Are the roots of the modern 'lex mercatoria' really medieval?

1. Introduction

The modern lex mercatoria is a set of rules of conduct for border-crossing transactions developed autonomously by the international business community and applied by arbitrators in case of trade disputes. Commonly, lawyers and economists writing about the new lex mercatoria claim that there was a "medieval lex mercatoria," too. According to them, the origins of the lex mercatoria go back to the high Middle Ages, that is, to the time between the tenth and thirteenth centuries when commerce rose from being almost nonexistent to being an important factor of economic development. This, it is alleged, was only possible because at that time, traders developed a law merchant similar to the modern lex mercatoria, whose forerunner it was. Formulations characteristic of this view are given in the following three paragraphs.

"The crucial period of change was the late eleventh and twelfth centuries. It was then that the basic concepts and institutions of modern Western mercantile law - lex mercatoria ('the law merchant') - were formed, and even more important, it was then that mercantile law in the West first came to be viewed as an integrated, developing system, a body of law" (Berman 1983, p. 333).

"The fear of a proliferated Law Merchant has led to the growth of a 'new' Law Merchant, closely resembling its medieval forefather" (Trakman 1983, p. 39).

"International law is still largely independent of nationalized legal systems, retaining many of the basic (though modernized) institutional characteristics of the medieval Law Merchant" (Benson 1992, p. 2).(1)

Similar statements can be found in almost every work about the modern lex mercatoria.(2) Still, there are differences in detail. While Benson and Berman emphasize the universal and objective qualities of what they call the "medieval lex mercatoria," authors like William Mitchell, Ian F. G. Baxter, Felix Dasser, and Uwe Blaurock concede that between the tenth and the thirteenth centuries, there were important regional differences concerning the way commercial transactions were conducted.(3)

The purpose of this article was to analyze whether and possibly to what extent the modern lex mercatoria originated in the high Middle Ages. We compared the institutional framework(4) of medieval trade with the modern lex mercatoria in order to indicate similarities and differences between the modern conditions of border-crossing transactions and the so-called "medieval lex mercatoria." Initially, we describe the present conditions of international trade and the modern lex mercatoria (section 2). Subsequently, the problems medieval merchants faced and the institutions they developed to solve them are analyzed. In section 3, we continue by describing Dark-Age conditions of trade. Regarding the high Middle Ages, we need to distinguish the tenth and eleventh centuries, when guilds played a major role in long-distance trade (section 4), from the twelfth and thirteenth centuries, when towns were decisive in regulating transactions (section 5). In the concluding section (6), the modern lex mercatoria and the medieval commercial codes of conduct are compared and final conclusions drawn.

2. International Trade Under Modern Conditions

International Trade in the Twentieth Century

The international system, with its numerous sovereign nation-states, each having its own legal order, cultural communities, and currency, forms the background of border-crossing transactions. International business is taking place between noncompatriots, and "international transactions make contact with a multitude of legal systems and with the monopoly of power claimed by each state within her boundaries. Collisions of norms and gaps between different norm systems then appear, an accord in decisions is often coincidental, and the assistance of the judicial and penal institutions in foreign countries is not at all a matter of course" (Schmidtchen and Schmidt-Trenz 1990, p. 16). On the international level, there is no authority that protects merchants' property rights, guarantees their freedom of contract, and enforces legitimate claims. Moreover, the transacting parties negotiate their contracts with their domestic customs of trade and informal rules of conduct in mind. As a consequence, in addition to problems like exchange rate, risks encountered in border-crossing transactions are characterized by legal and political uncertainties. Consequently, they seem to involve very high transaction costs.

Nevertheless, we can observe various kinds of international business - for example, strategic alliances, manufacturing joint ventures, complex long-term contracts, or high-technology licensing agreements - that take place between merchants from virtually every country in the world (Stoecker 1990). Some of the most important phenomena in the global economy today are increasing foreign direct investments and transnational corporations, which play a major role in linking national economies (UN 1995, p. xix). At present, the activities of transnational corporations are more important than standard trade contracts (UN 1995, p. 193). However, there remains a significant part of border-crossing trade among independent private agents. Because of the focus of this article, we will not go into the special problems facing transnational corporations but will concentrate on transactions between noncompatriots.(5)

Today, technological progress, especially in information and communication technologies, and vast improvements in transport have facilitated border-crossing exchange of goods and services and make for an increasing importance of international trade. As a consequence, specialization among merchants is further increasing (Dunning 1993). Regarding international business relations, Cooter writes that "[t]he modern economy creates many specialized business communities. These communities may form around a technology such as computer software, a body of knowledge such as accounting, or a particular product such as credit cards" (Cooter 1996, p. 147). It therefore seems reasonable to assume that international trade occurs rarely as a spot transaction between anonymous buyers and sellers. Rather, it can be expected that groups of highly specialized business people exchange goods and services. Frequently, they are organized in trade and professional associations that bring together buyer and seller (Cremades and Plehn 1984). In some lines of business, merchants can employ firms specialized in foreign trade as middlemen in border-crossing transactions. Therefore, we can presume that the business people know each other quite well and transact regularly.(6) These long-term and often personal business connections between merchants, and the importance of reputation in the particular specialized group for the individual success in business, form the background for nonsimultaneous transactions in international trade today.(7) Additionally, transactions are facilitated by modern means of payments and credits and by a network of banks that operate on an international level, thus being able to safeguard payments (e.g., documentary credits).

The drafting of contracts between noncompatriots is nevertheless often a difficult and complex task involving possibly higher transaction costs than within the same country. Merchants need to agree not only about the price, quality, and amount of exchanged goods and services. They need to specify the law governing their contract in order to fix the conditions in case of disputes arising from the contract.(8) Furthermore, the parties in a contract must choose among various means of payments while taking into account possible exchange rate fluctuations. Similarly, different forms of conveyance make it necessary for merchants to agree on delivery terms.

Thus, the international business community has to overcome several difficulties and uncertainties characteristic of border-crossing transactions. In the following section, we will show that it is the modern lex mercatoria that plays a major role in reducing the above-mentioned transaction costs of international business by facilitating the drafting of contracts and by creating a reliable institutional framework for international transactions.

The Modern Lex Mercatoria

Generally, the modern lex mercatoria is defined as "a transnational legal order founded on the trade usages of the international business community" (Schmitthoff 1987, p. 43).(9) The lex mercatoria is not created by national legislation or judication and is no international law. For the emergence of the modern lex mercatoria, it is essential that contracting parties in nearly all nation-states have the right to choose the law applicable to their contract, to enter into self-regulatory contracts, and to determine disputes by arbitration (Cremades and Plehn 1984; Schmitthoff 1987). The evident diversity and inadequacy of the national legal systems under the rapidly changing circumstances of international business seem to be the causes for the emergence of an autonomous institutional framework for international transactions (Goldstajn 1961).

The modern lex mercatoria can be more exactly defined as an institutional set consisting of trade usages, model contracts, standard clauses, general legal principles, and international commercial arbitration.(10) We will briefly describe these elements.

Trade usages are at the core of the modern lex mercatoria. In the American Uniform Commercial Code, they are defined as "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".(11) In other words, trade usages must be commonly accepted by the trading community. They ensure that the special characteristics and needs of the international business community are recognized and reflected in the modern lex mercatoria. They are binding without special consent by the transaction partners. A party unaware of a trade usage that applies to its contract is bound by it if this party can reasonably be expected to have known it (Schmitthoff 1987). Some of the trade usages are generally applicable. These "general rules for international commercial contracts" are codified, for example, in the so-called UNIDROIT principles (cf. the preamble). A group of experts in the field of comparative law and international trade law of the major legal and socioeconomic systems of the world has drafted these principles to make the new lex mercatoria less vague and more precise.(12) Apart from these universally applicable trade usages, each line of business normally develops its own usages, which are adapted to the special circumstances, conditions, and needs of the branch (Trakman 1983; van Houtte 1995). Frequently, trade associations and professional organizations publish documents containing the trade usages relevant to their line of business.(13)

The second element of the modern lex mercatoria consists of model contracts. Border-crossing traders can use a considerable number of model contracts and standard form contracts to prepare their contracts. Usually, model contracts are composed of trade usages. An example for a generally applicable standard contract is the Uniform Customs and Practice for Documentary Credits (UCP) of the International Chamber of Commerce. But, like trade usages, model contracts are very often specific to lines of business (Dasser 1989). They are drawn up by the commercial organization of a business branch and are only used by the members of that branch (e.g., the standard contracts of the Grain and Feed Trade Association). Model contracts normally include arbitration clauses, hence reflecting the commercial practice of turning to private arbitration tribunals instead of asking for a verdict by a national court (e.g., Berger 1992).

