European Union: The Development In Transnational Legal Regimes: Consequences On The Rule Of Law

Last Updated: 4 July 2019
Article by Mohammed Assayed

1. Introduction:

During the era prior to the famous "Westphalian Peace Treaties" in 1648, law was not as it is now where it has to be state-made in order to be or account as law.1 There was a wide range of regulatory overlaps, along with a lack of clarity on who had the last word over laws, rules and regulations within a certain territory2 i.e. the principles of supremacy and the Rule of Law ("RoL") associated with it were clearly missing. This led to one of the longest and most destructive wars in the history of Europe known as the "Thirty Years War".

Post signing the Westphalian Peace Treaties and the political doctrines involved in it i.e. full sovereignty of states and the commitment not to obstruct in the activities of other states, the notion of law and state-law has emerged with the purpose of reducing the regulatory overlaps between the major political bodies that form the state, by mainly enforcing the RoL and state supremacy.3 It was believed back then, that the ideal treatment to the political context which led to the war is by equating law with state-law, therefore subordinating other political powers and other regulatory bodies to the benefit of states.

Nowadays, however, the relationship between the states and other bodies i.e. non-state bodies, is changing. It is widely argued that the justifications for the state's authority and supremacy is not as strong as it was before, which means that it is more problematic for states to subordinate other political powers.4 In this article, we will start by discussing the underling principles of the RoL and states supremacy, we will then expand the discussion to cover some transnational legal regimes and its relevant developments, in order to form a conclusion on whether such developments challenge or improve the RoL.

2. The Rule of Law: State Supremacy

Generally speaking, it is hard to find a definitive definition of the RoL, nonetheless, there are two main influential inputs that I believe shaped and correctly define it. The first definition goes back to the 19th century when Albert Dicey, a well-known British lawyer concluded, in his corner-stone book "The Rule of Law", that the RoL contains three main principles: first, the supremacy of regular law over arbitrary power; second, equality before the law; third, no higher court has the right of individuals as determined through the courts i.e. common law.5

The second definition was put forward in 2006 by Lord Thomas Bingham, when he flagged that the 2005 Constitutional Reform Act in England has acknowledged the RoL as a constitutional principal though did not define it. As per Lord Bingham, the RoL is "All persons and authorities within the state, whether public or private, should be bound by and entitled to the benefit of laws publicly and prospectively promulgated and publicly administered in the courts."6 From this definition, we can highlight the following major points, first, the law shall be accessible as in the case of Sunday Times v UK where the European Court of Human Rights ("ECHR") held that the law must be sufficiently clear; second, discretionary power can lead to arbitrary power if not regulated properly; third, equality before the law; fourth, proper exercise of power as in the famous case of Entick v Carrington where it was held that the secretary of state had no right under statute or under common law to issue a search order warrant; lastly, fair legal process i.e. everyone shall have access to justice and a fair trial.

Now and after clarifying the underlying principles to the RoL, is it fair to say that all decisions or judgements in dispute resolutions are based only on rules which are acquired from legal rigid statute books, codes or from aged precedents that may not be applicable in our present days? To answer the question, the jurisprudential theories of "Legal Realism" and "Legal Positivism" have to be considered. Realism is basically a descriptive theory of judgement i.e. a theory of the procedures the judge undertakes to reach to his verdict. Whilst, positivism (or black letter) is a traditional theory of law i.e. a theory about what is idiosyncratic of any society legal norms.7

The core distinction between the two is regarding the definition of decision making, as the black letter positivisms believe that decision making reflects justification, realists, on the other hand, believe that the law in statutes and books has a huge influence on decision making, however it is not the only factor as other transnational legal norms have a role too.8

Thus, if we want to understand the real behaviour in transnational businesses, we cannot stop at studying laws in books, or be happy with state-law legal instruments, therefore understanding the reality of transnational business law is essential.

