercial transactions. There are two reasons for this view. The first is that this Convention, which deals with international commercial contracts, includes some general provisions that in domestic legislation belong to the general part of the law of contract. This approach was necessary in order to provide the Convention with a minimum of general rules and to enable it to function in a special field. This was achieved by the inclusion of two solutions in the "General Provisions" of the Convention -- one concerning the interpretation of the Convention (Art. 7(1)), and the other dealing with the substantial problems of the applicable law and the interpretation of contracts (Art. 7(2), Art. 8, and Art. 9). These solutions [page 56] exceed the framework of contracts of international sale of goods.

The second reason is that this way of introducing rules of general significance for all international commercial contracts will, in my opinion, be necessary until a general code of the law of contract pertaining to international trade transactions has been adopted.

If we compare changes in the regulation of trade usages or the definitions of what is considered to be an international sale under the Hague Sale Conventions (1964) and the 1980 UN Convention, it can be noted that a step-by-step approach has been used to achieve solutions of general significance in recent developments.

My second remark concerns the title of my contribution: "Usages and Other Autonomous Rules of International Trade." Usages of trade constitute an essential part of the autonomous rules of international trade. The reason for their being emphasized in the text of the Convention and regulated separately lies in the fact that usages of trade are interpreted differently in domestic laws, even though the actual business practice is identical. In the preparatory stages preceding adoption of the Hague Conventions and the 1980 UN Convention, special attention was devoted to trade usages. The formulation accepted in the Convention will need theoretical explanations, and practice will show to what extent consensus has been achieved internationally. This is due to differences in the legal traditions of individual legal systems and recently also to the doubts that the developing countries have displayed in usages of trade. There is, therefore, nothing unusual in the statement made by Professor Honnold: [page 57]

"... One of the most important features of the Convention is the legal effect it gives to commercial usages and practices."[1]

The Convention will give legal writers, especially those concerned with arbitral case law, an opportunity to clarify and do away with some of the doubts the developing countries have in regard to usages of trade applicable to international commercial contracts.

My third remark relates to the significance of the Convention in the sense that it constitutes the first step towards global unification of the law of international trade to the extent to which this can be achieved by conventions. The role of the Convention will be to serve as a "background" law for international contracts of sale, instead of various national systems.[2]

The fact that the Convention was adopted indicates implicitly that UNCITRAL succeeded in achieving world-wide cooperation in the field of the international law of commercial contract. Its adoption justifies the conclusion that in global terms the political, ideological and juridical impediments that acted as doctrinal and political obstacles to international cooperation in the creation of a world legal order in the field of commercial transactions have been removed. As Professor Schmitthoff stated:

"The ideological and economic division of the world would not provide an obstacle. The successful cooperation of countries of different social ideology and in a different stage of economic and industrial development within the framework of UNCITRAL proves this. Faithful to its original brief, UNCITRAL has restricted itself to the [page 58] technical task of removing legal barriers to the flow of international trade and has been little affected by the divisive effect of politics."[3]

During preparation of the Draft Convention, in connection with a few points, it was suggested that the interests of industrial and developing countries called for different rules. These rules -- as Professor Honnold stated -- arose in surprisingly technical settings. Happily, the delegates finally found acceptable solutions even to these problems.[4]

The adoption of the Convention has not fully removed different viewpoints on the suitability of uniform legal methods for all societies. It will therefore be necessary to examine the justifiability of the reservations made in regard to usages of trade and the method applied during preparation of the Convention, i.e. whether a convention which only contains optional rules is a satisfactory way of establishing a global system of international law of contract for commercial transactions. This question implies that the issue of freedom of contract, or the autonomy of the parties' will, was a crucial problem which the Convention solved by making all its provisions optional. This problem is important because the view was expressed that the Convention should also contain mandatory rules. These issues were taken into consideration during discussions on the possibility of establishing a uniform legal system for international commercial transactions. As a result, extensive agreement has been reached between Eastern and Western legal scholars regarding the prospects of the law of international trade. This interplay of legal schools has made it possible for UNCITRAL to achieve cooperation in all regions of the world. [page 59]

Finally, the modern lex mercatoria has not yet found a satisfactory place in legal writing. Contrary to developed business practice, classical textbooks are rather late in this respect, sticking mainly to the traditional doctrine about the sources of commercial law and law in general. Many textbooks have still not gone beyond the framework set by municipal rules, thus ignoring the fact that practice has developed innominate contracts, i.e. types of contracts that do not exist in any national law, although quantitatively such contracts by far exceed the number of nominate contracts regulated by national laws, and, in terms of economic significance, play an exceptional role in domestic trade, especially international commerce. This was noted more than half a century ago by Rabel,[5] who drew attention to the now well-known fact that not infrequently domestic laws exist only on paper. The practice has bypassed them as the result of usages of trade and commercial practices thanks to freedom of contracting.

Significant contracts, such as leasing, factoring and franchising, and numerous types of contracts in the spheres of banking, insurance, maritime affairs, oil and gas, and film making show a great degree of similarity. In the practice they have spread far beyond their countries of origin (frequently the U.S.A.). These contracts are economically much more significant than many types of contracts regulated by national laws, e.g., leasing contracts or contracts of goods inspection,[6] and thereby contribute to the security of the contracting parties in international sales.

This flaw in legal writing is being gradually eliminated by leading writers in the field of the law of international trade. "Novelty is always a [page 60] painful experience to the lawyer who traditionally has a conservative outlook. But the international lawyer can fulfill his function of assisting international business only if he is fully aware of the developing tendencies of the modern world" (Schmitthoff).[7] The general theory of law formed during the period of "nationalization" of the medieval lex mercatoria takes modern developments into account. This, in turn, raises the question of the limits of national legislations in regulating the law of international trade. Indeed, if we have a look at textbooks, we cannot but notice that most of them ignore international trade practice, which leads to discrepancies between living law and the law found in statutes and books. Antiquated municipal laws, on the one hand, and legal doctrine, on the other, confine themselves to legal problems concerning the so-called special part of the law of contract in the continental system, to nominate contracts, i.e. to those which were and still are regulated by actual laws of contract. These laws do not include the varied and numerous contracts established by modern business practice, which have not been incorporated into municipal laws for reasons we shall discuss below. Therefore, the obsolete provisions of municipal laws, with rare exceptions, such as the United States Uniform Commercial Code and the writings based on such provisions, cannot satisfy the needs of modern international business transactions. What is more, judicial case law has contributed but little to the development of municipal laws due to the fact that business circles prefer arbitration as a method of solving commercial disputes. Arbitral case law, however, has only recently become accessible to the public [page 61] and is gradually attracting the interest of legal writers.[8]

II. Prerequisites of the Modern Lex Mercatoria

1. Economic Background

Regardless of the economic order of individual countries and differences in social systems, the view has generally been accepted that international trade functions within the framework of market economies. The world market is based on market business methods. Countries with centrally planned economies have resigned themselves to the fact that international commercial relations remain subject to the rules of market economies. Big enterprises specialized in individual branches have a monopoly on foreign trade.

On the other hand, developing countries do not have a uniform economic and legal system, as do countries with centrally planned economies.

For the purposes of foreign trade, all countries have accepted the legal concept of freedom of contracting and use enterprises as the legal form of contracting parties. The concept of corporation and enterprise, as the forms in which parties enter into individual commercial transactions, includes the notion of legal person, separate from and independent of its incorporators. The concept of legal person is known world-wide and is the "universally accepted heritage of mankind" (Schmitthoff). In market economy countries this concept is based on the economic and philosophical concepts of their social order, and in planned economies state-owned enterprises are separate from their incorporators. [page 62]

2. Legal Factors

Almost 25 years ago I wrote in an article "The New Law Merchant":

"Notwithstanding the differences in the political, economic and legal systems of the world, a new law merchant is rapidly developing inthe world of international trade. It is time that recognition be given to the existence of an autonomous commercial law that has grown independent of the national systems of law."

