Czech (& Central European) Yearbook of Arbitration

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1 Czech (& Central European) Yearbook of Arbitration

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3 Czech (& Central European) Yearbook of Arbitration Volume III 2013 Borders of Procedural and Substantive Law in Arbitral Proceedings (Civil versus Common Law Perspectives) Editors Alexander J. Bělohlávek Filip Černý Naděžda Rozehnalová Professor Dr. Iur. Professor at the VŠB TU Charles University at the Masaryk University in Ostrava in Prague in Brno Czech Republic Czech Republic Czech Republic JURIS

4 Questions About This Publication For assistance with shipments, billing or other customer service matters, please call our Customer Services Department at: To obtain a copy of this book, call our Sales Department: Fax: Toll Free Order Line: (United States & Canada) See our web page about this book: COPYRIGHT 2013 By JurisNet, LLC All rights reserved. No part of this publication may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems without permission in writing from the publisher. Printed in the United States of America. ISBN ISSN JurisNet, LLC 71 New Street Huntington, New York U.S.A. The title Czech (&Central European) Yearbook of Arbitration as well as the logo appearing on the cover are protected by EU trademark law. Typeset in the U.S.A. by Juris Publishing, Inc.

5 Anton Baier Vienna, Austria Silvy Chernev Sofia, Bulgaria Sir Anthony Colman London, UK Alena Bányaivová Prague, Czech Republic Advisory Board Bohuslav Klein Prague, Czech Republic Pierre Lalive Geneva, Switzerland Nikolay Natov Sofia, Bulgaria Piotr Nowaczyk Warsaw, Poland Editorial Board Matthias Scherer Geneva, Switzerland Stanislaw Soltysiński Warsaw, Poland Jozef Suchoža Košice, Slovak Republic Vladimír Týč Brno, Czech Republic Marcin Czepelak Krakow, Poland Czech (& Central European) Yearbook of Arbitration Filip Černý Prague, Czech Republic Viorel Mihai Ciobanu Bukurest, Romania Wolfgang Hahnkamper Vienna, Austria Vít Horáček Prague, Czech Republic Marek Furtek Warsaw, Poland Vladimir Khvalei Moscow, Russia Miluše Hrnčiříková Olomouc, Czech Republic Lászlo Kecskes Budapest, Hungary Tomáš Řezníček Prague, Czech Republic Asko Pohla Talinn, Estonia Ian I. Funk Minsk, Belarus Květoslav Růžička Pilsen/Prague, Czech Republic Jiří Valdhans Brno, Czech Republic Thomas Schultz Geneva, Switzerland Address for correspondence & manuscripts Czech (& Central European) Yearbook of Arbitration Jana Zajíce 32, Praha 7, , Czech Republic v

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7 Impressum Institutions Participating in the CYArb Project Academic Institutions University of West Bohemia in Pilsen, Czech Republic Faculty of Law, Department of International Law & Department of Constitutional Law [Západočeská univerzita v Plzni, Právnická fakulta. Katedra mezinárodního práva & Katedra ústavního práva] Czech (& Central European) Yearbook of Arbitration Masaryk University (Brno, Czech Republic), Faculty of Law, Department of International and European Law [Masarykova univerzita v Brně, Právnická fakulta, Katedra mezinárodního a evropského práva] Pavol Jozef Šafárik University in Košice, Slovak Republic Faculty of Law, Department of Commercial Law and Business Law [Právnická fakulta UPJŠ, Košice, Slovensko. Katedra obchodného a hospodárskeho práva] VŠB TU Ostrava, Czech Republic Faculty of Economics, Department of Law [VŠB TU Ostrava, Ekonomická fakulta, Katedra práva] Institute of State and Law of the Academy of Sciences of the Czech Republic, v.v.i. [Ústav státu a práva Akademie věd ČR, v.v.i.] vii

8 Czech (& Central European) Yearbook of Arbitration Non-academic Institutions Participating in the CYArb Project International Arbitral Centre of the Austrian Federal Economic Chamber [Wiener Internationaler Schiedsgericht (VIAC), Vienna] Court of International Commercial Arbitration Attached to the Chamber of Commerce and Industry of Romania [Curtea de Arbitraj Comercial Internaţional de pe lângă Camera de Comerţ şi Industrie a României, Bucharest] Arbitration Court Attached to the Hungarian Chamber of Commerce and Industry [A Magyar Kereskedelmi és Iparkamara mellett szervezett Választottbíróság, Budapest] Impressum Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic [Rozhodčí soud při Hospodářské komoře České republiky a Agrární komoře České republiky, Prague] Arbitration Court Attached to the Czech-Moravian Commodity Exchange Kladno [Rozhodčí soud při Českomoravské komoditní burze Kladno (Czech Republic)] ICC National Committee Czech Republic [ICC Národní výbor Česká republika] The Court of Arbitration at the Polish Chamber of Commerce in Warsaw [Sąd Arbitrażowy przy Krajowej Izbie Gospodarczej w Warszawie] Slovak Academy of Sciences, Institute of State and Law, Slovak Republic [Slovenská akadémia vied, Ústav štátu a práva. Bratislava, Slovensko] Proofreading and translation support provided by: Agentura SPA, s. r. o., Prague, Czech Republic, and Pamela Lewis, USA. viii

9 Contents List of Abbreviations... xiii Czech (& Central European) Yearbook of Arbitration ARTICLES Andrzej Kubas Kamil Zawicki The Scope of Mandatory Provisions of Procedural and Substantive Law Binding upon a Court of Arbitration... 3 Alexander J. Bělohlávek Application of Law in Arbitration, Ex Aequo et Bono and Amiable Compositeur Vit Makarius The Nature of the Burden and Standard of Proof in International Commercial Arbitration Klára Drličková The Law Applicable to Arbitration Agreements Lex Arbitri or Lex Causae of the Principal Contract? Leonid Shmatenko Is Lex Mercatoria Jeopardizing the Application of Substantive Law? Vasily N. Anurov Cause of Action in Investment Arbitration ix