3. Transnational Legal Regimes and its Development:

To start with it is important to understand that not every solution to a specific problem is a legal solution.9 In this regard, Santi Romano, a leading Italian legal philosopher, claimed that there are many legal systems under the state legal system.10 In this section, we will discuss two practical examples of transnational legal regimes and highlight their phases of development: First, the private legal system of the cotton industry. Second, the development of arbitration as an alternative dispute resolution.

3.1. The Cotton Industry and its own Private Legal System:11

The cotton industry has successfully established their own distinct private legal system; this system came into existence about two hundred years ago, thus, it successfully survived many widespread social and legal changes.12 For most trading cotton contracts are determined in one of numerous privately drafted set of contracts default regulation which are subject to arbitration on one of several recognised tribunals. Therefore, it is neither regulated under any international treaty nor recognised in court when dispute emerges.13

To understand their legal system, we will look at the procedural rules, substantive rules, adjudicative approaches, and importantly the judgment enforcement mechanisms that they have applied specifically by the Board of Appeal ("BoA"), which deals with disputes between merchants and mills.14

For procedural rules, the BoA is structured of only two arbitrators selected by the presidents of the two major cotton associations, based on their expertise and their reputation for integrity and equality. The BoA decides on cases without holding hearings, rather on the basis of briefs and documentary proofs i.e. validated copies of confirmations, correspondence, mail receipt, telephone logs, and confessions from lawyers and employees who were involved in the transaction. Additionally, the BoA produces written opinions, which include a list of the facts, a short explanation of the rule applied, arbitrators reasoning, and a final award.15

For substantive rules, the BoA decides on contract disputes by mainly applying a comprehensive set of contractual default rules (based on the Uniform Commercial Code) which cover all aspects i.e. contract formation, performance, quality, delay, payment, and damages.16

For adjudicative approaches, notwithstanding the fact that arbitrators are selected based on their industry expertise, they in fact use a formalistic approach that gives little weight to elements of the contracting context, this is even when their sense of fairness indicates that further considerations are relevant.17 In contrast, the underlying code the courts applying directs them to investigate business norms reflected in the course of trading, performance, and usage of trade, to direct them to take parties actions under a contract as the best guidance of what their real contractual intentions are.18 To recap, arbitrators look to the contract first and then to the trade rules in making their decisions, other variable elements such as customs are not important.

For enforcement, the BoA arbitral award can be enforced via a simple entry of judgment at court, though its seldom the case. Failure to comply with the BoA award may lead to expulsion from most shippers' associations. Such expulsions are widely spread among members. Due to the fact that maintaining membership in the shippers is essential for the merchants to sustain profitability and is a pre-requisite to participation in the international cotton trade. The associations imposed penalties, along with the social and reputational sanctions associated with it, are usually adequate to prevent merchants of not complying with arbitration decision.19

Notwithstanding the fact that such a unique private legal system is efficient, well run and tailored to the industry needs, cotton traders do not primarily rely on the easy access to monetary remedies it provides to create the targeted discipline for contractual performance. Rather, traders attach great weight to the reputations and creditability's of their counterparties.20

One way to summarize the emergence of the cotton private legal system is to apply Paul Bohannan's theory of law based on double institutionalisation (the secondary rule). His theory highlights that legal systems develop naturally, starting with norms which certainly emerge once a group is formed, then diverge into primary norms of conduct and secondary rules of recognition, change and sanction. At the same time, certain individuals acquire specific law-making, law-changing and law-enforcement powers i.e. wearing multiple hats, and at the same time certain institutions emerge within which or by which law is made, changed and enforced.21

3.2. The Development of Transnational Legal Regimes: Arbitration

Over the past fifty years, arbitration has gained popularity and global recognition as an effective alternative dispute resolution. As globalization and foreign direct investment started to flow, the investment related disputes became more complex, technical and have a noticeable impact on the public and commercial atmosphere, therfore, engagement in multilateral treaties and reliability became a favourite features in the community of international arbitration.22

