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Theorizing Transnational Commercial Law

ROSS CRANSTON

SUMMARY

I. GLOBALISATION .................................................................................................600

II. THE RULE OF LAW AND ITS CONSEQUENCES..................................................607

III. THE POWER OF THE MARKET............................................................................610

IV. IMPLEMENTING THE NEW TRANSNATIONAL COMMERCIAL LAW .................614

V. CONCLUSION .......................................................................................................616

Over recent decades we can see the emergence of a new transnational

commercial law. It consists of international conventions, model laws, and statements
of principle (or standards). A recent compilation consists of some sixty instruments
divided into twelve subject areas as diverse as contract law, electronic commerce,
sales, agency and distribution, international credit transfers and bank payment
undertakings, secured transactions, cross-border insolvency, conflict of laws,
international civil procedure, and international commercial arbitration.1 Even this
comprehensive collection is not exhaustive, as will be evident from later discussion.
The new transnational commercial law is driven by international institutions
ranging from UNCITRAL, UNIDROIT, and the World Bank; regional
governmental or economic bodies like the European Union or MERCOSUR;
specialist international bodies such as the Basel Committees on Banking Supervision
and Payment and Settlement Systems, and the International Organization of
Securities Commissions (IOSCO); and industry bodies such as the International
Chamber of Commerce (ICC).2 There is a great deal of overlap in the application of
their work in practice. Take, for instance, the area of transnational financial law: the

QC; Centennial Professor of Law, London School of Economics and Political Science. President,
International Academy of Commercial and Consumer law, 2004-2006. This paper draws to an extent on
How Law Works (Oxford, 2006) and has benefited from being presented in various guises at the National
Law School, Bangalore, India, and the National Autonomous University of Mexico, Mexico City.
1. E.g., ROY GOODE, ET AL., TRANSNATIONAL COMMERCIAL LAW: INTERNATIONAL INSTRUMENTS
AND COMMENTARY at v (2004); see Gbenga Bamodu, Extra-national Legal Principles in the Global Village:
A Conceptual Examination of Transnational Law, 7 INTL ARB. L. REV. 6 (2001).
th
2. E.g., UNIDROIT 75 Anniversary Congress on Worldwide Harmonisation of Private Law and
Regional Economic Integration, 1 UNIFORM L.REV. 1ff. (2003).

597
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Financial Stability Forum brings together national authorities responsible for

financial stability around the world. In order to further its aims, the Forum advances
a compendium of twelve key standards concerning transparency of policy making in
the financial system, sound institutional and market infrastructure, and adequate
financial regulation.3 The standards are drawn from a range of international bodies,
including the International Monetary Fund (standards on macroeconomic policy and
data transparency), the World Bank (insolvency and credit guidelines), Organisation
for Economic Co-operation and Development (principles of corporate governance),
the Basel Committee, IOSCO, and Financial Action Task Force on Money
Laundering. As well as providing a fine overview of the area, Professor Mario
Giovanoli has argued that the new transnational financial law is mainly stand-alone
soft law, independent of any international framework of binding legal rules and
sometimes lacking the degree of precision indispensable to a legally enforceable
rule.4
In addition to classifying the new transnational commercial law according to its
subject matter or institutional source, one may classify it by the juridical nature of
the instrument. Thus it is possible to divide transnational commercial law into
principles (or standards), model laws, and international conventions. A very long-
standing set of principles is the Uniform Customs and Practice for Documentary
Credits, first published by the ICC in 1933. However, such principles of
transnational commercial law extend well beyond trade. The well known
UNIDROIT Principles of International Commercial Contracts are mentioned at
greater length below.5 The standards collected by the Financial Stability Forum have
been referred to. In the area of dispute settlement there are the ALI/UNIDROIT
Principles of Transnational Civil Procedure.6 The lex mecatoria is more difficult to
identify, as we shall see, but it consists of principles like good faith, reasonableness,
the duty to negotiate, set-off, and the obligation to compensate on expropriation.
Among the model laws of transnational commercial lawa second category of
instrumentare those of UNCITRAL, which now has Model Laws on International
Commercial Arbitration, Cross-Border Insolvency, and International Credit
Transfers.7 The model laws used by bodies like the World Bank and IMF in their
technical assistance work are not always publicly available nor are records of which
countries have adopted them and in what form. In effect, these World Bank Model
Laws extend beyond the financial sector to matters such as insolvency and security.
As to international conventions relating to transnational commercial law, these
began in the first part of the twentieth century. To take just the financial area,
conventions were drawn up for a Uniform Law on Bills of Exchange and Promissory

3. Financial Stability Forum, www.fsforum.org; see also THE ROAD TO INTERNATIONAL FINANCIAL
STABILITY: ARE KEY FINANCIAL STANDARDS THE ANSWER? (Benu Schneider ed., 2003).
4. Mario Giovanoli, A New Architecture for the Global Financial Market: Legal Aspects of
International Financial Standard Setting, in INTERNATIONAL MONETARY LAW, 40 (Mario Giovanoli ed.,
2000).
5. Michael J. Bonell, The UNIDROIT Principles and Transnational Law, 2 Uniform L. Rev. 199
(2000); Jrgen Basedow, Uniform Law Conventions and the UNIDROIT Principles of International
Commercial Contracts, 1 UNIFORM L. REV. 129 (2000).
6. American Law Institute & UNIDROIT, ALI/UNIDROIT Principles of Transnational Civil
Procedure xxix (2006).
7. The first-mentioned has been adopted by over fifty states: Pieter Sanders, UNCITRALs Model
Law on International and Commercial Arbitration: Present Situation and Future, 21 ARB. INTL 443 (2005).
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2007 THEORIZING TRANSNATIONAL COMMERCIAL LAW 599

Notes and a Uniform Law Concerning Cheques.8 International conventions from

recent decades include the United Nations Convention on Contracts for the
International Sale of Goods (CISG) (1980)9, the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the New York Convention) (1958)10 and
the United Nations Convention on the Assignment of Receivables in International
Trade (2001).11
It is possible to explore how these different types of instrument are given force.
First, uniform principles have effect in as much as they are consciously invoked by
parties engaged in international transactions (primarily by incorporation by
reference in their contracts) or by those settling disputes between such parties
(primarily arbitrators). Thus, the Uniform Customs and Practice for Documentary
Credits are widely incorporated by international banks in the letters of credit they
issue. Although the confidentiality of arbitration proceedings makes it difficult to be
definite about the matter, it seems that international arbitrators are making
increasing reference, if only informally, to the UNIDROIT Principles of
International Commercial Contracts. Secondly, as the name suggests, a model law is
designed for adoption by national legislatures. While it is not always easy to
determine whether a model law has been adopted since it may be dressed up as local
law reform, it is evident that the UNCITRAL Model Law on Cross-Border
Insolvency is being widely implemented. Thirdly, a convention is a treaty, to which
states can choose to be a party. Model laws can obviously be modified in their
adoption or adopted in part, whereas parties to a convention must enter reservations
if there are to be departures from it. The New York Convention has had almost
universal success and is one explanation for the popularity of international
commercial arbitration by contrast to the situation with foreign court judgments,
almost every country is committed to enforcing foreign arbitral awards.
The purpose of this essay is not so much to describe the institutions or to
analyse the substantive provisions of the new transnational commercial law. Rather
what this essay explores is whether it can be said that there is any legal theory which
helps explain the emergence of this new transnational commercial law and its
adoption by national systems. This essay suggests that there are several bodies of
legal theory which throw light on these two issues. The first uses globalisation as an
explanatory factor. It arises in particular in accounts of the new lex mecatoria and
also in explanations of the emergence of the uniform principles, model laws, and
international conventions drawn up under the auspices of bodies such as
UNCITRAL, UNIDROIT, the World Bank, and the ICC. A second is rule of law