I further stated:

"Two legal factors have made this development possible: the optional character of the law relating to the purchase and sa1e of goods, and the ever-growing use of arbitration in commercial disputes. The optional nature of commercial law isdue to the fact that that branch isfounded on the autonomy of parties' will -- freedom of contracting enables those engaged ininternational trade to overcome the historical peculiarities of the various national systems of law."[9]

In my report at the Colloquium of Experts on the New Sources of the Law of International Trade held in London (1962) within the framework of the International Association of Legal Science under the auspices of UNESCO, I stated as follows:

"The law governing trade transactions is neither capitalist nor socialist; it is a means to an end, and, therefore, the fact that the beneficiaries of such transactions are different in this or [page 63] that country is no obstacle to the development of international trade."[10 ]

This statement was made at a time when international legal experts were preoccupied with East-West relations. As a result of the London Colloquium, at which basic questions concerning the genesis, content and development of the law of international trade were discussed, extensive agreement was reached between Eastern and Western scholars regarding the prospects of the law of international trade. Professor Schmitthoff was right in saying:

"In the 1950s and 1960s, when lawyers from countries of different economic structure and in different stages of economic development met at international conferences an important discovery, (emphasis added) was made: the legal techniques of carrying on international trade are the same everywhere, irrespective of the political, ideological or economic orientation of the countries in question."[11]

Professor Schmithoff's General Report "The Law of International Trade, Its Growth, Formulation and Operation,"[12] which he presented at the London Colloquium, marked the beginning of a new era that can be characterized as the "rediscovery of the international character of commercial law" (Schmitthoff).

The optional character of municipal laws, with exceptional state interference by invocation of ordre public, is the legal expression of market economies. For this reason, the UN Sales Convention (1980) has only non-mandatory rules. As the result of economic competition on the free international market, new types of contracts are being created, either completely original or in combination [page 64] with the existing types of nominate and/or innominate contracts, one of whose significant features iscomplexity.[13]

In view of the nature of international commercial contracts, it follows that this kind of transaction belongs to the sphere of private law. As was stated in the Report of the Secretary General of the United Nations on the Progressive Development of the Law of International Trade, the expression "the law of International Trade" may be defined as the body of rules governing commercial relationships of a private law nature involving different countries.[14]

The reasons for the universal similarity of the law of international trade lies inthe fact that this branch of law isbased on three fundamental propositions:

(i) The principle of autonomy of the parties' will;
(ii) That contracts must be faithfully fulfilled (pacta sunt servanda);
(iii) The use of arbitration.

In the microsphere of international trade, including commercial transactions between independent enterprises, commodity-money relations are known to have existed under different social systems long before the emergence of capitalist and subsequently socialist societies. There isno need to insist on this statement after agreement on the acceptability of legal techniques has been reached with the CMEA socialist countries, whose planned economies, are, with respect to freedom of contracting, based on different economic foundations. Nevertheless, it is useful to mention this here because only developing countries found it necessary to make certain corrections in the UN Sales Convention, especially in regard to usages of trade. Similar reservations had been [page 65] previously expressed by planned-economy countries.

Some characteristics of codification are common to all legal systems and are conditioned by the possibilities of each codification, be it national or international. One should take into account the fact that there is something in business practice that differs from written municipal laws; there is something that takes no account of municipal laws, something that ignores or even negates them. Commercial law is not created in parliaments alone; its makers also include those engaged in business. It should be added that the increasing significance of commercial arbitration, which sanctions this law and its awards, transcend the legal conceptions of municipal law.

Several factors have contributed to this development, as I stated earlier:[15]

(i) The non-mandatory character of municipal rules;
(ii) The inadequacy of municipal rules;
(iii) A certain similarity of municipal rules pertaining to commercial transactions;
(iv) The positive climate of municipal law in respect of commercial arbitration;
(v) The limited effect of ordre public;
(vi) Economic and sociological factors.

Each of these factors deserves some explanation. However, a general remark should be made with respect to the law of international trade.

All legal systems agree, subject to some limitations, that the parties are at liberty to stipulate expressly the proper law of the contract. Commercial practice has made maximum use of the possibilities arising from the optional character of municipal rules. This destiny has been shared by international legislation in the field, as indicated [page 66] by business practice in the application of the Hague Uniform Laws on the International Sale of Goods.

Of the most important reasons for departing from municipal rules, the following can be mentioned:

a) Municipal rules are too generalized and traditionally rely on historical concepts, both with regard to general principles and the regulation of individual kinds of transactions;

b) International business practice is developing within the framework of individual branches, thus specialization is one of its basic features;

c) Domestic legislation does not take international elements into account, whereas the law of international trade must respect the recognized principles of international law created by business practice;

d) Statutes are more difficult to change and accordingly more difficult to adjust to the needs of international trade.

In regard to the needs of international trade, we should further add that international trade has created new forms of transactions; moreover, it has created complex types of contracts, which, due to their complexity, cannot be easily classified under standard transactions governed by national laws, especially in view of the fact that in international commercial transactions partners are involved who are outside the influence of national laws.

Since municipal laws cannot give an answer to everyday questions that arise in international commercial practice, the law-making monopoly has disappeared to a considerable extent in the field of commercial law, the law-creating role being shared by law-makers and parties representing [page 67] other interests. Modern commercial law embodies concepts and institutions which have come about as the result of international practice.

What was said under a) and b) also holds true for international codification concerning commercial contracts.

It should be added that the law of international trade isto be applied and interpreted uniformly. Imposing a national framework upon them would hinder uniform interpretation, which isa precondition for legal security.

III. The Content of the Law of International Trade -- Lex Mercatoria

1. Denomination

There are various nuances among legal writers regarding both the name and substance of lex mercatoria.

Professor Schmitthoff defined the law of international trade as follows:

"The autonomous law of international trade isderived from two sources, viz. international legislation and international commercial custom.

"The term 'international legislation' is a misnomer, since the power to create legal rules in a particular territory can only be exercised by, or by authority of the national sovereign.

"International commercial custom consists of commercial practices, usages or standards which are so widely used that businessmen engaged in international trade expect their contracting [page 68] parties to conform with them and which are formulated by international agencies, such as the International Chamber of Commerce, the United Nations Economic Commission of Europe, or international trade associations. The term 'international commercial custom' is used solely to denote custom formulated by international agencies; the commercial custom which is not so formulated is referred to as commercial usage or practice (usances)."[16]

In his well-known theoretical work Commercial Law in a Changing Economic Climate,Schmitthoff states that the autonomy of the parties' will in the law of contract is the foundation on which an autonomous law of international trade is developed by the parties. It is, as he says,

"therefore wrong to attribute the character of international or supranational law to international trade law ... The best way to describe the peculiar character of international trade law is to refer to it as transnational law."[17]

Later, Professor Schmitthoff specified that the "transnational law of international trade is a new lex mercatoria."[18]

The term "transnational law" for the new lex mercatoria is also used by other authors to denote the law of international trade as "the Transnational Law of International Commerce."[19] Professor Goldman was guided by the same thought when he said:

"Nous n'avons pas besoin de dire que cet ordre juridique est supérieur aux ordres juridiques nationaux ... Il est différent, il est transnational, mais non pas supranational; il est à travers [page 69] les frontières, mais pas auxdessus des frontières."[20]

Most learned authors have accepted the term lex mercatoria. Among those who use it are Bonell,[21] Coing,[22] Fouchard,[23] Loussouarn,[24] Klein,[25] Lalive,[26] Vischer,[27] Lando,[28] Delaume,[29] while some use both terms, namely "transnational law" and lex mercatoria, as for example Schmitthoff,[30] Goldman,[31] David [32 ] and Berman.[33]

Therefore, we shall alternately use the terms "international commercial law," "the law of international trade," "the transnational law of international trade" and lex mercatoria, although the latter is suitable for legal experts but not for businessmen. It should be noted that multilateral conventions and current literature still prefer the term "international commercial law" or "the law of international trade." The latter has been accepted as a conventional expression, regardless of the doctrinal distinctions which make it possible to differentiate between truly international law in the sense of public international law and private international law.

2. The Content of Lex Mercatoria

Lex mercatoria is the autonomous law of international trade. Thus, I wrote in the 1960s that it is time that recognition be given to the existence of an autonomous commercial law that has grown independently of national systems of law.[34]

Schmitthoff sees a separate body of legal rules in the law of international trade. Thus, it is necessary to take into account the division of traditional commercial law into two branches, the [page 70] law applying to home transactions and that applying to international business.[35] The law of international trade is a separate branch of law. The autonomous law of international trade is derived from two sources -- as Schmitthoff puts it -- from international legislation and international commercial custom.