Standard clauses - like the International Commercial Terms (Incoterms) - or general terms and conditions for trade are a further element of the modern lex mercatoria. They facilitate the drafting of contracts because merchants can definitely formulate their obligations under the contract and can appropriately calculate their costs. Standard clauses like the Incoterms are applicable worldwide and in all branches.(14) The International Chamber of Commerce repeatedly revises the Incoterms, thereby adapting them to new contractual arrangements and technological innovations in international trade (Bredow and Seiffert 1990). But again, there are many standard clauses typical of a specific business branch and without general validity (van Houtte 1995).

The fourth element of the modern lex mercatoria consists of the general legal principles. They are defined as principles common to several legal systems. Hence, at a first glance, general legal principles seem to be no part of the spontaneously evolved modern lex mercatoria. However, these principles have emerged independently of the legislature of nation-states. The origins of general legal principles go back to ancient times when nation-states did not exist. Consequently, these principles can be considered results of private autonomous action with legal implications. They are based on a concurrent sense of law of all people (Gentinetta 1973). Examples for general legal principles relevant to international business are clauses like pacta sunt servanda(15) or rebus sic stantibus and the principle of good faith.(16) The general legal principles are a kind of "safety net" for the modern lex mercatoria (Dasser 1989, p. 116). They are referred to when no applicable international trade usages exist in cases of arbitral awards.(17) Thus, trade usages complemented with general legal principles build - apart from possible contractual references to national laws - the basis for international commercial arbitration, the last element of the modern lex mercatoria.

Arbitral tribunals were created to resolve conflicts between business parties. The significance of commercial arbitration in international transactions can be illustrated by the fact that today almost 90% of all border-crossing contracts contain an arbitration clause.(18) Thus, international commercial arbitration is an important element of the modern lex mercatoria: By applying trade usages as well as general legal principles and by accommodating changes in transaction practices, arbitration reinforces the modern lex mercatoria and helps to consolidate its spontaneous evolution (Dasser 1989).

Compared to litigation in state courts, arbitration offers businesses some advantages:(19) The arbitrators elected by the parties to the contract or by international trading organizations are experts in international trade usages and are not responsible to any national judicial body (Stumpf and Steinberger 1990). According to almost all private arbitration rules and even international conventions, like the European Convention on International Commercial Arbitration (1961), "the arbitrators are required to take into account the relevant trade usages regardless of the law applicable to the substance of the dispute" (Berman and Dasser 1990, p. 33).(20) Thus, arbitration is a way to avoid the uncertainty of the application of little-known foreign laws. Arbitration proceedings and arbitral awards are confidential (Sandrock 1989). Therefore, the reputations of the business people involved are less likely to suffer, and trade secrets that may have to be revealed during the proceedings receive some protection. Arbitration usually takes less time than conflict resolution in state courts, where delays occur because of the elaborate administrative proceedings and the possibility of appeals (Sandrock 1989). All the more, the expected costs of a lawsuit are generally higher than the costs of arbitration.(21) Furthermore, arbitrators normally try to establish a compromise between the parties in conflict to protect business relations (Stumpf and Steinberger 1990).

Finally, the enforcement of arbitral awards appears to be an advantage of international arbitration. About 90% of all awards are settled voluntarily by the losing party.(22) Furthermore, the recognition and enforcement of verdicts by foreign arbitral tribunals hardly pose any problems, whereas it is extremely difficult to enforce verdicts of state courts in foreign countries. First, arbitral awards are normally recognized and enforced because of limited possibilities to contest an award. Since the beginning of the 1980s, the national arbitration laws have been reformed in many countries to the effect that the ties to national private law have been loosened or even severed.(23) This development can be explained as a consequence of institutional competition. As arbitration is a growing industry, its location gains importance from an economic policy perspective. As a consequence, legislation is revised where it appears to reduce the attraction of a location for arbitration.(24) Second, the most important countries in international trade have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (Dasser 1991). As a result, the enforcement of arbitral awards normally functions without difficulties.(25)

The short description of elements of the modern lex mercatoria has shown that, at present, businesses are able to spontaneously develop institutions that offer a reliable institutional framework for border-crossing transactions. Apart from general legal principles representing a heritage well beyond the nation-state, many rules of the modern lex mercatoria are uniformly applicable in international trade or at least in a specific line of business. By using model contracts and standard clauses, it is possible to significantly reduce transaction costs. International commercial arbitration seems to be an effective mechanism for conflict resolution and helps to reinforce the trade usages of the modern lex mercatoria, thereby further reducing potential transaction costs. Finally, the modern lex mercatoria can be seen as a spontaneously evolving private legal system that works as a "discovery procedure," generating and transmitting information and reducing transaction costs.(26)

Even now, the question remains open why business people voluntarily obey trade usages, model contracts, and arbitral awards although these cannot be enforced by an international authority. Here, we can only point to the aforementioned assumption that international transactions take place between relatively small groups of highly specialized business people.(27) If this could be empirically demonstrated, reputation would have to be considered as the relevant enforcement mechanism for the rules of conduct of the modern lex mercatoria. Reputation functions as an enforcement mechanism when it is likely to meet a transaction partner again (Axelrod 1984)(28) or "if members of the trading community can be kept informed about each other's past behavior" (Milgrom, North, and Weingast 1990, p. 3). Within groups of specialized business people or ethnically homogenous business communities, for example the Jews in the diamond industry,(29) these conditions can be easily observed. First, in a group of specialized businesses, it is very likely that trading partners transact regularly. Second, even if there were no long-term business relations, it would be no problem for community members who know each other quite well to inform each other about the behavior of other group members, for example, about noncompliance with an arbitral award.(30) Informal sanctions like gossip or ostracism should not be underestimated in this context.(31) The findings of Macaulay - even though he does not refer explicitly to border-crossing transactions - may be worth mentioning here. In numerous interviews with business people, Macaulay found that business relations are mainly based on a handshake or "common honesty and decency" (1963, p. 58), even in transactions bearing considerable risk. Therefore, reputation seems to be an important factor in trade relations.(32)

Before examining whether the modern lex mercatoria has its origins in the Middle Ages, we need to identify some criteria for the comparison of the modern and medieval situations. This is done in the following discussion.

Criteria for Comparing Modern and Medieval Conditions for Trade

To be able to compare modern and medieval conditions of trade, it is first necessary to analyze how institutions governing trade emerge. Above, we have shown that the modern lex mercatoria is an institutional set reducing the transaction costs of border-crossing transactions and evolving spontaneously (i.e., as the basically unintended result of autonomous actions of traders). It emerges from the practices of the international business community taking into account the changing needs and circumstances of the merchants. The new lex mercatoria reduces legal uncertainty produced by the "territoriality of institutions," that is, institutions created and enforced by the governments of nation-states. The first question we want to answer is, consequently, whether medieval merchants developed rules of conduct governing long-distance trade in a similar way or if these institutions were created by other authorities. Furthermore, we need to clarify whether institutions that were not specific to certain branches or trade associations - comparable, for example, to those today codified in the UNIDROIT principles - existed in the Middle Ages. If this was not the case, applying terms like "international commercial law" (Benson 1992, p. 1) or "universal law of trade" (Trakman 1983, p. 11) to tenth- to thirteenth-century mercantile institutions would ascribe an undue modernity to medieval conditions.