8. Manley O. Hudson & Abraham H. Feller, The International Unification of Laws Concerning Bills
of Exchange 44 HARV. L. REV. 333, 333-34 (1931); Abraham H. Feller, The International Unification of
Laws Concerning Checks 45 HARV. L. REV. 668, 668 (1932); see also the so-called Hague Rules the
International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading (Brussels,
1924); Jrgen Basedow, Global Life, Local Law? in LIBER AMICORUM EN HOMENAJE AL PROFESSOR DR.
DIDIER OPERTTI BASTAN 825-26 (2005).
9. United Nations Convention on Contracts for the International Sale of Goods, Apr. 10, 1980, 1489
U.N.T.S. 3, available at http://www.uncitral.org/en-index.htm.
10. United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,
June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38.
11. United Nations Convention on the Assignment of Receivables in International Trade, G.A. Res.
56/81, U.N. GAOR, 56th Sess., U.N. Doc. A/RES/56/81 (Dec. 12, 2001), available at
http://www.uncitral.org/pdf/english/texts/payments/receivables/ctc-assignment-convention-e.pdf.
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theory, which is especially popular with the World Bank and related bodies like the
IMF. According to this strand of thinking, economic development demands a legal
system which protects contractual and property rights both in terms of substantive
rules and judicial administration. A legal system built on the rule of law is said to do
this. One aspect of the rule of law is a substantive law which reflects the principles of
the new transnational commercial law. A third body of theory plays to market
forces. Countries fall along a spectrum from pro-creditor to pro-debtor in terms of
their commercial laws. Where countries are on the spectrum turns in part on
whether they have adopted the legal standards, codes, and principles of the new
transnational commercial law. Whether a country is pro-creditor or pro-debtor feeds
into market assessments of its economy and that influences the behaviour of foreign
investors. Finally, there is the theory which helps explain the adoption of the
conventions, model laws, and standards. One aspect of this is whether the legal
principles incorporated in them have resonance with legal practitioners and
institutions so that they use them to structure commercial transactions. Another
aspect is legal transplant theory, which bears on whether these codes and standards
are implemented by national legislation. Legal transplant theory is only part of the
explanation for successful adoptions, for, as we will see, there must also be the
political will within each jurisdiction to enact these into law.

I. GLOBALISATION

Globalisation is a slippery concept but encompasses objective developments in

the economic, cultural, political, and technological spheres.12 Peoples consciousness
about the phenomenon is as important as these objective developments. That
sometimes leads to resistance to what globalisation entails. In some contexts,
globalisation is being used to describe a process of social change, a world being
transformed so that there are greater contacts across national boundaries and growth
or intensification of new networks and interdependencies. In other contexts it
means the condition where geographical boundaries are rendered less relevant by
the existence of these cross-border connections and arrangements. Globalisation
gives rise to apparent paradoxes. The fact that globalisation is multidimensional
makes it all the more difficult to analyze. Depending on how it is defined, the
globalisation label may be applied to eras earlier than our own.13 Those dedicated to
resisting globalisation often use its products, such as global communications and
media outlets, to further their aims.
For the purposes of analysing the new transnational commercial law we can
ignore the complexities and paradoxes of globalisation. Our focus is mainly its
economic dimension. In this regard, globalisation is largely confined to international
trade and financial markets and often does not implicate multinational institutions
such as the North America Free Trade Area or the European Community. The
global economic order we are interested in takes its form in the huge flows of goods,
services, and capital around the world.14 The international nature of trade and the

12. ANTHONY GIDDENS, RUNAWAY WORLD (2000); DAVID HELD ET AL., GLOBAL
TRANSFORMATIONS 1 (1999); THE GLOBALIZATION READER 1 (Frank Lechner & John Boli eds., 2000).
13. E.g., Ross Cranston, Globalisation: Its Historical Context, in COMMERCIAL LAW AND
COMMERCIAL PRACTICE 3-4 (Sarah Worthington ed., 2003).
14. See, e.g., GLOBAL CAPITALISM (Will Hutton & Anthony Giddens eds., 2000); ROBERT GILPIN,
GLOBAL POLITICAL ECONOMY (2001).
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liberalisation of financial transactions have created an enhanced role for the

international institutions identified earlier. These bodies have promoted the
harmonized rules which constitute the new transnational commercial law to channel
and govern international trade and financial transactions. As the World Bank has
put it:

Beyond reducing transaction costs, adoption of international standards can

also facilitate domestic policy reform when local interest groups have
conflicting preferences. Adoption of international standards can also
signal to firms, consumers, and other groups the application of high
regulatory standards. The tensions between local customization and
international harmonization play out in proposals to develop common
international rules and standards on a wide range of issues relevant to the
investment climate. Efforts to develop uniform standards to ease
international commerce have long been a focus of private bodies such as
the International Chamber of Commerce. Complementary efforts at the
intergovernmental level include those of the United Nations Commission
on International Trade Law (UNCITRAL) and a variety of other
international agencies.15

So, in this analysis, globalisation means international commerce, which in turn

demands facilitative law, and this, it is said, is best derived from the new
transnational commercial law, itself a product of globalisation.
Those invoking globalisation as an explanation for the new transnational
commercial law frequently draw inspiration from the medieval lex mercatoria, which
evolved from the practices of the merchants as they traded at international trade
fairs, held in the great medieval cities and ports of Europe. It was globalisation and
globalised law, but in a different era. Berman provides an account of the
development of what came to be viewed as an integrated, developing system, a
body of law.16 In his analysis it was a consequence of the enormous social and
economic transformation which Europe underwent from the late eleventh and
twelfth centuries.17 Its principles began initially with the merchants themselves, in
the mercantile courts they founded.18 Later, the principles spread.19 Some were
compiled into codes of mercantile practice; in other instances, the mercantile courts
themselves kept records of their decisions, which could be used in subsequent cases.
Additionally, documents like bills of exchange and bills of lading, designed for
particular transactions, circulated widely.20 Among the distinctive characteristics of
European mercantile law which Berman identifies are: 1) the distinctions between
real and personal property and between ownership and possession; 2) the creation of
security interests in personal property; 3) the recognition of the rights of the good-
faith purchaser of goods and bills of exchange; 4) the creation of documents, such as

15. World Bank, World Development Report 2005: A Better Investment Climate for Everyone 181
(2004).
16. HAROLD BERMAN, LAW AND REVOLUTION: THE FORMATION OF THE WESTERN LEGAL
TRADITION 333 (1983).
17. Id. (emphasis omitted).
18. See id. at 333-56.
19. See id.
20. See id.
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negotiable instruments and bills of lading, which embodied rights distinct from any
underlying transaction; and 5) the development of new business forms such as
partnership and the commenda (which he describes as a kind of joint stock company,
with the liability of each investor limited).21 Ultimately this medieval lex mercatoria
lost its international character as it was incorporated into domestic law. In English
conventional wisdom, this was a happy process because of the role of Lord
Mansfield.22
The notion of a medieval lex mercatoriaglobalised, objective, and based on a
reciprocity of rights between the partiesdoes not bear close scrutiny. One form of
criticism is that the lex mercatoria was never completely divorced from state power.
In theoretical terms, this was because whatever independent merchants might want
in regulating the terms of trade, they needed the rule of law administered by a
national legal system to protect the market from the local rulers whim. However
desirable an independent mercantile law might be, merchants had to accept a
second-best solution where mercantile and state law were fused in national courts.23
In historical terms, despite a widespread belief in its existence, a general lex
mercatoria is not easy to uncover.24 There are examples of merchants winning some
privileges from the exercise of state power. For example, in England there were
separate procedures for mercantile disputes apart from the common law courts; thus,
shipping cases were handled by the separate Admiralty Court.25 However, until the
great constitutional struggles of the seventeenth century, the lex mercatoria as used
in England was apparently not a term describing a body of substantive law; rather, it
stood for the separate judicial procedure for settling mercantile disputes.26 The
distinct principles of mercantile law which existed for shipping and trade were far
from universalthe various maritime laws of Europe provided different solutions to
the same problems. As Cordes argues, Lord Mansfields one and the same law
that according to him existed in all countries and at all times in an identical form did
not exist even in the field of the maritime law of freight, which was quintessentially
an area where it should have.27 The body of transnational rules of law as postulated
in the lex mercatoria can be detected only by choosing to focus on overly general
issues.28

