Uncodified non-state rules
Uncodified non-state rules consist of trade usages and general principles of law. Trade usages are characterised by their spontaneous creation within the business community and their adaptability to the needs of that community. The differences between custom, usages, and practices arc not always clear. In contemporary commercial law literature, the terms are used interchangeably whereas in practice there is a tendency towards using the term trade usage
Custom is the practice of an authority and usages arc the practice of a trade. Customary law as defined by the ICJ contains two important elements: the repeated and consistent practice and the opinio iuris. The common law test is that for a custom to be recognised it needs to be legal, notorious, certain, reasonable, universal, obligatory, and ancient or immemorial. This is a high threshold to meet. In practice, custom in international trade does not always meet that threshold. It is more flexible, transient and adaptable, partly because of its close association with trade usages.
Custom is normative: parties follow the custom because they believe it should be followed. Without this sense of obligation, it cannot be considered custom. This is not the same with trade usages. Parties do not need to believe that the usage is legally binding for it to be enforceable; they only need to adhere to it.
The UCC states that ‘a usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. 752 It does not state that a sense of obligation is necessary. This was confirmed in Chase Manhattan Bank v. May where the court stated that usages do not need to meet the standard of custom. This is why trade usages are favoured in modern legislation as there is no need to prove a sense of obligation, but only to prove the actual practice itself. It can be difficult to distinguish between a usage followed out of courtesy or out of a sense of legal obligation.[1] Therefore, if there is no need to prove this sense of obligation it lessens the burden of proof. A trade usage thus has binding force regardless of whether the parties recognise this obligation Non-rcspect of a trade usage is seen as non-rcspect of a contractual term. Trade usages arc applicable in a specific locality or a specific trade and they go beyond the individual contractual relationship and can therefore not be equated with course of dealing.
Practices have a weaker obligation than trade usages. Practices can be associated with the individual contracting parties. In that case, practices are the equivalent of course of dealing and they are binding within the specific relationship. Another explanation is that a practice is a beginning trade usage. The pattern is emerging but is not yet firmly established. A practice is new trade usage, which has not yet acquired obligatory force. Under that definition a practice would not create any legal obligations for the parties unless this has been implied through course of dealing or if the practice is explicitly included in the contract.
Schmitthoff synthesises these differences by describing a gradual process whereby custom is started as practices that are followed by a few businesses which then become general usages within that trade or locality, and which over time may develop into custom. Trade usages and practices arc more restricted in time and space than custom, which is more universal and has deeper historical roots, as evidenced by the common law test. It should be kept in mind that these three terms are often used interchangeably in theoretical writing and in practice. As the legislative preference is for the concept of trade usages and in practice custom in international commerce is often equated to trade usages, this book uses the term trade usages as the point of reference and only uses custom when a distinction between the two should be made. Domestic law recognises trade usages (custom, practices...)
The roles of non-state rules 71 as a source of law.[2] Whether a specific practice is considered a trade usage depends on how regularly it is observed, how long it has existed, and how widespread it is.
Trade usages depend on the capacity of the merchant community to self-organise and select those usages which are beneficial to the community: 'when a usage has become uniform in an active commercial community that should warrant enough for supposing that it answers the needs of those who are dealing upon the faith of it.,6° There are instances when a usage develops that is not beneficial although this is rare. In a competitive market surviving usages can be assumed to benefit the parties. A usage that stands in the way of economic efficiency would soon give way to another one. This is an acceptable presumption as it is better to tolerate a rare unreasonable usage than go through the effort and costs of trying to establish general rules to define precisely when a trade usage is reasonable.
An example of a damaging trade usage is the practice of giving indemnity letters in exchange for a clean bill of lading. As speed is of the essence, the captain of the ship is asked to sign a clean bill of lading, even when he has not been given the opportunity to inspect the goods or if the goods do not conform. The captain is then given a letter of indemnity to exonerate the carrier from responsibility. This practice is widespread, yet it is not only fraudulent, but also counterproductive as it diminishes trust in the bill of lading and damages its value. Parties have argued in court that this is an enforceable trade usage. In a famous English case this was accepted by the trial court and by the court of appeal, but it was struck down by the House of Lords.65 The House of Lords stated that trust is the foundation of trade and that if doubt arises about the trustworthiness of a clean bill of lading this is damaging for international trade.
The legal authority of the trade usage does not come from enforcement in the courts. There are two main views on the legal authority of trade usages.
The first is that as long as a usage is not recognised by a court it does not have legal authority and the second view is that a ruling by a court is merely declaratory and the ruling itself is not the source of the legal authority.[3] The first view causes a paradox: if a usage is only law after its recognition, then it should not pose any obligation upon the parties given that the trade usage did not exist before the ruling. In that case, only trade usages that have been affirmed in judicial decisions are binding. This would lead to the court confirming that a specific usage is binding, yet not enforcing it in the current case, as the usage did not exist prior to the decision. It is therefore more reasonable to assume that a court recognises a trade usage, but that the legal authority does not come from this decision. That legitimacy comes from its usage by the merchant community. The authority of trade usages can thus come from domestic law (if trade usages are a source of law under domestic law), from the lex mercatoria (of which they are a source), and the business community (which creates and uses them).
