The Spontaneous Evolution of Commercial Law*

BRUCE L. BENSON
Florida State University
Tallahassee,Florida

I. Introduction

Jeremy Bentham contended that propertyand state-madelaw "are born and must die together.
Before the [state's] law there was no property:take away the law, all propertyceases" [4,309].
Most economists have taken this argumentto heart. Clearly,some system of defining and then
protecting and enforcing propertyrights (propertylaw) and rules of exchange (contractlaw) is
needed for a marketsystem to develop. But does the state have to develop and enforce property
and contractlaw? One purposeof the followingpresentationis to demonstratethatthe commercial
sector is completely capable of establishingand enforcingits own laws.
A second purpose is to illustratethatmoder commerciallaw is, in fact, largelymade by the
merchantcommunitydespite governmentaleffortsto take over provisionof such law. Commerce
is an evolving process of interactionand reciprocitywhich is simultaneouslyfacilitatedby and
leads to an evolving system of commercial law. Carl Menger [17] proposed that the origin,
formulationand the ultimateprocess of all social institutionsincludinglaw is essentiallythe same
as the "spontaneousorder" Adam Smith [20] describedfor markets.Marketsguided by Smith's
invisible hand coordinateinteractions,and so does customarylaw [6; 7]. These systems develop
because, perhapsthrougha process of trialand error,it is foundthatthe actionsthey are intended
to coordinateare performedmore effectively underone institutionalarrangementor process than
underanother.The more effective institutionsand practicesreplacethe less effective.
In the case of customarycommerciallaw, traditionsand practiceevolve to produce the ob-
served spontaneousorder.As Hayekexplained,however,while Smith'sand Menger'sinsights are
firmlyestablishedin economics, the study of jurisprudencehas been almostcompletelyunaffected
by their arguments[9, 101]. One reason, of course, is thatthe invisible handexplanationfor the
emergence of marketorder is highly plausiblebecause there is an obvious mechanism-the me-
chanics of individual but interrelatedmarketprices-which providesthe necessary coordination
we call the price system. The mechanismof evolution for a legal order is much less obvious.
Thus, the legal positivist view, which holds that law is the productof deliberatedesign, has a
strongfollowing among economists. Anothermajorpurposeof this discussionof commerciallaw,
therefore, is to demonstratethat the rules of propertyand contractnecessaryfor a marketecon-
omy, which most economists and legal scholarsfeel mustbe "imposed,"haveevolved withoutthe

*I was able to undertakethis project because of supportfrom the Institutefor HumaneStudies which providedme
with an F. Leroy Hill Fellowship. The paperextends and consolidatesworkbegun in a forthcomingbook [3] with support
from the Pacific Research Institutefor Public Policy. I wish to thankPacific Institutereviewers, and particularlyRandy
Barnett,as well as an anonymousreferee, for very helpful commentsand suggestions.

644
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 645

design of any absolute authority.Commerceand commerciallaw have developedcoterminously,

without the aid of and often despite the interferencesof the coercive power of nation-statesbe-
cause there is a mechanism in place. Commerciallaw itself is analogousto the price system in
that it facilitates interactionand makes exchange more efficient. The underlyingmechanics are
also analogous. Commerciallaw develops directlyfrom the marketexchangeprocess as business
practice and custom evolves.
In order to back up what may appearto be quite radicalclaims, the following presentation
is divided into seven parts beyond this introduction.First, in section II below, the source of the
authorityof law is briefly explored and the mechanismfor its productionis introduced. Then
section III contains an examinationof the Medieval "LawMerchant"in light of the discussionof
law and its evolutionarymechanismfrom section II. Merchantswanted to develop international
trade in the tenth, eleventh and twelfth centuriesbut they were limited by the highly localized
legal systems. Consequently,the internationalmerchantcommunitybrokethe bonds of localized
political constraintsto develop an internationalsystem of commerciallaw. They settled disputes
in their own courts and backed their law with the threatof boycott sanctions. Section IV follows
with an examination of the absorptionof the Law Merchantby common law, while section V
explores its reemergence as a primaryforce, particularlyin Americancommon law courts. Non-
governmentaladjudicationof commerciallaw today is discussed in section VI. The continuing
evolution of privatelyproducedcommerciallaw is examinedin section VII with emphasison the
internationalLaw Merchant.Finally, concludingremarksappearin section VIII.

II. The Authority of Law

Lon Fuller explained that "Law is the enterpriseof subjectinghumanconductto the governance
of rules" [6, 106]. Since law obviously requiresan enforcementapparatus,Fuller's definition
includes more than simply the existence of "social mores" defining rules of conduct. It is the
enterpriseof law which generatesthe mechanismsof recognitionand enforcement,legal change,
and dispute resolution. These mechanismsmay take the now familiarform that we call govern-
ment, but nation-statesare not a prerequisitefor law. We shall findthatthe merchantcommunity's
"enterprise"of accomplishingthe subjectionof commercialconductto controlnaturallygenerated
mechanismsfor recognition, adjudication,and change.'
One particularaspect of the enterpriseof law requiresdiscussion.Legal positivists typically
contend that for law to be recognized, it must be backedby some absoluteauthoritywhich cannot
be withdrawneven when that authorityis abused. This clearly implies coercive state power. In
fact, however, while authoritymay appear to be vested in individuals(leaders) or institutions
(legislatures, courts), this appearanceis a manifestationof the actual source of legal authority.
As Hayek explained, those who appearto have authorityto settle issues of law need not actually
determinewhethercertainactionshave abusedthe will of the state, but "whethertheiractionshave
conformedto expectationswhich otherpartieshad reasonablyformedbecause they corresponded
to the practices on which the every day conduct of the membersof the group was based" [10,
97]. Custom and practice gives rise to expectationswhich in turnguide people's action, so those
practices that people have come to count on observing are what often are recognized as law.

1. This terminology correspondsto Hart's [8] concepts of primaryand secondaryrules, but the interpretation
differs somewhat [3].
646 Bruce L. Benson

Authorityof (or support for) a legal system ultimatelyderives from a feeling that it is "right"
because it verifies expectations [6, 138].
Under this view of authorityit becomes clear that reciprocalarrangementsare the basic
source of the recognition of duty to obey law [5] (and of law enforcementwhen state coercion
does not exist [3]). Fuller suggested three conditionswhich make a legal (or moral) duty clear
and acceptableto those affected:

First,the relationshipof reciprocityoutof whichthedutyarisesmustresultfroma voluntary

agreementbetweenthepartiesimmediately affected;theythemselves"create"theduty.Second,
the reciprocalperformances of thepartiesmustin somesensebe equalin value. . . Wecannot
here speakof an exact identity,for it makesno senseat all to exchange,say, a book or idea
in returnfor exactlythe samebookor idea. Thebondof reciprocity unitesmen,not simplyin
spiteof theirdifferencesbutbecauseof theirdifferences.When,therefore,we seekequalityin a
relationof reciprocitywhatwe requireis somemeasureof valuethatcanbe appliedto thingsthat
aredifferentin kind.Third,therelationships fluidso that
withinthe societymustbe sufficiently
the samedutyyou owe me today,I mayoweyoutomorrow-inotherwords,therelationship of
dutymustin theoryandin practicebe reversible...
These, then are the threeconditionsfor an optimumrealizationof the notionof duty;the
conditionsthatmakea dutymostunderstandable andmostpalatable to themanwhoowesit [6,
23-24].
The authoritywhich can most effectively back law is individualrealizationof reciprocalbenefits
arising from recognition of that law. Indeed, Fuller proposedthat "customarylaw" might best
be described as a "languageof interaction"[7, 213]. Now let us turnto the developmentof the
medieval Law Merchantto illustratethat reciprocalgains from recognitionof rules of property
and contractprovidedsufficientincentivesfor merchantsto establishtheirown statelessenterprise
of law.