21. Id. at 349-50.

22. E.g., Thomas E. Scrutton [one of Englands great commercial judges], A General Survey of the
History of the Law Merchant, in 3 SELECT ESSAYS IN ANGLO-AMERICAN LEGAL HISTORY (1909), J.H.
Baker, The Law Merchant and the Common Law Before 1700, 38 CAMBRIDGE L.J. 295 (1979); JAMES
OLDHAM, ENGLISH COMMON LAW IN THE AGE OF MANSFIELD 124 (2004); Christopher P. Rodgers,
Continental Literature and the Development of the Common Law by the Kings Bench: c 1750-1800, in THE
COURTS AND THE DEVELOPMENT OF COMMERCIAL LAW 162 (Vito Piergiovanni ed., 1987); see MICHAEL
LOBBAN, THE COMMON LAW AND ENGLISH JURISPRUDENCE 1760-1850, 109 (1991).
23. ROBERTO UNGER, LAW IN MODERN SOCIETY 73-76 (1976).
24. Oliver Volckart & Antje Mangels, Are the Roots of the Modern Lex Mercatoria Really Medieval?
65 S. ECON. J. 427, 435-46 (1999).
25. HENRY J. BOURGUIGNON, SIR WILLIAM SCOTT, LORD STOWELL, JUDE OF THE HIGH COURT OF
ADMIRALTY 1798-1828 5-6, 59-60 (1987).
26. GERARD MALYNES, LEX MERCATORIA OR THE ANCIENT LAW MERCHANT (1622) may be seen
in the context of these struggles.
27. Albrecht Cordes, The Search for a Medieval Lex Mercatoria, 5 OXFORD U. COMP. L. FORUM 9, at
http://ouclf.iuscomp.org/articles/cordes.shtml (2003).
28. See id.; Emily Kadens, Order Within Law, Variety Within Custom: The Character of the Medieval
Merchant Law, 5 CHI. J. INTL. L. 39, 40-41, 56 (2004).
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The importance of this for present purposes is that, as with commercial law in
medieval times, globalisation may not provide a complete explanation of the new
transnational commercial law. Certainly advocates of a modern lex mecatoria see a
definite continuity with the medieval law merchant or at least an inspiration to be
derived from it.29 One of the most effective English proponents of the new lex
mecatoria was Professor Clive Schmitthoff. Schmitthoff argued that international
trade law developed in three stages the medieval lex mercatoria, the period of its
incorporation into national legal systems, and the modern period. He saw the third
phase as a conscious and deliberate return to the international spirit of the medieval
lex mercatoria. In this view the new lex mercatoria is global. Schmitthoff rejects the
second, national phase of international trade law where the lawyer must resort to
national rules in the conflict of laws to discover the law that is governing the
contract. That was an attempt at localising an international relationship in a national
legal setting, an approach modern thinking rejected. In Schmitthoffs view modern
trade demanded an autonomous international trade law, founded on uniform rules
accepted in all countries, making the localisation of a transaction in a national
jurisdiction superfluous. This would be a new lex mercatoria.30 While Schmitthoffs
views had been anticipated by others such as Berthold Goldman,31 it was he who
gave academic respectability to the idea in the English speaking world.32
A variety of scholars have taken up the cudgels for the new lex mercatoria.
Perhaps the most active proponent today of a new lex mercatoria is Dr. Peter Berger
of the Center for Transnational Law (CENTRAL) at the University of Cologne. In
his book The Creeping Codification of the Lex Mercatoria, Berger argues that the
concepts of transnational commercial law already used in contract drafting and
dispute resolution are now being transformed into concrete principles.33 The
UNIDROIT Principles of International Commercial Contracts are an example.34
Berger argues that the process is gradualthe lex mercatoria is living lawand that
the result comes not from above through formal codification but from below through
the private work of academics and practitioners.35 Thus, the new lex mercatoria is a
response to the commercial demands of globalisation. Based on Professor Bergers
discussion in Creeping Codification, CENTRAL now has an impressive collection of

29. LEON E. TRAKMAN, THE LAW MERCHANT: THE EVOLUTION OF COMMERCIAL LAW 30-40
(1983).
30. CLIVE M. SCHMITTHOFF, COMMERCIAL LAW IN A CHANGING ECONOMIC CLIMATE 20 (2d ed.
1981); see generally Jrgen Basedow, The Effects of Globalization on Private International Law, in LEGAL
ASPECTS OF GLOBALIZATION (Jrgen Basedow & Toshyuiki Kono eds., 2000).
31. E.g,. Berthold Goldman, Frontires du Droit et Lex Mercatoria, Archives de Philosophie du
Droit, 1964, 177; see also Berthold Goldman, The Applicable Law: General Principles of Law The Lex
Mercatoria, in CONTEMPORARY PROBLEMS IN INTERNATIONAL ARBITRATION 114-16 (Julian Lew ed.,
1987); Aleksander Goldstajn, The New Law Merchant, 1961 J. BUS. L. 12, 12, 17 (1961).
32. See John Adams, Clive Macmillan Schmitthoff (1903-1990), in JURISTS UPROOTED; GERMAN-
SPEAKING EMIGR LAWYERS IN TWENTIETH CENTURY BRITAIN (Jack Beatson & Reinhard
Zimmermann eds., 2004); THE SOURCES OF THE LAW OF INTERNATIONAL TRADE 374-76 (Clive
Scmitthoff ed., 1964).
33. KLAUS P. BERGER, THE CREEPING CODIFICATION OF THE LEX MERCATORIA (1998).
34. M. Bonell, Do We Need a Global Commercial Code? 106 DICK. L. REV. 87, 98-99 (2001); see
generally PRINCIPLES OF EUROPEAN CONTRACT LAW PARTS I AND II xxi-xxvii (Ole Lando & Hugh Beale
eds., 2000); http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13618&x=1. (The UNILEX website
lists only twenty-three cases where the UNIDROIT principles have been cited as of March 1, 2006.)
35. BERGER, supra note 33, at 210-11; Jeremy K. Sharpe, The Creeping Codification of Transnational
Commercial Law: An Arbitrators Perspective, 45 VA. J. INTL L. 199 (2001).
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lex mercatoria principles, rules, and standards.36 These are divided into fifteen
chapters, including chapters on good faith, reasonableness, the duty to negotiate,
damages for breach of contract, set-off, unjust enrichment, and the duty to
compensate on expropriation. Each principle is supported by detailed references to
scholarly writings, court decisions, arbitration awards, international conventions, and
national laws.37
International commercial arbitration has been seen by some as the key avenue
for the enunciation of the substantive rules of the new lex mercatoria.38 Its growth is
partly a product of globalised trade and financial transactions. The work of the Iran-
United States Claims Tribunal in applying general principles such as force majeure is
also said to have contributed considerably.39 Some critics raise both theoretical and
practical objections to the use of the lex mecatoria as a choice of law for international
contracts.40 There is no need to enter that debate since the empirical evidence
suggests that parties do not specifically apply the general principles of the lex
mercatoria as the proper law in their arbitration agreements or, if so, do it to
supplement rather than displace national law.41 Thus, only one to two percent of
clauses giving rise to ICC arbitration between 2000-2003 provided for transnational
or other non-national law as the governing law.42 As indicated, however,
international arbitrators seem to use the principles of the new lex mercatoria
increasingly in resolving difficult points arising in the course of disputes, although
there is no systematic evidence of the extent to which this occurs.43
At this point, a definitional issue arises: is the new lex mercatoria to be equated
with the principles, rules, and standards such as those developed by Berger? At the
outset, is Lord Mustills critique, that such principles, rules, and standards may be
too vague for legal analysis in the practical world of dispute resolution for the global
commercial activity?44 Then there are arguments that the Berger approach is both
too wide and too narrow. As to the first, some would confine the term lex mercatoria
to international trade practice which arises through transnational commercial usage.
The issue then becomes one of identifying usage or practice which is spontaneously