10 Czech (& Central European) Yearbook of Arbitration Contents Marina P. Bardina Determination of Substantive Law by International Commercial Arbitration in Russian Law, ICAC Rules and Arbitration Practice CASE LAW Section A I. Current Case Law of the Constitutional Courts and General Courts on Arbitration Czech Republic Alexander J. Bělohlávek Hungary Alexander J. Bělohlávek Poland Andrzej Kubas Kamil Zawicki Magdalena Selwa Slovak Republic Alexander J. Bělohlávek II. Court Rulings on the Application of Law in Arbitration Czech Republic Alexander J. Bělohlávek Section B Case Law of the Arbitral Tribunals: Decisions of Arbitral Tribunals within the Jurisdiction of the Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic Current Case Law on Arbitration Alexander J. Bělohlávek Application of Law in Arbitration Alexander J. Bělohlávek x 3. Borders of Procedural and Substantive Law in Arbitration Alexander J. Bělohlávek

11 Contents BOOK REVIEWS Alexander J. Bělohlávek Act on Arbitration Proceedings and Enforcement of Arbitration Awards, A Commentary NEWS & REPORTS Rajko Knez Marko Djinović Nejc Lahne Arbitration in Slovenia A New Perspective Alexander J. Bělohlávek New Rules of the Arbitration Court Attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic Czech (& Central European) Yearbook of Arbitration Bohumil Poláček Arbitration Expert Witnesses Miluše Hrnčiříková Fifth Annual Olomouc Pre-Moot Current Events, Past & Ongoing CYIL/CYArb Presentations Selected Bibliography of Czech, Slovak and Polish Authors for Important Web Sites Index All contributions in this book are subject to academic review. xi

12 Leonid Shmatenko Is Lex Mercatoria Jeopardizing the Application of Substantive Law? Abstract The following article discusses the application of lex mercatoria by domestic courts and international arbitral tribunals instead of or supplementary to domestic substantive law. Emphasising the legal status of lex mercatoria, the article evaluates its value compared to substantive law. To provide legal certainty, it also tries to establish certain criteria regarding the recognition of certain business principles as lex mercatoria.* Key words: lex mercatoria merchant law customary law substantive law arbitral tribunals arbitration requirements applicable law UNIDROIT Russia Ukraine Germany Dipl.-iur. Leonid Shmatenko is a Junior Fellow and Doctoral candidate at the Chair of German and Foreign Public Law, European Law and Public International Law at the Heinrich-Heine- University of Düsseldorf. leonid.shmatenko@ hhu.de Czech (& Central European) Yearbook of Arbitration * The author would like to thank Mr. Aron Leimbach for the helpful feedback. 89

13 Czech (& Central European) Yearbook of Arbitration Leonid Shmatenko [Lex mercatoria is] a kind of Yeti or Loch Ness monster; no one has ever seen them but they might turn out to be useful. 1 I. Introduction Law evolves over years. This is particularly true for transnational commercial law and arbitration. Lex mercatoria is not a new phenomenon. It even existed in Roman law under the name of ius gentium, a body of law regulating the economic relations between foreigners and Roman citizens. 2 Some scholars in researching the roots of lex mercatoria have found that it already existed in ancient Egypt and in the Greek and Phoenician sea trade of antiquity Beginning in the 1960s, stimulated by the London Chamber on the Sources of International Trade, the first discussions took place on the concept of lex mercatoria as a common transnational law. 4 Several scholars such as Kegel, Goldman and Schmitthoff, take this approach leading to a broader discussion of the doctrine. 5 This debate continues, showing its effects in the jurisdiction of international arbitral tribunals and domestic courts. This unification of transitional business and economic laws that led to the lex mercatoria we know today. The more frequent and sometimes exclusive application of lex mercatoria instead of domestic substantive laws causes some legal uncertainty because it is not clear when a principle should be considered as lex mercatoria. The following article discusses the legal status of lex mercatoria in the jurisdiction of domestic courts and international arbitral tribunals and explores whether it replaces the application of private international law or represents just a passing trend, afflicted with problems Roland Loewe, Kaufrechtsübereinkommen Lückenfüllung durch nichtamtliche Kodifikationen, (Agreement on the Sale of Goods Gapfilling through non-legislatory codifications), TRANSPORT-UND VERTRIEBSRECHT 2000, FESTGABE FÜR ROLF HERBER, Neuwied: Luchterhand 7 (K.-H. Thume ed., 1999). 2 Ana Mercedes López Rodríguez, Lex Mercatoria, 1 RETTID 46 et seq. (2002). 3 Ibid., at 46 with further references. 4 FELIX DASSER, INTERNATIONALE SCHIEDSGERICHTE UND LEX MERCATORIA (International Arbitration Tribunals and Lex Mercatoria), Zurich: Schulthess Polygraphischer Verlag 39 (1989). 5 For further details see: GERHARD KEGEL, CRISIS OF CONFLICT OF LAWS, Leyden: Sijthoff 17 (1964).