III. The Medieval Law Merchant: Voluntarily Produced Law for the Commercial
Revolution

With the fall of the Roman Empire, commercial activities in Europe were almost nonexistent
relative to what had occurred before and what would come after. Things began to change in
the eleventh and twelfth centuries. Rapid expansionin agriculturalproductivitymeant that less
labor was needed to produce sufficientfood and clothingto sustainthe population.Agricultural
commodities were produced at levels which stimulatedgreatertrade and populationbegan to
move into towns, many of which rapidlybecame cities of substantialsize [5, 333-335].
One consequence of (and simultaneously,one impetus for) the increased productivityin
agricultureand the urbanizationwhich followed was the emergence of a class of professional
merchants.There were significantbarriersto overcomebefore substantialinterregionaland inter-
national trade could develop, however. Merchantsspoke differentlanguages and had different
cultural backgrounds. Beyond that, geographicdistances frequentlypreventeddirect communi-
cation, let alone the building of stronginterpersonalbonds that would facilitatetrust. Numerous
middlemen were often requiredto bring about an exchange, includingbuyer, seller and shipping
agents. All of this, in the face of localized, often contradictorylaws and businesspractices, pro-
duced hostility towardsforeigncommercialcustomsand led to mercantileconfrontations[23, 11].
There was a clear need for Law as a "languageof interaction."
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 647

It was during this period, because of the need for uniformlaws of commerce to facilitate
internationaltrade, ". .. that the basic concepts and institutionsof moder Westernmercantile
law-lex mercatoria ("The Law Merchant")-were formed, and, even more important,it was
then that mercantilelaw in the West first came to be viewed as an integrated,developingsystem,
a body of law" [5, 333]. Virtuallyevery aspect of commercialtransactionsin all of Europe (and
in cases even outside Europe)were "governed"by this body of law afterthe eleventhcentury.In
fact, the commercialrevolutionof the elevenththroughthe fifteenthcenturythatultimatelyled to
the Renaissanceand industrialrevolution,could not have occurredwithoutthe rapiddevelopment
of this system of law. This body of law was voluntarilyproduced, voluntarilyadjudicatedand
voluntarily enforced. In fact, it had to be. There was no other potential source of such law,
including state coercion [23, 13].

Recognition
Recall Fuller's three conditionsfor reciprocityproviding"optimalefficacyof the notion of duty."
Fuller also noted that the kind of society in which these conditionsare most likely to be met "is a
surprisingone: in a society of economic traders"[6, 24]. Tradersenter into voluntaryexchange.
The marketdeterminesthe value of disparategoods so that "equal"exchangesare possible. Of
course, without marketdeterminedprices the concept of equality in value has little substance.
Furthermore,tradersfrequentlychange roles as buyersand sellers so that the duties which arise
out of exchanges are reversible. Indeed, such analysisled Fullerto concludethat it is only under
capitalismthat legal duty can become fully developed[6, 24].
The Law Merchantdid not springfrom a void. A considerablepartof it was based on Roman
commercial law [5, 339]. Nonetheless, Romanlaw as it was passed down throughthe centuries
was not adequate to meet the kinds of problemsthat arose in the early commercialrevolution.2
Furthermore,none of the other systems of law that existed or were being formulatedduring
this period were sufficient to meet the needs of the merchantclass either.3The developmentof
commercial law was almost entirely left up to the merchantsthemselves. This meant that the
Law Merchantwas customarylaw, and the "customarynatureof the Law Merchantwas by far
the most decisive factor in its development:it made the law eminentlya practicallaw adapting
to the requirementsof commerce" [6, 12]. When new forms of commercialactivity developed,
evolving business practice framed the new law. The emergence of the commercial society was
spontaneousand undesigned. Its developmenton an internationallevel requiredsimultaneousand
complementaryevolution of the mechanicsof marketexchangeand of commerciallaw.
When the merchantclass began to develop in variouslocalities, localized business practices
(customs) also developed. Internationaltraderequiredthatmajorconflictsbetween local customs
be eliminated. The internationalLaw Merchantevolved just as Hayek suggested customarylaw
in general evolves: "transmissionof rules of conduct takes place from individualto individual,
while what may be called the naturalselection of rules will operate on the basis of the greater
or lesser efficiency of the resultingorderof the group" [9, 67]. As merchantsbegan to transact
business across political, culturaland geographicboundariesthey transportedtrade practices to

2. Roman commercial law was not state produced [15, 83]. Indeed, customarylaw has been the source of the
rules of trade and commerce throughouthistory [23, 7-8].
3. Several systems of law arose aroundthe same time, includingthe royal law of many countries(e.g., common
law) [5].
648 Bruce L. Benson

foreign markets. Those previously localized customs which were discoveredto be common to
many localities became part of the internationalLaw Merchant.Furthermore,where conflicts
arose, those practiceswhich provedto be the most efficientat facilitatingcommercialinteraction
supplantedthose which were less efficient[23, 11]. As internationaltradedeveloped, the benefits
from uniformrules and uniformapplicationof those rules supersededthe benefits of discrimina-
tory rules and rulings thatmight favora few local individuals.By the twelfthcentury,commercial
law had developed to a level where alien merchantshad substantialprotectionin disputes with
local merchants, and "... against the vagaries of local laws and customs" [5, 342].4
The universalityof the Law Merchantwas more thanjust a resultof the commercialrevolu-
tion. It was a prerequisitefor the rapid developmentof trade. Withoutclear and understandable
laws, alien merchantswould not have been willing to carryon tradeat near the level that arose
during the eleventh, twelfth and subsequentcenturies. Merchantsrequiredprotection against
potential discriminationby locally enforcedlaws, and protectionfrom the potentialabuses of co-
ercive states that were increasingtheir law makingand law enforcementpowers duringthe same
period [5, 343].
Landes and Posner noted that
. . . therewouldappearto be tremendous economiesof standardizationin [law],akinto those
thathavegivenus standarddimensionsfor electricalsocketsandrailroadgauges.Whilemany
industrieshaveachievedstandardizationwithoutmonopoly,it is unclearhowthe requisitestan-
dardization of commonaltycouldbe achievedin the [law]withouta singlesourcefor [law]-
without,thatis to say,a monopoly... [13, 239].

Many have concluded that the state must be that monopoly source of law. This clearly is not the
case, however. Indeed, such significanteconomies of standardizationexist in commercial law
that it took the voluntarilyproducedand adjudicatedLaw Merchantto overcome the limitations
of political boundariesand localized protectionism.