36. BERGER, supra note 33.

37. See CENTRAL Center for Transnational Law, available at www.central-koeln.de.
38. E.g,. Ole Lando, The Lex Mercatoria in International Commercial Arbitration, 34 Intl & Comp.
L.Q.747, 747-48 (1985); see Thomas E. Carbonneau, Rendering Arbitral Awards with Reasons: The
Elaboration of a Common Law of International Transactions, 23 COLUM. J. TRANSNATL L. 579, 614
(1985); LEX MERCATORIA AND ARBITRATION: A DISCUSSION OF THE NEW LAW MERCHANT, (Thomas
E. Carbonneau ed., rev. ed. 1998).
39. Maurizio Brunetti, The Lex Mercatoria in Practice: The Experience of the Iran-United States
Claims Tribunal, 18 ARB. INTL 355, 359-67 (2002).
40. Peter Flanagan, Demythologising the Law Merchant: The Impropriety of the Lex Mecatoria as a
Choice of Law, 15 INTL COMPANY & COMM. L. REV. 297 (2004).
41. Christopher R. Drahozal, Contracting out of National Law: An Empirical Look at the New Law
Merchant, 80 NOTRE DAME L. REV. 523, 538-39 (2005); Klaus P. Berger et al., The CENTRAL Enquiry on
the Use of Transnational Law in International Contract Law and Arbitration Background, Procedure and
Selected Results, in THE PRACTICE OF TRANSNATIONAL LAW (Klaus P. Berger ed., 2001) (a survey of
practitioners experience).
42. BERGER, supra note 33.
43. Id.
44. Michael Mustill, The New Lex Mercatoria: The First Twenty-Five Years, LIBER AMICORUM FOR
LORD WILBERFORCE 151-53 (Maarten Bos & Ian Brownlie eds., 1987); see also Bruce L. Benson, The
Spontaneous Evolution of Commercial Law, 55 S. ECON. J. 644 (1989); Christopher R. Drahozal,
Commercial Norms, Commercial Codes, and International Commercial Arbitration, 33 VAND. J.
TRANSNATL L. 79, 94-110 (2000).
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2007 THEORIZING TRANSNATIONAL COMMERCIAL LAW 605

generated in global commercial transactions. The doyen of academic commercial

lawyers in England, Professor Sir Roy Goode, argues that the main focus of inquiry
should not be the Berger-type principles, but rather the practices surrounding typical
international commercial transactions.45

Though it is common to treat the lex mercatoria as including general

principles of law, and I myself used to follow this approach, it seems to me
on further reflection that these principles for example pacta sunt
servanda, the nemo dat rule and the duty to mitigate loss suffered from a
breach of contract are not particular to international trade or even to
commercial contracts, are qualified by numerous exceptions and tell us
nothing about the process of spontaneous lawmaking which is said to be
the hallmark of the lex mercatoria. If we look at the lists of rules of the lex
mercatoria propounded by modern scholars and remove from it general
principles of law, we find that almost nothing is left, while on the other
hand there is a conspicuous absence of references to important modern
usages in relation to documentary credits, demand guarantees, and
clearing and settlement systems for the transfer of funds and investment
securities.46

Either waythe Berger principles or the Goode trade usagethe lex

mercatoria is only a small aspect of the new transnational commercial law, which
extends to the uniform principles, model laws, and international conventions already
outlined. These are neither confined to custom and practice in global transactions
nor the type of principles incorporated in the UNIDROIT Principles of International
Commercial Contracts.
Putting aside these definitional issues and taking a broad view of the new
transnational commercial law, how is all this activity explained in theoretical terms?
As far as the lex mercatoria is concerned, its advocates have as a prime contention
that it is autonomous and transnational. Not only is it free from the conflicting
principles of national law, but as a corollary, through the complexities of private
international law, it avoids the problems of choosing between those principles.
Berger argues that it has grown up in this way because of the trend towards a global
civil society, in which there is an erosion of national boundaries in markets and a
relative decline of state power to steer national or international economic factors.47
The upshot is the growth of party autonomy and the privatisation of international
commercial law-making, notably through arbitration. So the modern lex mercatoria,
in this view, is a spillover of the complex institutional processes connected with the
phenomenon of globalisation.48 The codification of the lex mecatoria, as
incorporated into uniform principles such as the UNIDROIT commercial contract

45. Roy Goode, Usage and its Reception in Transnational Commercial Law, 46 INTL & COMP. L.Q.
1(1997).
46. Roy Goode, Rule, Practice and Pragmatism in Transnational Commercial Law, 54 INTL & COMP.
L.Q. 539, 548 (2005); See also Goode, supra note 45, at 32-33.
st
47. Klaus P. Berger, The New Law Merchant and the Global Market: A 21 Century View of
Transnational Commercial Law, 3 INT. ARB. L. REV. 91 (2000).
48. Id. at 100; see also Gunther Teubner, Global Bukowina: Legal Pluralism in the World Society, in
GLOBAL LAW WITHOUT A STATE 40 (Gunther Teubner ed., 1997).
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principles, can therefore be regarded as responding to the demand believed to exist

amongst the business community working in this globalised environment.
Apart from the lex mercatoria, there is the wider field of transnational
commercial law promulgated under the auspices of bodies such as UNCITRAL,
UNIDROIT, and the ICC. Here, harmonisation has been a typical goal, with the
rules of different legal systems being replaced by a uniform law, which can either be
incorporated in international contracts or adopted by national legal systems (either
through adoption of a model law or adherence to an international convention). In
recent times, the aim has been not only harmonization, but also to improve rules in
situations where the national legal rules are non-existent, underdeveloped, or
unsuitable to international transactions.49 A good illustration of the latter is the
Cape Town Convention on International Interests in Mobile Equipment, which is
designed to overcome the problems of financiers obtaining a secured interest over
what could be categorized as global assetsaircraft, railway rolling stock, and space
assets that by their nature regularly move across national borders. The Convention
and its attendant protocols create an international interest, recognised in all
contracting states and registerable in a public international register, which neatly
side-steps the diversity of national laws on secured transactions and confers on
financiers an enforceable priority in the event of the debtors insolvency.50
Outsiders to the process of formulating the new transnational commercial law
have sometimes had a more jaded view of its application and development. For
example, Dezalay and Garth see the lex mecatoria not so much as a response to
globalisation but in terms of the rent-seeking, material interests of international
arbitrators and their clients.51 In their analysis of the evolution of modern
international commercial arbitration, they identified two main areas of tension.
First, there was a struggle between those offering arbitration services on the one
hand was an older cadre of mainly continental academics, adherents of the lex
mercatoria, and on the other, increasingly, Anglo-American legal practitioners,
adherents to the doctrines and techniques of the common law. Secondly, there was a
north-south tension: foreign investors did not want resort to local courts and law if
disputes arose over construction and other projects but had to accommodate the
objection of developing countries to the use of western law and courts. International
arbitration using the lex mercatoria became the way through for both the European
pioneers of international arbitration and for foreign investors. So the lex mecatoria
not only permitted foreign investors to win time when confronted with the escalation
of demands of developing countries, but also allowed its investors to preserve their
position for a period vis--vis the challenge provided by Anglo-American law firms.52