A second criterion for the comparison between now and then presents itself when we take into account that enforcement mechanisms are a necessary element of institutions. It is reasonable to assume that today, border-crossing transactions are taking place between small, specialized business communities where reputation can serve as an enforcement mechanism. In this context, we therefore need to ask whether groups of merchants - utilizing reputation to enforce institutions - existed in the Middle Ages.

Individually different interpretations of institutions, as well as uncertainty with respect to future developments, may lead to involuntary conflicts between transaction partners. Mechanisms for the resolution of conflicts are necessary. International arbitration is the modern type of these mechanisms. It is frequently claimed that merchant courts existed in the Middle Ages, too.(33) Was that the case? And, if it was, did merchants there resolve conflicts in a way that may have influenced the proceedings in modern arbitration tribunals?

Regarding the general legal principles as an element of the modern lex mercatoria, a comparison of the medieval conditions for foreign trade and the modern lex mercatoria is hardly possible. As mentioned above, the origins of general legal principles are supposed to predate the high Middle Ages. Therefore, the historical predecessors of the general legal principles go back to ancient times and need not be discussed here. Having these main characteristics of the modern lex mercatoria in mind, we will now take a closer look at medieval conditions of trade.

3. Dark-Age Conditions of Trade

In the Dark Ages - that is, roughly the period between the fall of the western Roman Empire in the fifth century and the upswing of trade about half a millennium later - merchants had to cope with conditions that contrasted markedly to the problems besetting modern trade. Sections 4 and 5 show how these conditions were overcome; first, however, it is necessary to briefly describe them.

The most fundamental difference between the modern world and archaic Europe was the lack of states. Of course, the reader may recall Charlemagne (768-814) and his empire, the kingdoms of the Anglo-Saxons, or those of the Eastern and Western Franks, which were ultimately to become modern Germany and France. However, these lordships cannot be termed states in any sense of the word approaching its modern meaning. During the ninth and tenth centuries, the Occident was constantly threatened by Viking, Magyar, and Moslem raiders, under whose impact most branches of central administration broke down.(34) On the whole, the Carolingian rulers as well as the kings of the Anglo-Saxons proved unable to supply the basic services of states, that is, the provision of security and the specification and enforcement of property rights (cf. North 1979).

This does not mean that property rights did not exist and were not enforced. There were rules that in the south, that is, in Italy and parts of Provence, had mainly been derived from late Roman law. In the north, the archaic laws of various Germanic tribes had been codified at different times (Kroeschell 1992, p. 31 f.). Altogether, there were a large number of different legal systems that applied to different people: A Frank would live according to Frankish law, a Bavarian according to Bavarian law, a cleric according to Church law, and so on. Law was valid according to personal rather than territorial criteria (Hattenhauer 1994, p. 21). It was enforced by local courts, where the local feudal lord or, in the case of clerics, the bishop presided and tried to determine which legal system was to be applied to whom.(35) At the same time, the landlords began to organize the defense against raiders. It is difficult to tell how successful they were here and as providers of justice, but during the ninth and tenth centuries, they more or less seem to have failed. The Dark Ages were characterized by high danger and legal insecurity.

All legal systems prevalent in western Europe during this period contained rules concerning changes in the ownership of property rights, but almost all of these applied to changes brought about by violence or theft.(36) Most property rights transferred by consent of both parties seem to have been gifts. They were exchanged within social groups where the members expected to interact regularly: Rulers, for example, gave them to each other as well as to their retainers. Usually, it was expected that something or some service would be rendered in return; there was a kind of implicit contract in every exchange of gift. Still, such transactions cannot be called trade. Posner (1980) interprets the reciprocal giving of gifts as a kind of insurance system common in primitive societies and moreover, as a way of communicating information about one's wealth. In any case, supply and demand were irrelevant in the exchange of gifts, and prices did not develop. Moreover, nobody expected to make a living by giving and receiving them (Grierson 1959; Duby 1981, p. 54). Trade in the sense of a professional occupation existed, but at least up to the end of the tenth century, it was less important than this kind of exchange.

Conditions like these had, of course, consequences for the way commerce was conducted in the Carolingian age. Merchants were itinerant; they traveled with goods they bought before setting out for their journey or from people they met on the way. As news spread slowly and was often unreliable, they ran a considerable risk: it was much more difficult than today to acquire information about potential buyers. Trade necessarily involved venturing (de Roover 1979). Spreading the risk was therefore essential; merchants could not afford to specialize in specific goods. As late as the high and late Middle Ages, they used to deal in anything promising a return (Bernard 1983). Given high transport and transaction costs, most merchandise consisted of luxury goods (Latouche 1961, p. 162 ff.). Long-distance trade in mass products did not exist (Sprandel 1971, p. 129; Henning 1994, p. 52). Transactions were concluded at yearly fairs, such as the one at St. Denis near Paris, or at naturally favored localities where traders met accidentally (e.g., river crossings).

Because of the unstable political situation, merchants found it difficult to keep dates: The likelihood of meeting a specific partner again was low. Under such conditions, nonsimultaneous commercial transactions were rare, if they occurred at all.(37) Simultaneous exchange had, however, one advantage: There were no disputes over the date of payment, the conditions of delivery, and so on. Differences between systems of law, whether applied locally or according to personal criteria, were therefore no obstacle to trade.

There is no evidence that commerce expanded in the course of the ninth and tenth centuries. Nevertheless, there was one important development: The merchants' personal status changed. Before, many of the traders mentioned in the sources had been unfree agents of secular or ecclesiastical landlords (Kuchenbuch 1978, p. 302 f.). Since the later Carolingian age, most merchants seem to have been personally free (Planitz 1940). Probably because of the unstable political situation, landlords were unable to control the actions their traveling agents undertook, who consequently became independent: They did not owe allegiance to anybody. As will be seen, this contributed to the revival of trade that set in at the close of the Dark Ages.

4. The First Phase of the Commercial Revolution: The Achievement of the Guilds

The Supply of Security and of Institutions for Trade

The eleventh century saw a spectacular revival of commerce. This "revolution," as it has been called by some historians (e.g., Lopez 1976), was based on a new way to solve the problems posed by raiders and plunderers. Beginning in the area between Seine and Rhine, free merchants - some of them newly independent of their - former principals formed communities to travel together. Contemporary sources call these organizations hanses, artes, gildae, or various other names; modern historiography has coined the term "elder mercantile guilds" to distinguish them from the cartelistic fraternities of the later Middle Ages, which are not the subject of this paper (Dilcher 1985). The fundamental function of the elder guilds was to protect the property rights of their members vis-a-vis nonmembers. They supplied a club good: the security that was of benefit to all members of the community but did not extend to nonmembers. Guilds were, as the German historian Planitz (1940) pointed out, genuine protective cooperatives.

Guilds achieved the provision of security by making use of a kind of exchange that had been unfamiliar to merchants as long as they were too dependent to form organizations of their own. It was based on mutual support in case of distress, that is, on armed help against assailants. A trader had a choice between deserting his companion in need or fighting for him. Choosing the latter alternative was based on his expectation that if he failed to support his companion, he would lose standing and never receive any help in turn. He knew that his future success depended on his present cooperation and preferred this to the short-term gains his defection might make possible.

Altogether, guilds generated trust among their members in exactly the way analyzed by Coleman with respect to what he called "communities of mutual trust" (1990, p. 188 f.). On this basis, the merchants themselves fulfilled one of the basic functions later taken over by the state: the provision of security. In a certain sense, they created a pax mercatoria: not a public good but a club good that had limited benefits and did not preclude attacks by plunderers, but nevertheless allowed an expansion of trade.