Rules of Obligation
The laws which came to dominate the internationalLaw Merchantwere laws which reinforced
rather than superseded business practice: laws which commandedmerchantsto do what they
had already agreed to do [23, 10]. Furthermore,these laws typically did not involve complex
legal forms or mandatorycontrols over business. Commerciallaw was clearly intendedto be a
language of interaction.Complexitiesthat might hindercommunicationand therebyinhibittrade
were avoided.
Commerciallaw can be conceived of as coordinatingthe self-interestedactionsof merchants,
but perhaps an equally valuable insight is gained by viewing it as coordinatingthe actions of
people with limited knowledge and trust. The need for a languageof interactionthen becomes
more apparent.The limitations of knowledge in emerging medieval commerce are obvious, of
course. Thousands of traderstraveled to fairs and marketsall over Europe exchanging goods

4. Some differencesremainedacross variouslocalities, but this does not imply thatthe legal system was inefficient
or a reflection of local discriminatorypractices. Indeed, the remainingdiversity reflected differentialpreferences for
relatively minor variationsin commercialpractices and institutionsamong the merchantgroups who tended to travel to
the variousmarketsand fairs, thus enhancingthe universalrecognitionof developingcommerciallaw [23, 20-21].
5. There is no reasonto believe thatany particularnationalgovernmentis of the ideal size to take full advantageof
the economies of standardizationin law. In fact, economics of standardization
reallyprovidesa justificationfor voluntarily
producedlaw, in order to breakaway from the inefficientartificialpoliticalrestrictionsthatexist [3].
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 649

which they knew little aboutwith people they knew little about. Exchangeitself allows individuals
to take advantage of different producers' specialized knowledge. Marketscoordinate diffused
knowledge [10, 13], but diffused knowledge necessarilyimplies that some people are ignorant
of what others know and commercial law evolved as internationalcommerce developed in the
middle ages, in orderto keep commercialtransactionsas simple as possible. In the process, over
the period from 1000 to 1200 the rights and obligationsof merchantsin their dealings with each
other became significantlymore objective and precise, and less arbitrary[5, 341].
Furthermore,as the norms of commerciallaw became more precisely specified they were
increasingly recorded in writing. These written laws were not statutorycodes, although many
governments ultimately did adopt the Law Merchantin their commerciallegislation, as noted
below. Rather,they were writtencommercialinstrumentsand contracts[5, 439]. In this regard,
note that "contract law" refers to the "law" parties in exchange bring into existence by their
contractualagreement rather than to the law of or about contracts. Thus, customary law and
contractlaw are closely linked [7, 224-225].6 As a contractualform came into common usage it
actuallybecame part of the Law Merchant.
When it is recognized that individualshad to voluntarilyadopta certainpractice (enter into
a contract)before it could develop as commonusage it becomes clear why the Law Merchanthad
to be objective and impartial.Reciprocity,in the sense of mutualbenefits and costs, is the very
essence of trade. However,the legal principleof reciprocityof rights, as it was developed in the
late eleventh and early twelfth centuriesand still is understoodtoday, involves more than mutual
exchange. It involves an element of fairness of exchange. Thus, mercantilelaw requiredthat
exchanges had to be entered into "fairly" [16, 16; 23, 12]. Fraud,duressor other abuses of the
will or knowledge of either partyin an exchangemeantthatthe transactionwould be invalidated
in a merchantcourt. Beyond this however, "substantively,even an exchangewhich is enteredinto
willingly and knowingly must not impose on eitherside costs thatareexcessively disproportionate
to the benefits to be obtained;nor may such exchangebe undulydisadvantageousto thirdparties
or to society generally" [5, 343]. Fairnesswas a requiredfeatureof the Law Merchant,of course,
precisely because its "authority"arose voluntarilyfrom recognitionof reciprocalbenefits. No
one would voluntarilyrecognize a legal system that was not expected to treat him fairly. The
objectivity and impartialityof the Law Merchant,reflectingthis emphasison fairness,was further
reinforcedby impartialadjudicationwhich manifesteditself in the rise of participatorymerchant
courts.

Adjudication
The Law Merchant "governed" without the coercive power of a state. Merchantsformed their
own courts to adjudicatedisputes in accordancewith their own laws. These courts' decisions
were accepted by winners and losers alike because they were backedby the threatof ostracismby
the merchantcommunity at large [23, 10]-a very effective boycott sanction. A merchantwho
broke an agreementor refused to accept a courtrulingwould not be a merchantfor long because
his fellow merchantsultimately controlledhis goods. The threatof a boycott of all future trade
"proved, if anythingmore effective thanphysicalcoercion" [24, 96].
Merchantsestablishedtheir own courts for severalreasons. For one thing, state law differed
from merchantlaw. For instance, the royal courts of the day typically would not consider dis-

6. Customarylaw and contractlaw are typically differentiatedmuch more sharplythan suggestedhere. However,
Fuller arguedquite forcefully that a sharpdistinctionis inappropriate[7, 176].
650 Bruce L. Benson

putes arising from contracts made in anothernation. And governmentcourts would not honor
any contractualagreement which involved the paymentof interest. Any interest was usurious.
Common-lawcourts would not consider books of accountas evidence despite the fact that mer-
chants held such records in high regard. Merchantsneeded their own courts in orderto enforce
their own law.
Another reason for the developmentof merchantcourts was that resolutionsof commercial
disputes often had to be achieved after considerationof highly technical issues. In such cases,
the merchantcourts used judges who were experts in that particulararea of commerce, unlike
royal courtjudges who could adjudicatedisputesaboutwhich they knew nothing. Merchantcourt
judges were always merchantschosen from the relevantmerchantcommunity(fair or market).It
was widely recognized that lawyers were not suitablejudges in commercialmattersfor a number
of reasons [23, 15]. For instance, lawyerslackedknowledgeof commercialcustom and practice.
Furthermore,they tended to be preoccupiedwith strictrulesthatinvolvedformalitieswhich often
hinderedcommerce. Commerce, and simplicityin its law were paramount.
Perhaps the most widely cited characteristicof the merchantcourts was their speed and
informality[5, 347]. This characteristicwas in responseto the needs of merchants,of course, and
a third reason for developing merchantcourts [16, 13]. Merchantsof the time had to complete
their transactionsin one marketor fair and quickly move to the next. A disputehad to be settled
swiftly to minimize disruptionof business affairs.This speed and informalitycould not have been
equitablyachieved withoutthe use of judges who werehighlyknowledgeableof commercialissues
and concerns, and whose judgments would be respectedby the merchantcommunityat large.
Participatoryor communal adjudicationwas, therefore, a necessary characteristicof the Law
Merchant.The adjudicativeprocedures,institutionaldevices and substantivelegal rules adopted
by merchantcourts all reflectedthe overallconcernfor facilitatingcommercialinteraction.
In this same light, rules of evidence and procedureswere kept simple and informal. Ap-
peals were forbiddenbecause the tribunalswished to avoid unnecessarylitigationand delays in
order to avoid disruptionsof commerce [23, 16]. Similarly,there was an avoidanceof lengthy
testimony under oath; notarialattestationwas usually not requiredas evidence of an agreement;
debts were recognized as freely transferablethroughinformal"writtenobligatory,"a process de-
veloped by merchantsthemselvesto simplify the transferof debt;actionsby agents in transactions
were consideredvalid without formalauthority;and ownershiptransferswere recognizedwithout
physical delivery [23, 14]. All these legal innovationswere validatedin merchantcourts despite
their frequent illegality in nationalcourts. All were desirablebecause they promotedspeed and
informalityin commerce and reducedtransactioncosts. In fact, this bringsup a fourthreason for
developing participatorymerchantcourts. While royal law, such as the common law in England,
was developing during this same period, and while supportersof the common law take pride
in its rationalityand progressiveness,the fact is that this state producedlaw as enforced by the
kings' courts simply did not adapt and change as fast as the rapidly changing commercial system
required.

