Law Merchant

Recommended Reading

Norman Barry, “The Tradition of Spontaneous Order,” Literature of Liberty, Summer 1982, Vol. V, No. 2, pp. 7–58.

Levin Goldschmidt, “Handelsrecht,” in Handworterbuch der Staatswissenschaften, ed. J. Conrad et al. (Jena: G. Fischer, 1909–11, 3rd revised edition), Vol. V, pp. 316–27.

F.A. Hayek, Law, Legislation, and Liberty (University of Chicago Press, 1973), Vol. I, Chapter 2, “Cosmos and Taxis,” pp. 35–54.

F.A. Hayek, “The Results of Human Action but not of Human Design,” in Studies in Philosophy, Politics, and Economics (University of Chicago Press, 1967), pp. 96–105.

William Mitchell, An Essay on the Early History of the Law Merchant (Cambridge University Press, 1904).

Peter Stein, Legal Evolution: The Story of an Idea (Cambridge University Press, 1980).

The classical liberal concept of spontaneous ordering is vital to any understanding of the complexities of large-scale, voluntary human activity. When large numbers of individual actors take steps to fulfill their plans, the unintended and unplanned result is a spontaneous order, an order that Hayek has defined as “the results of human action but not of human design” (borrowing from the eighteenth-century Scottish social philosopher Adam Ferguson). See Hayek’s essay on this topic, “The Results of Human Action but not of Human Design,” in Studies in Philosophy, Politics, and Economics (University of Chicago Press, 1967), pp. 96–105.

By peacefully pursuing their own self-interest, millions of people spontaneously interact within the market place, settling upon the price of goods through the interaction of supply and demand, even though no law, no deliberate design, has required them to act in this manner. Adam Smith referred to this process of unplanned but coordinated action as the “invisible hand” (Inquiry into the Nature and Causes of the Wealth of Nations, ed R.H. Campbell and A.S. Skinner [Indianapolis: Liberty Classics, 1981], Vol. I, p. 456) because what made the market work was indeed “invisible” and not deliberately contrived.

Today we describe this process as spontaneous ordering and observe it in the evolution of law, economics, politics, and even language. Of vital importance for a liberal political order is that spontaneous structures contribute to social and economic well-being. This is because they have demonstrated by their existence and continued evolution that they have served and continue to serve the common interests of the participants.

Some useful background material on the theory of spontaneous order includes Ludwig von Mises, Human Action (Chicago: Henry Regnery Co., 3rd revised edition, 1963); Friedrich A. Hayek, Law, Legislation, and Liberty (University of Chicago Press, 1973), Vol. I; Carl Menger, Problems of Economics and Sociology (Urbana: University of Illinois Press, 1963), ed. Louis Schneider; Michael Polanyi, The Logic of Liberty: Reflections and Rejoinders (University of Chicago Press, 1980); Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980); Peter Stein, Legal Evolution: The Story of an Idea (Cambridge University Press, 1980); and Bruno Leoni, Freedom and the Law (Los Angeles: Nash, 1972).

A curiously neglected writer on spontaneous orders is the great classical liberal social theorist Herbert Spencer. See his essay, “Specialized Administration,” in Man versus the State: With Six Essays on Government, Society, and Freedom, ed. Eric Mack (Indianapolis: Liberty Classics, 1981), pp. 435–86. However, the best and most comprehensive introduction is provided by Norman Barry in “The Tradition of Spontaneous Order,” Literature of Liberty, Summer 1982, Vol. V, No. 2, pp. 7–58.

The evolution of the legal system is a paradigm of spontaneous ordering at work. For example, the evolution of the common law as a system is attributable in large measure to spontaneous ordering. After all, common law, as the name implies, grew out of the usages and customs that were common to communities of people associated with one another. As groups of people came into contact in social units, they fashioned habits of association that, through continual use, evolved into custom and ultimately into law itself. The legal rules so formed stemmed from the common assumptions that arose among people about how to act or not to act in a particular situation, not from the command of some superior authority that functioned independently of the social unit and imposed its will deliberately and forcefully on the community.

On the idea of legal evolution and its historical development, see Peter Stein, Legal Evolution: The Story of an Idea (Cambridge University Press, 1980). On the evolution of custom into law, the work of the German historical school is quite relevant, especially that of Friedrich Karl von Savigny, Zum Beruf unsrer Zeit für Gesetzgebung und Rechtswissenschaft (originally published in 1815), translated by A. Howard as On the Vocation of Our Age for Legislation and Jurisprudence (London, 1831; New York: Arno Press, 1975) and System des heutigen Römi-schen Rechts [System of Contemporary Roman Law] (Berlin: Veit, 1840–49), 8 volumes.

On the important transition from status-based law to law based on liberal notions of contract, see the many works of the great Victorian jurist Sir Henry James Sumner Maine, Dissertations on Early Law and Custom (London: J. Murray, 1891, revised edition); Village Communities in the East and West (London: J. Murray, 1871); and his most famous contribution to legal theory, Ancient Law: Its Connection with the Early History of Society and its Relation to Modern Ideas (Original edition, London: J. Murray, 1861) and (London: Oxford University Press, 1930), ed. Sir Frederick Pollock. A complete bibliography of Maine’s writings is contained in George Feaver, From Status to Contract: A Biography of Sir Henry Maine, 1822–1888 (London: Longmans, Green, and Co., 1969). A more modern treatment of the same theme can be found in Bruno Leoni, Freedom and the Law (Los Angeles: Nash, 1972).

