03. transnational and soft law

The question

The two preceding sub-units presented a clean division: public international law governs the relations of states, and private international law allocates private relationships among national legal systems. Much of the law that in fact governs cross-border commercial life fits awkwardly into either category, for it is neither the law of states among themselves nor the law of any single state, but a body of rules and standards generated by commercial practice, by international organisations, and by private bodies, operating across borders without belonging to any one national order. This sub-unit examines that body of law under two connected headings, transnational law and soft law, and asks how rules can shape conduct across borders when they issue from no legislature and bind through no court. The answer reveals a domain of law that the rigid division between public and private international law fails to capture, and that is of the first importance to commerce.

Transnational law

Transnational law is a term used to describe the body of rules that regulates actions or events transcending national frontiers, cutting across the conventional division between public international law and private international law and including rules that fit neatly into neither. The concept responds to a practical observation: the legal environment of a cross-border enterprise is composed not only of the public international law binding its home and host states and the private international law allocating its relationships, but also of a wide range of further norms, generated by commercial custom, by industry bodies, by international institutions, and by the contracts of the parties themselves, that govern its conduct in fact.

This concept connects to the analysis of sources in the earlier unit by complicating it, for transnational norms often issue from origins the classical doctrine of sources does not recognise as lawmakers. A standard promulgated by an international industry association, a set of contractual terms drafted by a private institute and adopted across an industry, a code of practice issued by an international organisation: none of these is legislation, a treaty, or a judicial decision, yet each may govern cross-border conduct as effectively as a formal source, because the parties adopt it and the practice of the field gives it force. Transnational law thus draws attention to the gap between the formal sources of law and the norms that actually order cross-border life.

Consider an international enterprise in a regulated industry such as shipping or finance. Its conduct is shaped by the public international law its states have made, by the private international law that governs its contracts, and, beyond both, by the technical standards of international bodies, the model terms its industry has adopted, and the codes of practice to which it adheres. The enterprise experiences this assemblage as a single regulatory environment, and the concept of transnational law names that environment, drawing together norms of diverse origin that operate across the same frontier.

Transnational law is therefore a concept that captures the law governing cross-border conduct without regard to the public-private division, directing attention to the many norms of commercial and institutional origin that order international life alongside the formal sources, and it sets the frame for the more particular notion of soft law.

Hard law and soft law

The norms that order cross-border conduct differ not only in origin but in binding force, and the distinction between hard law and soft law captures this difference. Hard law denotes norms that are legally binding and enforceable, creating obligations that a court or tribunal will recognise and give effect to, such as a ratified treaty or a statute. Soft law denotes norms that are not legally binding in themselves but that nonetheless influence conduct, shaping behaviour through their persuasive authority, their adoption by parties, or their tendency to harden over time into binding law.

This distinction qualifies the account of normativity given in the first unit, for it identifies a category of norm that guides conduct without commanding it in the manner of binding law. Soft law takes many forms: declarations and resolutions of international organisations, codes of conduct, guidelines, model provisions, and statements of principle, none of which binds of its own force, yet each of which may exert substantial influence. Soft law influences conduct through several channels: parties may incorporate it into their contracts, giving it binding force by their agreement; states may treat it as a standard toward which to converge; courts and tribunals may draw on it as evidence of accepted practice; and a soft-law instrument widely followed may in time contribute to the formation of customary law or be embodied in a binding treaty. The category is therefore not a weaker imitation of law but a distinct instrument, valued precisely because it can secure agreement and shape practice where binding obligation could not be achieved.

Suppose an international body issues a set of principles for responsible conduct in a particular industry, principles that bind no one of their own force. An enterprise may nonetheless adopt them, incorporating them into its contracts and its internal rules, so that they bind it by its own choice; competitors may follow, so that the principles become the standard of the industry; and a state may later enact them as binding regulation. The soft-law instrument shapes conduct at each stage without ever, in itself, commanding it, and the example shows the distinctive manner in which soft law operates.

The distinction between hard law and soft law is therefore essential to understanding the transnational domain, for much of the norm-generation that orders cross-border commerce takes the form of soft law, influential without being binding, and a party that attends only to hard law misjudges the forces that in fact shape its environment.

