The Law Merchant, or Lex Mercatoria, was originally a body of rules and principles laid down by merchants themselves to regulate their dealings. It consisted of usages and customs common to merchants and traders in Europe, with slightly local differences. It originated from the problem that civil law was not responsive enough to the growing demands of commerce: there was a need for quick and effective jurisdiction, administered by specialised courts. The guiding spirit of the merchant law was that it ought to evolve from commercial practice, respond to the needs of the merchants, and be comprehensible and acceptable to the merchants who submitted to it. International commercial law today owes some of its fundamental principles to the Law Merchant as it was developed in the medieval ages. This includes choice of arbitration institutions, procedures, applicable law and arbitrators, and the goal to reflect customs, usage and good practice among the parties.
The Law Merchant was administered by merchant courts, set up along trade routes and trade centres. A distinct feature of the Law Merchant was the reliance by merchants on a legal system developed and administered by them. States or local authorities seldom interfered, and surrendered some of the control over trade within their territory to the merchants. In return, trade flourished under the Law Merchant, increasing tax revenues.
The Law Merchant was the product of customs and practices among traders, and could be enforced through the local courts. However, the merchants needed to solve their disputes rapidly, sometimes on the hour, with the least costs and by the most efficient means. Public courts did not provide this. A trial before the courts would delay their business, and that meant losing money. The Law Merchant provided quick and effective justice. This was possible through informal proceedings, with liberal procedural rules. The Law Merchant rendered proportionate judgements over the merchants’ disputes, in light of “fair price”, good commerce, and equity.
Judges were chosen according to their commercial background and practical knowledge. Their reputation rested upon their perceived expertise in merchant trade and their fair-mindedness. Gradually, a professional judiciary developed through the merchant judges. Their skills and reputation would however still rely upon practical knowledge of merchant practice. These characteristics serve as important measures in the appointment of international commercial arbitrators today.
Less procedural formality meant speedier dispensation of justice, particularly when it came to documentation and proof. Out of practical need, the medieval Law Merchant originated the “writing obligatory”. By this, creditors could freely transfer the debts owed to them. The “writing obligatory” displaced the need for more complex forms of proof, as it was valid as a proof of debt, without further proof of; transfer of the debt; powers of attorney; or a formal bargain for sale. The Law Merchant also strengthened the concept of party autonomy: whatever the rules of the Law Merchant were, the parties were always free to choose whether to take a case to court, what evidence to submit and which law to apply.
It is believed that goods and services flowed freely during the medieval Law Merchant, thus generating more trade and wealth. This is also the purpose of the single market, as we know it today. It is, however, debatable whether the law was uniform in nature, was spontaneous as a method of dispute resolution, or applied equally to everyone who subordinated to it. The Law Merchant was also a means for local communities to protect their own markets. By holding merchants to local rules the Law Merchant required a distinct local character. It was an issue then, as now, to what extent nation states are justified in regulating trade to protect local interest (such as tax revenue or custom barriers). Nation states were non-existing at the early stages of the Law Merchant, but local kings or authorities saw to the task just as well. The effort to create a single market did not fail, but lack of a higher authority to unify rules and customs certainly gave room for local variations within the market.
The Law Merchant declined as a cosmopolitan and international system of merchant justice towards the end of medieval times. This was to a large extent due to the adoption of national commercial law codes. It was also connected with an increasing modification of local customs to protect the interests of local merchants. The result of the replacement of Law Merchant codes with national governed codes was the loss of autonomy of merchant tribunals to state courts. The main reason for this development was the protection of state interests.
The nationalisation of the Law Merchant did not neglect the practises of merchants or their trans-border trade. Some institutions continued to function, and state judges also were appointed for their merchant expertise, just as modern commercial arbitrators. The law of the merchants were not eradicated, but simply codified. National codes built on the principles laid down by trade commercial practise and to a large extent they embodied Law Merchant substantial rules. This was for example the case in France. The Code Commercial was issued in 1807, where Law Merchant rules were preserved to govern formation, performance and termination of contracts. In effect, the nation states reconstituted the Law Merchant in their image.
English courts applied merchant customs only if they were “certain” in nature, “consistent with law” and “in existence since time immemorial”. English judges also required that merchant customs were proven before the court. But even as early as 1608, Chief justice Coke said: “the Law Merchant is part of this realm”. The tradition continued especially under Lord Mansfield, who is said to be the father of English commercial law. Precepts of the Law Merchant were also kept alive through equity and the admiralty courts in maritime affairs. In the US, traditions of the Law Merchant prevailed in the general principles and doctrines of commercial jurisprudence.
Law merchant precepts have been reaffirmed in new international mercantile law. National trade barriers are torn down in order to induce commerce. The new commercial law is grounded on commercial practice directed at market efficiency and privacy. Dispute resolution has also evolved, and functional methods like international commercial arbitration is now available. The principles of the medieval Law Merchant -- efficiency, party autonomy and choice of arbitrator -- are applied, and arbitrators often render judgements based on customs. The new Law Merchant encompasses a huge body of international commercial law.
In summary, nation states somewhat fragmented the medieval Law Merchant, but it is far from destroyed. Local interests triumphed in the medieval ages, just as national interests do today. A modern variant of the Law Merchant is the evolving law and dispute resolution in cyberspace. Internet traders are the fastest growing body of merchants in history. Parties can solve domain-name disputes online expeditiously and quickly. In a virtual court documents are filed and examined online, arguments are made online and decisions are published online – seldom challenged before traditional courts of law. The medieval, the modern and cyberspace Law Merchants face comparable issues of enforceability. They solve the problems somewhat differently, but the reaction of the market is the main incentive to comply with a ruling. What remains of Law Merchant precepts today is a qualified faith in self-regulation by merchants, and a reluctance to surrender the efficiencies of merchant practice to state confinement.