14 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? II. The Concept of Lex Mercatoria and Its Substantive Qualities It is first necessary to clarify the concept of lex mercatoria, also known as merchant law and its substantive qualities as it directly competes with domestic substantive laws. Unfortunately, there is no general agreement on the definition of lex mercatoria. It could be defined as the merchant s uniform (unwritten) rules created by the international trade community to serve the needs of international trade. Other scholars define it as transnational commercial law, general principles of international commercial law, principles common in several legal systems, and international trade usages. 6 It is clear that many parties or arbitrators choose lex mercatoria as the lowest common denominator to circumvent a range of legal problems arising out of the application of domestic laws. Hence, lex mercatoria and its (dis-)advantages shall be regarded vis-à-vis domestic legislation. Czech (& Central European) Yearbook of Arbitration II.1. Is It Autonomous or Positivist? That Is the Question! The relationship between lex mercatoria and domestic law can be seen in two different ways. On the one hand, it is regarded as an autonomous legal order in a sense that is different from both domestic and international legal orders. 7 On the other hand, it is seen as a defined body of rules with a transnational origin, existing only by virtue of state laws, which give effect to them, thus being founded on domestic law. 8 6 JULIAN D. LEW, LOUKAS A. MISTELIS, STEFAN KRÖLL, COMPARATIVE INTERNATIONAL COMMERCIAL ARBITRATION, The Hague: Kluwer Law International 454 (2003). 7 Berthold Goldman, The applicable law: general principles of law the lex mercatoria, in CONTEMPORARY PROBLEMS IN INTERNATIONAL COMMERCIAL ARBITRATION, Dordrecht: Martinus Nijhoff Publishers 116 (J. D. M. Lew ed., 1986); Filip De Ly, Feloc Dasser s Internationale Schiedsgerichte und Lex Mercatoria, Rechtsvergleichender Beitrag zur Diskussion Über Ein Nichtstaatliches Handelsrecht (Feloc Dasser s International Arbitral Tribunals, A Comparative Law Essay on the Discussion about Non-State Commercial Law), 39 AM. J. COMP. L. 626 (1991); Ole Lando, The Lex-Mercatoria in International Commercial Arbitration, 34 INTERNATIONAL AND COMPARATIVE LAW QUARTERLY 151 (1985); Michael Mustill, The New Lex Mercatoria: The First Twenty-Five Years, 4 ARB.INT L 86 (1988). 8 Clive M. Schmitthoff, International Business Law: A New Law Merchant, 2 CURRENT LAW AND SOCIAL PROBLEMS 129 (1961) (Reprinted in, CLIVE M. SCHMITTHOFF, SELECT ESSAYS ON INTERNATIONAL TRADE, Dordrecht: Martinus Nijhoff Publishers 20 (C-J Ceng ed., 1988)); and Clive M. Schmitthoff, The Unification of the Law of International Trade, JOURNAL OF BUSINESS LAW, Reprinted in CLIVE M. SCHMITTHOFF, SELECT ESSAYS ON INTERNATIONAL TRADE, Dordrecht: Martinus Nijhoff Publishers (C-J Ceng ed., 1988). 91

15 Czech (& Central European) Yearbook of Arbitration II.1.1. The Autonomous Perspective Leonid Shmatenko According to the autonomists view, international commerce and thus lex mercatoria is a legal order sui generis guaranteeing a special and separate regime of governance. 9 Goldman even argues that international commercial law was never bound to nations and territories and is a direct successor of the ius gentium of Roman law. 10 In the autonomist approach several scholars such as Berger 11 or Mustill 12 developed various lists of principles of lex mercatoria. Those lists, be it the one by Mustill containing twenty principles, such as culpa in contrahendo, pacta sunt servanda and rebus sic stantibus, 13 or the one by Berger describing the principles as creeping codification, are not exhaustive. They bring some legal certainty to the extensive number of principles (from public international law; uniform laws and conventions; trade usages and customs, including standard form contracts, which are observed in the dealings of the international commercial community; general principles of law common to commercial states, which are discovered through a comparative approach; the rules of international organisations; and the reports of international commercial arbitral awards), 14 They show on the other hand how differently lex mercatoria is perceived and how much uncertainty is connected with its application. II.1.2. The Positivist Perspective The positivist approach sees lex mercatoria and its origins in medieval times as the so-called law merchant. 15 The lex mercatoria is a third generation law merchant in European history. According to Schmitthoff, it is the rediscovery of the international character of 92 9 Clive M. Schmitthoff, International Business Law: A New Law Merchant, 2 CURRENT LAW AND SOCIAL PROBLEMS 27 (1961). 10 Clive M. Schmitthoff,The Unification of International Trade, The Unification of the Law of International Trade, (Reprinted in M. SCHMITTHOFF S SELECT ESSAYS ON INTERNATIONAL TRADE, Dordrecht: Martinus Nijhoff Publishers 170(C-J Ceng ed., 1988)). 11 KLAUS PETER BERGER, THE CREEPING-CODIFICATION OF THE LEX MERCATORIA, The Hague: Kluwer Law International (1999). 12 Michael Mustill, supra note 7, at Ibid., at Jarrod Wiener, The Transnational Political Economy: A Framework for Analysis, SISU (online publication) 1, 9 (1996). Available at: political.economy.a.framework.for.analysis.jarrod.wiener.ukc/sisu_manifest.html (accessed on October 1, 2012). 15 Aleksandar Goldstaijn, The New Law Merchant, JOURNAL OF BUSINESS LAW 12 (1961); Leon E. Trakman, The Evolution of the Law Merchant: Our Commercial Heritage, 12 JOURNAL OF MARITIME LAW AND COMMERCE 1 ( ).

