The Law Merchant and International Trade

By Leeson, Peter T.; Smith, Daniel J. | Freeman, May 2011 | Go to article overview
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The Law Merchant and International Trade

Leeson, Peter T., Smith, Daniel J., Freeman

Is the State necessary for flourishing international trade? Conventional wisdom thinks so. According to that wisdom, private international commerce would wither without intergovernmental treaties, State courts dealing with international affairs, and Statecrafted legal practices for international merchants. Some commentators have gone so far as to suggest that a world legal system is needed to ensure the continual growth of international commerce.

Superficially, at least, the idea that State involvement might be indispensable for international trade seems sensible. Without it, how could merchants from different legal systems - not to mention cultures, languages, and religions - make binding contracts, providing the security they need to trade with persons beyond their nations' borders? Without a world court for private international commercial agreements, what law would take precedence in commercial disputes? Which nation's courts would handle merchants' disagreements? And how could merchants secure a fair hearing in the courts of their adversaries? Without a supranational legal system, or at least national governments' cooperation, these and myriad other potential problems stemming from commercial conflicts between parties from different countries would seem insurmountable.

Yet private parties have surmounted these problems - without government. International trade first took off under a private international legal system called the lex mercatoria, or Law Merchant. It continues to thrive under private legal arrangements today.

In the eleventh century Europeans discovered agricultural improvements that could sustain a larger population. The growing population increasingly migrated to urban areas. In these cities a new class of merchants was born. Merchants across Europe were separated by language, distance, and local law. To facilitate trade, they needed a common set of commercial rules. Out ofthat need the Law Merchant was born.

The Law Merchant was a purely informal body of law. It developed out of merchants' international commercial customs and shared legal notions. Roman law (the ius gentium) provided many of these notions, which merchants modified to meet their special needs, as Bruce L. Benson pointed out in "The Spontaneous Evolution of Commercial Law" (Southern Economic Journal, 1989.)

In its early days the Law Merchant relied entirely on private adjudication and enforcement. Merchants conducted much of early international trade at fairs throughout Europe. At these fairs local authorities performed regular activities, such as preventing violence, but they didn't normally adjudicate disputes between international traders.

Nor did authorities enforce the terms of private commercial contracts. International merchants formed their own courts for this purpose and applied their own law to these cases. Merchants' courts came to be called "dusty feet courts" because of the condition of merchants' shoes as they busily traveled between commercial fairs. In these courts merchants acted as judges, deciding the disputes of fellow traders on the basis of shared customs. Merchant courts enforced their decisions privately by threatening noncompliant traders with a loss of reputation and merchant-community ostracism.

Advantages of the Lex Mercatoria

Medieval international merchants used the lex mercatoria's private system of international commercial governance instead of government for several reasons. First, they desired speedy dispute resolution. Disrupting business to resolve contractual disagreements was costly. The Law Merchant minimized costs by eschewing the formality of State court proceedings. Merchant courts' flexible rules of evidence, "[o]ral proceedings, informal testimony of witnesses and unwritten judicial decision-making" hastened the judicial process for time -pressed international traders, according to Leon Trakman's The Law Merchant: The Evolution of Commercial Law.

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