Furthermore, the existence of guilds accounts for some fundamental changes in the way transactions were conducted, at least among their respective members. Few tenth- and eleventh-century sources have survived, but one of them refers to the life led by guild merchants(38) and sheds light on the change of transaction practices the organization brought about. In about A.D 1020, the cleric Alpert of Metz described the merchants of Tiel in Flanders. He wrote that they were

hard and almost completely undisciplined men who settle disputes not according to law but according to their own arbitrary will, and they say that an imperial charter empowers them to do so. When one has accepted a loan or credit from another, and this one demands it back at the specified time, he [i.e., the debtor] persistently denies and immediately swears to have taken nothing. When one is discovered to have committed public perjury they maintain that nobody can prove this. When the object is so small that it can be concealed in one hand he uses the other hand to swear that it does not exist. . . . They begin their drinking bouts at the crack of dawn, and the one who tells dirty jokes with the loudest voice and raises laughter and induces the vulgar folk to drink gains high praise among them. For this purpose they pool their money and finance carouses at special times of the year where they, at higher feasts, get drunk quasi solemnly. (Pertz 1925, p. 118 f.)(39)

What is to be learned from this? Evidently, guilds provided more incentives for merchants to join them than just security (i.e., the possibility to listen to jokes and to free ride on alcohol). More importantly, the source shows that already at the beginning of the eleventh century, merchants engaged in nonsimultaneous transactions and that they, or rather their organizations, had rules of their own. These rules distinguished them from the peoples and tribes among whom they lived, regardless of whether they were at home or abroad. In cases of doubt, a Frisian guild merchant, for example, would not act according to Frisian law but according to the rules of his guild, whether he was in Frisia or elsewhere. Consequently, from the early eleventh century, it is useful to distinguish three different kinds of transactions: those among members of one and the same guild, those between merchants from different organizations, and those between merchants and nonmerchants.

Above, we claimed that the existence of guilds was responsible for the change in transaction practices, that is, for the emergence of nonsimultaneous transactions among their respective members. As the existence of mercantile organizations was based on the exchange of support and as this exchange could extend over longer periods of time (one merchant helping another in return for support lent to him on a previous occasion), it was natural to begin to exchange other services and goods, as well. It seems plausible to assume that credit relations developed in this way. How, then, did rules concerning such relations develop within a guild? Alpert wrote that the Tielers claimed to have received an imperial charter that allowed them to settle disputes according to their own rules. This may well have been the case: Occasionally, medieval rulers granted so-called immunities, thereby exempting certain of their subjects from normal jurisdiction (Kroeschell 1992, p. 66). Alpert's remark does not imply, however, that the rules of the guild at Tiel had been created by feudal authority. Medieval rulers conferred privileges or granted immunities, but they did not deliberately institute abstract law. This usually developed spontaneously.(40) Within guilds, the emergence of institutions probably really showed some similarity to the way the modern lex mercatoria or the institutions of modern trade associations develop. Among their members, trade was conducted in a similar fashion. Still, functionally, there is an important difference between medieval guilds and modern mercantile associations. The latter do not serve to supply military security but to overcome problems posed by differences between territorial legal systems or cumbersome legal proceedings within one country. As the legal systems current in the tenth and eleventh centuries scarcely touched trade, which was at this time predominantly simultaneous, they were not obstacles to exchange. Consequently, unlike modern national law, feudal law did not have to be supplanted but rather supplemented by merchant-devised institutions. The guilds accomplished this at least for exchange among their respective members, their main achievement nevertheless being the provision of physical protection.

Alpert's account does not clearly show whether the merchants of the guild at Tiel entered into credit relations only among themselves or with members of other organizations and nonmerchants. Still, the behavior he describes, especially his reference to public perjury, suggests that the latter was the case: Oaths played an important role in the feudal courts of the Middle Ages (see discussion below). Mercantile organizations had probably increased physical security so much that traders found it easier to visit fairs regularly and to keep dates - a precondition for the trust others developed in them and therefore, for nonsimultaneous exchange. Which institutions governed such transactions between the members of guilds and outsiders?

There are no sources that shed a direct light on this question. However, one contemporary text may be helpful. In his commentary on Boethius, Notger of St. Gallen, a monk writing in about A.D 1000, defined negotiale as "the dispute which arises about customs: as merchants maintain that a sale made in a fair should be binding, whether it is just or unjust, since it is their custom" (our translation, O.V. and A.M.).(41) Notger does not mention loans, and he seems to refer to disputes between traders and local folk, but the source nevertheless shows that merchants laid claim to customs that were common among them - probably even among the members of several guilds - and that differed from traditional law. It indicates that they did not like customers to back out of a transaction after it had been concluded. Obviously, a maxim like pacta sunt servanda - which before seems to have been relevant mainly within communities - had gained importance among merchants from different guilds or between them and local folk, too. Otherwise, it is unknown what transaction practices were like (de Roover 1979). The rule that a contract was valid only after it had been sealed by a handshake and a toast may possibly stem from this time: By lengthening the time of exchange, it allowed both parties more time to consider the arrangement and to draw back in case one of them found fault with it. Gradually, similar common rules concerning nonsimultaneous exchange emerged.

In view of the facts mentioned above, it is hardly necessary to point out that feudal authorities played no part in this process. Institutions that had been developed within guilds were probably transferred by analogy onto new situations - in the way analyzed by Sugden (1989) - and imitated if they proved to be advantageous. All of this, however, is largely conjecture. As noted above, sources indicating that nonsimultaneous transactions occurred between members of different organizations or between merchants and nonmerchants are scarce and moreover, ambiguous. There seems to have been some exchange of this kind, but it must have been extremely rare. The reason why it could not become more common is analyzed in the following section.

The Problem of Enforcement and Dispute Settlement

We are going to analyze next how enforcement was achieved with respect to the different rules developed by eleventh-century merchants, that is, of guild-specific institutions and of rules governing transactions between the members of different guilds as well as between them and nonmerchants.

Usually, the members of a guild would have settled disputes arising among them for themselves without taking recourse to feudal or ecclesiastic jurisdiction. The ultimate sanction that could be imposed on a violation of guild-specific institutions was exclusion from the community. The rules do not seem to have been backed by coercive means. Even when the offender was not expelled but, for instance, was sentenced to a fine, he preferred to pay because exclusion from the organization meant the greater economic loss. Sometimes, this sanction was even applied to those who, by lending help to strangers, weakened the merchants' conviction that there was no security outside their own community (Planitz 1940).

When a merchant felt cheated or had noticed another one shirking a fight against assailants, he initiated the sanctioning by gossiping about the offender. Nobody was interested in interacting with somebody who had shown himself as unreliable. The exclusion of offenders was in the interest of every honest merchant. Moreover, guild brothers who used to express their disapproval of the improper actions of other merchants built up a reputation as rule-abiding and reliable persons, and this could prove useful in future transactions. Such a reputation was valuable enough to make it worthwhile to initiate the sanctioning of fellow merchants by spreading gossip (cf. Axelrod 1986).

Altogether, early eleventh-century merchants were able to enforce those institutions that had developed within their organizations. In this context, reputation played a similar role as it does today in international trade - with the necessary qualification that today, a loss of reputation just means a loss of opportunities to do business, whereas at the close of the Dark Ages, it additionally meant expulsion from the community that provided physical security: The affected merchant had to fend for himself under conditions that approached anarchy.

As has been shown above, guilds increased security for their members so much that merchants found it easier to keep dates or to return regularly to specific fairs. It seems likely that nonsimultaneous transactions developed between them and people they repeatedly met, that is, other traders or local folk. At the same time, rudimentary institutions concerning such transactions emerged. States able to enforce law were still lacking in the eleventh century. How, then, was it possible to punish traders who had broken a rule, for example, pacta sunt servanda? The statutes of a French guild set down in the second half of the eleventh century determined that a foreign merchant who was the enemy of one member was to be treated as the enemy of all (Planitz 1940). This seems to have been the usual way of sanctioning the violation of interorganizational rules. The effect of the all-for-one-and-one-for-all rule on trade among merchants from different guilds is difficult to assess. It is, of course, possible that the rule implied that even dishonest traders had to be supported when they belonged to one's own organization and that this led to frequent quarrels and lengthy feuds. In contrast, it seems plausible that not all members of the offender's group were prepared to sever relationships with the other guild, and they were rather interested in making their guild brother conform to the rules (cf. Posner 1980). Therefore, exclusion from the group may have been a forceful sanction even in interguild trade.