16 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? commercial law, i.e. moving away from national restrictions to a universal and international conception of international trade law. 16 Although Schmitthoff says that lex mercatoria is autonomous from any system of law, 17 it should be noted that only three aspects must be taken into account. First, it should contain universal principles, e.g., pacta sunt servanda, which are usually recognized in any legal system. Second, it should contain certain standards applying to the formation of contracts and third, it should contain the growing jurisdiction of international commercial arbitration. 18 In conclusion, the whole doctrine of Schmitthoff concentrates on the unification and harmonisation of international trade law and is closely interwoven with domestic laws. 19 This approach is more convincing than the autonomous one for many reasons, the most striking one being the origin of lex mercatoria. As it originates from customs in commercial law, customary rules, general principles of commercial law, etc. it is a logical consequence that lex mercatoria must be treated as transnational commercial law. 20 Czech (& Central European) Yearbook of Arbitration III. Lex Mercatoria and Its Disadvantages Lex mercatoria divides law scholars and practitioners into two factions, those who disapprove of the principles of lex mercatoria and those who think that lex mercatoria is the way to salvation. It is undisputed that lex mercatoria is relevant in international commercial arbitration, especially in the interpretation of international commercial contracts. However, in applying the rules of a constitutional state, lex mercatoria shows a number of substantial deficits From a systematic point of view, lex mercatoria lacks an inner system, a fact which leads to a patchwork of many dispersed principles. With its open clauses, which allow for a number of arbitrary decisions, it is insufficient to rebuild the reality of legal relations. Last but not least, which institution legitimately approved lex mercatoria is not evident. 16 Clive M. Schmitthoff, International Business Law: A New Law Merchant, 2 CURRENT LAW AND SOCIAL PROBLEMS 129 (1961) (Reprinted in, CLIVE M. SCHMITTHOFF S SELECT ESSAYS ON INTERNATIONAL TRADE, Dordrecht: Martinus Nijhoff Publishers 20 (C-J Ceng ed., 1988)); Clive M. Schmitthoff, The Unification of the Law of International Trade, JOURNAL OF BUSINESS LAW (Reprinted in CLIVE M. SCHMITTHOFF, SELECT ESSAYS ON INTERNATIONAL TRADE, Dordrecht: Martinus Nijhoff Publishers 105 (C-J Ceng ed., 1988)). 17 Ibid., at Ibid., at Ibid., at López Rodríguez, supra note 2, at 48; Roy Goode, Usage and Its Reception in Transnational Commercial Law, 46 INTERNATIONAL & COMPARATIVE LAW QUARTERLY 4 (2008). 93

17 Czech (& Central European) Yearbook of Arbitration 94 Leonid Shmatenko Contrary to codified law, especially to private international law with its links to other domestic regulations, lex mercatoria exists in a vacuum. This fact is underlined by the predominant doctrines about the relation of lex mercatoria to substantive law. Whereas these doctrines deal with the relationship, they do not provide an answer to the question of whether lex mercatoria could be substantive law. This becomes more obvious as lex mercatoria frequently reproduces principles and doctrines already included in domestic legislation The traditional statutory laws of the nineteenth and twentieth centuries did not provide any options for considering lex mercatoria as an autonomous law. However, it still found its way into legislation as customary law. The best examples of this practice are found in Section 346 of the German Commercial Code and Article 9 of the United Nations Convention on the International Sale of Goods (CISG). Section 346 of the German Commercial Code reads: Trade customs and usages must be observed among merchants, in respect of meaning and effect of actions and omissions. Article 9(2) of the CISG has a very similar wording: 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 Hence, lex mercatoria as natural law, which always co-exists with statutory law, is part of a reality that cannot be disregarded. It clearly demonstrates that a parallel legislation is taking place in the codification of state laws. The cornerstone of the whole discussion is still whether lex mercatoria can meet the quality standards to be treated as law. No matter how relevant lex mercatoria may be in practice, one should bear in mind its aforementioned disadvantages, e.g. its patchwork character and lack of legitimacy, which lead one to the conclusion that lex mercatoria should be a complementary, subsidiary set of rules, but never an independent and colourful potpourri of principles replacing substantive law. As long as there is no worldcustomary-law, lex mercatoria can never gain enough support to suppress domestic laws. Hence, lex mercatoria cannot be a lex specialis to domestic laws as long as its principles are not reflected in them As a result, it can be said that as long as the principles of lex mercatoria are dispersed and inconsistent, lex mercatoria cannot be an autonomous law. To achieve this it is necessary to promote domestic codification of these principles, while arbitral tribunals should return to the application of substantive law and should not try to circumvent these provisions by the application of lex mercatoria. It is undisputed

18 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? that lex mercatoria should be used in a complementary manner in order to strengthen its position. However, only the application of hard law, i.e. substantive law can provide the demanded certainty when enforcing arbitral awards. IV. Lex Mercatoria s Advantages Although there are several disadvantages to the application of lex mercatoria, there are a few positive aspects that should be mentioned. The community of lex mercatoria supporters that consists of Goldman, Schmitthoff, Berger, Lando and Gaillard, brings forward several arguments detaching lex mercatoria from the discussion on whether a substantive law is needed. Whereas it is clear that a law cannot exist in a vacuum and needs a legitimate legislator, Fouchard, Gaillard and Goldman state that it is by no means evident that to be the object of a valid choice of governing law the rules chosen must necessarily be organised in a distinct legal order. 21 Goldman, who has argued that international trade was autonomous from domestic laws as a majority of international business was not regulated by domestic laws, introduced the idea of lex mercatoria being an international trade law. 22 This ad hoc approach is needed to meet the demands of the alwaysevolving reality of transnational trade. Thus, lex mercatoria reflects customary and spontaneous regulations. 23 Schmitthoff s argument providing three pillars for the foundation of lex mercatoria, mentioned above, underlines this approach. As these principles can be combined with domestic law, they allow the parties to have a more flexible handling of their dispute as long as they do not violate the mandatory rules of the respective country. 24 It was described above how lex mercatoria can be spontaneous as well as customary, thus giving the parties remarkable flexibility in shaping their commercial relations. Such flexibility cannot be found in domestic law, which can be unpredictable as well. Additionally, lex mercatoria is frequently applied in international practice, where parties do not always want to apply domestic laws. Czech (& Central European) Yearbook of Arbitration 21 FOUCHARD, GAILLARD, GOLDMAN ON INTERNATIONAL COMMERCIAL ARBITRATION, Hague: Kluwer Law International 809 (E. Gaillard & J. Savage eds., 1999). 22 Berthold Goldman, Frontières du Droit et Lex Mercatoria, Le droit subjectif en question, ARCHIVES DE PHILOSOPHIE DU DROIT 181 (1964). 23 Berthold Goldman, The applicable law: general principles of law the lex mercatoria, CONTEMPORARY PROBLEMS IN INTERNATIONAL ARBITRATION, Doldrecht: Martinus Nijhoff Publishers 113 (J. D. M. Lew ed., 1987). 24 Katharina Boele-Woelki, Principles and Private International Law, 1 UNIFORM LAW REVIEW 652 (1996). 95