Change
Considerablechange in the Law Merchantoccurredin a relativelyshort time. In fact, Berman
found that "a great many if not most of the structuralelements of the moder system of com-
mercial law were formed in this period" [5, 350]. Consider, for example, the developmentof
credit devices. By the twelfth century, bartertrade had been virtuallyreplaced by commercial
middlemen who bought and sold using commercialcontractsinvolving credit. The main forms
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 651

of credit extended by sellers to buyers were promissorynotes and bills of exchange. When such
commercialinstrumentsbecame common, they acquiredthe characterof independentobligations,
like money; they also became negotiable, anothercharacteristicof money [5, 350]. The practice
of negotiabilityof credit instrumentsdid not exist priorto this period;it was "invented"by West-
ern merchantsbecause of the need for improvedmeans of exchangeas commercedeveloped, and
because the rise of the Law Merchantgeneratedsufficientconfidencein the commercialsystem
so that a reservoirof commercialcredit could be established[5, 351].
Credit instrumentsbecame the means of exchange that allowed trade to flourish and the
commercial revolution to take place. The Roman commercial system had functioned because
of the availability of money issued by Rome, but with the fall of Rome a currencythat could
be trustedto maintainits value disappeared,and so, virtually,did commercialtrade. No sound
source of money as a means of exchangearose, so in orderfor tradeto emerge again, merchants
had to develop their own exchange medium. "The take-off of the following period was fueled
not by a massive input of cash, but by a closer collaborationof people using credit" [5, 351]. In
other words, when governmentcould not be countedon to providea stable means of exchange,
the merchantcommunityprovidedits own througha series of legal innovations.
Many kinds of credit instrumentsdeveloped duringthe period, and all became part of the
Law Merchant. As Hayek explained, even though orderdeveloped "spontaneouslybecause the
individuals followed rules which had not been deliberatelymade but had arisen spontaneously,
people gradually learned to improve those rules" [10, 45]. Thus, for instance, credit was ex-
tended from sellers to buyers in the form of the negotiableinstrumentsmentionedabove. Buyers
extended credit to sellers throughthe use of variouscontractsfor futuredeliveryof goods. Third
parties (e.g., bankers)extended credit to buyers, and in orderto protectthese creditorsagainst
default, devices such as mortgagesof movableswere developed.These were all new legal devices
developed duringthis period.
Many other aspects of the Law Merchantcould be examined to emphasize the evolution
and integrationof a wide variety of principles, concepts, rules and proceduresinto a system of
law.7They shall not be discussed, however,because the story would, in each instance, be similar
to the development of commercial credit devices. The point is that governmentinstitutionsare
not needed for a complex system of commerciallaw to arise. Rules can be formulatedand then
rapidly spread among large diverse groups when changes prove desirable. Duty to those rules
can be recognized as a consequence of the reciprocalarrangementsthat are reflected in contract
and exchange. Adjudicationproceduresand ostracism sanctionscan be developed to facilitate
compliance to those rules. The medieval Law Merchantprovesthis. In fact, the Law Merchantis
still in place today, providingthe law needed to carryout internationaltrade, as explainedbelow.
Beyond that, the customarylaw developedby the Law Merchanthas been absorbedin whole or
in partby the common law and civil law systems of WesternEuropeand America, thus providing
substantialcomponents of the underpinningsof today's domestic commerciallaw. The process
and consequences of that absorptionare explorednext.

IV. The Absorption of the Law Merchant into Common Law

Beginning aroundthe twelfth century, governmentsin Europebegan systematically"enacting"

the customaryrules establishedby the Law Merchant[5, 341]. Englandwas no exception with

7. See [5, 349-50] for a list of legal innovationsin the Law Merchantduringthe eleventhand twelfth centuries.
652 Bruce L. Benson

codification of the Carta Mercatoriain the fourteenthcentury. Such enactmentswere not new
law. Establishedcustom still providedthe rules of commerce, so even where a governmentlegis-
lated, the rules that had alreadybeen establishedby merchantswere simply confirmedor slightly
modified [16, 11].
Merchantscontinuedto use their own courtsdespite statecodificationof commerciallaw, so
governmentsalso began to make laws which would attractmerchantsinto the royal courts and/
or make merchantcourts less desirable. In England, for example, the Statuteof the Staples of
1353 presumablygave "merchantstrangers"protectionin the fourteenmajortradingcenters for
"staple"products-mainly wool, leatherand lead. Tradein these goods was handledprimarilyby
Italian, Flemish and Germanmerchantsand bankers.Of course, such protectionalreadyexisted
underthe Law Merchantso this was largely a codificationof custom. Similarly,the statutespeci-
fied that disputes involving these foreign merchantswould be settled underthe Law Merchant,
ratherthan royal law or any law of the city which might apply. Significantly,however, appeals
could be taken to the chancellor and the King's council. By giving merchantsaccess to royal
appeal the appearanceof royal enforcementof commerciallaw was created,while simultaneously
a roll for the royal courts in enforcementof commerciallaw was established.And perhapsmore
importantly,by creating the possibility of appeal, the authorityof the merchantcourts and the
Law Merchantitself was weakened. The potentialfor appeal made the Law Merchantappearto
be less decisive law. Thus, througha gradualprocess of absorptionby creatinggovernmentally
backed institutionalarrangementsand laws which would be acceptableto the merchants,and by
weakeningthe authorityof the merchantcourts, commerciallaw began to become part of com-
mon law. In fact, common law institutionswere relativelymore acceptablebecause the authority
of Law Merchantinstitutionswas undermined.
The Statuteof Staples also began a process of focusing andconcentratingforeigntradeflows
so they would be easier to controlby the state. Most foreigntradewas compelledto pass through
a few importanttowns in the fourteenthcentury,and special courtswere createdin these "staple"
towns to administer the Law Merchant [16, 72]. The makeupof these courts was dictated to
consist of the mayorof the town, two constablesand two merchants.It was only fromthese staple
courts that appeal could occur. Fairs and marketsstill held theirown merchantcourts, however.

