Law
How Lex Mercatoria Governs Transnational Commercial Arbitration Awards
Quick fact
In international commercial arbitration, awards are increasingly based on lex mercatoria—a body of transnational commercial law—rather than the national law of any state. This allows disputes to be decided according to internationally accepted trade usages and general principles, and such awards are widely enforceable under the New York Convention.
Why this is interesting
When two companies from different countries sign a contract, they often avoid choosing any national law to govern it. So how do arbitrators decide the dispute when the conflict arises?
Read the full explanation
Understanding How Lex Mercatoria Governs Transnational Commercial Arbitration Awards
Imagine two merchants from different countries centuries ago: they didn't rely on any single king's law, but on shared customs of trade. Today, lex mercatoria is a modern revival of that idea—a 'law of the merchants' that transcends national borders. In international arbitration, when parties have not specified a national law, arbitrators may turn to this transnational legal framework. It is not a codified system but a collection of principles, usages, and soft law instruments that reflect business expectations in cross-border trade. For example, arbitrators may apply the UNIDROIT Principles of International Commercial Contracts, or general principles such as pacta sunt servanda (agreements must be kept), good faith, and the prohibition of unjust enrichment. This allows the award to be fair and neutral, rather than favoring one party's legal system. Lex mercatoria works because international arbitration is private: parties agree to arbitrate, and the arbitral tribunal has the authority to choose the applicable law—often including a non-national one.
A deeper explanation
The mechanism by which lex mercatoria governs awards is rooted in party autonomy and the flexible conflict-of-laws rules in arbitration. Unlike courts, arbitral tribunals are not bound by the forum's choice-of-law rules; they can directly choose the law they deem appropriate. If the parties have chosen a national law, that governs. But if they have not, or if the dispute touches multiple jurisdictions, the tribunal may apply a transnational body of law. This body is drawn from several sources: international trade usages, general principles of law common to major legal systems, and codified restatements like the UNIDROIT Principles. These sources gain authority through their consistent use in international commerce and through arbitral precedent. The ability of arbitrators to decide ex aequo et bono (based on fairness) or as amiable compositeur further empowers them to apply lex mercatoria. The award itself, when issued, is a binding decision, and its enforceability relies on the New York Convention, which only requires that the award be in writing and be based on a valid arbitration agreement—it does not question whether the tribunal applied lex mercatoria. Thus, lex mercatoria provides a flexible, neutral, and internationally accepted framework, though critics argue it lacks predictability and legitimacy because it is not democratically enacted.