The lex mercatoria and standardised terms

The most developed expression of transnational commercial norm-making is the body of practice known as the lex mercatoria, the law merchant, a term denoting the body of customary commercial rules and principles that merchants have developed across borders through their dealings, regarded by its proponents as a transnational commercial law existing alongside the national legal systems. The concept has medieval origins, in the customary law that governed merchants trading across the boundaries of the medieval polities, and it has been revived in the modern era to describe the transnational commercial norms generated by international trade, arbitration, and the practice of merchants.

The practical core of this phenomenon lies in the standardised terms and instruments that order international commerce, and these connect the abstract concept to daily commercial reality. Sets of standardised contractual terms, drafted by international bodies and adopted across industries, allow parties in different legal systems to contract on common terms whose meaning is settled and understood, reducing the uncertainty that the diversity of national laws would otherwise create. Standardised definitions of delivery terms in international sales, uniform rules governing documentary credits in international payment, and model clauses for international contracts all furnish a common commercial vocabulary that operates across borders by the adoption of the parties rather than by the command of any state. Whether the lex mercatoria amounts to an autonomous body of law or is better understood as a collection of practices given force by national law and party agreement is debated, and the course takes no position; what is not debated is the practical importance of the standardised terms through which transnational commercial practice operates.

Imagine a seller and buyer in different states agreeing that delivery shall be on standardised terms drawn from an internationally recognised set of trade definitions. By adopting the standardised term, the parties incorporate a settled allocation of the costs and risks of carriage whose meaning is the same wherever the parties are situated, sparing themselves the negotiation of these matters from scratch and the uncertainty of differing national understandings. The example shows transnational commercial norms operating through the deliberate adoption of standardised terms, the practical mechanism by which the lex mercatoria, however its nature is characterised, orders international trade.

The lex mercatoria and the standardised terms that express it are therefore the developed form of transnational commercial norm-making, supplying a common vocabulary and a settled allocation of commercial risks across borders, adopted by the parties and operating alongside the national legal systems.

Harmonisation and the model law

The diversity of national legal systems imposes a cost on cross-border commerce, and a major effort of the international institutions is directed at reducing that cost through harmonisation, the process of bringing the laws of different states into closer alignment so that a cross-border transaction encounters fewer and smaller differences among the systems it touches. Harmonisation connects this sub-unit to the concerns of certainty and positioning that run through the course, for the closer the alignment of national laws, the lower the legal friction and uncertainty that cross-border commerce must overcome.

Among the principal instruments of harmonisation is the model law, a text prepared by an international body that sets out a recommended legislative scheme for a field of law, which individual states are invited to enact into their own law, with or without modification. The model law is an instrument of soft law in its origin, binding no state of its own force, yet powerful in effect, for as more states enact it the law of the field converges across them, and a party operating in several states that have adopted the same model law encounters a familiar legal framework in each. International bodies devoted to harmonisation have produced model laws and uniform principles in many commercial fields, including international commercial arbitration, electronic commerce, and the law of cross-border insolvency, and the widespread enactment of these models has substantially reduced the divergence of national laws in the fields they address. The same bodies produce conventions, which bind the states that ratify them as hard law, and uniform principles, which parties may adopt as soft law, so that harmonisation proceeds through a spectrum of instruments of differing binding force.

Suppose an enterprise conducts arbitration in several states that have each enacted the same model law on international commercial arbitration. Because the governing legislative framework is substantially the same in each, the enterprise encounters a familiar law wherever it arbitrates, and the risk that an unfamiliar national peculiarity will defeat its expectations is much reduced. The example shows harmonisation operating through the model law, converting the diversity of national systems into a measure of convergence that directly serves commercial certainty.

Harmonisation, pursued through the model law and the spectrum of related instruments, is therefore the institutional response to the cost that legal diversity imposes on cross-border commerce, and it represents the constructive complement to the conflict-resolving technique of the private international law examined in the previous sub-unit, reducing the differences among systems rather than merely allocating relationships among them.