Competitionbetween Courts
Several competing court systems existed in Englandprior to the seventeenthcentury. Separate
royal common law courts (e.g., CommonPleas, King's Bench, Exchequer)[3], the cannon law
courts [5], the royal maritimecourts [16, 57-77], and the merchantcourts, among others [3],
were all in competition with one anotherfor variouspartsof the disputeresolutionbusiness. The
common law courts ultimatelytriumphedover most of the competition,however.The method of
victory was similar in each instance, so the emphasisbelow is on the competitionbetween the
common law and merchantcourts, but it must be stressedthatothercourts also actively pursued
commercialdisputes [3].
Merchantcourts remained availablefor commercialdisputes up until the early 1600s, al-
though case loads were graduallyshifted into governmentcourts. Landes and Posner suggested
thatthe royal courts workedto graduallytakemoreandmorecases awayfromthe merchantcourts,
because it was in the financialself-interestof the Englishjudge, who was paid, in large part, out
of litigation fees during this period [13, 258]. This probablyadded incentives to governmental
efforts to absorb the Law Merchant. Furthermore,since the merchantsreally remainedfree to
choose between theirown courtsand the royalcourtsthroughthe fifteenthand sixteenthcenturies,
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 653

the fact that merchantswere willing to choose the royal courtsin increasingnumbersimplies that
those courts must have been doing a reasonablygood job of applyingthe Law Merchant.The
threatof competitionfrom privatemerchantcourtswas alwaysthere, so if the royalcourtswanted
the merchants'business they had to enforce law as the merchantssaw fit.8Of course, the royal
courts had some advantagein this competitiondue to state actionssuch as those discussed above
which weakened the authorityof the merchantcourts and enhancedthatof royal courts.
The competitive relationshipbetween royal and merchantcourtswas alteredsubstantiallyin
1606, with an even greateradvantagegoing to the royal courts. The dictumpronouncedby Lord
Edward Coke in reviewing a case previouslyjudged underprivatearbitrationwas "that though
one may be bound to standto the arbitramentyet he may countermandthe arbitrator... as a man
cannot by his own act make such an authoritypower or warrantnot countermandablewhich by
law and its own proper natureis countermandable"(Quotedin [14, 18]). This ruling meant that
the decisions of the merchantcourtscould be reversedby the royalcourts, because an arbitrator's
purpose was, accordingto Coke, to find a suitablecompromise,while a judge's purpose was to
rule on the merits of the case. In essence, Coke's rulingassertedthatthe Law Merchantwas not
a separateidentifiablesystem of law, but ratherthat it was "partof the law of the realm." This
was in turn interpretedto mean that merchantswere bound to submitto the jurisdictionof the
common law courts and subject to those courts' procedures.In effect, it withdrewthe guarantee
in the Statute of Staples that merchantdisputeswould be settled accordingto the Law Merchant
ratherthan royal law. The use of privatecommercialcourtsvirtuallydisappearedin Englandafter
the early 1600s. Now let us consider the consequencesof this takeoveron the applicationand
growthof commercial law.

The SubjugatedLaw Merchant

The Law Merchantdid not die. It changedin the seventeenthcentury,becomingless universaland
more localized under state influence;it began to reflect the policies, interestsand proceduresof
kings. Merchantcustom remainedthe underlyingsource of much of commerciallaw in Europe,
and to a lesser degree in England, but it differedfrom place to place. "Nationalstates inevitably
requiredthattheir indigenouspolicies and concernsbe given directconsiderationin the regulation
of commerce. As a result, distinctlydomestic systems of law evolved as the official regulatorsof
both domestic and internationalbusiness" [23, 24].
The changes were most strikingin Englandwhere the courtsrejectedmany of the underpin-
nings of the Law MerchantafterCoke's 1606 ruling[23, 26-27]. Merchantsbecame increasingly
constrainedunderthe commonlaw system as the informal,speedy institutionsthey had developed
disappearedfor well over two centuries. Furthermore,Englishcommonlaw courts either refused
to admit custom into law, or custom was requiredto satisfy onerous admissibilitytests. In par-
ticular, the origins of a business practice had to be demonstratedto be truly "ancient" and the
practice had to be consistentlyemployedfor a long period in orderfor it to be consideredas law
-this despite a rapidlychangingbusiness environment.Thus, Englishcommonlaw restrictedthe

8. The gradualshift of merchantcases to governmentcourtsmight suggestthatgovernmentcourts were providing

and enforcing a "better"law thanthe Law Merchant.Certainlythe voluntaryshift implies thatmerchantsfound it in their
own self-interestto use governmentcourts. However, note that not all litigationand enforcementcosts were covered by
fees; taxpayerswere subsidizing some aspects of governmentlaw enforcement.The relevantself-interestmotive actually
appears to be that merchantswere able to shift part of the cost of adjudicatingand enforcingtheir law onto others, not
that governmentcourts providedbetter law [3]. In addition,of course, the merchantcourts' authoritywas being reduced
throughthe creationof royal court appeal procedures.
654 Bruce L. Benson

evolution and use of business practiceas a sourceof commerciallaw. "In this way, the Law Mer-
chantbecame rigid as post-medievalEnglishjudges soughtto integratethe Law Merchantinto the
establishedconfines of a centralizedcommonlaw" [23, 27]. Manyof the desirablecharacteristics
of the Law Merchantin Englandhad been lost by the nineteenthcentury,includingits universal
character,its flexibility and dynamic abilityto grow, its informalityand speed, and its relianceon
commercialcustom and practice.
Still, the Law Merchantcould not be completelyeliminatedfor a very good reason. Custom
prevailed in internationaltrade, and England was a great tradingnation. English judges had
to compete with other national courts for the attentionof internationalmerchants'disputes so
they had to recognize commercialcustom in cases involving internationaltrade if they hoped to
attractsuch cases. One importantreason for this, in the context of such competition, was that
the Europeancountries' civil law had been much more receptiveto the Law Merchantthan had
English common law [23, 24]. There was some fragmentationin the form of the Law Merchant
across Europe, but there was little differencein its substance.

V. The Reemergence of the Law Merchant in Common Law

Some legal historianscite Lord Mansfieldas the "founderof commerciallaw" in England, but
in fact, Mansfield simply reintroducedthe internationalLaw Merchantinto English law [23,
27]. Mansfield arguedquite forcefullythatEngland'scommerciallaw had to develop as business
practice developed, and had to recognize business custom and usage. The primaryimpetus for
once again recognizing the merchants'law, however,may havebeen the fact thatthe common law
courts' hold on commerciallaw once again came undersignificantcompetitivethreatat aboutthis
time. Internationalcompetition by nationalcourts for the attentionof merchantswas apparently
getting more intense [23, 27]. As England'srelative position in world trade began to decline,
common law courts began to lose internationalbusiness disputesto other nations' courts. There
was a new source of competitionas well.
The moder resurgenceof commercialarbitrationcan be tracedto the AmericanCivil War.
The naval blockade of the South resulted in tremendouscourt congestion in England due to
contract claims-claims that would have taken years to untangle [24, 99]. The contractswere
in regard to the purchase, delivery and sale of cotton to British markets. Many ship owners
became unwilling to run the blockade, and a lot of those who tried had their vessels sunk.
Furthercomplicationsarose due to Britishneutrality,and contraband-of-war laws. Insurancewas
either unavailable, or carried new and extremely complex provisionsdeveloped in light of the
tremendousuncertainty.These provisions requiredreinterpretationwith each new contingency.
Because of all the difficulties and uncertaintiesassociated with the blockade, and the resulting
public court backlog, the Liverpool Cotton Association, whose memberswere handlingmost of
the cotton trade, agreed to insert arbitrationclauses in their contracts.Arbitrationproved to be
very inexpensive and convenient relative to public court adjudication,as well as less disruptive
to business arrangements(the adversarialnatureof publiclaw suits tendedto terminateprofitable
business relationshipswhile the compromisingcharacterof arbitrationtended to preservethem),
so other Liverpool commercial associationsquickly adoptedthe device [24, 99].
The success of arbitrationin Liverpool led to its adoptionin London within a short period
of time. The large commodity dealers (corn, oil seed, cotton and coffee) establishedarbitration
clauses first, followed by stock dealers and produce merchants.Then professionalassociations
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 655