49. Roy Goode, Rule, Practice and Pragmatism in Transnational Commercial Law, supra note 46, at
556; see Jeffrey Wool, Rethinking the Notion of Uniformity in the Drafting of International Commercial
Law: A Preliminary Proposal for the Development of a Policy-based Unification Model, 2 UNIFORM L.
REV. 46, 46-47 (1997); Kazuaki Sono, The Rise of Anational Contract Law in the Age of Globalisation, 75
TUL. L. REV. 1185, 1191-92 (2001).
50. Roy Goode, The Cape Town Convention on International Interests in Mobile Equipment: a
Driving Force for International Asset-Based Finance, 7 UNIFORM L. REV. 3, 4 (2002); Roy Goode, Official
Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto, on
Matters Specific to Aircraft Equipment (2002).
51. YVES DEZALAY & BRYANT G. GARTH, DEALING IN VIRTUE: INTERNATIONAL COMMERCIAL
ARBITRATION AND THE CONSTRUCTION OF A TRANSNATIONAL LEGAL ORDER 41 (1996)
52. Id. at 89; see also LEX MERCATORIA AND ARBITRATION, supra note 38.
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In this account the time of the lex mercatoria is coming to an end as the European
pioneers are being replaced by the Anglo-American law firms.53
Similarly, the forces behind the cluster of international conventions, model
rules, and principles can be seen in a more materialistic light. Thus, the political
economy of the Cape Town Convention on International Interests in Mobile
Equipment includes the privatisation of many national airlines, and some railways,
with finance increasingly from private rather than state sources and the consequent
demand by global financial institutions for recognition and protection of their
secured interests in such high value assets. It is said that in the process leading to the
Convention, interest groups representing industry, especially the aviation industry,
were particluarly active.54 In this account, their involvement led to bright line rules
in the Aircraft Protocol protective of secured interests. The danger is said to be a
perception that the rules fit the preferences of the more powerful nations likely to be
host to the banks providing secured finance.55
While there is an element of truth in this type of analysis, it certainly does not
stand up in its entirety. In relation to the lex mercatoria, there is a plausibility to the
argument that those practicing as international commercial arbitrators need to
attract work. Whether expertise in the lex mercatoria was ever the way of doing this
is open to argument unless it is seen as just one part of the arbitrators reputation.
Moreover, any argument that the lex mercatoria was used as the way of meeting
developing-country demands does not fit some important facts, such as the regular
appearance of English and New York law as the governing law of investment and
finance contracts involving those countries. As to the forces behind international
conventions, model laws, and statements of principle, there is certainly a case for
closer inquiry of the process in this important area of law-making. This paper is one
attempt at doing that. But if, say, the aviation industry had a heavy input into the
Aviation Protocol of the Cape Town Convention, that should not be a surprise nor
necessarily a cause for condemnation. If a commercial instrument is to meet its
professed aim, then those most affected by its operation need to be part of the
process of formulating it. What is necessary is that the process must be transparent
and must accord all interests an opportunity to have an influence. With international
commercial lawmaking, the input of developing counties is especially important, not
least if an instrument is to have legitimacy and be widely adopted.

II. THE RULE OF LAW AND ITS CONSEQUENCES

That the rule of law has prominence in the so-called Washington consensus is in
part a response to the changes associated with the process of economic globalisation,
the spread of democracy, and the enhanced authority of international human rights.56
In recent decades, a conventional wisdom has also evolved linking the rule of law

53. DEZALAY & BRYANT, supra note 51, at 89.

54. Iwan Davies, The New Lex Mercatoria: International Interests in Mobile Equipment, 52 INTL &
COMP. L.Q. 151, 162 (2003).
55. Id. at 175.
56. Julio Faundez, The Rule of Law Enterprise: Promoting a Dialogue Between Practitioners and
Academics, 12 DEMOCRATIZATION 567, 568 (2005).
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with economic growth, sustainable development, and poverty alleviation.57

Multilateral financial institutions like the World Bank, regional development banks
like the Asian Development Bank, and some industry organisations and NGOs
advocate for national principles of good governance, including a legal system of a
type associated with the rule of law.58 It is said that law can have an impact on
development by facilitating economic activity through encouraging savings and
assisting in the allocation of capital.59 It can do this by having predictably
transparent and enforceable rules for the economy, which ensure well-functioning
and regulated markets, appropriate business forms with high standards of corporate
governance, and efficient methods for dealing with default and insolvency in markets
and businesses.60 Government subject to law is part of the equation, to guarantee
that insiders cannot use state power to trump arbitrarily property and contractual
rights recognised by law.61
In modern accounts, the rule of law has both procedural and substantive
aspectsa legal system with an independent, impartial, and non-corrupt judiciary;
laws that are clear, publicly available, and in accordance with the constitution and
human rights; and an accessible, efficient court system which protects contractual,
property, and human rights and provides for judicial review of government action.62
Some like Professor Armartya Sen would contend that rule of law reform along
these lines must be valued in itself as part of the development process, not just for
the way it may aid economic or any other type of development.63 Another line of
argument is that rule of law reforms by themselves are only part of the story. For
development to occur, what is also needed is legal empowerment of the
disadvantaged, which will benefit them in a broad array of fields that may not have a
strict legal dimension, such as education, public health promotion, and agriculture.64
Both glosses on the basic argument have great force.
Even if all this is accepted, there is still the difficulty of identifying what follows
from rule of law analysis in relation to specific laws, particularly commercial laws.
Many of the early advocates of rule of law for promoting economic development
were economists, so it is not surprising that their concern with legal detail was
minimal. Early on, their focus was technical assistance for reform of the
infrastructure and administration of courts and judicial training. Suffice to say that,
in relation to commercial law, what has happened is that the new transnational
commercial law has generally been accepted as containing the prescriptions
necessary for domestic reform consistent with the rule of law model. This should not

57. There is a growing body of literature about economic growth that is pro-poor. See Martin
Ravallion, Pro-Poor Growth: A Primer (World Bank Policy Research Working Paper 3242, 2004).
58. E.g., Ibrahim F. I. Shihata, Democracy and Development, 46 INTL & COMP. L.Q. 635 (1997);
Thomas Carothers, The Rule of Law Revival, 77 FOREIGN AFF. 95 (1998); Promoting the Rule of Law
Abroad, (Carnegie Endowment, Democracy and Rule of Law Project, Working Paper No. 34, 2003).
59. Richard A. Posner, Creating a Legal Framework for Economic Development, 13 WORLD BANK
RESEARCH OBSERVER 1 (1998).
60. Id. at 1 (1998).
61. Id.
62. E.g., Paul P. Craig, Formal and Substantive Conceptions of the Rule of Law, 1997 PUB. LAW 467
(1997); T.R.S. ALLAN, CONSTITUTIONAL JUSTICE (2001); William Whitford, The Rule of Law, 2000 WIS.
L. REV. 723 (2000).
63. AMARTYA SEN, DEVELOPMENT AS FREEDOM 37 (1999).
64. Legal Empowerment: Advancing Good Governance and Poverty Reduction 8 (Asian Development
Bank RETA 5856, 2001).
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2007 THEORIZING TRANSNATIONAL COMMERCIAL LAW 609

be surprising when important components of the new transnational commercial law

have been generated under the auspices of rule of law advocates like the World
Bank. Whatever the defects of some of the analysis, the rule of law matters. That
means that along with a transparent and democratic political system, efficient
bureaucracy, and developed public institutions, reforms in the commercial sector
which will encourage investment, reduce corruption and cronyism, and generally
contribute to social and economic development.65 So what is the evidence that law
mattersthat the effort to give legislative force to the prescriptions of the new
transnational commercial law is worthwhile?
There is some historical evidence of a link between the rule of law and
economic development.66 Over the last decade, there have also been a number of
large, cross-country studies which, by using proxies for rule of law measures such as
the quality of legal institutions, lend support to the thesis.67 Yet it is no use
pretending that the relationship between rule of law reform and economic
development is simple; as always, real world contingency must be taken into account.
It may be that, in some respects, it is economic development which facilitates a
better-functioning legal system or that factors such as investment or political change
move both economic development and legal reform in the same direction.68 Another
difficulty with the rule of law-economic development causation is identifying the
relevant factors in the relationship. Is the key to economic growth the symbolic
value of new law on the books, or is the effectiveness in practice of legal institutions,
such as commercial law as practiced and market and financial regulation, more
significant? Is governmental accountability, not least through the courts, a necessary
element of the rule of law, and if so, how do we explain the East Asian model of
economic development (best exemplified these days by China)?69 There is also the
puzzle of foreign investors, who are important in bridging the gap between
investment and savings. While they may say that they desire a legal system with a
clear framework for contracting, one which both protects propertyincluding
intellectual property rightsand provides for the timely resolution of disputes; in
practice, the existence of business opportunities means that they may invest heavily
in countries where these basic features of the rule of law are absent.70