According to Fouchard, usages of trade make up the hard kernel (le noyau dur) of the lex mercatoria:

"Règles de droit nées d'une pratique répétée dans un milieu déterminé et applicables sauf convention contraire des parties ... avaient connaissance ou auraient dû en avoir connaissance."[36]

According to one view, the international law of commercial transactions - lex mercatoria -- is an international body of rules based on an understanding among merchants and the contractual practice of the international community consisting predominantly of merchants, shipowners, insurers and bankers from all countries of the world. The source of universality is not only comparative law, i.e. the similarity of merchants' concepts and institutions in various legal systems, but primarily the contemporary process of interaction on the part of those involved in the international commercial community. Custom is the primary source, while the law of international trade is a special type of international law.[37]

Horn maintains that the relevant alternative to international legislation is not so much customary law as international commercial custom in the broadest sense, i.e. commercial usages, standard clauses, contracts or contractual rules.[38] The approach of the supporters of lex mercatoria and "transnational law" is based on the recognition [page 71] of the great influence which the will of the parties engaged in international transactions has had on the sources of international trade law. This influence has been exercised directly by means of the drafting of contract clauses, adhesion contracts, standard contract forms and general conditions, and the gradual formation of usages and customs employed in contractual dispositions or in dealings between merchants.[39]

Professor Goldman noted:

"International economic relationships may perfectly well be governed by a body of specific rules including transnational custom, general principles of law, and arbitral case law. Within this body of rules, the general principles of law are not only those referred to in Article 38(c) of the Statute of the International Court of Justice; there may be added to it principles progressively established by general and constant usages of international trade."

In one of his more recent works Professor Schmitthoff says that "the concept of trade usages is known to most legal systems." Furthermore, he classifies usages of trade as codified trade usages (which, in his opinion, include formulated international trade usages) and unformulated international trade usages of general application.[41]

As for myself, I stated that a new autonomous law was being developed in practice, embodied in standard contract forms, standard clauses, general conditions of trade, commercial customs and trade usages.[42] Usages of trade constitute the most important part of lex mercatoria. National laws and multilateral conventions explicitly emphasize usages [page 72] of trade. This, however, does not exhaust the content of lex mercatoria. Along with usages of trade, all other phenomenal forms of business practice must be taken into account, together with all the implications arising from their legal qualification, although it differs from the legal qualification of usages of trade. Here we have in mind commercial practices in international trade in general, and, in particular, general conditions, standard clauses, standard contracts as well as general principles of law and codes of conduct which have recently been drafted with the intention of contributing to the formation of fair-play rules. These forms of business practice will be discussed in the part of this paper dealing with the lex mercatoria as a form of positive law.

Numerous authors classify only usages of trade and other forms of international business practices under the modern lex mercatoria. The fact alone that a considerable number of international trade contracts are governed nowadays by international conventions and uniform laws "cannot be considered as proof of the existence of an autonomous lex mercatoria, because these conventions become relevant only to the extent that they have been ratified by States, and therefore have become positive law within the various national systems."[43]

Another dilemma involves the qualification of practices which have not or not yet become usages of trade. Schmitthoff rightly draws attention to the lack of clarity regarding the transition from practice, custom and customary law, which, until recently, has made it difficult to determine usages of trade,[44 ]adding:

"In practice, the distinction between statutory, recognized, acknowledged and [page 73] adopted trade usages is sometimes not strictly drawn and the transition is gradual."[45]

In judicial and international arbitration practice, these distinctions are sometimes referred to as questio facti and sometimes as a "fruitful area of research." The "transition from what practice is doing to usages and to custom and eventually to law is a very slow one, and even inthe formulating agencies expressions of the lex mercatoria are not generally accepted ... If we disregard the form and look at the substance, more indications "show themselves on the horizon."[46]

It has been necessary to present all these opinions and differences among authors in order to determine the content of the lex mercatoria more easily. It is not surprising that some important questions are still being researched in academic circles inorder to be able to take a stand on the status of lex mercatoria in the legal system. As Goldman stated, "The commentators in the early 1960s began to take note of this evolution. Clive Schmitthoff was the first in England to salute the 'New Law Merchant'." Professor Goldman concluded in 1964 that the lex mercatoria could be acknowledged a place.

In a lecture held at the Hague Académie de droit internationa1,[48] Professor Kegel confirmed, under the marginal title "Doctrine (Clive M. Schmitthoff and others)," the existence of the

"most modern doctrine, namely the doctrine of a New Law Merchant. This trend is represented mainly by Clive M. Schmitthoff, Philippe Kahn, Berthold Goldman and Eugen Langen, and in the East Block by Laszlo Réczei and Aleksander Goldstajn."

[page 74] Article 9(2) of the UN Sales Convention (1980) gives legal effect to commercial usages by stating that the usage must be one which "in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."

The lex mercatoria obtained international recognition in the Vienna Convention (1980), and prior to that in the Hague Sales Conventions -- ULFIS and ULIS. In addition, it has been recognized by legislation changes at the national level, all of which have resulted in the emergence of the new lex mercatoria. Nevertheless, some categories such as general principles of law, codes of conduct, non-legal arrangements and non-legal sanctions still attract attention in the legal theory of international trade, and thus also in the general theory of law. Professor Schmitthoff warns that modern law teaching aims at teaching law in its social, political and academic context. The living law cannot be distilled in a pure and isolated form; it is a part of the social life of the community.[49]

IV. The New International Economic Order and Lex Mercatoria

As far as international commercial transactions are concerned, East-West economic relations have found a satisfactory solution. Countries with centrally-planned economies as well as those with free-market economies have held the law of international trade to be acceptable for both economic and social systems due to the fact that the external commercial law of the CMEA countries transcends the division based on different economic concepts for home transactions. Cooperation [page 75] with representatives of the CMEA countries has been achieved within the framework of UNCITRAL and other formulating agencies.

The developing countries are faced with the extremely difficult task of linking their own less developed economies with the complicated mechanism of international trade that has been developed over the centuries without their active contribution and without regard to the needs of the new independent developing States.[50]

In view of this problem, the UN Sales Convention sought to satisfy the needs of the developing countries within the framework of UNCITRAL by developing a system that is private law in nature and that, in the eyes, of the developing countries, would serve their needs in the same measure as those of their partners abroad.

This question had already emerged at the Hague Diplomatic Conference on the International Sale of Goods in connection with the provisions of the two sales conventions regarding the duties of the parties to communicate information needed by the other party "promptly," i.e. within as short a period of time as possible under the circumstances, and in connection with the meaning of the wording of the Draft Convention that communications shall be made by the usual means considering the circumstances.

At the UN Conference on the Limitation Period in International Sales (New York 1974), the representatives of some developing African countries pleaded for the longest possible limitation periods for claims, stating that due to lack of funds, they might be subjected to sanctions if they failed to meet their obligations on time.

During preparation of the UN Sales Convention, the developing countries suggested different rules in a few instances, e.g., the time for [page 76] giving notice of defective goods and the circumstances under which a party may suspend performance due to the possible failure of counter-performance. The position of several industrial States that the strict notice requirements contained in their domestic rules should be retained was also opposed by the representatives of developing countries.

The next issue concerned the excuse for failure to notify the lack of conformity of the goods. Efforts to relax the notice requirements (Article 39) had failed by narrow margins. Informal discussions revealed -- as Professor Honnold stated -- that some developing countries were seriously dissatisfied with this result and that the representatives of industrial countries had strongly resisted relaxation of the notice requirements proposed. The issue was reopened and a compromise solution worked out. (This led to the inclusion of Article 44 in the Convention).[51]

Despite some objections of a political nature, the discussion during preparation of the Draft Convention was focused primarily on legal techniques rather than on economic and political issues.[52] As a result, in some fields it was difficult to distinguish the views of the representatives of socialist countries from those of others. Political overtones were felt in positions on usages of trade insisted upon by the developing countries.[53] This ended in a compromise, which, however, resulted in much more complex solutions for some issues, but such was the "price of unification."[54]

The problems that had to be solved by the drafters of the Convention will emerge again in practice in connection with the interpretation of the Convention's provisions. [page 77]

The most serious objection made by the developing countries concerned usages of trade, the result being that a provision proposal similar to that contained in Article 9(2) of ULIS was eliminated from the draft "as unnecessary." More specifically, the ULIS provision that in the event of conflict between the applicable usage and the Uniform Law, the usages prevail, unless otherwise agreed by the arties, was regarded to be in conflict with the constitutional principles of some States and against public policy in others.[55] A compromise solution was reached, resulting in the following formulation of Article 9(2) of the Convention:

"The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties of the contracts of the type involved in the particular trade concerned."