Another means to enforce rules concerning credits given to outsiders was found during the twelfth century. There are a few instances of mergers taking place between several mercantile organizations. Associations were formed by the guilds of 17 towns of Flanders, Champagne, Picardy, Hainault, and Ponthieu (Verlinden 1979), by the organizations of Tuscan, Lombard, and Roman merchants visiting France (Goldschmidt 1891, p. 199) and, best known, by the hansa of the German and Baltic trading ports (Dollinger 1981). The regional character of these organizations shows that their formation was made possible by frequent contact between their members. It was frequent enough to make it worthwhile to build up a reputation as honest and reliable not only among the members of one's own small guild but also among merchants from nearby towns who interacted regularly. Here, too, the interest in a good reputation explains why a merchant was prepared to gossip about offending behavior and to initiate the imposition of sanctions. On this basis, courts of arbitration could be formed with merchants acting as judges. It can be assumed that the enforcement of rules against a member of a different association worked in a way similar to when disputes between members of different guilds were concerned. However, on the whole, it was probably less efficient because contact between members of different associations of guilds was less frequent.(42)

How were institutions concerning nonsimultaneous transactions enforced when a dispute arose between a merchant and a nonmerchant? Alpert of Metz' description of the way the Tielers behaved suggests that such conflicts were settled by local, that is, feudal or ecclesiastical courts. Here, the oath played an important role - not as a means to ascertain the material circumstances of the case but rather as the decision of the dispute itself. An oath, taken with the proper gestures, such as the raised hand mentioned by Alpert, created truth in a magical way (Hattenhauer 1994, p. 40). The merchants' opponent could contest its validity in several ways: by compurgation, that is, by swearing a counter oath that was backed by more or higher ranked oath helpers than the merchant could supply (Ebel 1974, p. 246 f.), by demanding a single combat, or by ordeal, for example, glowing iron (Hattenhauer 1994, p. 41). Since traveling merchants could not easily find enough oath helpers, they were generally at a disadvantage and stood in constant danger of being submitted to single combat or ordeal. It was therefore usually in the interest of locals who had given or received a loan to turn to their own court, regardless of which party was cheating. A merchant, by contrast, would be willing to give a credit only when he knew the debtor to be interested in a continuation of the business relation. Obviously, this legal insecurity hampered an extension of nonsimultaneous exchange.

The great achievement of the elder mercantile guilds was the provision of security indispensible for travel and long-distance trade. It was the basis of the expansion of commerce that took place in the eleventh century. Guilds supplied other club goods, too, notably institutions regulating nonsimultaneous transactions between their respective members. These rules were created by the merchants themselves - in the same way as modern mercantile codes, which develop within trade associations. In the course of the eleventh century, a few basic institutions necessary for nonsimultaneous exchange between traders from different guilds also developed. Still, on the whole, medieval merchants seem to have been less successful in enforcing these rules compared to institutions relevant for transactions among their respective members. It is therefore highly problematic to speak of a medieval lex mercatoria when the term is meant to denote an "international system of commercial law" (Benson 1989, p. 645) or an "integrated, developing system, a body of law" (Berman 1983, p. 333, italics added).

5. The Second Phase of the Commercial Revolution: The Rise of the Towns

Ius Mercatorum and the Rise of the Towns

In the previous section, we demonstrated that it was extremely difficult for merchants to enforce institutions regulating nonsimultaneous transactions between them and members of another guild or outsiders. To solve these problems, a number of political and social changes had to come about, which resulted in towns developing from feudal or ecclesiastic administrative centers into autonomous political organizations. Since the late eleventh or early twelfth centuries, towns became protostates vested with mechanisms to enforce external institutions, thereby supplementing and gradually replacing the elder guilds as suppliers of rules for trade.(43) Institutions developed autonomously by merchants themselves were therefore supplanted by high medieval urban law, which varied widely from one group of towns to the next, and sometimes even among single towns (cf. Berman 1983, p. 364 ff.). Concerning a comparison between the modern lex mercatoria and the conditions of eleventh- and twelfth-century trade, the questions are, How far were the legal systems developing within towns influenced by mercantile custom?, and Did merchants influence urban law after towns had become autonomous?

To answer these questions, it is first necessary to take a closer look at the conditions that made urban autonomy possible. Its development was initiated by feudal and ecclesiastical rulers, whose demand for luxury products provided by merchants and the taxes these were able to pay explain their interest in improving trading conditions. However, as they were unable to supply security or enforce property rights in the whole area they claimed to rule, they granted privileges valid only for specified places or people, that is, to individual traders and later to guilds. Usually, rulers conferred, or rather, confirmed, the merchants' freedom of contract and movement, thereby helping unfree traders to become independent of their principals (Dilcher 1984). Additionally, merchants received the "king's peace," a special right of protection for themselves and their goods. The places where these privileges were valid, that is, enforced, were thereby designated as markets (Spiess 1916, p. 352; Scholler 1960). As members of guilds, merchants could travel safely, but it was the additional security rulers provided at markets that encouraged them to settle down for longer than just one winter. From now on, their journeys became excursions from which they regularly returned home. Only after markets had become permanently inhabited were privileges granted not to the members of specific guilds but to all merchants living there (Dilcher 1984). Freedom from tolls and freedom from certain archaic procedures before court, such as single combat and ordeal, seem to have been the most important rights rulers conferred (Planitz 1943). Altogether, the privileges granted to traders constituted a group of rights called ius mercatorum in contemporary texts and distinguished merchants from the rest of the population (Kroeschell 1995b).(44)

Within the emerging market towns, the ius mercatorum served to distinguish merchants from the rest of the population, which consisted of retainers of the lord of the town, both of freemen and of serfs. In the later eleventh century, these began to form confederations that were aimed at reducing the political influence the feudal rulers exerted on the towns and at obtaining the same rights and entitlements the merchants living among them enjoyed. In many cases, the revolts against the lords of the towns were led by the merchants themselves (Planitz 1940; Dilcher 1984). Beginning in the twelfth century, most medieval towns were free to order all their internal and many of their external affairs as they wished. Autonomy was founded both on rights granted by the lord of the town before the confederations were formed and on rules developed by the burghers in the course of the revolt.

Everywhere, the rights subsumed under the term ius mercatorum, especially freedom of movement, contract, and of the archaic practices prevalent in traditional law, became part of town law (Dilcher 1984). The influence guild-specific rules gained on urban law varied (cf. Berman 1983, p. 375). Where craftsmen or former retainers of the lord of the town had played a major part in the revolt and later took part in urban government, they had the chance to influence property rights defined by the law of the town according to their special group interests. Guild rules would have less chance of being integrated into the new bodies of law, with the consequence that the economic development of the town would take a different course: Trade would be of comparatively little importance. This explains the difference between Lubeck, the law of which was dominated by mercantile practices, and Magdeburg, which integrated large parts of rural Saxon law (Dilcher 1990). Lubeck, not surprisingly, became one of the great centers of medieval commerce. Magdeburg's trade gained much less importance, while its law was adopted by more than 80 towns all over central and eastern Europe (Berman 1983, p. 377 ff.). Additionally, the role of trade influenced the direction of further developments of urban law. In Saalfeld in Thuringia, little noted for mercantile importance, trial by combat was practiced as late as the fourteenth century, when this had long been abandoned in centers of trade (Stoob 1985, pp. 170-96). However, just where urban law mirrored mercantile practice, the group interest of the merchants led to a systematic discrimination of foreign traders. The law of Lubeck, codified in the thirteenth century, determined, for example, that "no guest may give evidence against a burgher, but burghers may well give evidence against guests."(45) Almost everywhere, foreign traders suffered from privileges enjoyed by domestic merchants, from rights of staple and from special duties only they had to pay (Bernard 1983, p. 201). Thus, when Hattenhauer describes the medieval town as "the merchants' own order of law" (1994, p. 229), it must be kept in mind that this provided domestic merchants with the opportunity for rent seeking that was frequently directed against merchants from other towns.(46) In fact, the domestic merchants' desire to take advantage of their ability to impose institutions regulating commerce seems to have been a prime motive for their formulation of institutions regulating trade.

