International arbitration and punitive damages: delocalization and mandatory rules: now that non-state parties are using international law, the question whether punitive damages arbitration awards can be enforced has become more important.

• Author: Wood, Darlene S.

THE TREND toward non-state parties being the subjects of international law and the employment of the body of law known as lex mercatoria have come together with the worldwide acceptance of international commercial arbitration, creating a viable substitute for national courts in resolving increasingly international trade disputes. Law, as it applies to the world economy, has evolved and crystallized into competing concerns of the "delocalization" of the arbitral process and the application of mandatory rules. (1)

The imposition of punitive damages is a good example of a legal issue where the arbiter's ability to apply lex mercatoria is circumscribed by mandatory rules. Discounting these rules could adversely affect the eventual enforcement of the award. Although custom and usage has taken center stage in the arbitral decision, it is clear that the laws of sovereign nations cannot be completely ignored. (2)

Lex mercatoria is framed against a backdrop of conventional notions of international law. International commercial arbitration employs lex mercatoria as one of its most effective tools in resolving disputes. But are punitive damages viable awards in international arbitration? It will become clear that in the area of punitive damages, lex mercatoria has no place in international commercial arbitration, even though the subjects of the law are non-state actors.

INTERNATIONAL LAW

In order to appreciate the role of lex mercatoria in international law and the issue of punitive damages, one must look at what is traditionally accepted as "international law." But even this innocuous endeavor is fraught with contention among legal scholars. (3)

Article 38 of the Statute of the International Court of Justice recognizes three major sources of public international law: international conventions, international custom, and the general principles of law recognized by civilized nations. Article 59 also considers judicial decisions and the teachings of highly qualified publicists of various nations as additional sources.

1. International Treaties and Conventions

   International treaties and conventions are regarded at the first source of international law, but only one kind actually makes law--the "law-making" treaty, which is an agreement between two or more nations intended to create new rules to be respected by them. Only the signatories are bound initially, and, depending on the number of ratifying states, the treaty can become a source of regional or international law. Unless a state specifically refuses to sign, over time it can become bound by the agreement. (4) Another way regional law can be created is by resolutions and declarations, even though ratification is not required.

   Now the globalization of the world economy has infringed on these bastions of authority, adding non-state actors who heretofore had little power. (5) Traditionally, the true "subjects" of the law were sovereign states, whereas the individual was considered the "object" of the law. Intergovernmental organizations, derivative subjects of international law such as the United Nations, achieved status as legal persons only by explicit grant of authority in treaties. The trend, however, is to include the non-state actor as a subject of the law as well. Non-governmental organizations--the International Monetary Fund and the World Trade Organization, as examples--attend international conferences, actively seeking to participate in the further development of international law. It is now being argued that even individuals have achieved the status of "partial subjects" under international law. (6)

2. International Custom

   With the rise of non-state actors in the international law arena, there is an overlap in public and private international law with regard to custom, the second source of international law. Whereas public international law is concerned with regulating intergovernmental interactions, private international law addresses dispute resolution between non-state actors, who can be both natural persons and corporations. "The most obvious example," one commentator states, "is the law relating to the regulation of international business dealing with trade and investment and international financial transactions." (7)

   The phrase "custom and usage" is familiar in the context of international business dealing. It is at this point that judicial precepts begin to merge into lex mercatoria and international commercial arbitration. Traditionally, custom in international law has been defined as the general and consistent practices or usage by states and non-state actors adhered to from a sense of legal obligation. (8) Custom and usage in the field of commerce has been judicially recognized in the United States at least since the 1920s. (9)

   The territoriality aspect of custom is changing, however, in private international law. The classic function of private international law is to match the appropriate local, municipal law to the subject of adjudication, using the law of the country having the closest connection to the matter. (10) But there is a trend toward delocalization private international law. The contest over customary international law and delocalization is often fought in the conflict of laws arena. According to Friedrich Juenger, conflict of laws in the private sector is often resolved by courts applying "a lex mercatoria of sorts by permitting private parties to extricate themselves from the grasp of undesirable state and national laws." (11)

3. General Principles of Law

   General principles can be controversial in much the same way as customary international law, depending on which definition one uses for these rules. They could be principles of domestic jurisprudence, a primary source assured and harmonizing with Article 38. However, some legal scholars regard general principles of law as a secondary source, believing that these rules are based on subjective concepts of morality and justice, or natural law.

   Secondary sources must be considered. Domestic judicial decisions generally do not bind a state's own government on the international stage, but they are given respect and weight in the international community in that they indicate how the law would be applied in that forum. The decisions of international tribunals, such as the International Court of Justice, have garnered increasing respect over the decisions of domestic courts.

   The writings by publicists, or legal scholars, also must be considered. Weight is given to such scholarly endeavors, but not as much as in bygone times--for example, the civil law writings of Grotius. There is a concern that legal scholars "are preoccupied with merely replying to each other," discussing paradigms rather than evaluating the behavior of international actors in an empirical manner. (12)

   LEX MERCATORIA

   Lex mercatoria is a body of law that fills a need in international commerce not met by traditional sources of international law. In discussing law and globalization, Muchlinski points to this void:

   [T]he cross-border activities by non-state actors, coupled with the relocation of certain regulatory functions outside the traditional domain of the territorial nation-state toward regional and multi-lateral organizations, have cast doubt on exclusive territorial theories of legal order and sovereignty. Furthermore, those responses often involve informal or unofficial regulatory orders based on such things as business practices, shared communal values and professional perceptions of problems and their solutions, which all give rise to order outside official law. (13) He adds that whereas traditional state authority and regulation continues to be sound in certain areas of law, such as immigration and labor law, the international business community is increasingly relying on the "new" lex mercatoria.

   It is ironic that this might be the oldest form of law in the world. Some scholars argue that lex mercatoria actually antedates that of the system of nation-states. For example, the subject was addressed in 1622 by English writer, G. Maynes in Consuedo vel Lex Mercatoria or The Law Merchant. (14) The theory is that after the rise of nation-states, this body of law became ignored by writers and courts, yet survived through customary practices of those involved in international commercial trade. (15)

   Black's Law Dictionary (7th edition) defines lex mercatoria as "a system of customary law that developed in Europe during the Middle Ages and regulated the dealings of mariners and merchants in all the commercial countries of the world until the 17th century. Many of the law merchant's principles came to be incorporated into the common law, which in turn formed the basis of the Uniform Commercial Code." Thus, lex mercatoria was delocalized in origin.

   Now, through the principles of custom and usage, it can be said that modern contracts refer, expressly and/or impliedly, to lex mercatoria. (16) By corollary, so does international arbitral law, in...