Regarding the inapplicable concept of "usage," Honnold said:

" 'Usage' and similar legal ideas have been used in settings that are fundamentally different from trade usages to which Article 9 refers ... Even more remote from the current problem is 'custom' as a source of public international law that binds States. Governments have sometimes viewed such 'custom' as inconsistent with their sovereignty ... Echoes of these fears were heard in UNCITRAL in early discussions of trade usages, but it became [page 78] evident that construing sales of contracts in the light of expectations current in international trade does not impair the sovereignty of States."[56]

I believe that this stand on usages of trade is the result of a misunderstanding. Let us first take a look at the terminology "usage," "usage of trade," "custom." Even in some continental systems it frequently occurs that no distinction is made in legal writings between "usages" and "usages of trade." Without going into these problems outside the framework of commercial laws, especially the law of international trade, a distinction should be made between "custom" in public international law and "usages of trade" ("usances"). "Modern legal systems generally accord a significant role to customs -- or usages as they have come to be called -- and give a similar role to courses of dealing between parties." As for the American Uniform Commercial Code, the term "usage of trade" is "relatively new and favoured by the Code over the more traditional and narrower term 'custom'."[57]

As I once noted:

"It should be borne in mind that in international trade the contracting parties' rights and duties are rarely determined solely by their own stipulations. This self-regulation is normally supplemented above all by rules derived from practice, i.e. commercial usages ... Commercial usages are created within a specialized branch, their applicability being self-understood therefore. Commercial usages are operative in relation to those who know them or who were in the position to know them. What is customary should be effective [page 79] ipso facto; it is not necessary to decree it, and still less to have explicit agreement."

I further stated:

"If the contract lacks more detailed clauses, it is executable in the customary way. In doubtful cases it is to be taken that the meaning of the contract agrees with the meaning attaching thereto in commercial traffic ... The parties must be supposed, while appreciating the general practice, to have chosen the application of trade usages. Generally speaking, the parties reduce what they are expressly agreeing about to special details, omitting to cite expressly the usages which they consider to be implicit in their contract. Such a method of forming contracts is practiced for economic reasons, as a time and money saving expedient, while the inclusion of usages instead of detailed formulation in each individual case makes for uniform application. A conscientious party presumes the application of usages and expects the other party to do likewise. Failing this, the party observing the usages would be put in an unequal position in relation to the partner who either does not know the usages or disregards them."

Therefore, usages of trade will always be applied unless they are excluded in a way which discloses a contrary intention. Commercial usages applicable in international trade do not exist to satisfy the needs of individual countries but the higher interests of the international community. [page 80]

Commercial usages constitute one of the sources of the law of international trade.[58] Professor Eörsi has also observed that "the law regulating" the international flow of commodities might in principle be uniform for all types of countries."[59]

As I myself have pointed out, the two Hague Conventions (1964) on international sales do not adequately take into account the interests of new States.[60] However, on the basis of the improved formulation of the UN Sales Convention on usages of trade, there is no reason to oppose the generally accepted views on the indispensability of usages of trade and the conditions for their application to international commercial contracts. There are two arguments supporting this.

One is based on the economic position of the contracting parties in international trade, and the other on the legal technique that will inevitably be used in modern trade, especially international trade. These two arguments deserve a brief explanation. As already noted in connection with the economic prerequisites, international trade takes place under the market conditions on the world market. International commercial transactions are concluded between independent enterprises having the status of legal persons all over the world. These participants in international commercial transactions are free to conclude business transactions and determine their content. Under these conditions, the legal prerequisite of international trade transactions is that they should take place within the framework of private law, which is characterized by optional rules, the application of mandatory rules in a narrow field being the exception. Any deviation from this rule would substantially hinder the flow of international business transactions and [page 81] partly make them impossible. For this reason, the Vienna Convention does not contain any mandatory rules.

It is, therefore, not possible to give an affirmative answer to the question whether the request of the developing countries for the establishment of a new international economic order could be satisfied by departing from the general stand on usages of trade in international trade. Even under this unthinkable presumption, the objectives of the new international economic order would not be attained. As the representative of a developing country, Date-Bah pointed out:

"It is important to recall that the Draft Convention, on Contracts for the International Sale of Goods regulates only a legal form. It is within UNCTAD that the issues relating to the substance of international trade have usually been debated, studied and solutions sought for such issues. Most of the work done inUNCITRAL isunlikely to lead to really significant changes in the economic relations between developed and developing countries. Of course, form can never be totally isolated from substance ...

"... In the case of international sales, there are both international buyers and sellers in all countries ...

"... An important reason why ULIS and ULFIS did not find acceptance inmost developing countries is the political fact of the non-representation of most developing countries at the diplomatic conference. In political terms, this attitude is quite understandable ..."

[page 82] However, the distinguished UNCITRAL representative from Ghana rightly observed:

"It is understandable for organized communities to refuse to submit to legislation produced by a legislative process in which they, have not participated ... In some developing countries, some large-scale traders whose business may include international trade are illiterate."

In regard to usages of trade, Date-Bah said:

"The Draft gives no overriding effect to customs and usages. They are to bind the parties only if they have agreed to them, expressly or impliedly. Accordingly, it follows that no such custom or usage can be implied if it is in conflict with any term expressly agreed upon by the parties. Trade practices and usages evolved in international trade can thus be excluded by the parties to international sales contracts if they agree on terms inconsistent with practices and usages."[61]

Macroeconomic relations are regulated by public law, and thus international macroeconomic relations are a part of international economic law. Macroeconomic relations influence the sphere of microeconomic relations, which includes the law of international trade, in that they determine the position of the parties engaged in microeconomic relations. Therefore, changes in international trade law in favour of the economic weaker can be achieved by altering the economic prerequisites for individual situations in contractual relations, but not by optional rules of the law of contract. As participants in international business transactions, individual firms [page 83] cannot change the economic positions of weaker partners from developing countries. Economic laws of the world market are in force here.[62]

The second argument is of a legal nature. There is no doubt that something can be achieved within the framework of the law of contract, as shown by the work of the UN Economic Commission for Europe, and this willalso be the case with the UN Sales Convention. On the other hand, it should be emphasized that usages of trade are optional rules and that the Convention does not cover issues concerning the validity of "any usage" (Article 4(a)).

Municipal laws are generalized and therefore cannot meet the needs of individual branches. This holds true for any codification; even international conventions cannot avoid this trap. Special rules, the most important being primarily usages of trade, are those factors which are continuously being developed to satisfy the specific needs of international trade. Usages of trade and practices are legal tools and a kind of legal technique, just as municipal law provisions or international conventions are. This does not exclude the possibility that in individual situations the economically stronger partners can create a more favourable position for themselves within general associations if they act as centres of trade in their respective branches. However, they do so by the strength of their economic position, not because of weaknesses of legal solutions. This economic position adapts itself to the economic situation on the market.

"The dominant theme of the Convention is the role of the contract made by the parties -- a theme of deeper significance than may be evident at first glance." To avoid the area of uncertainty posed by the vague contours of "mandatory rules," [page 84] "such controls over contracts are out of place in the international market and are excluded by the Convention. The Convention's rules play a supporting role, supplying answers to problems that the parties have failed to solve by contract" (Honnold).[63] Uniform law is "the last link in a hierarchical chain and recourse to it will be had only when from the sources preceding it the mutual rights and obligations of the parties cannot be established" (Réczei).[64] Therefore, as a part of the lex contractus, usages of trade have been recognized as a source of commercial law and international trade law.

As Schmitthoff notes:

"The motives for entering into a contract, for making use of legal technique, may be very different in the various national economies. The distinction between the legal technique of contracting and the motivation for contracting enables us to depoliticise the law of international trade."[65]

And, as I stated:

"The fact that the beneficiaries of transactions are different in this or that country is no obstacle to the development of international trade."[66]

Just as the developing countries did not take part in the creation of usages of trade, this also holds true for many other countries not at the level of the developed countries. It took a long time to establish usages of trade and practices which, like legal techniques, have been accepted universally as a result of their rational content. This is confirmed, for example, by the ICC Uniform Customs and Practice for Documentary Credits and Incoterms, which have world-wide acceptance, and the FIDIC contract, which has [page 85] been accepted by organizations in 73 countries. Moreover, the legislators of some developing countries have incorporated it into some provisions of their law.[67]

The weaker position of the less developed countries is a fact. The economic reasons for this have already been pointed out; however, in addition, the lack of a workable infrastructure and education should also be mentioned. In many countries the legal infrastructure lags behind that of the industrial countries. As a result, the enterprises in countries with an advanced economy and considerable share of foreign trade are in a better position. Furthermore, their market economies[68] and national systems are better suited to international sales. The experience with the Hague (1964) Sales Convention shows that some large firms excluded ULIS in their standard contracts. [69 ]

V. Lex Mercatoria as Positive Law

1. Lex Mercatoria --Transnational Law of Commercial Transactions

The term lex mercatoria is the common denominator of all the sources of the autonomous law of international trade. The law merchant arose in the Middle Ages as a body of international customary rules. The international character of the old law merchant is the result of four factors: the unifying effect of the law of fairs, the universality of customs of the sea, the activity of notary publics, and the use of arbitration as special courts. The second period was characterized by the incorporation of this international law merchant into national laws; [page 86] however, even during this period commercial law did not entirely lose its international character. At this time the law-creating custom of the international business community was also active, as it had been in the Middle Ages. The third, contemporary, stage is characterized by the fact that the law of international trade has reverted to the concept of internationalism (Schmitthoff). [70]

If we compare the medieval lex mercatoria with the modern law merchant, we see that the same factors that led to the creation of the medieval law also played an important role in the formation of the modern law. These include the universal practice of international trade (standard contracts and general conditions produced by formulating agencies and various associations) and the, use of arbitral tribunals as special courts for international commercial disputes. In contrast to the spontaneous creation of the law merchant in the Middle Ages, the modern lex mercatoria is contained, to a great extent but not exclusively, in the acts of formulating agencies and business associations.