19 Czech (& Central European) Yearbook of Arbitration Leonid Shmatenko V. Codification of Lex Mercatoria Halfway There? Berger speaks about a creeping codification of lex mercatoria. Indeed the practices and principles of international trade have been translated into numerous codifications by UNIDROIT and UNCITRAL. The latter contain, e.g., the Convention on the Limitation Period in the International Sale of Goods 25 and the very successful CISG. 26 Other sources can be found in the ICC INCOTERMS. 27 These codifications show the transnational origin of lex mercatoria, though their existence depends on the discretion of every single state. These principles become only a part of domestic law if the states ratify them. The unification nevertheless proceeds: UNCITRAL, ICC, UNIDROIT, the Hague Convention on Private International Law, and the International Maritime Committee all pursue the codification of trade principles and try to achieve a maximal adoption of these rules. Even the European Union recognizes this trend and wants to introduce a Common European Sales Law 28 incorporating the latest developments in international trade. Although the latter aims at B2C relationships, there has been a distinct tendency toward development of a Common European Civil Code. 29 While it might take some time until such a 25 The convention was not very successful. As of today only 21 parties have amended it. For further information see the status available at: uncitral_texts/sale_goods/1974convention_status.html (accessed on August 14, 2012). The convention can be accessed in English at: sales/limit/limit_conv_e_ebook.pdf (accessed on August 14, 2012). 26 As of today 78 parties have amended the CISG. See the status at: uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980cisg_status.html (accessed on August 14, 2012). The undisputed access of the CISG and its close relationship to international commercial arbitration can be seen in the Willem C. Vis Commercial Arbitration Moot Court, taking place in Vienna and attracting 280 student teams from over 67 countries. For further details see: Hew R. Dundas, The Willem C Vis International Commercial Arbitration Moot, 1 STOCKHOLM INTERNATIONAL ARBITRATION REVIEW 155 (2008); ANA BARBARA BAIDE, CISG THROUGH THE WILLEM C VIS MOOT CASEBOOK SEVENTEEN YEARS OF THE CISG EVOLUTION EXPLORED THROUGH ANNUAL DISCUSSION, Dissertation, Victoria University of Wellington (2009), available at: vuw.ac.nz/bitstream/handle/10063/1246/thesis.pdf?sequence=1 (accessed on August 15, 2012) See (accessed on August 14, 2012). 28 See Proposal for a Regulation of the European Parliament and Council on a Common European Sales Law, EC COM(2011) 635 final. Available at: LexUriServ/LexUriServ.do?uri=COM:2011:0635:FIN:EN:PDF (accessed on August 14, 2012). 29 See e.g. STEFAN LEIBLE, WEGE ZU EINEM EUROPÄISCHEN PRIVATRECHT: 96 ANWENDUNGSPROBLEME UND ENTWICKLUNGPERSPEKTIVEN DES GEMEINSCHAFTSPRIVATRECHTS (The Ways to European Civil Law: Problems of Application and Perspectives of Evolution of a Common European Civil Code), Habilitationsschrift, Bayreuth (2001).

20 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? uniform law is introduced, the only logical step would be a Common European Commercial Code finally unifying and codifying the scattered principles of lex mercatoria. VI. The Application of Lex Mercatoria in International Practice Even though domestic courts do acknowledge the principles of lex mercatoria, not every domestic court wants to deal with it and produce a decision that might be overruled in the next instance. This applies to arbitral tribunals as well, as there is some risk that an award based on lex mercatoria rather than on substantive law might be set aside, or not enforced in the domestic courts. Success in enforcing an award based on the principles of lex mercatoria very much depends on whether the domestic court is familiar with the principle. This might be the case for culpa in contrahendo in Germany; however, for e.g., in Russia the doctrine of culpa in contrahendo is unknown both in substantive law and in jurisprudence. An evaluation of some domestic decisions from Germany, Russia and the Ukraine, as well as arbitral awards using lex mercatoria illustrate this point. Czech (& Central European) Yearbook of Arbitration VI.1. Lex Mercatoria in International Arbitration The application of lex mercatoria in international arbitration is seen as a success of transnational law against substantive law. VI.1.1. SCC Case 117/1999 Application of the UNIDROIT Principles This dispute involved a Luxembourg company and a Chinese company. Both companies were a licensor and licensee. They had a contractual relationship from 1980 to In 1998, they entered into a nondisclosure agreement (settlement), which effectively imposed on them a secrecy obligation until 31 December However, alleged breaches of the secrecy obligation were recorded. The European company filed a request for arbitration with the Arbitration Institute of the Stockholm 30 Loukas Mistelis, UNIDROIT Principles Applied as Most Appropriate Rules of Law in a Swedish Arbitral Award, 8 UNIFORM LAW REVIEW 630 (2003). Available at: (accessed on August 14, 2012); see also Case summary with observations Herbert Kronke & Juan Fernández-Armesto, Separate Arbitral Award rendered in 2001 in SCC Case 117/1999, STOCKHOLM ARBITRATION REPORT 59 (2002). 97