As a result, multiple corner stone treaties and conventions have been enacted to establish the essential need of autonomy in arbitration. In 1958, the New York Convention was created with respect to set forth the obligation over domestic member states to recognise and enforce arbitral awards approved in another member state (subject to public policy exceptions, however, it fails to determine whether international or national public policy shall apply).23 In 1976, arbitration had a significant step forward when the United Nations Commission on International Trade Law ("UNCITRAL") adopted its own arbitration rules (revised in 2010), providing a detailed set of procedural rules which the member states may use and agree upon to regulate their arbitration arising out of their commercial disputes.24 In 1985, the UNCITRAL Model Law was created for the purpose to guide member states in regard to the modernisation and development of their domestic arbitration rules and regulations.25 The mandate of the UNCITRAL Model Law involves all stages of the procedure i.e. the jurisdiction and composition of tribunal, the form of the arbitration clause, the degree to which domestic courts are allowed to `intervene and the recognition and enforcement of the award.26 Additionally, bilateral investment treaties ("BITs"), which currently stands around 3000 treaties into force opted arbitration as a preferred dispute resolution.27

In the 21st century, arbitration continues to spread which led professor Emmanuel Gaillard, well-known French arbitration practitioner, to conclude, in answering the question of what makes arbitration exist as a legal phenomenon, is that there are three structuring representations of international arbitration. The first relegates international arbitration as a component of a single national legal order. The second anchors international arbitration in plurality of national legal orders. The third, of which he is a proponent , is that international arbitration has an autonomous character, viewed as having generated an authentic legal order "the arbitral legal order",28 Arbitration started to appear in sectors other than investment and general trade, such as construction, insurance, shipping, securities, labor and sports. Such expansion spread is attributed to the strengthening of international business relations along with the rapid technological development.29

Parties to an arbitration now have a wide number of institutional rules and regulations to choose from to govern their arbitral process and a vast array of arbitrators to engage in their matter.30 For example, in the UAE there are two main seats (in Dubai and Abu Dhabi) with multiple centres i.e. DIAC, DIFC LCIA and ADCCAC, where the infrequent harmony between common and civil law is noticeable. This resulted in greater transparency towards arbitral procedures, fuelled by the UNCITRAL adopted rules on transparency in 2014, establishing procedural rules ensuring transparency and easy-public access to investor-state arbitration. In fact, the recent stand alone UAE Arbitration Law 2018 is modelled exclusively on the UNCITRAL model law.

After discussing some examples of transnational legal regimes and it is organic development, the question that asks itself, what are the consequences of such regimes on the RoL? Does it challenge it or improve it? How can such systems replicate the RoL in a stateless transnational legal setting?31

4. Transnational Legal Regimes & the RoL: The Consequences

Prior to discussing the consequences of transnational legal systems on the rule of law and whether it challenges or empowers it, I would first like to highlight the initial and essential goals for arbitration.32 Firstly, the primary goal is to have a more stable and predictable RoL. Secondly, the goal of increasing trade and foreign direct investment to fuel the economic growth and development.33 Furthermore, what are the alternatives? In the absence of some form of independent international regime for resolving foreign and highly technical investment disputes, parties will have to petition their home countries to interfere on their behalf, or the domestic courts of the host country. Neither system is beneficial to the formation of an international RoL.34

According to Stephen Toope, "It would appear that the so-called lex mercaroria is largely an effort to legitimise as 'law' the economic interests of western corporations"35, which means that the pre-emptive character of legality is the idea that once law has taken the form of social context, then there is no actual need for law i.e. state law. Therefore, restrict and challenge the RoL.36 Thus it is clear that there is a robust argument that instead of imposing the RoL, lex mercaroria may indeed challenge it (RoL).

Similarly, there is an argument that transnational legal regime awards i.e. arbitration awards, are individualized, unascertainable and retrospective directives that are barely compatible with a requirement containing a temporal dimension. In other words, a regime based in arbitral awards seems to amount to governance by men i.e. arbitrators (who might not have the required knowledge and expertise) and not by laws, thus failing to establish a case of RoL.37 Furthermore, with the nature of the arbitration process being classified, the practice of following arbitral precedents is almost inexistence,38 which hinders the credibility and the transparency in such awards.