Great as the differences between the developing urban systems of law were, there was one principle common to all of them: They applied not only to everybody living in the town but to visitors, too (Ebel 1974, p. 253). Urban law was the first European legal system since Antiquity valid according to territorial rather than personal criteria. Compared to the time when guilds dominated trade, it allowed a considerable reduction in transaction costs. Before urban autonomy developed, a merchant wanting to engage in nonsimultaneous transactions had to be familiar with the rules of perhaps dozens of different mercantile organizations, and even then, he could never be sure that he would be able to enforce the agreement vis-a-vis his partner. Information costs were high, and the costs incurred while negotiating and enforcing the contract were often prohibitive. Then, when a merchant could rely on all traders visiting a certain town being subject to the law of this town, it became relatively simple to accrue the necessary information. In this way, town law facilitated a further expansion of trade.

The Enforcement of Urban Law

As indicated above, towns brought about a further reduction in transaction costs, ultimately because they were vested with enforcement mechanisms. How did these come into existence? In contrast to guild-specific norms, urban law was deliberately created by the civic councils, which acted both as legislature and judicature. The executive was carried out by lower officials who received a salary (Gerhard 1983).

In many towns, special courts for the settlement of disputes among or with foreigners were established. These were the normal urban courts in which the usual judges sat and administered the usual law of the town, the only differences being that they worked more quickly and that no appeals were possible (Ebel 1974, p. 253). Some historians represented the establishment of such guest courts - piepowder courts, they were called in England, because of the "dusty feet" of traveling merchants - as a step toward the promotion of trade: Merchants were nearly continually on the move and seldom had the time to await the judgment of the regular courts (Goldschmidt 1891, p. 120). This corresponds to the interpretation of modern arbitral tribunals, which are favored by merchants - apart from other reasons - because of their quick proceedings (Streit and Mangels 1996). In a medieval town, the creation of a guest court was, however, a concession of doubtful quality. Schultze (1908) pointed out that at that time, judges tended to favor their fellow citizens who, as they were often merchants themselves, were their colleagues and business associates. Therefore, the lack of the possibility to appeal to some higher instance cannot be interpreted as a measure in favor of foreign traders (Schultze 1908). Often, the main object seems to have been the quick retrieval of credits burghers had advanced to merchants from abroad (Thieme 1958).

It was possible to turn to guest courts only when both parties happened to be in the same town. What was to be done when a merchant who was suspected of having cheated in a nonsimultaneous exchange had already left the town? When a lawsuit arose between a burgher and a foreign merchant, not only was this individual merchant held responsible, but all burghers of his hometown would be arrested and their goods confiscated.(47) To enforce rules at markets and fairs, authorities made extensive use of collective reprisals (Verlinden 1979). Throughout the Middle Ages, joint liability was the principal means by which rule compliance of foreign merchants was enforced (Thieme 1958; Verlinden 1979, p. 137). This was practiced as late as the fifteenth century, not only by towns but also by feudal lords - and against their agents, when they carried on a trade of their own (Volckart 1996, p. 112).

Joint liability may have been a forceful deterrent, but it tended to cause prolonged disputes, not only between individual merchants but between towns, which could disrupt trade considerably (cf. Bridbury 1986). Many towns therefore concluded bilateral law enforcement treaties in which they promised to abstain from prosecuting each other's burghers when a single merchant broke the law. Occasionally, one partner in the treaty was the lord of the surrounding principality or of a country much visited. Between 1159 and 1285, the city of Cologne concluded a large number of such contracts, among others, with Verdun, Liege, Deventer, Nymwegen, Ghent, Siegburg, with the counts of nearby Berg, and with the kings of England (Kuske 1978, pp. 2-19).(48)

Occasionally, urban governments formed joint commissions to settle disputes. This was, however, the exception. Put before the decision either to grant some other power the right to administer justice to their fellow citizens or to do this themselves, civic authorities generally chose the latter alternative: The fines that could be collected at court seem to have been the decisive incentive. In fact, it seems to have been this kind of competition that induced the councils to promote strict laws against merchants appealing to any court but that established by the civic authorities themselves (Schultze 1908). The guiding principle was forum contractus, the competence of the court of law of the town where a contract had been concluded (Thieme 1958). Consequently, merchants found it reasonable to formulate their contracts according to the law of the town where they happened to meet.

Within the elder mercantile guilds, interest in a good reputation had made it possible to enforce rules. The problem the guilds failed to overcome - how to enforce rules vis-a-vis a member of a different legal system - was solved by the towns. This, however, was not done in the best interest of the merchants but because judicature and executive were formalized and functioned on the basis of salaries paid to civic officials. Town law and its enforcement made it safer to engage in nonsimultaneous exchange with strangers. Nevertheless, because of the differences between urban law codes, which confronted merchants for the first time with the territoriality of institutions, and because town law systematically discriminated against strangers, credit relations were rare. As long as there was no efficient, reliable, and impartial mechanism to enforce contracts, merchants were forced to rely predominantly on simultaneous exchange. This seems to have been the case at least until the fourteenth century, when they began to give up the practice of traveling together with their goods.

6. Conclusion

The principal aim of this paper was to draw attention to some caveats pertaining to research on medieval trade law. Hopefully, it has been possible to demonstrate how important it is to refer to the few surviving contemporary sources. Of course, because there are so few sources, there is wide room for interpretation, and this should be consistent with what economic theory has to say about human behavior. Writing conjectural history cannot be avoided when studying medieval trade law, and theory is indispensible as a guide to formulating hypotheses. The main difference between a historian's and an economist's approach to this task seems to be that for a historian, sources come first. The historian formulates hypotheses with the aim of clarifying historical developments and leaves them to be tested against the primary sources. Most economists, by contrast, seem to tend toward formulating historical hypotheses rather with the aim of illustrating their theories, and that is why historians feel so uncomfortable with this kind of literature.

What the surviving medieval sources show without doubt is that the importance of merchant-made institutions regulating nonsimultaneous exchange should not be overrated. At least until the fourteenth century, most commercial exchange was simultaneous. It was not hampered by differences in the legal systems and consequently, hardly gave rise to the development of institutions regulating trade. Merchant guilds formed to provide security, not institutions for commerce. That rules regulating nonsimultaneous exchange emerged within guilds goes without question. This probably happened in much the same way as in modern commercial associations, reputation being of decisive importance as an enforcement mechanism. However, contemporary sources contain no evidence that these institutions were not guild-specific but rather a universal or "transnational" commercial body of law (cf. Benson 1989, p. 645; Berman 1983, p. 333).

It goes without question, too, that institutions that had developed within guilds influenced medieval town laws. Similarly, merchants continued to influence town laws throughout the Middle Ages, albeit in different measure. Differences between the legal systems of different towns can be explained with differences between guild-specific institutions, on the one hand, and with the diverging influence of other social groups (e.g., the retainers of the former lords of the towns), on the other. Additionally, the importance of mercantile rent seeking should not be underestimated. Especially where merchants exerted considerable influence on town law, their rent seeking interests led to the systematic discrimination of their competitors from other towns. Moreover, within towns, reputation lost much of its importance as an enforcement mechanism. Instead, urban law was enforced with the help of the monopoly of force held by the civic authorities.

It has been possible to demonstrate from medieval sources that the way medieval commercial institutions developed really showed some similarity to the modern lex mercatoria. Still, we must close with a caveat: Direct links between medieval and modern trade rules are problematic, because they tend to obscure the fundamental differences in medieval and modern trade.

For criticism and suggestions, thanks are due to Manfred E. Streit, Thoralf Erb, Jochen Jahraus, Daniel Kiwit, Uwe Mummert, Axel D. Schulz, Stefan Voigt, Tobias Winkler, and Michael Wohlgemuth.