21 Czech (& Central European) Yearbook of Arbitration Leonid Shmatenko Chamber of Commerce, claiming damages for breach of the secrecy obligation The case was referred to the arbitration tribunal in July of The place of arbitration was Stockholm and the arbitration tribunal consisted of two Swedish arbitrators (one being the Chairman) and one Chinese arbitrator. 32 On 24 October 2000, the European company requested a determination of the issue of applicable law in a final partial award. The Chinese company agreed with the European company in this request. There had been no agreement as to the applicable law in either the 1980 or the 1998 agreement. 33 Both parties made submissions regarding the applicable substantive law since there was no choice-of-law clause. The tribunal had as choices Swedish law, Chinese law, the UNIDROIT Principles or Luxembourgian law There were no provisions in the Swedish Arbitration Act to determine the applicable substantive law. It did allow the arbitrators to apply the rules of law it considered most appropriate. Chinese law could not be applied due to the Swedish conflict-of-law rules of the 1980 Rome Convention. 34 Swedish law was not a good option as its choice would have been hypothetical and fictional. 35 Bearing that in mind, the arbitral tribunal applied the UNIDROIT Principles stating that: [the Principles] have wide recognition and set out principles that in the Tribunals [sic] opinion offers [sic] a protection for contracting parties that adequately reflects [sic] the basic principles of commercial relations in most if not all developed countries. 36 VI.1.2. ICC Case No Application of UNIDROIT Principles Another example of the application of the UNIDROIT Principles and thus lex mercatoria is ICC Case No This dispute arose out of a contract that was silent as to the law to be applied on the merits. It did not contain any express choice of law clause, neither written nor implied. The contract and the arbitration involved a Vietnamese seller and a Dutch buyer acting through its French company. The place of Ibid., at Ibid., at Ibid., at Ibid., at Ibid. 36 Herbert Kronke & Juan Fernández-Armesto, supra note ICC Case No Available at: (accessed on August 14, 2012).

22 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? arbitration was Paris, France. 38 As in the case above, the dispute had connections with several national laws, all of which might have played a relevant role Under Article 13(3) of the ICC Rules, the arbitral tribunal should apply the law designated by the rule of conflict which it deems appropriate. 39 However, the contract referred to international trade usages, such as the INCOTERMS or the Uniform Customs and Practice for Documentary Credits. Bearing this in mind, the arbitral tribunal decided to base its award on trade usages and generally accepted principles of international trade 40 and to integrate when required by the circumstances, [ ] the provisions of the 1980 Vienna Convention on Contracts for the International Sale of Goods (Vienna Sales Convention) or [ ] the Principles of International Commercial Contracts enacted by UNIDROIT, as evidencing admitted practices under international trade law. 41 VI.2. Lex Mercatoria in Domestic Courts Generally, domestic courts tend to be unwilling to rule on something rather unknown and wish to remain conservative. This, however, is not the case for lex mercatoria. Lex mercatoria finds its counterpart in national legislation and is frequently applied by domestic courts. The German counterpart of lex mercatoria, mentioned above and found in Section 346 of the German Commercial Code, refers to the so-called Handelsbrauch, meaning mercantile customs. Article 7 paragraph 1, sentence 1 and 2 of the Ukrainian Civil Code even provides a legal definition of a торговий звичай (torhovyi zvyčaj). It states that a mercantile custom is a rule, which is not set forth in the Civil Code, but represents a fortified rule in a certain area of civil relations. Article 5 paragraph 1 of the Russian Civil Code follows the same approach as the Ukrainian Civil Code. Обычаи делового оборота (Obyčai delovogo oborota) means the customs of a commercial turnover. The definition contained in Article 5 paragraph 1 of the Russian Civil Code itself states that: A mercantile custom is an acknowledged and broadly applied rule in any branch of business which is not positively regulated by law, legally independent of whether it is in writing or not. Czech (& Central European) Yearbook of Arbitration 38 Ibid. 39 Ibid. 40 Ibid. 41 Ibid. 99

23 Czech (& Central European) Yearbook of Arbitration VI.2.1. Handelsbrauch in German Jurisdiction Leonid Shmatenko German domestic courts frequently apply Handelsbrauch in their jurisprudence. This is because the application found its codification in Section 346 of the German Commercial Code. The following decisions are examples of when the courts applied Handelsbrauch. VI Implicit Arbitration Agreement as Handelsbrauch In a rather old case from 1992, the Federal Supreme Court had to apply Handelsbrauch to establish an implicit arbitration agreement between two parties On 1 May 1987, Corporation R sent a telegram to the respondent, ordering 3000 dozen wetblue-sheepskins and referring to contract C The respondent confirmed that order and assumed that Corporation R was the contractual partner for the 3000 dozen wetblue-sheepskins. In the respondent s letter with the contract number 7297 it was stated inter alia: Remarks basis: International Hide & Skin Contract No. 2 Arbitration and Appeal H. On 7 May 1987, Corporation R sent a Contract Note to the claimant, a third party, with the number C 3132 which stated that it dealt as an agent of the S-KG selling to the claimant 3000 dozen wetblue-sheepskins. The claimant, being a third party to the contract, confirmed receipt of the contract and the terms and conditions. On the same day, Corporation R sent a contract note C 3132 to the respondent (S-KG). The latter received the letter on 14 May 1987, and responded in a telegram to Corporation R on 20 May 1987 asking to modify the contract stating: Please modify our contract 7297 accordingly. This request was sent with the intention of clarifying the identity of the contracting buyer. On 22 June 1987, the respondent issued an invoice to the claimant, as a third party, demanding USD based on contract 7297, concluded 8 May The claimant paid the invoice on 13 July After the claimant cancelled the contract, it demanded the purchase price from the respondent. The respondent claimed in the revision that there was still the objection of the presence of an arbitration agreement. The regional court ruled that due to this objection the claim was inadmissible. The appellate court did not concur with this ruling and remitted the case to the regional court Decision of the Federal Supreme Court, 3 December 1992, Case No. III ZR 30/91. Published in NJW 1993, 1798.