The converse position on the other hand, transnational legal systems may be seen as an instrument that further empowers the RoL, by mainly establishing some sort of certainty that commercial transactions can be upheld39; it has provided alternative methods for a private individual to bring claims against big institutions and even against governments.40

5. Conclusion:

In summary, I believe that transnational legal regimes have substantially contributed and further empowered the RoL, nonetheless, for more autonomy and legality in the future I think we have to deal with a pool of criticisms that have been and will be raised in the future.

In this regard, I agree with Prof. Schultz regarding the argument he raised in his article "The Concept of Law in Transnational Legal Orders and some of its Consequences", where he argues that in order for an arbitration mechanism to be counted as law, it must display certain essential features, such as, without limitation, awards must have precedential force and such awards must be published and reasoned. However, if publishing the awards contains the name of arbitrators, it might prove to be a counter productive exercise, as the arbitrator may feel pressured to issue awards to further his/her reputation instead of contributing on the correct and most effective remedy to an award, the emphasis will be on self gratification and future appointments to other arbitral proceedings.41

Footnotes

1. Thomas Schultz, 'How Conceptions Of Justice Associated With The Nation-State Obstruct Our View On The Possibilities Of Transnational Commercial Law' (2014) 25 King's Law Journal.

2. Ibid

3. Ibid

4. Ibid

5. Robert Stein, Rule of Law: What Does It Mean?, 18 Minn. J. Int'l L. 293 (2009), available at https://scholarship.law.umn.edu/faculty_articles/424.

6. Ibid

7. Brian Leiter, 'Legal Realism And Legal Positivism Reconsidered' (2001) 111 Ethics.

8. Ibid

9. Thomas Schultz, 'How Conceptions Of Justice Associated With The Nation-State Obstruct Our View On The Possibilities Of Transnational Commercial Law' (2014) 25 King's Law Journal.

10. Ibid

11. Lisa E. Bernstein, 'Private Commercial Law In The Cotton Industry: Creating Cooperation Through Rules, Norms, And Institutions' [2001] SSRN Electronic Journal.

12. Ibid

13. Ibid

14. Ibid

15. Ibid

16. Bernstein L, 'Private Commercial Law In The Cotton Industry: Creating Cooperation Through Rules, Norms, And Institutions' [2001] SSRN Electronic Journal

17. Ibid

18. Ibid

19. Ibid

20. Ibid

21. Thomas Schultz, Private Legal Systems: What Cyberspace

Might Teach Legal Theorists, 10 Yale J.L. & Tech. 151

(2007-2008)

22. Gdbor SZALAY, 'A Brief History Of International Arbitration, Confidentiality' University of Pecs.

23. Ibid

24. Ibid

25. Ibid

26. Ibid

27. Ibid

28. Emmanuel Gaillard, Legal Theory Of International Arbitration (2010).

29. Ibid

30. Ibid

31. T. Schultz, 'The Concept Of Law In Transnational Arbitral Legal Orders And Some Of Its Consequences' (2011) 2 Journal of International Dispute Settlement.

32. D. W. Rivkin, 'The Impact Of International Arbitration On The Rule Of Law: The 2012 Clayton Utz/University Of Sydney International Arbitration Lecture' (2013) 29 Arbitration International.

33. Ibid

34. Ibid

35. T. Schultz, 'The Concept Of Law In Transnational Arbitral Legal Orders And Some Of Its Consequences' (2011) 2 Journal of International Dispute Settlement.

36. Ibid

37. Ibid

38. Ibid

39. D. W. Rivkin, 'The Impact Of International Arbitration On The Rule Of Law: The 2012 Clayton Utz/University Of Sydney International Arbitration Lecture' (2013) 29 Arbitration International.

40. Ibid

41. Ibid

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