of architects, engineers, estate agents and auctioneerstook up the practice, regularly putting
arbitrationclauses in all contractsto guaranteethat disputesover transactionswould not go into
government courts. The benefits of arbitrationwere quickly recognized despite Coke's 1606
ruling.
The long period of subjugationwas not without its costs, however.After the common law
court system gained control of the marketfor disputes, it began acting like a coercive monopo-
list, dictating or administeringlaw ratherthan recognizingthe more importantsource of law-
evolving business practice. Consequently,as common law developedthroughjudicial precedent,
the evolution of merchantcustom and practicewas alteredfrom what it might have been without
such coercive influence. "The Law Merchant,ratherthaninfluencingthe growthof common law,
has often been influenced-indeed changed in character-by the common law. Customs of the
Law Merchantwhich were adopted in the early common law have sometimesbeen so rigidified
in legal content that they have varied from their merchantorigins" [23, 30]. The rigid definition
of custom and requirementthat it be consistent with the state's law remainedintegral parts of
Britishcommon law as appliedto commercialdisputesand Britishmerchantsbecame accustomed
to operatingundercommon law rigidities.

The AmericanLaw Merchant

Merchantsbroughttheir law to colonial America and quickly moved to establishtheir own sys-
tems of rules and disputeresolutioneven as commonlaw was subjugatingthe Law Merchantand
its courts in England. Commerciallaw and its enforcementwere dominatedby custom and pri-
vate arbitrationin North America throughthe eighteenthcentury.Merchantsavoidedgovernment
courts because those tribunalsdid not apply commerciallaw in a just, and inexpensive fashion.
Furthermore,public courts did not accept new commercialpracticesrapidlyenough. Indeed, it
was not until the end of the eighteenthcenturythat public judges began to convince merchants
that they could understandcomplex business issues and practices,and that they accepted as law,
agreementsestablishedto facilitatethe reciprocalself-interestmotives of traders.Once the gov-
ernment courts began to apply the merchants'law as the merchantshad establishedit, without
delay, the commercial arbitrationsystem began to disappear[1, 33].
Public judges in America have been somewhatmore receptive of the Law Merchantthan
their English counterparts[23, 33]. Indeed, the UniformCommercialCode indicatesthatbusiness
practices and customs have served as the primarysource of substantivebusiness law, as "the
positive law of the realm was forced to conformto the mandateof the merchants,not vice versa"
[23, 34]. This probablyreflectsthe widespreadacceptanceof commercialarbitrationpriorto 1800
(and its revitalizationsince 1900, as discussed below). In addition, many litigants can choose
among differentjurisdictions. Two or more state court systems might have jurisdictionalclaims
over a case, for example, or perhapsboth state and federal courts can be considered. With the
jurisdictionaldivisions thatexist in the United States, competitionfor disputesmay be much more
significantthan in England.
Trakmansuggested the possibility that the uniformityof commerciallaw might be under-
mined because of separate state court systems and regional specific federal court jurisdictions
in the United States, if local custom supersedesmore uniformnationalor internationalbusiness
practices [23, 34-35]. The potential for the same kind of breakdownin the universalityof the
law merchantthat occurred with the rising power of kings and their royal law may be present
in the United States. In fact, however, substantialdifferencesin business practices across local
656 Bruce L. Benson

American communities are rare. This is really not too surprising.If judges were only interested
in monopolizing local business disputes, state precedentmight differ significantly,but given the
open natureof the U.S. economy, interstatecompetitionfor business disputesis likely to reduce
the tendency for favoringlocal businessmenand theircustoms. Furthermore,commercialarbitra-
tion has reemerged as a viable option for business disputesand its competitiveimpact has been
substantial.
The potential for arbitrationas an alternativeto public courts always existed in the United
States, forcing public courts who soughtto adjudicatecommercialdisputesto dispense law as the
merchantcommunity had developed it. Thus, the reemergenceof commercialarbitrationin the
United States aroundthe end of the nineteenthcentury is not surprising.As governmentregu-
lation became more intrusive,businessmenre-establishedarbitrationto maintaintheir voluntary
exchanges without state interference.Arbitrationwas seen as a "shield against governmentin-
trusion" [1, 101]. The New York Chamberof Commerce'sarbitrationcommitteeevolved into a
permanenttribunaljust before the end of the nineteenthcentury.The main area of rapid arbitra-
tion redevelopmentwas in the tradeassociations,however.By the end of WorldWarI, arbitration
had become the preferredpractice among many of these groups. However,the characterof the
reemergenceof arbitrationhas been stronglyinfluencedby the threatposed by the coercive power
of the governmentcourts.

VI. Non-Governmental Adjudication of Commercial Law Today

The practiceof commercialarbitrationin the UnitedStateshas continuedto grow since its reemer-
gence at the beginning of this century.It has been estimatedthatalmost75 percentof commercial
disputeswere being settled througharbitrationby the 1950s [1, 113], and thatthe use of commer-
cial arbitrationwas increasingat the rateof about 10 percentper yearin 1965 [14, 20]. This trend
appearsto be continuing althoughdata on the extent of commercialarbitrationis not available.
Many industriesand most tradeassociationsnow insertarbitrationclauses into all theircontracts.

Non-merchantInfluenceson the Evolutionof Arbitration

When arbitrationreemerged in the United States, supportcame from a surprisingsource. Influ-
ential lawyers proposed that voluntaryarbitrationby a lawyer should be used to alleviate court
congestionand delay. This was notjust a publicspiritedeffortto relievecourtcongestion,however.
Auerbackexplained that lawyers felt that if only lawyers with "characterand learning" served
as arbitrators,"suspicion and reproach"of the bar would diminish [1, 104]. Anotherfactor not
stressed by Auerback was that lawyers were beginning to recognize the competitive threatthat
commercial arbitrationposed to the government'sadversarialdispute resolutionprocess which
they had come to dominate [3]. They hoped to dominatearbitrationas well [1, 104]. In contrast,
businessmen wanted speedy, inexpensive disputeresolutionbased on business custom and prac-
tice-they wantedthe Law Merchant-but when the New YorkBarmade a stronglobbyingeffort
to obtain state recognition of arbitration's"legality" it was supportedby the Chamberof Com-
merce. This led to a 1920 New York statutepresumablydesigned to overturnthe 1606 common
law ruling by Lord Coke. Arbitrationagreementswere made binding underNew York law and
enforceablein New Yorkcourts. Since then all the other stateshave passed similarstatutes.
Many observers of the legal process contendthat arbitrationclauses in contractsare "effec-
tive, in a majorpartanywayonly because the publiccourtsenforcesuch contracts;if they did not,
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 657

there would often be no effective sanctionagainstthe partywho simply breachesthe contractto