24 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? The Federal German Court stated that both parties contracted for an arbitration agreement through the International Hide & Skin Contract No. 2 as a Handelsbrauch. A Handelsbrauch could also lead to an implicit arbitration agreement, as is typical for this business branch and the participating parties took actions in the relevant business branch. VI Business-like Letter of Confirmation as Handelsbrauch Another acknowledged Handelsbrauch in German commercial law is the business-like letter of confirmation ( kaufmännisches Bestätigungsschreiben ). 43 This principle states that a businessman 44 implicitly accepts an offer by another businessman unless it is immediately contradicted In a recent case that came before the Federal Supreme Court 45 a claimant sought to have an arbitral award declared enforceable, which would oblige the respondent to pay damages. The regional court of first instance granted the request, confirming the existence of a valid arbitration agreement. The court stated that there were no grounds to refuse the declaration of enforceability within the meaning of Article V paras. 1 and 2 of the New York Convention (NYC). Although there was no written arbitration agreement within the meaning of Art. II para. 2 of the NYC, the court found that in light of the most-favoured treatment clause contained in Article VII of the NYC, the requirement of an arbitration agreement signed by both parties could be dispensed with. The court held further that the claimant could rely upon an arbitration agreement established by a business-like letter of confirmation, thus complying with the less stringent provision of Section 1031 paragraphs 2 and 3 of the German Code of Civil Procedure. 46 Thus Czech (& Central European) Yearbook of Arbitration 43 See the established law practice in the Decisions of the Supreme Court of the German Reich: RGZ 54, 176; RGZ 95, 96; RGZ 129, 347, According to Section 1 of the German Commercial Code a businessman is someone who carries out mercantile trade. In its original text it provides: 1 (1) Kaufmann im Sinne dieses Gesetzbuchs ist, wer ein Handelsgewerbe betreibt. (A businessman in the sense of this Code, is someone who is conducting a business). (2) Handelsgewerbe ist jeder Gewerbebetrieb, es sei denn, daß das Unternehmen nach Art oder Umfang einen in kaufmännischer Weise eingerichteten Geschäftsbetrieb nicht erfordert. (A business is every commercial undertaking, unless, the business, due to its type or scope, does not demand commercial operations). 45 Decision of the Federal Supreme Court, 30 September 2010, Case No. III ZB 69/09. Published in 332 SCHIEDSVZ (2010). 46 Section 1031 Form of arbitration agreement (1) The arbitration agreement shall be contained either in a document signed by the parties or in an exchange of letters, telefaxes, telegrams or other means of telecommunication which provide a record of the agreement. 101

25 Czech (& Central European) Yearbook of Arbitration Leonid Shmatenko a valid arbitration agreement is also concluded if a business-like letter of confirmation is sent to the opposing party according to Section 1032 paragraph 3 of the German Code of Civil Procedure The Federal Supreme Court in the last instance confirmed the decision of the appellate court holding that the most-favoured treatment clause in Article VII para. 1 of the NYC permits the application of the less stringent provision of Section 1031 paras. 2 and 3 of the German Code of Civil Procedure. Such a broad interpretation of the most-favoured treatment principle applying recognition-friendly national provisions, not only for national but also for foreign arbitral awards, is supported by international law. 47 VI.2.2. Torhovyi Zvyčaj in the Ukrainian Jurisdiction From 2006 to today, 728 court decisions on torhovyi zvyčaj can be found in the Ukrainian jurisdiction. 48 The following paragraph evaluates the application of two different principles of lex mercatoria. VI Pacta Sunt Servanda in the Ukrainian Jurisdiction The principle of pacta sunt servanda is acknowledged by the majority of scholars as a principle of lex mercatoria. In the Ukrainian jurisdiction there is only one case in which the court applied this principle. The Commercial Court of Černivec ka Oblast ruled upon a cancellation of a contract In this case the claimant wanted the contract it had with two respondents to be declared invalid. In its view the contract violated Articles 512, 516, 527, 1077 and 1079 of the Civil Code of Ukraine and thus was invalid according to Article 215 of the Civil Code of Ukraine. On 23 January 2002 the claimant and the second respondent entered into a construction contract containing a clause stating that the rights arising out of the contract could not be part of an assignment agreement. On 15 November 2010, the claimant and the first 102 (2) The form requirement of subsection 1 shall be deemed to have been complied with if the arbitration agreement is contained in a document transmitted from one party to the other party or by a third party to both parties and if no objection was raised in good time the contents of such document are considered to be part of the contract in accordance with common usage. 47 Decision of the Federal Supreme Court, 30 September 2010, Case No. III ZB 69/ This number originated from a case search with the term torgovyj zvyčay in the Common Register of Court Decisions of Ukraine (in Ukrainian only) available at: (accessed on August 14, 2012). 49 Decision of the Commercial Court of Černivec ka Oblast, 14 March 2011, Case No. 6/97, Available at: (accessed on August 14, 2012).

26 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? respondent entered into a contract, which stated that the first respondent became the cessionary of the second respondent and thus could demand payment from the claimant which arose from a subcontract. The first instance court ruled that this contract was invalid, and the second respondent stopped fulfilling the contract. The Commercial Court of Černivec ka Oblast ruled that the second respondent had to continue the fulfilment of its obligations (pacta sunt servanda) as the contract forbidding the assignment had been validly contracted (actio ex contractu). VI UNIDROIT Principles in the Ukrainian Jurisdiction The UNIDROIT Principles were applied frequently in the Ukrainian Jurisdiction. An example of their application in domestic courts is seen in the case of the Kiev Commercial Court. The court had to rule upon the frustration of an easement contract, which resulted in the cancellation of the latter. 50 The claimant, a private stock corporation, entered into an easement contract with the respondent, a municipal limited liability company, on 1 December On 14 July 2011, and 29 August 2011, the municipal parliament issued two decisions limiting the rights of municipal agencies and transferred the rights to other municipal companies that did not include the respondent s company. Referring to Article 406 sec. 2 of the Civil Code of Ukraine, the claimant wrote to the respondent that it was entitled to cancel the easement contract due to hardship. Article 652 of the Civil Code of Ukraine contains a definition of hardship and states that the parties shall renegotiate the contract; if the negotiations fail, the equilibrium can be either adjusted by the courts or cancelled. Thus the claimant cancelled the contract on 1 December The municipal company claimed, however, that the contract had not been cancelled because the decisions by the municipal parliament were not retroactive. Furthermore, they were not connected to the dispute in the case and thus this did not constitute fundamental changes When applying Article 652 para. 2 of the Civil Code of Ukraine, the court interpreted the definition of hardship in the light of Article UNIDROIT Principles by referring to its definition, saying that hardship was where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party s performance has increased or because the value of the performance Czech (& Central European) Yearbook of Arbitration 50 Decision of the Kiev Commercial Court, 12 April 2012, Case No / , Available at: (accessed on August 14, 2012). 103