1 A similar statement can be found in Benson (1995, p. 115).

2 See, for example, Berman and Kaufman (1978), Kappus (1990), or Cremades and Plehn (1984).

3 "Each important fair had its local version of the law merchant, being a set of commercial rules to be observed by merchants attending that fair and applied to transactions made there" (Baxter 1985, p. 547). See similar statements in Mitchell (1904, p. 2), Dasser (1989, p. 34 f.), and Blaurock (1993, p. 249).

4 Institutions are here defined as relatively stable rules of human conduct. They put costs on some actions, thereby influencing how individuals evaluate various ways of action. Commonly known rules of conduct enable individuals to form stable expectations about the actions of others, which makes them indispensable for coordinating one's own activities with those of others. Institutions may be grouped in different categories, the distinction between external institutions (that are enforced with the help of the state's monopoly of force) and internal institutions (that are enforced by informal or private means) being especially useful (cf. Kiwit and Voigt 1995).

5 Interesting observations concerning multinational firms can be found in Buckley (1990), Dunning (1993), UN (1995), and Schmidtchen and Schmidt-Trenz (1990).

6 This assertion still needs empirical investigation.

7 A more detailed discussion of this argument can be found in Benson (1992). Charny (1990) presents an excellent study of nonlegal sanctions in business communities.

8 In almost all countries, contract law is adhering to the general principle of "party autonomy," which means "that the parties are free to select the law governing their contract, subject to certain limitations" (Scoles and Hay 1992, p. 657); for similar statements, see Baxter (1985, p. 541), Reimann (1995, p. 133), and Stone (1995, p. 229 f.). Thus, the parties can choose a national system of law governing their contract. Still, in many countries, they can explicitly provide either for the application of the modern lex mercatoria - for example, by allowing arbitrators to act as "amiable compositeur" - or for general principles of law (Cremades and Plehn 1984, p. 331; Dasser 1989, p. 405; van Houtte 1995, p. 399).

9 Among lawyers, the character of the modern lex mercatoria as a transnational or anational legal order is disputed. See, for example, Cremades and Plehn (1984), Highet (1989), and Stoecker (1990).

10 Similar definitions of the modern lex mercatoria can be found, for example, in Goldstajn (1961, p. 12), Dasser (1989, p. 301), Goldman (1990, p. xviii), Kotz (1992, p. 216), and van Houtte (1995, p. 26). Other authors, such as Schmitthoff (1964) or Kappus (1990, p. 798 f.), interpret international legislation (in the sense of international treaties or model laws) as an element of the modern lex mercatoria. We prefer the first definition because often international legislation is only a subsequent codification of customs that emerged from practices of the international business community (Schmidtchen 1995).

11 American Uniform Commercial Code [section] 1-205,2 quoted from Schmitthoff (1987, p. 13).

12 Cf. Bonnell (1992) and IIBLP (1995).

13 See Dasser (1989, p. 91 ff.) or Schmitthoff (1987, p. 29). If there were no published trade usages, factual trade usages would be normally proven, for example, in case of an arbitral award or a court decision, by expert witnesses or by an inquiry at the relevant chamber of commerce (Schmitthoff 1987, p. 20 f.).

14 Other standard clauses like the American Foreign Trade Definitions are gradually displaced by the Incoterms (Dasser 1989, p. 88).

15 Ropke pointed out the significance of the principle pacta sunt servanda: "The theory of international trade tells us that world economy rests on the law of comparative costs, but recent experience suggests that it would be truer to say that it ultimately rests on the maxim pacta sunt servanda" (1959, p. 76 f.).

16 More general principles can be found in van Houtte (1995, p. 27 f.) and Osman (1992).

17 It should be mentioned here that some authors doubt the predictability of the new lex mercatoria: "The general principles of law are vague and often contradictory; . . . Its rules are insufficiently coherent or detailed to offer a solution to the questions of law which may come up in an international trade dispute" (van Houtte 1995, p. 29). However, Cremades and Plehn point out that "[t]he business community is subject to constantly changing circumstances and goals. Specific rules initially providing certainty soon become obsolete. A New Lex Mercatoria must achieve clarity and coherence without sacrificing adaptability. These goals are best reconciled by applying clearly defined fundamental principles which, though broad, take on the greater specificity of a rule when applied to a particular factual situation" (1984, p. 337 f.).

18 Among many others, cf. Casella (1992), Voigt (1992, p. 179), Berger (1994).

19 For a discussion of the different advantages and motives of business people who resort to arbitration, see David (1985, p. 10 ff.).

20 "In contrast to national courts, international arbitrators do not hesitate to refer to international commercial custom, including contract practices in international trade, as a basis of their award. No doubt that is one reason why most international trade contracts expressly exclude adjudication in a national court and refer all disputes to arbitration" (Berman and Dasser 1990, p. 33).

21 Some authors write about a change in the costs of international arbitration. Cassella, for example, is of the opinion that the services of large suppliers of international arbitration are very expensive. Thus, only large contracts have an arbitration clause, whereas smaller business deals cannot use the services of international trading organizations like the ICC (1992, p. 13). Stein argues in a similar way (1995, p. 29 f.). But most authors maintain that the lower expected costs of international arbitration proceedings are an advantage of private dispute resolution (e.g., Sandrock 1989).

22 See Dasser (1989, p. 352), Stumpf and Steinberger (1990, p. 175 f.), and Blaurock (1993, p. 257). But it should be mentioned that this figure is based on verbal statements of the Court of Arbitration of the ICC or of experts. The confidentiality of arbitration proceedings makes exact statistical surveys impossible.

23 "New legislation over the course of the last few decades (and especially in the last ten years) as well as liberal court decisions have given arbitrators the power to apply a nonnational legal system such as the lex mercatoria and even the duty to apply almost any rules of law chosen by the parties themselves. Even where the national law does not go that far, the courts are normally deprived of most of their power to set aside or not to enforce awards on the grounds of incorrect application of choice of law rules" (Berman and Dasser 1990, p. 33 f.).

24 See Triebel and Lange (1980, p. 620), Dasser (1991, p. 318), Berger (1992, p. 7), Schumann (1993, p. 701).

25 It should be mentioned at this point that the frequent voluntary compliance with arbitral awards cannot only be explained with the expectation that these awards can be easily confirmed in state courts. It has to be taken into account that arbitration was in widespread use before being acknowledged by jurisdiction (Benson 1989, 1995).

26 For a discussion of "law as a discovery procedure," see Christainsen (1990).

27 Firms specializing in handling border-crossing transactions or banks operating in international markets are again small groups of transactors highly dependent on their reputation.

28 Telser writes in this context: "A sequence of self-enforcing transactions must have no last one. . . . A sequence has no last term if there is always a positive probability of continuing. As long as this is true, anyone who violates the terms at one time incurs the risk of losses in the future" (1980, p. 29).

29 Cf. Bernstein (1992). For other examples of ethnically homogenous business communities, see, for example, Landa (1981).

30 This is not to mean that trade associations that supply arbitration or arbitral tribunals themselves publish the names of parties who failed to comply with awards. This seems to be the case in some lines of business (it is, for example, allowed by the United Nations ECE Model Contract for the Sale of Cereals, No. 5A) (Cremades and Plehn 1984, p. 329), but generally, the confidentiality of arbitration proceedings does not allow the publication of any information about the arbitral award (cf. Internal Rules of the ICC Court of Arbitration Art. 2). Of course, information may spread informally, for example through gossip, but the explanations of voluntary compliance with arbitral awards given by Milgrom, North, and Weingast (1990) and Schmidt-Trenz (1990, p. 279) nevertheless do not seem to be generally applicable.

31 Although Ellickson is not directly referring to our problem, see his impressive analysis of how neighbors in Shasta County settle disputes (Ellickson 1986, 1991).

32 An illustrative example is the following comment given by a businessman: "Contracts are a waste of time. We've never had any trouble because we know our customers and our suppliers. If we needed a contract with a man, we wouldn't deal with him" (Macaulay 1971, p. 9).