The place of general principles of law in international commercial law generates more debate. General principles of law are sources of public international law, domestic law, and transnational commercial law. According to Lord Mustill their practical applicability in commercial law is limited because they are not specific enough. Despite this criticism phrases like ‘general principles of law’, ‘principles of commercial law’ and similar are regularly found in choice of law clauses. Courts must then find a way to translate these general and sometimes vague principles into concrete rules. At other times courts and tribunals apply them without the parties having referred to them, either to interpret the law or to interpret the contract.
There arc different theories on how general principles function as a source of international commercial law. They could be a way of ordering the legal system or as guidance to understanding similar concepts in different laws. In that case they would not be sources of law. They can also be seen as sources of law for gap filling purposes or to interpret the law. This gap-filling method can be found in the CISG, which states that for matters covered by the convention, but not explicitly discussed in it, decisions should be based on the conventions’ underlying general principles. De Ly analyses that in the Netherlands and Belgium general principles arc recognised as a source of law and are applied regularly. In France they arc applied less frequently, but they are a formal source of law, and in Germany they are recognised as a method to interpret the law.[4]
General principles of law as defined by article 38 of the ICJ are sources of public international law. General principles are also a source of domestic law. They can thus derive their legal authority from domestic law or from international law. General principles of transnational commercial law pose a conundrum. If they arc reduced to the general principles of law under article 38, they become so abstract as to lose their practical importance for international commerce. If on the other hand general principles of law arc defined in a concrete way that is applicable to international commerce, they serve an important purpose in interpreting the law. If they are concrete rules, they will lose some of their universality because they arc applied in state courts, which means that domestic law influences how these principles are interpreted and applied. Therefore, general principles of commercial law are on the juxtaposition of public international law, transnational commercial law, and domestic law and how they arc defined and interpreted varies between jurisdictions.
- [1] Roy Goode, ‘Usage and its Reception in Transnational Commercial Law’ in Jacob S Ziegel and Shalow Lerner (editors), New Developments in International Commercial and Consumer Law, proceedings of the 8th Rienal Conference of the International Academy of Commercial and Consumer Law (Hart Publishing 1998) 11. 2 Alejandro M Garro ‘Rule-Setting by Private Organisations, Standardisation of Contracts and the Harmonisation of International Sales Law’ in Ian F Fletcher, Loukas Mistelis and Marise Cremona (editors), Foundations and Perspectives of International Trade Law (Sweet & Maxwell 2000) 314. 3 Roy Goode, ‘Usage and Its Reception in Transnational Commercial Law’ (1997) 46 International & Comparative Law Quarterly 4,4. 4 Clive M Schmitthoff, ‘The Unification or Harmonisation of Law by Means of Standard Contracts and General Conditions’ (1986) 17 International & Comparative Law Quarterly 551, 554. 5 Hellbusch v. Rheinholdt 550 P.2d 1199 (1976):’the terms 'usage’ and 'custom’ are commonly used interchangeably, though there is a recognized distinction in the meaning of the two words.’ (Quoting from Samuel Williston, Law of Contracts 1-4, § 648 (3rd edition Jaeger 1961).
- [2] See for instance the Uniform Commercial Code, which recognises trade usages as a source of law in all 50 states of the USA. See Section 346 of the German Code of Commerce which obliges courts to take into consideration trade usages. 2 Judge Learned Hand in Kunglig Jarnvagsstyrelsen v Dexter and Carpenter 299 F. 991 (S.D.N.Y. 1924). 3 Jim C Chen, 'Code, Custom, and Contract: The Uniform Commercial Code as Law Merchant’ (1992) 27 Texas International Journal 91, 123/124 This is especially so as reputation is vital in international trade. The enforcement of the lex mercatoria also depended on reputation. A sanction was for instance the exclusion from commercial fairs (see page 132 of professor Chen’s article). See also: Kerry Lynn Mackintosh, 'Liberty, Trade, and the Uniform Commercial Code, When Should Default Rules Be Based on Business Practices?’ (1996) 38 William & Mary Law Review 1465, 1478 4 Jim C Chen, ‘Code, Custom, and Contract: The Uniform Commercial Code as Law Merchant’ (1992) 27 Texas International Journal 91, 135 5 Brown Jenkinson &Co v Percy Dalton [ 1957] 2 Lloyd’s List L. R. 1 (C.A.).
- [3] Roy Goode, ‘Usage and its Reception in Transnational Commercial Law’ in Jacob S Ziegel and Shalow Lerner (editors), New Developments in International Commercial and Consumer Law, proceedings of the 8th Bienal Conference of the International Academy of Commercial and Consumer Law (Hart Publishing 1998) 12. 2 Ibid. 3 Michael Mustill, ‘The New Lex Mercatoria: The First Twenty-Five Years’ (1998) 4 Arbitration International 86,92. 4 Filip de Ly, International Business Law and Lex Mercatoria (T.M.C Asser Instituut 1992) 193. 5 Ibid. 6 Ibid, 194. 7 CISG Article 7 (2).
- [4] Filip de Ly, International Business Law and Lex Mercatoria (T.M.C Asser Instituut 1992), 194-199.' 2 Although some jurisdictions do explicitly recognise certain codified non-state rules: Ukraine for instance recognises the UPICC and Incoterms as trade usages (Official Note of the High Commercial Court of Ukraine No.01-8/211, 07.04.2008).