27 Czech (& Central European) Yearbook of Arbitration Leonid Shmatenko decreased. However, it said that such circumstances did not occur in this case and there was no need to adjust the equilibrium. VI.3. Lex Mercatoria in Case Law A Brief Summary In conclusion, both arbitral tribunals and domestic courts apply lex mercatoria. Whenever a codification of a principle is missing in domestic legislation, lex mercatoria is able to bridge this gap. Lex mercatoria can also be useful for cases where it is unclear which substantive law applies. However, lex mercatoria as an independent substantive law is rarely applied. It rather acts as an addendum to substantive law. Nevertheless, it cannot be denied that lex mercatoria has become an important part of jurisprudence and has almost entered the legal mainstream. Yet the application of substantive laws still prevails, thus making lex mercatoria a nice bonus given to the tribunals, courts and parties to shape their business relations in a globalised world. VII. Requirements for Acknowledgement of Principles as Lex Mercatoria As seen above, lex mercatoria principles are applied in arbitral awards and in domestic courts. However, there is as yet no criteria substantiating when a certain rule may be seen as applicable lex mercatoria. Courts rather tend to apply it arbitrarily, which makes the results unpredictable compared to results based on substantive law. This leads to legal uncertainty. Consequently, it would be a major improvement to the application of lex mercatoria if the principles had to fulfil certain requirements to be seen as applicable and applied. Thus, in the following discussion, we will make an attempt to establish some requirements for making a mere business practice a lex mercatoria. VII.1. Real Practice (longa consuetudo) As a first requirement, the practice should really be a practice. In cases where the practice is only limited to the business between two parties, it would not fulfil this requirement. It is fair to demand that the practice be at least regional. 51 This practice should take place in a certain branch of business and it should be distinguishable from See also: Ulrich Magnus, Michael Martinek, Art. 9 CISG, in KOMMENTAR ZUM BÜRGERLICHEN GESETZBUCH MIT EINFÜHRUNGSGESETZ UND NEBENGESETZEN (Commentary on the German Civil Code and Other Laws), München: Sellier-de Gruyter para. 23 (J. Staudinger ed., 2005).

28 Is Lex Mercatoria Jeopardizing the Application of Substantive Law? ordinary contractual obligations. Consequently, an objective point of view must be applied. The application of an objective point of view makes it possible to identify the principle as a practice in a certain branch of business, which is not just limited to certain parties. VII.2. Common Understanding between Businesspersons (consensus mercatoria) Second, it is obvious that both parties must be businesspersons. A contractual relationship between a businessperson and a customer cannot establish a practice resulting in lex mercatoria. However, it is questionable how businessperson can be defined in legal practice. VII.3. Over a Certain Period of Time Third, it is necessary that the practice be applied over a certain period of time. A first hint toward defining this period can be taken from customary law, which demands a practice of thirty years. 52 However, for a business practice such a period would be too long. 53 For the establishment of a prolonged period of time, it is necessary that the practice take place regularly and consciously and not by sheer coincidence. This means that the legal effects are foreseeable for any of the parties. In times of crisis, such as war or inflation, this period of time could be relatively short. Czech (& Central European) Yearbook of Arbitration VII.4. Legal Significance (opinio necessitatis) Although legal significance is demanded for customary law only, 54 one should demand some degree of legal significance for lex mercatoria as 52 FRIEDRICH KARL ROTH, HANDBUCH DES FORSTRECHTS UND DES FORSTPOLIZEIRECHTS: NACH DEN IN BAYERN GELTENDEN GESETZEN (Handbook of Forest Law and Forest Police Law: According to the Laws of Bavaria), München: Lindauer 7 (1863); PETER BYDLINKSI, BÜRGERLICHES RECHT, BAND 1, ALLGEMEINER TEIL (Civil Law, Vol. 1, General Part), Wien: Springer-Verlag 13 (2007). 53 NADIA AL-SHAMARI, DIE VERKEHRSSITTE IM 242 BGB: KONZEPTION UND ANWENDUNG SEIT 1900 ( The Customary Law in Section 242 of the German Civil Code: Concept and Application since 1900), Tübingen: Mohr Siebeck 200 (2006); Ingo Koller, Wulf-Henning Roth, Winfried Morck, in GROßKOMMENTAR HANDELSGESETZBUCH (Commentary on the German Commercial Code), München: C. H. Beck Sec. 346, marg. no. 7 (20 th ed. 2001); KARSTEN SCHMIDT, MÜNCHENER KOMMENTAR ZUM HANDELSGESETZBUCH (Munich Commentary on the German Commercial Law), München: C. H. Beck Sec. 346 marg. no. 6 (2 nd ed. 2009). 54 For an extensive overview on opinio necessitatis see: Alan Watson, An Approach to Customary Law, in 1 FOLK LAW: ESSAYS IN THE THEORY AND PRACTICE OF LEX NON 105