arbitrate"[13, 247]. In other words, privatearbitrationis a viable optionto public courtsbecause
it is backed by those public courts. This claim is demonstrablyfalse. For one thing, the historic
developmentof the Law Merchantindicates that a significantboycott sanctioncan be produced
by the commercial community.Indeed, it is explainedbelow thatthe internationalLaw Merchant
survives and flourishes to this day without the backing of a coercive governmentauthority.Be-
yond that, arbitrationcaught on and developed in the United States before 1920-that is, before
an arbitrator'saward could be taken into a public court-indicating that legal coercion is not
essential for its success. The boycott sanction can still work. A merchantrefusing to abide by
an arbitrationruling before 1920 would find future access to his trade association's arbitration
tribunalwithdrawnor see his name releasedto the associationmembership:"thesepenalties were
far more fearsome than the cost of the awardwith which he disagreed. Voluntaryand private
adjudicationswere voluntarilyand privatelyadheredto if not out of honor, out of self interest"
[24, 101]. This does not mean that the New York statuteand all those which followed have not
had an impact on arbitration,however. In fact, arbitrationbecame a less attractivealternativeto
the public courts than it would have been in the absenceof these laws. These statutesdid what the
availabilityof royal appeal did centuriesearlier-they underminedthe authorityof the merchant
community'sown courts.
Lawyers became actively involved in commercialarbitrationbecause of these statutes. An
enormous numberof court cases were filed after passage of the New York statute, for instance,
as businessmentried to determinewhat characteristicsof arbitrationwould be considered"legal"
by the courts. Cases involved such issues as the appropriateway to select arbitrators,whether
lawyers had to be present, whether stenographicnotes of the proceedingsshould be taken, and
so on. Businessmen, forced to pay attentionto the prospectof judicial review, had to make their
arbitrationprocesses compatible with statuteand precedentlaw includingproceduralaspects of
common law. One observerof the period following 1920 noted that "Thereis irony in the fate of
one who takes precautionsto avoid litigationby submittingto arbitration,and who, as a reward
for his pain, finds himself in court fighting not on the merits of his case but on the merits of
arbitration. . . [this] monumentaltragicomedy[demonstratesthe success of the governmentlegal
process at] thwartinglegitimate efforts to escape its tortuousprocedure"[11, 149-151].
Commercialarbitrationhas continuedto face legal establishmentattackssince the 1920s, but
the public courts with theirlong, expensive delays simply areno longercompetitivewith merchant
courts for the large majorityof commercialdisputes.Even thoughthe characterof arbitrationhas
been substantiallyinfluenced by the efforts of governmentto limit its authorityand make it less
attractive,the advantagesobviously remainconsiderable.The same advantagesexplain the very
recent phenomenonof privatefor profitdisputeresolution.

Rent-a-JudgeJustice
An 1872 Californiastatute states that individualsin a disputehave the right to have a full court
hearingbefore any referee they might choose [18]. In 1980 therewas a 70,000 case public court
backlog in Californiawith a medianpre-trialdelay of 50 and one-halfmonths. Thus, it is not too
surprisingthat two lawyers who wanted a complex business case settled quickly "rediscovered"
the statute; they found a retired judge with expertise in the area of the dispute, paid him at
attorney'sfee rates and saved their clients a tremendousamountof time and expense.
No count of the numberof "rent-a-judge"cases tried since 1980 exists, but the civil court
coordinatorof the Los Angeles County SuperiorCourtestimatedthat several hundreddisputes
658 Bruce L. Benson

had been so settled throughthe first five years of operationin their county. Most of the private
cases involve complex business disputesthat litigants "feel the public courts cannot quickly and
adequately"try [18, 51]. Privatejudging is now a growth industryacross the country.Indeed,
severalprivatefor profitfirmshave enteredthe justice marketin severalstatesduringthe past few
years [12]. The Californiastatute and others like it in some other states treat all privatejudges'
decisions like arbitratedjudgments, but therearea couple of subtledifferencesbetweenthe system
developing now and arbitration.First, individualsand firms in several states are now actively
seeking disputes to judge in order to earn profits. And second, arbitrationclauses in previously
existing contractsare not what moves disputesinto these privatecourts.9

VII. Modern "Legislation" of Commercial Law: Customs and Contracts

The commercial sector continues to develop an expandingbase of customarylaw. Orderclearly

arises from contractualagreements, for instance. Thus, contractsnegotiatedand voluntarilyen-
tered into by private individuals provide one form of privatelycreated law. If a contract is a
standardone based on long standingtradition,it simply reflects existing customarycommercial
law; if a contract develops an effective new business practice in the face of a new situation, it
is likely to add to customary law. Since commerce operates in a dynamic continually chang-
ing environment, new contractualarrangementsare always being mediated-new law is being
created.
Arbitrationalso can, and often does, create law by setting precedentswhich become part
of customarylaw. This contradictsLandes and Posner (amongmany others) who contendedthat
commercial arbitrationdoes not set precedents, but simply applies laws establishedby govern-
ment courts and legislation [13, 257-258]. Thatthey are wrongcan be superficiallydemonstrated
by the fact that when individuals wish to agree to somethingwhich may not stand up in gov-
ernment courts, they frequently write an arbitrationclause into the contract [24, 104]. Private
commercial arbitratorswill consider the contractualagreementto be valid. Furthermore,recall
the competition between public and private courts. Public courts managed to take a dominant
position in commercial dispute resolutionby first enforcing laws the merchantcommunity de-
veloped in a fashion consistentwith merchantneeds (e.g., quickly).10Whenthe commonlaw and/
or public court proceduresdepartedtoo far from what merchantsdesiredand began to raise costs
to merchantssuch as the delay arising with court congestion, however, commercial arbitration
surfacedagain. Commercialarbitrationshould enforce virtuallythe same laws recognized by the
public sector underthese circumstances,but causationactuallyflows in the opposite directionto
that suggested by Landes and Posner. When governmentcourts do not enforce merchants'law,
the public court bureaucracyloses even more of its commercialbusiness as more businessmen
use their own courts (as indeed they are). Thus, commerciallaw precedentsare largely being
set by the private sector in the process of developingcustomarylaw, even if some laws become
articulatedin the context of litigationbefore a commonlaw court.
If a dispute arises because a contractdid not anticipatea change in business environment,
the arbitratorwill have to determinewhat business practiceshould be underthe new conditions

9. Landes and Posner [13, 237] implied thatprivateadjudicationis not a viable option withoutpreviouslyexisting
arbitrationclauses in contracts. The emergingjudicial marketcasts doubton this claim.
10. See note 8 in this regard.
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 659

based on what custom and practicehas been underrelatedbut not identicalcircumstances.When

this occurs, as it frequentlydoes, then withoutany formalizedstate doctrineset out by legislation
or public judicial precedent, the private adjudicativedeterminationwill enter into the litigants'
future relations as well as the futurerelationsof other possible litigantsbefore the same type of
tribunal.A statementby the privatetribunalof the reasonsfor its decision is not even necessary,
because a reason will be perceived and people will governtheir conduct accordingly[7, 90]. In
other words, a new law has been createdthatbegins to "govern"the behaviorof partiesentering
into similar circumstancesin the future. Such a law is likely to be recognizedvery quickly when
the arbitrationinvolved was internalto a tradeassociation. It may take longer to spreadthrough
the relevant commercial populationif the group is more diverse, but if it is an effective remedy
to a now frequent potential conflict it can catch on quite quickly anyway [3], becoming part of
customarylaw.
It is often difficult to see the importantrole that customarylaw plays in determiningcom-
mercial order since so much of custom has been codified or coopted by common law courts,
and claimed as state law. One instance of orderthroughcustomarylaw remainsrelativelyfree of
state-interference,however. Internationaltradeis still largelyruledby customarycommerciallaw
as it has evolved from the medieval Law Merchant.

