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A combination of large commercial disputes and competition among groups of arbitrators helped to create the field of international commercial arbitration.
 

What social factors were responsible for the development of transnational commercial law?

Scholars Yves Dezalay and Bryant G. Garth say that transnational business disputes, and the way that a small group of lawyers responded to these disputes, are key to answering this question. International arbitrators, say Dezalay and Garth, helped create current transnational commercial law.

How could a relatively small group of judges, professors, and lawyers help create the field of international arbitration? The process is complex, but the field had its roots in the petroleum disputes of the 1970s.

Petroleum Disputes and the Market for Transnational Commercial Law

Beginning in the early 1970s, things began to unravel for the multinational oil companies. Up till then, with minor exceptions, oil company executives enjoyed amicable relationships with oil producing Middle Eastern countries. While contracts were put on paper, business largely proceeded on the basis informal personal ties. Oil executives and Arab ruling elites relied on their personal relationships rather than contracts to conduct business. Contracts were a secondary and modifiable part of the relationship—a relationship in which the leaders of these third world countries were definitely the junior partners.

However, two historical events caused a rupture in this otherwise close relationship.

  • The rise of post-colonial nationalism. As a new generation of third world leaders rose to power a new sense of nationalism grew. Third world countries were no longer content to live in the shadow of Western colonial powers—or their corporations. Beginning with Libya, oil producing countries began to assert their sovereignty over their own natural resources. Assets of Western multinational corporations were subject to being nationalized.

  • Competition from independent oil companies. Prior to the 1970s the petroleum industry was dominated by the so called “Seven Sisters,” the major multinational oil companies. However, the oil market became less stable and independent oil companies began to compete with the majors. Before, oil-rich third world countries had to live with patriarchal multinationals. Now, oil rich nations gained the ability to shop for the best deal.

The combination of these events brought about a breakdown in the previously stable relationships. Oil-rich countries were eager to assert their sovereignty and competition among oil companies lead to a decrease in the influence of the major multinationals. The majors, on the other hand, were eager to protect their assets. The problem was that there existed no transnational law or forum to solve the conflict.

If transnational commercial law did not exist, it now needed to be created.

Enter the Arbitrators

The contracts between third world countries and multinational oil companies often contained arbitration clauses. These arbitration clauses were vague about whose law applied and in which forum disputes would be resolved. In disputes, both partners agreed to submit to “principles of law recognized by civilized nations” in a neutral forum if possible.

This arrangement, if not ideal for either party, at least provided some benefits for both. Western multinationals were eager to avoid resolving disputes in local courts (where they questioned the political independence of the judges) and under local law (which put the foreign oil companies at a distinct disadvantage). At the same time, the vague formulation of the arbitration clauses allowed the new third world governments to avoid appearing that they had sacrificed too much sovereignty. As usual, this arrangement would work to the benefit of the Western companies.

The problem was that no transnational commercial law existed, and “general principles” had to be made sufficiently clear to be helpful at all.

Grand Old Men

How can a legitimate legal order be created?

In order for the resolution to be seen as legitimate by both parties, the dispute called for arbitrators with impeccable legal knowledge and virtue along with a neutral forum in which the dispute could be decided. As it turned out, a handful of distinguished Continental professors and jurists fit the bill.

These “grand old men” as they came to be called, drew on their legal and social pedigrees to arbitrate very complex (and high dollar) disputes. Their expertise and performance worked to create a legal field where a legal field had not existed before. Their work defined not only the contours of the field (what the field of arbitration was about) but the basic rules of the field as well (how international commercial arbitration was to be carried out).

Even if the field of international commercial arbitration did not have the clarity that it would later come to have, the “grand old men” had brought the new field into existence.

Common Interests in U.S.-style Adversarial Legal Practice

As the practice of international commercial arbitration began to grow, so did its its prestige. Soon, large Anglo-American law firms began to vie for entry into the field. There were two challenges brought about by this change, one for the new entrants, and one for the field itself.

  • Challenge to new entrants. The field of international arbitration was, and continues to be, dominated by relatively small social networks centered initially in the International Chamber of Commerce in Paris. It is a club of sorts. Large, important cases (the kind that will make an arbiter's career) must be referred, often by close personal contacts. The generation of new, younger arbitrators face daunting challenges to entry into the club. In the last couple of decades, however, the “new generation” has made significant inroads.

  • Challenges to the definition of the field. The entry of the younger generation of arbitrators presented a challenge to the nature of the field of international arbitration. American trained arbitrators were trained in a very different legal approach than the older, Continental generation. American-style litigation, with its emphasis on rule of law and legal procedure, became more prevalent, and began to eclipse the less formal approach of the older generation. Not only did American-style litigation provide a level of precision beyond the vague, general principles of “merchant law,” but it allowed arbitrators to act self-consciously in the interests of their client, rather than in the interests of neutrality. American-style litigation also allowed arbitrators to use juridical procedures as tactics to win cases for their clients

Both of these changes worked in the interests of the parities of international commercial disputes.

  • On the one hand, Western companies benefited from the increased procedural rigidity since it allowed them to negotiate and dispute contracts provisions in a familiar style. In fact, Western companies often took advantage of their knowledge of how Western procedure “worked” to negotiate contracts that they knew they would be likely to dispute later.

  • On the other hand, third world countries benefited from the changes because they could now enlist Western or Western-trained lawyers who would and could fight for their particular interests.

A Pattern in the Development of Transnational Law

The petroleum disputes provide a pattern for the development of a market for transnational commercial law. This development was not necessary—that is, it could have turned out much differently. Nonetheless, Dezalay and Garth say that there is a certain logic to the process (see Figure 1).

Figure 1: Pattern in the Development of Transnational Commercial Arbitration Field

 
Data and Methods:

Data Source:

Based on interviews with nearly three hundred individuals involved in international arbitraton. Most of those interviewed were lawyers.

Funding Sources:

  • American Bar Foundation
  • National Science Foundation
 
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Reference

Dezalay, Yves, and Bryant G. Garth. 1996. Dealing in Virtue. Chicago: University of Chicago Press. Chs. 4-5, pp. 63-114.

 
 
 
 
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