The modern lex mercatoria comprises standard contract forms, general conditions of business, commercial customs, trade usages, and guide texts as well as general standards such as good faith, pacta sunt servanda, duty to cooperate, duty to inform, responsibility, and general principles.

The body of the modern lex mercatoria consists of sources which vary in origin (the actual practice as rendered in written as well as unwritten usages; the work of various formulating agencies), in content (codified and non-codified practices, recommendations, guides, codes of conduct) and in legal qualifications [page 87] (usages of trade as implied contract terms, general conditions if invoked, recommendations, codes of conduct and guide texts, if and to the extent they reflect the current practice). In my opinion, Professor Schmitthoff has best characterized the present situation by saying:

"We have to face the fact that the new law merchant which is emerging before our eyes is an entirely new phenomenon. When trying to understand it and take it as what it was in the Middle Ages and what it will be again: unsystematic, complex and multiform, but of bewildering vigour, realism and originality."[71]

Just as the sources of lex mercatoria are fluid, there are also nuances in the doctrine regarding the position of lex mercatoria in the legal system. According to Schmitthoff, transnational law is the "uniform law developed by parallelism of action in various national systems in an area of optional law." As a result, lex mercatoria is found in "various formulations of the appropriate international institutions,"[72 ]such as the International Chamber of Commerce, UNCITRAL and UNIDROIT.

Goldman maintains that:

"the criterion for determining the ambit of lex mercatoria does not solely reside in the object of its constituent elements, but also in its origin and its customary, and thus spontaneous, nature ... Lex mercatoria today fulfills in an effective manner the function of positive law, and national courts of the highest level recognized it as such. Lex mercatoria and positive law; lex mercatoria and the general [page 88] theory of law -- these are two aspects of the accomplishment of the newly reborn lex mercatoria."[73]

On the other hand, according to Bonell,[74] lex mercatoria is not an independent legal system, whereas Coing[75] notes that in the case law of West Germany it is in principle held that spontaneous norms, such as lex mercatoria, are rules of law (Rechtsnormen). Opponents who underrate lex mercatoria, which is not a fully closed system, overrate at the same time the level of perfection of state legislation.

2. Lex Mercatoria and Positive Law

There is agreement in doctrine that the new lex mercatoria is not and cannot be separated from national law. Schmitthoff notes that the autonomy of the parties' will in the law of contract is the foundation on which an autonomous law of international trade can be built, because

"the national sovereign has no objection that in that area an autonomous law is developed by the parties, provided always that that law respects in every national jurisdiction the limitations imposed by public policy. International trade law acquires its autonomous character by leave and licence of all national sovereigns. Ultimately it is founded on national law but has been developed by international business in an area in which all national sovereigns are in principle desinterested."[76]

However, Professor Schmitthoff goes on to say that the transnational law of international trade is: [page 89]

"essentially founded on a parallelism of action in the various national legal systems. The aim of this parallelism of action is to facilitate the conduct of international trade by establishing uniform rules for it."[77]

Delaume also emphasized the links between lex mercatoria and national legislation by saying:

"La lex mercatoria c'est quelque chose de supplémentaire qu'on peut incorporer dans le mesure ou les lois impératives ne s'y opposent pas." [78]

The law of international trade is derived from the various systems of national law and is fully reconcilable with the concept of national sovereignty.[79]

Thus one can refer to the co-existence of the state order and the lex mercatoria. This co-existence is not the same as co-existence between state orders.[80] Therefore, it is necessary to present the position of lex mercatoria in the general theory of law. It is a fact "that we are living in a world of national laws and we cannot get away from it." For this reason it would be quite wrong to assume that lex mercatoria provides an answer to everything ... "We cannot have such a legal system and the ideal of the lex mercatoria is not to provide a complete separation of legal transactions from national laws. Essentially we must have a national localization of laws ... One of the characteristics of our time is a separation of domestic commercial law and the law of international trade."[81]

With respect to the relations between lex mercatoria and national laws, the law of international trade is entering a phase of development which could be characterized as a transition from tolerance to action. Lex mercatoria was [page 90] "nationalized" as a result of "nationalism which has been introduced in the field of law as the unfortunate result of the French codification" (Tunc). [82]

Another distinguished French author, Professor R. David, stressed this situation by saying that

"the unity of civil and commercial law is, frequently, no more than a sham. The law governing trade relations is in theory only to be found therefore in the provisions of the codes and statutes compiled by jurists. More important in the practice of business are the standard forms and the general conditions emanating from commercial organizations."[83]

The reasons for codification should be sought rather in the economic sphere:

"The national legislations were symptoms of a world political development towards national economic imperialism: they followed the course of the great economic powers away from cooperation and towards the power struggle for a dominant position ..."

In France, England or Germany, national legal unification is attributed to other causes. Consequently, depending on their models and the needs of the individual country, the "nationalization" of lex mercatoria became and still is a symbol of sovereignty and, moreover, "a triumph for the isolation of the national private legal systems towards each other." [84]

The economic interdependence of national economies, the abandonment of autarky, and the wish for international cooperation have become a driving power in the unification of the law applicable to international commercial transactions. [page 91] Reciprocity in the law of international trade contributes to harmonization of the law and paves the way for a law of coordination.[85] There are numerous examples of international cooperation in the field of international trade law. In modern economic development it can be noted that those engaged in international commercial transactions tend to sever traditional ties inorder to be governed by a rational law which is less bound to a particular milieu. A strong economic position is certainly a significant factor in the acceptance of a commercial practice; nevertheless, it is a fact that standard contracts and general conditions have often been corrected as the result of competition and therefore contain rational solutions.[86]

Interstate cooperation is also evidenced in international cooperation at the level of the UN Economic Commission of Europe, UNIDROIT, the International Chamber of Commerce, and especially within the framework of UNCITRAL. In addition, national legislators and judicial case law have recently demonstrated that national legal systems are being adapted to meet the needs of international trade, e.g., the Code of International Trade (Czechoslovakia, 1963) and the Law on International Economic Contracts (German Democratic Republic, 1976), both of which contain special provisions pertaining to the application of trade usages and were enacted for application in international trade relations outside the CMEA group.

The United Kingdom Arbitration Act (1979) makes a distinction between domestic and non-domestic arbitration. According to the special case procedure that is a specific English form of judicial review, in non-domestic arbitration, judicial review may be excluded before the commencement of arbitration.[87] Furthermore, English [page 92] law has in fact abandoned the specific common law institute -- the doctrine of consideration -- in international commercial transactions in connection with documentary credits.[88]

The French law applicable to international commercial contracts is "d'origine essentiellement jurisprudentielle." French authors find "a remarkable law-maker's acceptance of lex mercatoria" in the new French Code of Civil Procedure. Article 1496(1) provides that in international arbitration the arbitrator shall settle the dispute in accordance with the rules of law which the parties have chosen, and in the absence of such choice, in accordance with those rules of law which he considers to be appropriate. The Code's expression "rules of law" is meant to refer to customary rules as well as to legislative ones. The second paragraph of Article 1496 provides that in "all cases the arbitrator shall take account of trade usages." This repeats the wording of Art. VII of the 1961 Geneva Convention, Art. 42(1) of the 1965 Washington ICSID Convention, Art. 13(5) of the ICC Arbitration Rules, and Art. 33(3) of the UNCITRAL Arbitration Rules, as well as that of the rules of many institutional arbitrations.[89]

In view of the contemporary development of international economic relations, we are of the opinion that States are no longer passive as far as international economic cooperation is concerned and that they are no longer satisfied with the mere fact that freedom of contract has been legislated as a basic rule for commercial contracts. Instead, they have become interested in removing obstacles posed by national law in order to facilitate their participation in the international division of labour. There are two ways to obtain this goal: the first, by participation in [page 93] the creation of international conventions and adjustment of domestic legislation, and the second, and more effective, by autonomous formation of rules within this framework on the part of the international business community. Thus we can speak of the phenomenon of law being created outside legislation by "public and private rule making,"[90]selbstgeschaffenes Recht,"[91] "transnational commercial law,"[92] "private legislation,"[93] and "non-authoritative sources of law,"[94] all of which are synonyms for autonomous law, autonomous in relation to legislation.