The InternationalLaw Merchant

Internationalcommercial law is a universal law [23]. The merchantsthemselves are the only
potential source of legal uniformity,of course. Their agreementshave to produceit since agree-
ments between governmentsare not likely to. Many internationaltrade associations have their
own conflict resolutionprocedures.Othertradersrely on the InternationalChamberof Commerce
(ICC) which has established a substantialarbitrationinstitution.ICC arbitratorsare experts in
internationalcommerce;their proceduresare speedy and flexible reflectionsof commercialinter-
est. These privatecommercialadjudicationprocessesaremoder versionsof the medievalfair and
marketcourts. The decisions and agreementsthatarise arebackedby the reciprocalarrangements
of the internationalcommercialcommunity.
The InternationalLaw Merchanthas certainly grown and changed substantiallysince its
medieval beginnings." However, the primaryprinciplesunderlyingcustomarybusiness law are
not likely to change [23, 7]. The basic rules of privatepropertyandfreedomof contractdeveloped
centuriesago [3]. As internationalcommerciallaw continuesto develop,the need for extensionsof
these basic principlesto cover unanticipatedcircumstancesalwaysarises, however,and customary
law adapts, buildingon the existing base of substantiveprinciples.The point is thatcustomarylaw

11. This is the characteristicof common law that Landes and Posner [13], Leoni [15], Rubin [19], Hayek [10]
and others have found desirable. They attributethis characteristicto the fact that common law is judge made law. But
common law, assuming away legislative interferenceby non-judges(e.g., Kings, legislators,bureaucraticadministrators)
and outright authoritarianlegislation discretionarilyimposed by judges themselves, would grow gradually.It would, in
other words, grow and develop in a fashion similar to the way the customaryLaw Merchantgrows and develops (see
footnote 12 for an indicationof how governmentlaw really grows). In particular,it would grow as a consequence of the
mutual consent of parties enterings into reciprocalarrangements.Two businessmenmay agree to call upon an arbitrator
or mediatorto lead them to a conflict solution. The solutiononly affects those partiesin the dispute, but if it turnsout to
be an effective one and the same potential conflict arises again, then it will be voluntarilyadoptedby others. In effect,
the private arbitrator/mediatorhas no authorityover anyonebeyond what individualsvoluntarilygive them by requesting
a particulardecision and adopting it after it is made. Their decision carriesno weight for others unless it is a good one
that others find useful in facilitatinginteraction.
660 Bruce L. Benson

grows, it does not change in the sense thatan old law is suddenlyoverturnedandreplacedby a new
law. That growth tends to be gradualbut fairlycontinuous,throughspontaneouscollaboration.'2
Beyond its ability to grow and adapt, the internationalLaw Merchanthas proven to be a
very effective source of order [23, 3]. The fact is that the internationalLaw Merchant,free from
the dominant influences of governmentsand localized politics, has developed and grown much
more easily and effectively than has intranationalcommerciallaw constrainedby the government
imposed laws of most (probablyall) nation-states.

VIII. Conclusions

Most economists have assumed that for marketsto work governmentmust define and enforce
"the rules of the game"-private propertyrights, contractlaw, etc. An explorationof the rise and
continued dominationof the Law Merchantcasts considerabledoubt on this widely held prem-
ise.13The merchantcommunityactuallydevelopedits own law in orderto avoid the inefficiencies
and political nature of royal law and government(e.g., common law) courts. Indeed, as Hayek
explained "the growth of the purpose-independentrules of conductwhich can producea sponta-
neous order will . . . often have takenplace in conflict with the aims of the rulerswho tended to
turntheir domain into an organizationproper.It is in the ius gentuim,the law merchant,and the
practices of the ports and fairs that we must chiefly seek the steps in the evolutionof law which
ultimatelymade an open society possible" [10, 82].
Adam Smith describedthe spontaneousorderevolving out of marketprocessesas developing
as thoughguided by an "invisiblehand."The marketprocesscould not developandevolve without
a coterminouslyevolving, clearlydefinedand enforceableset of rules of propertyand contract,of
course. Thus, the invisible hand guiding the developmentof the market'sspontaneousorderhad
to be supportedby anotherinvisible handwhich guided the evolutionof commerciallaw. Neither
of these evolutionaryprocesses could have been achievedby intentionaldesign. Developmentof
trade requiredsimultaneousdevelopmentof law, but commerciallaw could not develop without
changing requirementsin trade. Thus, evolving trade practices provided the primaryrules of
evolving commerciallaw. Both were "produced"by the same people-the merchantcommunity.
They had to be, and they continueto be cooperatingevolutionaryprocesses-two invisible hands,
fingers intertwinedto produce commercialorder.
Customarylaw continues to "govern"most commercialinteractioneven today. It is difficult
to visualize this, in partbecause customarylaw "owes its force to the fact that it has found direct
expression in the conduct of men towardone another"[7, 212]. Customarylaw's authorityis
based on voluntaryrecognitionof rules of obligationbecauseof reciprocalgains fromrecognition.
Thus, it is much less likely to be violated than enacted law, imposed by a state and lacking
reciprocity.Its role and impactare simply less likely to be noticedas a consequence.Nonetheless,
customarycommerciallaw flourishesandpromotesorderin most of ourmodernmerchantsociety,
much as it did in the medieval period. Differencesarise only because variousgovernmentshave

12. This is very differentthan the way legislated law grows, and despite Leoni [15], Landes and Posner [13] and
others (see note 11), it can be very differentthanthe way commonlaw grows. Legislationimposedby a coercive authority
(king, legislature, bureaucracy)can make majoralterationsin law withoutthe consent of all partiesaffected. It becomes
enforceablelaw for everyone in the society whetherit is a useful law or not. Judgemade commonlaw precedentstake on
the same authorityas statutelaw, of course.
13. When this is added to stateless primitivelaw's emphasison privateproperty[3] this assumptionbecomes even
more tenuous.
 THE SPONTANEOUSEVOLUTIONOF COMMERCIALLAW 661

been partially successful at subjugatingthe Law Merchant,not because governmenthas had to

provide and enforce certainrules of the game.
Actually, the private sector has to be the primarysource of law necessary for the support
of a marketsystem. Politically dictatedrules are not designed to supportthe marketprocess; in
fact governmentmade law is likely to do precisely the opposite [15, 90]. Indeed, it appearsthat
the increasing governmentalizationof law making has been associated with increasingtransfers
of propertyrights from private individualsto government,or perhapsmore accuratelyin repre-
sentative democracies, to interestgroups.14In other words, public productionof law undermines
the privatepropertyand contractarrangementswhich supporta free marketsystem. Government
statutes may appear to be creating and enforcingprivaterights and contractlaw in many coun-
tries, but that simply reflects the demandsof powerfulinterestgroups (the business community
naturallyprefers to shift the cost of enforcing their laws onto others), and/or the competitive/
coercive efforts of public courts to attract/takeoverbusinessdisputes.

14. This is a natural extension of the developing interest group theory of government,and/or the rent-seeking
paradigm[2; 3; 21; 22].

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