65. On the earlier law and development movement, see David Trubek & Mark Galanter, Scholars in
Self-Estrangement: Some Reflections on the Crisis in Law and Development, 1974 WIS. L. REV. 1062 (1974);
Brian Z. Tamanaha, Review Article: The Lessons of Law-and-Development Studies, 89 AM. J. INTL. L. 470
(1995); Julio Faundez, Legal Technical Assistance, in GOOD GOVERNMENT AND LAW, 1 (Julio Faundez
ed., 1997).
66. E.g., P.S. ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT (1979); DOUGLAS NORTH,
INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990); KATHARINA PISTOR &
PHILIP A. WELLONS, THE ROLE OF LAW AND LEGAL INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT
1960-1995 (1999).
67. See Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997); Rafael
La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998).
68. Richard E. Messick, Judicial Reform and Economic Development: A Survey of the Issues, 14
World Bank Resource Observer 117, 122 (1999).
69. See Frank K. Upham, Mythmaking in the Rule of Law Orthodoxy, (Carnegie Endowment for
International Peace, Rule of Law Series, Working Paper No. 30, 2002); Carol A. G. Jones, Capitalism,
Globalization, Rule of Law, 3 SOC. & LEGAL STUDIES 195 (1994).
70. Amanda Perry-Kessaris, Finding and Facing Facts About Legal Systems and Foreign Direct
Investment in South Asia, 2003 LEGAL STUDIES 649, 651-52 (2003).
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Moreover, the laws contribution to development in practice is a long-term and

tortuous process. As a matter of public policy, it demands a sensitivity to its inherent
limits, the context in which it operates, and the force of other social and economic
factors.71 There is always the potential for unintended consequences. A helpful
illustration pertinent to the issue of credit and security law is provided by the
colonial courts in India, which were superimposed on a system where informal
sanctions operated in rural areas to guarantee the repayment of credit, but which
also encouraged money-lenders to carry debtors in difficult times. In one account,
new creditors, with access to the enforcement mechanisms of the colonial courts,
entered the market and forced down margins, which in turn reduced the capacity of
local money-lenders to accommodate debtors in difficulty.72 The same unintended
consequences are bound to occur in certain contexts on the domestic adoption of the
new transnational commercial law.
How the law actually operates is at least as important as the law in the books.
Using law such as commercial and financial law for utilitarian ends means
acknowledging, for example, the importance of non-state norms such as commercial
custom, informal methods of social control, and alternative mechanisms of dispute
resolution. Also, it should not be forgotten that the laws outcomes are not value-
free and that the law can be part of the struggle for power in society. Protecting
contractual and property rights may simply shield what a powerful, and possibly
corrupt, elite have seized under the cover of state power. Even more benign
societies recognize the need for legislative controls and well-oiled regulatory
agencies to curb the abuses associated with free contracting and markets. Apart
from equity concerns, the state must police markets to curb corrupt and predatory
practices which undermine their very integrity. Additionally, creating a system
which works for private economic interests does not mean overlooking values such
as equality before the law, the wider public interest, and protecting the more
vulnerable in society.

III. THE POWER OF THE MARKET

Financial markets respond favourably to whether a society controls public debt

and inflation, restricts state control of enterprises, and facilitates rather than hinders
foreign trade. Legal categorisation of a society can also affect market perceptions.
Consider the rather simplistic characterisation of legal systems along a spectrum
from pro-creditor to pro-debtor.73 The more pro-creditor a society, the more
favourable the market perceptions become, which can lead internationally to greater
foreign investment and economic activity. The nature of a countrys commercial and
financial laws is an important factor affecting where a country falls along the
spectrum. Adoption of many of the prescriptions of the new transnational
commercial law, despite the regulatory bent of some of it, would generally move a
country along the spectrum in the pro-creditor direction. The World Banks
guidelines on insolvency and creditor rights are a good illustration. Take, as an

71. Patrick McAuslan, Path Dependency, Law and Development, 1 J. COMMONWEALTH L.& LEGAL
ED. 51, 58 (2001).
72. Rachel E. Kranton & Anand V. Swamy, The Hazards of Piecemeal Reform: British Civil Courts
and the Credit Market in Colonial India, 58 J. DEV. ECON. 1, 12-15 (1999).
73. See Rafael La Porta et al., Legal Determinants of External Finance, supra note 80; Rafael La Porta
et al., Law and Finance, supra note 80.
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aspect, the provision of credit, in particular the role of security (collateral) in

facilitating this. Broadly, secured transactions law gives creditors and investors a
priority claim against the debtors property (the collateral) should the debtor be
unable or unwilling to pay in accordance with the credit or investment contract. The
nature of an effective security law for an economy is advanced in the World Bank
Guidelines in this way:
The legal framework should provide for the creation, recognition, and
enforcement of security interests in movable and immovable (real) property, arising
by agreement or operation of law. The law should provide for the following
features:

Security interests in all types of assets, movable and immovable, tangible

and intangible, including inventory, receivables, and proceeds; future or
after-acquired property, and on a global basis; and based on both
possessory and non-possessory interests;

....

Methods of notice that will sufficiently publicize the existence of security

interests to creditors, purchasers, and the public generally at the lowest
possible cost;

Clear rules of priority governing competing claims or interests in the same

assets. . .

....

Enforcement procedures should provide for prompt realization of the

rights obtained in secured assets, ensuring the maximum possible recovery
of asset values based on market values. Both nonjudicial and judicial
enforcement methods should be considered.74

As we see below, the force of the guidelines is enhanced by their use by the
IMF and World Bank as international best practice in financial sector assessments of
individual countries. A recent study of the Asian Development Bank underlines the
importance of small- and medium-sized enterprises to sustainable economic growth.75
It argues that the key to their success is access to readily available, cheap, long-term