The pluralism of the sources of the law of contract and the need for an autonomous law of international trade are based on the tacit agreement of all national law-makers who have made creative commercial practices possible through optional rules. This was the first phase in the development of the modern lex mercatoria. The second phrase, which is still underway, began when national law-makers abandoned their passive roles and agreed to cooperate in drawing up international legislation. This eventually led to a parallelism between domestic commercial law and the international law of trade. It has become evident that the rules applicable in international commercial transactions cannot be fixed unilaterally by the will of the rulers of a single country.

Regarding the methods and techniques of unification, "legislation is one of the methods by which it is conceivable that the unification of private law will be attained, but it is not the only one."[95] In addition, even in principle, legislation cannot be considered the sole source of law in this field [page 94].

VI. The Structure of the UN Sales Convention

1. The Contract

As I stated earlier, contracts are based on the fundamental proposition of this branch of law, i.e. on freedom of contract. Therefore, the Convention provides that the parties may exclude the application of the Convention as a whole or derogate from or vary the effect of any of its provisions (Art. 6).

The need to create in this branch of law, except to a minor extent in the sphere of public law, is evident. This is illustrated, for example, by the types of nominate contracts, i.e. those regulated by national codification. The number of nominated contracts in national laws is small, e.g., the Swiss Law of Contract (OR) provides nineteen types of contracts, five of which do not pertain to commercial transactions; the German Civil Code (BGB) eleven, and the German Commercial Law (HGB) seven. Five types of contracts contained in the BGB will rarely be considered for use in commercial transactions. This shows that domestic legislation lags behind business needs.

2. Basic Legal Characteristics of the Convention

a) Provisions of the Convention are of a non-mandatory character;

b) The Convention does not contain any provisions falling within the so-called general part of the law of contract;

c) The Convention is not the only source of law for international sales contracts. Trade terms, like the ICC Incoterms, and the Convention are complementary, each performing a different [95] function. Therefore, a reference to trade terms in a contract should not be taken as an exclusion or modification of the Convention.[96]

The parties may entirely exclude application of the Convention by choosing a law other than the Convention (a national law as the proper law of the contract). If the parties agree that the Convention does not apply without designating the national law to be applied, the rules of private international law determine the applicable national law.

The Convention does not contain a provision (similar to that found in Art. 3 of ULIS) specifying that exclusion may be express or implied. The working of ULIS has been eliminated because special reference to implied exclusion "might encourage courts to conclude, on insufficient grounds, that the Convention had been wholly excluded."[97] This legal-political motivation for deleting explicit provisions on ways of excluding application of the Convention does not influence the general rules pertaining to the formation of contracts.

3. Usages of Trade and Trade Practices

The Convention has taken into account international practice and modern legal systems, both of which accord significance to the rule of' usages. "Where the contract is silent, current practices and usages may apply."[98] Usages of trade constitute the core of the lex mercatoria. In regard to the way of determining the intent of the parties, the Convention specifies in Art. 8(3):

"In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to [page 96] be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."

The general provision on trade usages is contained in Art. 9:

"(1) The parties are bound by any usage to which they have agreed …

"(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned."

The Convention, like national laws, does not define usages of trade. An exception is the American Uniform Commercial Code (UCC, section 1- 205):

"A 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. The existence and scope of such usage are to be proved as facts."

Réczei commented on the role of usages briefly and clearly by saying that the application of the uniform law begins where that of usages ends.[99] First of all, it should be emphasized that usages of trade are optional rules. They cannot [page 97] abrogate a mandatory rule of the proper law of a contract that concerns the validity of either the contract or that of any usage (Art. 4(a) of the Convention).

The function of usages is to give particular meaning to and supplement or qualify terms of agreement (American UCC, Section 2 -205(3). Farnsworth explains that although the Convention text is much less detailed than the UCC, there are obvious parallels.[100] Usages "give particular meaning, supplement or qualify terms of contract."[101] Thus it follows that usages have the same role as optional provisions of national codes. As stated in the US UCC Commentary (1-205, Comment 4), Usages "are the framework of common understanding controlling any general rules of law which hold only when there is no such understanding."

Another question is that of proving the existence of usages. The US UCC provides that the existence and scope of usages are to be proved as facts.

As optional rules, usages have the same function as the optional provisions of national laws of contract; nevertheless, they differ from the latter as follows:

a) Usages are applied because of the presumed agreement of the parties on usages (Art. 8(2) and Art. 9(2)). It is reasonable to expect that the other party will observe the usages of their trade. Usages are lex contractus as an expression of the impossibility to provide for everything in a contract. Therefore, the Convention gives contractual effect to usages (Honnold).[102]

b) Contrary to the general provisions of the Convention, usages are special rules and thus have priority over the provisions of the Convention and the applicable national law. [page 98]

c) The rule iura novit curia does not apply to usages. They must be proved, which is usually possible by means of expert witnesses. It must be proved that the usage has been "regularly observed" over a period of time, thus justifying the conclusion that the parties "knew or ought to have known" of it. Therefore, it is not necessary that the usage be ancient or longstanding, which is a prerequisite in English law for proof of "custom" that requires that the custom be not only notorious but also ancient or immemorial, universal or the like,[103] It is sufficient to establish actual practice; opinio juris sive necessitatis is not required.

d) In view of Articles 6 and 9, the Convention has the character of a contract model that gives the parties a general framework which they can supplement or modify by mutual agreement through standard contract forms, general conditions of business and usages of trade.[104] An applicable usage has the same effect as a contract.

e) The validity of a usage is determined according to the applicable national law (Art. 4).

f) The applicable usage should be widely known in international trade. It is not necessary for it to be international, it should only be a usage which is applied in international trade. This can be a national or local custom which meets the requirements of the Convention.[105]

As for the question when a usage can be considered to be international, it is held that a usage is international when it is so widely known in international trade that the parties can be expected to know or ought to have known it, as provided by the Convention. It is not necessary that a usage be universally practiced (this cannot be expected), nor is a quantitative test [page 99] decisive, i.e. that a usage is applied in most countries, but only if it is applied in trade centres in a particular branch and accepted by those of that branch.[106]

4. Hierarchical Ranking of the Sources of Lex Mercatoria

The hierarchical ranks of the applicable rules of law are derived from their legal nature, their legal classification.

The hierarchical ranks of the sources of lex mercatoria can be determined in the following order:

(i)   The contract;
(ii)   The practice established between the contracting parties;
(iii)  General conditions or standard contract forms (if expressly or impliedly accepted by the contracting parties);
(iv)  Usages of trade (international and national);
(v)   The Convention (unless excluded by the contract);
(vi)  The general principles underlying the Convention;
(vii)  The national law applicable to the contract (if so provided by the contract, or failing an agreement of the parties, by virtue of the rules of private international law);
(viii) In all cases of the mandatory provisions of the applicable domestic law;
{ix)  Judicial and international arbitration case law;
(x)   Scholarly writing (indirectly). [page 100]

In order to avoid uncritical application, the "general principles" of the Convention should be considered before turning to domestic law.[107] Since the Convention, as a whole, is optional in character, the question arises as to whether this provision of the Convention (Art. 7(2)) can be abrogated. There is no unanimity on this point. In view of the fact that this provision relates to the interpretation of the Convention and not to the interpretation of contracts, its exclusion by contract could be an obstacle to promoting uniformity of application of the Convention.[108]

In connection with usages of trade, codes of conduct and guide texts should also be mentioned as they have recently been attracting increasing attention. Whereas guide texts have an educational significance and consist of a compilation of actual practices and possible recommendations, codes of conduct pretend to be internal norms of conduct for a specific circle of those concerned, or recommendations for the formation of a specific type of contract. Codes of conduct are not, nor are they expected to be, legally binding, and as such can be qualified as soft law.[109] In spite of this, some of the provisions of the codes may form part of the body of lex mercatoria under given circumstances. Codes of conduct may intervene where there are no usages, as is the case when new products or services are introduced.[110]

VII. Lex Mercatoria and the General Theory of Law

What is lex mercatoria? Is it an independent, a true legal system? Can lex mercatoria function independently of a national legal order and how [page 101] is it related to national legal systems? All of these questions should be answered. The basic objection raised against the lex mercatoria is that it is multiform, incomplete, unsystematic and exclusively optional, thus lacking the attributes of a true legal system.