33 Among others, Berman (1983, p. 346 f.) and Milgrom, North, and Weingast (1990).

34 On the continent, a royal coinage continued to exist despite the fact that the successors of Charlemagne began to hand over the right to mint coins to their vassals. Up to the 880s, money seems to have circulated freely throughout both the Eastern and Western Frankish kingdoms (Spufford 1988, p. 46). Taxes disappeared, but the Carolingian rulers continued to receive tolls, with which they tried to maintain a rudimentary infrastructure (Adam 1996, p. 235).

35 In Lombard and Venetian Italy, civic courts that administered a debased form of Roman law retained much of the importance they had in late Antiquity (Berman 1983, p. 340; Hattenhauer 1994, p. 134 f).

36 The early medieval law codes have been edited comprehensively in the Leges Nationum Germanicarum series of the Monumenta Germaniae Historica. Cf. Lehmann (1888), von Sails (1892), Beyerle and Buchner (1951), and Eckhard (1962-1969). An edition of the Lex salica with English annotations and glossary was published by Hessels (1880).

37 The taking of interest was outlawed by Charlemagne, but his ban referred to consumptive credits only (Latouche 1961, p. 156 f.). Obviously, other kinds of loans did not occur.

38 The oldest surviving statutes of a guild are at least 80 years younger: They were set down in about 1100 (Planitz 1940). The surviving source does not mention a guild, but as it refers to merchants claiming to have received an imperial charter, it is clear that some kind of organization must have existed.

39 Homines sunt duri et pene nulla disciplina adsuefacti, iudicia non secundum legem set secundum voluntatem decernentes. et hoc ab imperatore karta traditum et confirmatum dicunt. Si quis quicquam ab alio mutuum sive accomodatum acceperit, et illa ad constitutas inducias rem suam repetit, constanti animo inficias it et sine mora se nihil ab illo accepisse iurat. Et si quis deprehensus fuerit publice peiurasse, a nullo posse redargui confirmant. Si rein quoque una manu tenuerit, si tantilla est, ut pugno includi possit, cum altera iuramento denegabit. [. . .] Summo mane potationibus student, et quisquis ibi altiori voce turpes sermones ad excitandum risum et ad vinum indocile vulgus provocandum protulerit. magnum apud eos fert laudem. Siquidem ob hoc pecuniam simul conferunt et hanc pertitam singulis ad lucra distribuunt et ex his quoscumque potus certis temporibus in anno cernunt et in celebrioribus festis quasi sollempniter ebrietati inserviunt.

40 Kern (1958, p. 11 if.); Brunner (1992, pp. 118-20); Kroeschell (1995a, p. 279).

41 Notger wrote that negotiale was ter strit umbe daz kewoneheite geskihet: also choufliute stritent, taz ter chouf sule wesen store, der zu jarmercate getan wirdet, er si reht alde unreht, wanda iz iro gewoneheite ist (van de Kieft and Niermeijer 1967, p. 60). The translation given above is not unproblematic. Mitchell suggested that it should rather read: "Merchants assert that sales made at fairs, whether made with proper legal forms or not, should be binding, since it is their custom" (1904, p. 11). However, since it is unclear what these proper legal forms were and since a cleric like Notger would probably rather be concerned with questions of just prices than of legal formalities, we claim superior merit for our translation. Middle High German reht means both "lawful" and "just" (cf. Lexer 1876, p. 376).

42 One hypothesis concerning the enforcement of rules by merchants themselves should at best be mentioned in a footnote. In a 1990 article, Milgrom, North, and Weingast envisaged so-called "law merchants." These merchants, working at the Champagne fairs of the thirteenth century, kept informed about traders who had unpaid judgments against them and sold this information to anybody inquiring whether his partner was reliable, in effect being paid for spreading gossip. However, medieval sources do not mention "law merchants," and there is too little known about the function of the "consules" employed by several Italian guilds or associations of guilds at the Champagne fairs to ascertain whether they acted in the way described by Milgrom, North, and Winegast. Moreover, merchants frequently appealed to the princely, ecclesiastic, and urban courts established at the sites of the fairs, and the counts of Champagne employed a major official (the "garde de foires") to enforce rules. The garde de foires was supported by a number of lieutenants, clerks, and sergeants at arms; the lieutenants were the superiors of the notaries working at the fairs (cf. Verlinden 1979, p. 127 f.; for a closer account, see Goldschmidt 1891, pp. 228-30). There might, of course, have been merchants like those envisaged by Milgrom, North, and Winegast, but given the lack of sources, their existence can neither be verified nor disproven.

43 The fact that throughout the Dark Ages in italy urban courts had enforced debased forms of Roman law (cf. footnote no. 35) accounts for the continuous existence of nonsimultaneous exchange in this part of the Mediterranean world.

44 There is one medieval source that, in this context, seems to have been misinterpreted. Some authors refer to a passage from Fleta - a treatise on English law compiled in ca. 1290 - in support of their hypothesis that the modern lex mercatoria originated in the Middle Ages (e.g., Blaurock 1993, p. 251). The Fleta is the oldest known record in which alex mercatoria is mentioned. The passage reads: "So that justice may be even-handed, the proof of the defendant is preferred to that of the plaintiff. [. . .] And what is said about suit for proving verbal statements' can be said about suit produced to prove tallies, for, if they are put forward without suit, the simple oath of the defendant will be accepted against them. The position is different, however, in cities and fairs' and among merchants, in whose favour, by grace of the prince, it is granted that proof shall be the privilege of the party asserting the claim, in accordance with the law merchant, and merchants are permitted to prove, by witnesses and by a jury, tallies that are repudiated." ("In paritate [. . .] iuris prius admittatur defensor quam pars actrix in probacione. [. . .] Et quod dicitur de secta ad vocem probandam dici poterit de secta producta ad tallias probandas, contra quas sine secta prolatas simplici sacramento negantis erit credendum. Secus tamen erit in ciuitatibus et nundinis et inter mercatores, quibus ex gratia principis conceditur ob fauorem mercatorum quod parti affirmatiue secundum legem mercatoriam erit probacio concedenda, et ipsis conceditur tallias dedictas probare per testes et per patriam") (Richardson and Sayles 1955, p. 211 ff.). As Kroeschell (1995a, c) points out, in the Middle Ages, the term lex often signified a right in the sense of an entitlement. Evidently, the lex mercatoria mentioned in the Fleta was a royal privilege exempting merchants from the archaic legal procedures described at the beginning of the section cited above. Although it initially seems to have been granted to specific English guilds, by 1290, it had been extended to all merchants trading in England. In effect, the lex had developed from a privilege conferred to an interest group to an early instance of national law.

45 Nen gast ne mach thugen vp enen borgere. Men borgere mogen wol thugen vppe geste (Korlen 1951, p. 120).

46 That commerce continued to expand in spite of mercantile rent seeking points to the improvement even biased urban law courts constituted over the way dispute resolution functioned among members of different guilds.

47 Since the burghers had formed a confederation among themselves and had elected a council that was empowered to make decisions binding for all, they had become corporate actors not only in the sense modern social theory uses this term but also in the eyes of their contemporaries (Ennen 1987, p. 222). In contrast to Roman law. medieval law readily acknowledged the idea of collective entities acquiring responsibility for the actions their individual members undertook (Ullmann 1948).

48 In the thirteenth century, joint liability was sometimes abandoned completely: The town law of Fribourg in Uechtland, codified in 1249, decreed summarily that no burgher should hold anybody liable for debt except the debtor himself, regardless of where he came from (Thieme 1958). In 1275, the Statute of Westminster (I) freed the subjects of the King of England from the danger of being made liable for debts their fellow citizens had contracted (Berman 1983, p. 342). Some of the treaties concluded by Cologne determined alternative proceedings: either the number of oath helpers needed to prove the existence of a debt or the establishment of a joint commission to settle disputes (Kuske 1978, pp. 2, 7).

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