74. World Bank, Principles and Guidelines for Effective Insolvency and Credit Rights Regimes, excerpt
in [2003] World Bank Leg R627, Principles 3 & 5; see also U.N. Comm. on Intl Trade Law, Working
Group 6 Security Interests. Draft Legislative Guide on Secured Transactions A/CN.9/WG.VI/WP.24/Add. 2
(Nov. 24, 2005); Spyridon V. Bazinas, UNCITRALs Work in the Field of Secured Transactions, in
EMERGING FINANCIAL MARKETS AND SECURED TRANSACTIONS (Joseph Norton & Mads Andenas eds.,
1998).
75. Ross Cranston, Credit Security and Debt Recovery: Laws Role in Reform in Asia and the Pacific,
in EMERGING FINANCIAL MARKETS AND SECURED TRANSACTIONS (Joseph Norton and Mads Andenas
eds., 1998).
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credit that turns on a legal framework enabling small borrowers to give security over
their movable property; unlike larger enterprises, they are less likely to be able to
offer land and buildings as security.76 That security must be readily enforceable on
default.
Enhancing creditors rights in this way has considerable intuitive appeal. That
security rights under credit and investment agreements are readily enforceable,
possibly without resort to the court, means that lenders and investors can more
accurately manage and control the risk of default. It encourages discipline on the
part of debtors. Disputes are more readily resolvable in the shadow of the law. By
contrast, if enforcement of a credit or investment contract is doubtful, creditors and
investors cannot price the risk of default accurately. A premium needs to be
extracted to compensate for the uncertainty or for the risk of non-performance. In
some cases, the confidence of creditors and investors may be so eroded that credit is
altogether unavailable.77
Perhaps the best example in the legal literature of a categorisation of legal
systems in a manner relevant to market perceptions has been advanced by Philip
Wood. Beginning in 1995, Wood developed a comprehensive and sophisticated
analysis that eschews a simplistic pro-creditor/pro-debtor division and instead
divides the financial law world according to five key criteria: 1) the availability of
insolvency set-off; 2) the marketability of contracts, receivables, and claims; 3) the
availability and scope of security interests; 4) the availability of the commercial trust;
and 5) whether tracing delinquent money is possible.78 Wood concedes that his
mapping is not exact, is in some respects incomplete, and relies to an extent on
subjective judgment.79 Nonetheless, he says that the differences between
jurisdictions are striking.80 The criteria are tested mainly on insolvency and go to the
efficiency of the financial system, the extent to which risks are reduced, and whether
the legal system facilitates economic development.81 Wood concludes,
controversially, that the traditional Napoleonic systems are negative on all of these,
the Roman-Germanic systems are negative on just over half of them and positive on
the other half, and the Anglo-American systems are positive on all five.82 While he
concedes substantial similarities across large areas of law, on these five aspects of
commercial law, there still remain significant differences.83
Not surprisingly, given the huge task which would be involved, Woods
taxonomy does not include the impact of the rules, their actual implementation, or
compliance with them in practice.84 Of course, laws in themselves have symbolic
significance. Yet in any society, law works against a background of social factors.
Unless this context is taken into account, the workings of the law will not be properly
understood, and efforts at reform will be misguided. One aspect is that a problem
might not lie in inadequate laws or legal procedures but in the way law is enforced or

76. Id.
77. Barry Adler, Secured Credit Contracts, in 3 NEW PALGRAVE DICTIONARY OF ECONOMICS AND
THE LAW 405 (Peter K. Newman ed., 1998).
78. PHILIP R. WOOD, PRINCIPLES OF INTERNATIONAL INSOLVENCY 10-12 (1995).
79. Id.
80. Id.
81. Id.
82. Id.
83. See id. at 59.
84. See generally WOOD, supra note 78, at 13.
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operates in a society. Thus, it is well known that in Japan, litigation is relatively rare,
and parties seek to avoid court.85 This could mean that it is more likely that when,
say, a borrower is having difficulty repaying, a Japanese bank may not invoke the
very wide powers conferred on it by the loan agreement. Rather, the borrower
might receive visits from the bank and find its freedom of action curtailed as the
bank prescribes a remedial course. Whether this has also resulted in Japanese banks
implicitly promising to rescue troubled but viable firmsthe conventional wisdom
now under fierce challengeis beyond the scope of the present inquiry.86
Regarding law reform, what will be needed is a careful and painstaking
identification of the problems in a particular jurisdiction and the possible legal
solutions. There will be no easy answers. Sensitivity to the context of the law is
essential. A blanket introduction of pro-creditor laws without taking this into
account could result in yet more ineffective laws. Indeed, it could well be
counterproductive: schemes, both simple and sophisticated, will be devised to avoid
their impact, and in extreme cases courts will simply refuse to apply what they see as
draconian laws in their impact on debtors, further undermining the rule of law. And
there will also be social justice issues if adequate protections are not incorporated
into creditor laws, notably in favour of consumer debtors.
There can be little doubt that perceptions of whether a country is pro-creditor
or pro-debtor, or where they fall along the spectrum in more sophisticated analyses
like Woods feed into decisions by international markets, especially foreign investors
and lenders. Rating agencies, so important in channelling international capital, are
one influence and have some version of a pro-creditor or pro-debtor model as part
of their assessment processes. This is reinforced by FSAP and ROSC assessments of
countries by the IMF and World Bank.87 The Financial Sector Assessment Program
(FSAP) involves the IMF and World Bank working together to prevent financial
instability in one country threatening others. To do this, a system of benchmarks is
used as an early warning mechanismat an international level, as minimum
standards for transparency, market efficiency, and financial disciplineand at a
national level to guide policy reform. Countries are then evaluated against the
benchmarks in Reports on the Observance of Standards and Codes (ROSCs);
among the benchmarks are some of the key parts of the new transnational
commercial law.88
From the academic point of view, pro-creditor/pro-debtor mapping is a useful
heuristic device in considering the issues that any national system of commercial law
must address. Recall that in practice it will be difficult to place a country accurately;
recall also that the purpose of the exercise is not to make moral judgments, but to
isolate problems and then to suggest possible legal reforms; recall that a legal

85. E.g., CARL F. GOODMAN, THE RULE OF LAW IN JAPAN (2003), 230-32; Yukiko Hasebe, Civil
Justice Reform: Access, Cost and Expedition. The Japanese Perspective, in CIVIL JUSTICE IN CRISIS 248
(Adrian Zuckerman ed. 1999).
86. E.g., Yoshiro Miwa & J. Mark Ramseyer, The Myth of the Main Bank: Japan and Comparative
Corporate Governance, 27 L. & SOC. INQUIRY 401 (2002).
87. Duncan E. Alford, Core Principles for Effective Banking Supervision: An Enforceable
International Financial Standard? 28 B.C. INTL & COMP. L. REV. 237, 273-74 (2005) (extensive information
about the International Monetary Funds Financial Assessment Programme); see The World Bank Group,
Reports on the Observance of Standards & Codes (ROSC), available at www.worldbank.org/ifa/rosc.html
(details of the Report on Observance of Standards and Codes).
88. Id.
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systems economic effectiveness may actually decline if it becomes too pro-

creditor; and recall, finally, that social justice issues cannot be ignored. Despite
these qualifications, issues such as the free transfer of contracts and receivables are
crucial if the law is to respond flexibly to new methods of financing and doing
business. This is equally true with respect to important parts of the package of
measures falling under the rubric of the new transnational commercial law.

IV. IMPLEMENTING THE NEW TRANSNATIONAL COMMERCIAL LAW

Some aspects of the new transnational commercial law need to be adopted by

private parties if they are to be effective. For decades banks have incorporated the
Uniform Customs and Practice for Documentary Credits, issued by the International
Chamber of Commerce, into their standard documentation for letters of credit.
Similarly, UNIDROITs Principles of International Commercial Contracts will need
to be referred to in international contracts as the proper law if they are to be
invoked on a regular basis in international commercial arbitration. Otherwise,
although an international arbitrator may still refer to the Principles as guidelines, he
will have a difficult task of overtaking national systems of law as the key factors in an
arbitrators decision making.89 Before the bulk of the new transnational commercial
law can take effect, however, it needs to be adopted legislatively in domestic
jurisdictions. For example, private parties have only limited scope to choose the
insolvency or regulatory law to govern their transactions.
What has been said already militates against a notion that economic
development follows from a blind legislative adoption into domestic law of the
standards, codes, and principles of the new transnational commercial law. It cannot
be assumed that their introduction will automatically occasion economic stability,
facilitate sophisticated economic transactions, foster the establishment of complex
enterprises, or further the resolution of legal disputes. This is quite apart from the
adverse reaction which could follow as a result of transplantation of these models
being interpreted as a form of neo-colonial domination. Ideally, an incremental
approach is desirable, drawing on theory and international best practice, and over
time melding the prescriptions of the new transnational commercial law to local
conditions in the light of accumulated experience.90 In many cases, copying foreign
models is unavoidable because of the pressure of time, the lack of expertise, and the
demands of outside interests for immediate action.91 It might also be that a window
of opportunity for fundamental law reform presents itself; the ideal in these
circumstances is a counsel of perfection and will thus miss this window of
opportunity.
At the level of theory, Montesquieu argued that it was unlikely that the laws of
one nation would suit another, given the variety of environmental factors making up