On the other hand, national legal orders only formally meet the traditional criteria regarding the characteristics of a legal system. In regard to commercial law -- and this is the subject matter with which we are concerned -- national legal orders cannot be considered to be closed systems, because they too are not complete; they open the door to multiformity and the system of national legal orders makes it necessary to take into account the variety of sources to be applied. To a great extent, national legislation on commercial law consists of blanket norms in its general parts in that they refer to usages of trade and the principle of good faith. The example of the German Civil Code is more explicit in this respect (§ 242 BGB), especially if the provisions of the German Commercial Law (§ 346 HGB) are also taken into consideration. The most modern national codification, the American Uniform Commercial Code, provides that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement" (Sec. 1 -203). It is the only national law which contains a definition of usages of trade (Sec. 1 -205(2)). According to the UCC, the "underlying purposes and policies" of usages are:

"a) to simplify, clarify and modernize the law governing commercial transactions;

"b) to permit the continued expansion of commercial practices through custom, [page 102] usage and agreement of the parties." (Sec. 1- 102(2)).

National legislations have necessarily taken into account the need for specialization in commercial life, a need which cannot be satisfied by the codification of general, rules, especially as far as the individual requirements of individual types of contracts or trade branches are concerned.

In international trade there is no confrontation between domestic legislation and lex mercatoria as the law of international trade. These are two systems which complement each other. We cannot, however, disregard the fact that lex mercatoria also contains standards of conduct specified for international trade relations, which, as general norms, meet the needs of practice. Their significant feature lies in the fact that they take the specificities of international commercial transactions into account.

In addition to this legal argument, we should also comment on the sociological aspect. Lex mercatoria operates in a specific economic and social climate. The economic background has already been discussed here. International business is also characterized by professional discipline and the authority of the milieu. Professional discipline is not only an expression of the conviction of the usefulness of a specific conduct, the rationality of individual solutions and standards, but also the result of pressure exercised by power centres concentrated in international trade centres. This development is enhanced by specialization in the international economy and frequent monopolistic positions. As a result, self-discipline is achieved without judicial intervention, including arbitration, as is especially the case in banking, the film industry [page 103] and in large-scale specialized industries having a monopolistic position in a particular market.

National systems and lex mercatoria complement each other. National legal orders complement lex mercatoria particularly in matters falling under the general rules of the law of contract. "Lex mercatoria indeed constitutes a legal order -- imperfect or incomplete though it may be, like international order itself" (Goldman).[111] "The ideal for lex mercatoria of our time is not to provide a complete separation of legal transactions from national laws ... One of' the characteristics is a scission, a separation of domestic commercial law and the law of international trade" (Schmitthoff).[112]

In such a dynamic field as lex mercatoria, international case law and scholarly writing will surely be helpful when it comes to application of the Convention.


1. J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (Boston 1982) p. 144.

2. J. Hellner, The UN Convention on International Sale of Goods - an Outsider's View, Jayme, Kegel and Lutter, eds. Ius Inter Nationes (Heidelberg 1983) p. 71.

3. C.M. Schmitthoff, "The Codification of the Law of International Trade," J.Bus.L. (1985) p. 37.

4. J. Honnold, supra n. 1, pp. 51, 54.

5. E. Rabel, Das Rechtdes Warenkaufs, vol.1 (Berlin 1957) pp. 19-20.

6. A. Goldštajn, "The Contract of Goods Inspection," 14 Am. J. Comp. L. (1965) p. 383.

7. C.M. Schmitthoff, "Nature and Evolution of the Transnational Law of Commercial Transactions," N. Horn and C.M. Schmitthoff, eds. TheTransnational Law of International Commercial Transactions (Deventer 1982) p. 31.

8. A. Goldštajn, "International Conventions and Standard Contracts as Means of Escaping from the Application of Municipal Law," C.M. Schmitthoff, ed. The Sources of the Law of International Trade (London 1964) p. 111.

9. A. Goldštajn, "The New Law Merchant," J.Bus.L. (1961) pp. 12 -13 and 17 .

10. A. Goldštajn, supra n. 8 at p. 110.

11. C.M. Schmitthoff, Commercial Law in a Changing Economic Climate 2d ed. (London 1981) pp. 18-20.

12. C.M. Schmitthoff, supra n. 8.

13. A. Goldštajn, "Tipologija trgovakih ugovora" [Classification of Commercial Contracts], A. Goldštajn, ed. Ugovori autonomnog automonog privrednogprava [Autonomous Commercial Law Contracts] (Zagreb 1974) p. 11.

14. United Nations Doc. No. A/6396, 23 September 1966, para.l.

15. A. Goldštajn, The New Law Merchant Reconsidered," F. Fabricius, ed. Law and International Trade,Festschrift für Clive M.Schmitthoff (Frankfurt 1973) pp. 176-178.

16. C.M. Schmitthoff, supra n. 8, p. 16.

17. C.M. Schmitthoff, supra n. 11, pp. 11, 22.

18. C.M. Schmitthoff, supra n. 7, p. 19.

19. N. Horn, "Uniformity and Diversity in the Law of International Contracts," N. Horn and C.M. Schmitthoff, eds. supra n.7, p.19.

20. B. Goldman, in F. Klein and F. Vischer eds. Basle Symposium Governing Contractual [105] Obligations (Proceedings), (Basle/Frankfurt 1983) p. 194.

21. M.J. Bonell, "The Law Applicable to International Commercial Contracts: The Standpoint of Italian Doctrine and Case-Law," Basle Symposium, supra n. 20, p. 16.

22. H. Coing, "La détermination de la loi contractuelles en droit privé allemand," Basle Symposium supra n. 20, p. 29.

23. Ph. Fouchard, "La loi régissant les obligations contractuelles en droit international privé francais," Basle Symposium, supra n. 20, p. 105 and "Les usages, l'arbitre et le juge," Ph. Fouchard, Ph. Kahn and A. Lyon-Caen, eds. Le droit des relations économiques internationals, Etudes offertes à B. Goldman (Paris) p. 67.

24. Y. Loussouarn, Basle Symposium, supra n. 20, p. 130.

25. F.E. Klein, Basle Symposium, supra n. 20, p. 134.

26. P. Lalive, Basle Symposium, supra n. 20, p. 135.

27. F. Vischer, Basle Symposium, supra. n. 20 p. 137.

28. O. Lando, BasleSymposium, supra n. 20, p. 141.

29. G.R. Delaume, Basle Symposium, supra n. 20, p. 178.

30. C.M. Schmitthoff, Basle Symposium, supra n. 20, pp. 120 -121 .

31. G. Goldman, Basle Symposium, supra n. p. 127; B. Goldman, "Lex Mercatoria," 3 Forum internationale 1983.

32. R. David, Arbitration in International Trade (Deventer/London 1985) para. 367.

33. H. Berman and C. Kaufman, "The Law of International Commercial Transactions (Lex Mercatoria),19 Harv. Int'l. L.J. (1978) pp. 222-225.

34. A. Goldštajn, supra n. 9, p. 12.

35. C.M. Schmitthoff, supra n. 11, p. 18.

36. Ph. Fouchard, Fouchard, Kahn and Lyon-Caen, eds. supra n. 23, p. 67.

37. H. Berman and C. Kaufman, supra n. 33, p. 274; J.D.M.Lew, Applicable Law in International Commercial Arbitration (Dobbs Ferry, N.Y. 1978) p. 274.

38. N. Horn, supra n. 19, p. 15.

39. H.A. Grigera Naon, "The UN Convention on Contracts for the Sale of Goods," Horn and Schmitthoff, eds. supra n. 7, p. 90.

40. B. Goldman, "Lex Mercatoria," supra n. 31, p. 21.

41. C.M. Schmitthoff, Interpretation and Application of International Trade Usages (ICC Publication No.374 Paris) pp. 25, 31-34.