89. Anthony S. Winer, The CISG Convention and Thomas Francks Theory of Legitimacy, 19 NW. J.
INTL L. & BUS. 55, 55-56 (1998); see also THOMAS M. FRANCK, THE POWER OF LEGITIMACY AMONG
NATIONS (2002).
90. See generally Ann Seidman & Robert B. Seidman, Using Reason and Experience to Draft Country-
Specific Laws, in MAKING DEVELOPMENT WORK (Ann Seidman et al. eds., 1999).
91. Thomas W. Wlde & James L. Gunderson, Legislative Reform in Transition Economies: Western
Transplants: A Short-cut to Social Market Economy Status?, in MAKING DEVELOPMENT WORK, 92-95
(Ann Seidman et al. eds., 1999).
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the spirit of the law.92 In a more modern account, Professor Otto Kahn-Freund
thought it possible to transplant law, but emphasised the very great difficulties.93
Factors, which in his account are especially important, are political institutions,
ideologies, and the power structure.94 Professor Alan Watsons contrary thesis is that
transplants can readily be made.95 The law has a strong autonomy from societal
forces, such as the culture of the legal elitelegislators, jurists, or judgeswho have
control of the accepted mechanisms of legal change. Watson accepts that although
legal institutions will not exist without corresponding social institutions, law evolves
from the legal tradition rather than the social context.96 Lending support to
Watsons view are Roman law and other major episodes of legal transplantation:
Napoleon carried his code to other parts of Europe; in the nineteenth and first part
of the twentieth century, imperial powers, like Britain, took their laws to other parts
of the world, like India; and in recent decades, as we have seen, international
financial institutions like the World Bank have successfully marketed their models to
developing and emerging economies.
So at a purely formal level, law can be transplanted. The obvious issue is: does
a transplanted law become living law, and if so, how? There are no easy answers.
Taxonomies in which certain families of law transplant efficiently and other
ineffectively are not especially convincing.97 Nor are some of the massive empirical
studies that give them some support. What can be said is that a transplanted law is
changed in use: it will be transformed through interpretation and application, and
amended formally to take in local conditions. Secondly, whatever the law,
commercial activity goes on. Thus, in England and the United States, informal
norms, as with commercial customs, have always been part of the working of the law.
In some situations, transplanted law may have a greater chance in some areas, in
particular the investment and financial sectors, because receptivity and demand are
present, especially among foreign investors.98 But commercial laws which trench on
rights in the wider community may be more likely to be resisted. The examples of
security and insolvency law fall into this category if they threaten employees
continued employment in a jurisdiction which has comparatively little in the way of a
social security system. Nonetheless, criminal and family laws have been successfully
transplanted, even those laws which were initially forced onto a jurisdiction.99 Such
transplants may have had a catalytic effect. It seems that the positive attitude of

92. J.W.F. ALLISON, A CONTINENTAL DISTINCTION IN THE COMMON LAW 12-13 (1996).
93. Otto Kahn-Freund, On Uses and Misuses of Comparative Law, 37 MOD. L.REV. 1, 7-10 (1974).
94. Id.; see also Andrew Rosser, The Political Economy of Institutional Reform in Indonesia, in LAW,
CAPITALISM AND POWER IN ASIA: THE RULE OF LAW AND LEGAL INSTITUTIONS (Kanishka Jayasuriya
ed., 1999).
95. ALAN WATSON, THE EVOLUTION OF LAW 119 (1985).
96. Id.; see also ALAN WATSON, SOCIETY AND LEGAL CHANGE 98-111 (2d ed. 2001).
97. See generally Daniel Berkowitz et al., Economic Development, Legality and the Transplant Effect,
47 EUR. ECON. REV. 165 (2003); see also Ugo Mattei, Efficiency in Legal Transplants: An Essay in
Comparative Law and Economics, 14 INTL REV. L. & ECON. 3 (1994); Ugo Mattei, Three Patterns of Law:
Taxonomy and Change in the Worlds Legal Systems, 45 AM. J. COMP. L. 5 (1997); Malcolm D. H. Smith,
Comparative Law and Legal Culture, 15 BOND L. REV. 20 (2003).
98. Frederick Schauer, The Politics and Incentives of Legal Transplantation (Center for International
Development at Harvard University, Working Paper No. 44, 2000).
99. Andrew Harding, Global Doctrine and Local Knowledge: Law in South-East Asia, 51 INTL &
COMP. L.Q. 35, 44-45 (2002).
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local and legal elites cannot be underestimated.100 In all, the transplant of law is a
very mixed picture, but context cannot be underestimated.

V. CONCLUSION

My argument is that there are legal theories which help explain some aspects of
the emergence and adoption of modern transnational commercial law. They cannot
explain the full picture by any means. The efforts of bodies like UNCITRAL,
UNIDROIT, and the World Bank have at base a concern with solving practical
problems in transnational commercial law, particularly where globalisation creates
gaps in the ability of national legal systems to solve them. There are many examples,
but perhaps the best in recent times is the way the Cape Town Convention addresses
a modern problem of how financiers and investors can take effective security over
valuable, privately and state-owned mobile property such as aircraft, railway stock,
and space assets like satellites. The work of the International Monetary Fund over
the years in relation to central banking lawand more recently that of the Basel
bodies with respect to the adequate supervision of the financial sectorthe core
principles for effective bank supervision and the rules for capital adequacy and
sound risk management of banks can be seen broadly as motivated by a pragmatic
concern with the stability of the international financial system, risk reduction, and
efficiency.101
As we have seen, there are examples of standards from the new transnational
commercial law suggested for adoption in domestic legal systems, consistent with the
rule of law and pro-creditor/pro-debtor models. The World Bank, the International
Monetary Fund, and regional development banks like the Asian Development Bank
have all been engaged in this work. It is natural to consider carefully international
commercial law having its pedigree in such a model. The forces behind the
provisions consequently spun off, and their impact may be reasons for pause.
Another may be the point already made that however splendid these laws may be
on the books, they may simply be an illusion of progress if there is not the
administrative machinery to give them force in practice. Perhaps most important are
social justice issues such as the protection of consumers and employees. If these
concerns are addressed, however, it can be strongly argued that important aspects of
the new transnational commercial law are as important for the poor as for others. In
his book The Mystery of Capital, Professor Hernando de Soto observes that in
developing countries, although the poor may have capital such as growing crops or
possibly land, it is dead economicallyit lacks adequate legal protection and,
crucially, cannot be used as collateral for credit.102 Access to ready finance is the
preserve of the elite. Modern laws relating to credit and security are therefore
needed.103 Whether so benign a view of the new transnational commercial law can be
taken in general as opposed to this one example, depends in every case on the

100. Frank B. Cross, Law and Economic Growth, 80 TEX. L. REV. 1737, 1774 (2002).
101. E.g., JOSEPH J. NORTON, DEVISING INTERNATIONAL BANK SUPERVISORY STANDARDS (1995);
GEORGE A. WALKER, INTERNATIONAL BANKING REGULATION: LAW, POLICY AND PRACTICE (2001);
Mamiko Yoko-Arai, Financial Stability Issues: The Case of East Asia (2002).
102. Id.
103. HERNANDO DE SOTO, THE MYSTERY OF CAPITAL: WHY CAPITALISM TRIUMPHS IN THE WEST
AND FAILS EVERYWHERE ELSE (2000).
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circumstances. Each measure must be tested not only in terms of its contribution to
economic development, but also to social justice.