42. A. Goldštajn, supra n. 9, p. 12.

43. M.J. Bonell, supra n. 21, p. 161.

44. C.M. Schmitthoff, "Das neue Recht des Welthandels," RabelsZ (1964) p. 75.

45. C.M. Schmitthoff, supra n. 41, p. 36.

46. C.M. Schmitthoff, Basle Symposium, supra n. 20, p. 189.

47. B. Goldman, "Lex Mercatoria," supra n. 31, p. 5.

48. G. Kegel, "The Crisis of Conflict of Laws," 112 Recueildes Cours (The Hague 1964) vol.II, p. 17.

49. C.M. Schmitthoff, "The Effects of the Accession of the United Kingdom to the European Communities on Law Teaching in England," The Law Teacher vol.7 (London 1973) p. 70.

50. E. Boka, "The Sources of Law of International Trade in the Developing Countries of Africa," C.M. Schmitthoff, ed. supra n. 8, p. 227.

51. J. Honnold, supra n. 1, pp. 144, 278 and 283.

52. Gy. Eörsi, "Problems of Unifying Law on the Formation of Contracts for the International Sale of Goods," Am.J.Comp.L. (1979) p. 315.

53. J. Honnold, "UNCITRAL: Mission and Methods," Am.J.Comp.L. (1979) p. 208; S.K. Date-Bach, "Problems of Unification of International Sales Law from the Standpoint of Developing Countries," Problems of Unification of International Sales Law (London/Rome/New York 1980) p. 46.

54. Gy. Eörsi, supra n. 52, p. 323.

55. Commentary to the Text of Draft Convention prepared by the Secretariat of UNCITRAL UN A/CONF./97/5 14 March 1979, para. 5.

56. J. Honnold, supra n. 1, pp. 146-147.

57. E.A. Farnsworth, "Unification of Sales Law: Usages and Course of Dealing," UNIFICATION Liber Amicorum Sauverplanne (Deventer 1984) pp. 81, 83-84.

58. A. Goldštajn, "Commercial Usages as the Source of the Law of the Law of International Trade," Mélanges Fragistas (Thessalonikki 1967) pp. 400-402.

59. G. Eörsi, "Regional and Universal Unification of the Law of International Trade," J.Bus.L. (1967) p. 147.

60. A. Goldštajn, "Uniform Laws of International Purchase, Sale and Autonomous Mercantile Law," Collection of Studies on Foreign and Comparative Law (Beograd 1966), p. 181.

61. S.K. Date-Bach, supra n. 53, pp. 40, 43-44 and 47.

62. A. Goldštajn, "Prolegomena Zakonu o obveznim odnosima [Prolegomenon to the Obligation Act], A. Goldštajn, ed. Obveznopravo [The Law of Obligations] vol.I (Zagreb 1979) pp. 31-32.

63. J. Honnold, supra n. 1, pp. 47-48.

64. L. Réczei, "The Rules of the Convention Relating to its Field of Application and to its Interpretation", Problems of Unification of International Sales Law (London/Rome/New York 1980) p. 81.

65. C.M. Schmitthoff, supra n. 7, p. 21.

66. A. Goldštajn, supra n. 8, p. 110.

67. N. Horn, supra n. 19, p. 9.

68. O. Lando, "Unification of Commercial Law between Societies at Equal and at Different Levels of Industrial and Social Development," Legal Organization of Commerce (Aarhus 1979) pp.28-29.

69. J. Hellner, supra n. 2, p. 75.

70. C.M. Schmitthoff, "The Unification of the Law of International Trade," J.Bus.L. (1968) p. 108; Schmitthoff, supra n. 44, p.49; Y. Loussouarn and J.Bredin, Droit du Commerce International (Paris 1969) p. 14.

71. C.M. Schmitthoff, supra n. 70, p. 112; A. Goldštajn, Medjunarodna trgovacka arbitraza i lex mercatoria [International Commercial Arbitration and Lex Mercatoria) (Zagreb 1984) p. 56.

72. C.M. Schmitthoff, Basle Symposium, supra n. 20, p. 189.

73. B. Goldman, "Lex Mercatoria," supra n. 31, pp. 6-7.

74. M.J. Bonell, supra n. 21, p. 160.

75. H. Coing, supra n. 20, p. 50 footnote 70 and p. 52.

76. C.M. Schmitthoff, supra n. 11, p. 76.

77. C.M. Schmitthoff, supra n. 7, pp. 21-23.

78. G.R. Delaume, supra n. 29, p. 178.

79. C.M. Schmitthoff, "The Legal Organisation of Commerce and its Relation to Social Conditions," LegalOrganization of Commerce (Aarhus 1979) p 17.

80. Ph. Fouchard, "Les usages, l'arbitre et le juge," supra n. 23, pp. 67, 139, 145.

81. C.M. Schmitthoff, BasleSymposium, supra n. 20, pp. 121, 123. [109]

82. A. Tunc, "English and Continental Commercial Law," J.Bus.L. (1961) p. 237.

83. R. David, supra n. 32, p. 15.

84. F. Wieacker, "On the History of Supranational Legal Systems of Commerce," LegalOrqanizationof Commerce (Aarhus 1979) pp. 13-14.

85. G. Schwarzenberger, PowerPolitics (London 1964) p. 203.

86. A. Goldštajn, "The Formation of Contracts," J. Honnold, ed. Unification of Law Governing International Sales of Goods (Paris 1966) pp. 41, 366.

87. C.M. Schmitthoff, "The United Kingdom Arbitration Act 1979,"Yearbook Commercial Arbitration,vol. V. (1980) p. 231.

88. C.M. Schmitthoff, supra n. 20, p. 125.

89. Fouchard, BasleSymposium, supra n. 20, p. 81; J.D. Bredin, "Le loi du juge," Fouchard, Kahn and Lyon-Caen, eds. supra n. 23, p. 27; Goldman, supra n. 31, p. 13.

90. S. Strömholm, "'Public Rule Making and 'Private'," Scandinavian Studies in Law (Stockholm 1971).

91. Grossmann-Doerth, "Selbstgeschaffenes Recht der Wirtschaft und staatliches Recht" cited at Langen, Transnational CommercialLaw (Leiden 1973) pp. 11.

92. E. Langen, TransnationalCommercialLaw (Leiden 1973) pp. 8, 12.

93. Macaulay, "Private Legislation and the Duty to Read," 19 Vand.L.Rev. (1966) p. 1051.

94. D. Karlen, Judicial Administration, the American Experience (London 1970) p. 68.

95. A. Goldštajn, supra n. 58, p. 392; R. David, "The International Unification of Private Law," International Encyclopedia of Comparative Law, vol.II Ch.5, pp. 55-56.

96. J. Honnold, supra n. 1, pp. 47-48.

97. UNCITRAL Commentary, supra n. 55, p. 44 para. 2.

98. J. Honnold, supra n. 1, pp. 61, 106.

99. L. Réczei, "The Field of Application and the Rules of Interpretation of ULIS and UNCITRAL Conventions," 24 Acta Juridica Academiae Scientiarum Hunqaricae (Budapest 1982) p. 179.

100. E.A. Farnsworth, supra n. 57, p. 82.

101. Ibid. p. 84; H.J. Mertens and E. Rehbinder, Internationales Kaufrecht (Frankfurt 1975) p. 144, No.27.

102. J. Honno1d, supra n. 1, p. 146; E. A . Farnsworth, supra n. 57, p. 85; H.J. Mertens and E. Rehbinder, supra n. 101, pp. 121-122; L. Réczei, supra n. 99, p. 181.

103. J. Honnold, supra n. 1, p. 147; E.A. Farnsworth, supra n. 57, p. 85; H.J. Mertens and E. Rehbinder, supra n. 101, p. 118 No. 6.

104. H.J. Mertens and E. Rehbinder, supra n. 101, pp. 119-120.

105. J. Honnold, supra n. 1, p. 148; H.J. Mertens and E. Rehbinder, supra n. 101, p. 121; L. Réczei, supra n. 99, p. 181.

106. A. Goldštajn, supra n. 71, p. 35.

107. J. Honnold, supra n. 1, p. 133.

108. H.J. Mertens and E. Rehbinder, supra n. 101 pp. 139 No.5, 142 No.18, 144.

109. G. Farjat, "Réflexions sur les codes de conduite provés," Fouchard, Kahn and Lyon-Caen, eds. supra n. 23, p. 281.

110. P. Sanders, "Codes of Conduct and Sources of Law," Fouchard, Kahn and Lyon-Caen, supra n. 23, pp. 281, 298; F. Farjat, supra n. 109, p. 54.

111. B. Goldman, supra n. 31, p. 22.

112. C.M. Schmitthoff, BasleSymposium, supra n. 20, p. 189.

Pace Law School Institute of International Commercial Law - Last updated September 12, 2002
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