A particular illustration of the growth of a common law system can be found in the laws of England. Indeed, the proper noun “Common Law” has acquired a specific meaning throughout the English-speaking world. It refers to laws that have arisen from the customs and usages that were “common” to the communities of England. As a system of law today, the common law has extended its reach across the globe, from Britain to the countries of the British Commonwealth and the United States. Yet this system grew out of the practices of people who lived and functioned in England in centuries gone by. These communities developed their own particular practices in response to the dictates of mutual need; these practices gradually solidified into wider usages as more people adhered to the same codes of behavior.

From this natural process custom was born, and from custom the common law system tooks its form. The system of common law was not purposefully planned, nor did it grow out of the imposition of a set of higher legal commands upon the diverse communities of England. It acquired its shape instead from what people did in their daily lives, in the conduct of their family and business affairs, and in their relations with towns and villages across England. It was spontaneous, yet it gave rise to a vast body of law.

On the evolution of the English common law system, see Sir Frederick Pollock and Frederick William Maitland, History of English Law before the Time of Edward I (Cambridge University Press, 2nd edition, 1968), 2 volumes; T.F.T. Plucknett, A Concise History of the Common Law (Boston: Little, 1956); G.R.Y. Radcliffe and G. Cross, The English Legal System (London: Butterworths, 1964); Sir Carelton Kemp Allen, Law in the Making (Oxford: Clarendon Press, 1958); Roscoe Pound, The Spirit of the Common Law (Boston: Marshall Jones, 1921).

The process of spontaneous ordering is not peculiar to the common law system of England. Spontaneous activities have evolved wherever human beings have interacted in accordance with their natural interests, seeking to satisfy personal ends within a social framework that is free enough to incorporate and respond to such ends in a process of self-ordering. Another important example of spontaneous ordering can be found in the development of the body of law known as the Law Merchant.

The Law Merchant evolved out of the practices of medieval merchants as they transacted their business across regional boundaries throughout Europe, Asia Minor, and North Africa. It is a body of law that arose spontaneously out of the needs of merchants and found its life-blood in the transportation and exchange of goods and services in the market places of the medieval world.

The classic account of the development of the Law Merchant and its eventual incorporation into English law is Gerard Malynes, Consuetudo, vel Lex Mercatoria, or the Ancient Law Merchant (London: 1622; facsimile reprint Amsterdam: Theatrum Orbis Terrarum Ltd; Norwood, New Jersey: Walter J. Johnson, 1979). The most comprehensive studies of the comparative development of the Law Merchant are the works of Levin Goldschmidt, especially Handbuch des Handelsrechts (Stuttgart: F. Encke, 1891, 3rd edition), Part I: Universale Geschichte des Handelsrechts; Vermischte Schriften (Berlin: 1901), 2 volumes; and his summary account in the article “Handelsrecht,” in Handwörterbuch der Staatswissenschaften (Jena: G. Fischer, 1909–11, 3rd revised edition), ed. J. Conrad et al., Vol. V, pp. 316–27.

In English, the best introductions are provided by William Mitchell, An Essay on the Early History of the Law Merchant “Spontaneous activities have evolved wherever human beings have interacted in accordance with their natural interests, seeking to satisfy personal ends within a social framework that is free enough to incorporate and respond to such ends in a process of self-ordering.

(Cambridge University Press, 1904), and Wyndam A. Bewes, The Romance of the Law Merchant, being an introduction to the study of international and commercial law, with some account of the commerce and fairs of the Middle Ages (London: 1923). The most recent account can be found in the early chapters of Leon E. Trakman, The Law Merchant and the Evolution of Commercial Law (Colorado: Fred B. Rothman, 1983).

The merchant codes, such as the Rolls of Oléron, the Laws of Wisby, and the Rhodian Laws, provided the legal framework for trade. These commercial codes grew out of the practices of merchants who met at the islands of Oléron or Rhodes or elsewhere in the domain of medieval traders. The medieval merchant codes are discussed in Gerard Malynes, Lex Mercatoria (facsimile edition, 1979) in Part I, Chapter 17, “On the beginning of the sea lawes,” pp. 119–20; Part I, Chapter 33, “An abridgement of the imperiall sea lawes of the Haunce towns made in the year 1614,” pp. 175–82; and Part III, Chapter 17, “On the lawes of severall countries, whereby the differences and controversies are determined,” pp. 460–70. On the Rhodian Laws, see Robert D. Benedict, “The Historical Position of the Rhodian Law,” Yale Law Journal, February 1909, Vol. XVIII, No. 4, pp. 223–42. In general, see Frederick Rockwell Sanborn, Origins of the Early Maritime and Commercial Law (New York: The Century Co., 1930).

The system of the Law Merchant was self-perpetuating in nature because it satisfied the expectations of the trading community and the needs of medieval consumers. It earned the tolerance of local rulers by providing them with much-needed taxes and other sources of revenue. The Law Merchant survived because it was capable of responding to a diverse yet interdependent body of reconcilable interests. Spontaneity allowed the system to adapt to different commercial and political circumstances and facilitated legal changes in accordance with merchant practice. Deliberate planning was avoided because it would have interfered with the market’s fluctuating supplies and changing prices.

The Law Merchant operated widely, notwithstanding geographical distance, linguistic barriers, and political and military unrest, because the merchants themselves transported the Law Merchant to distant trade fairs and market towns. Commercial communities accepted the customs of merchants as law because by doing so they advanced the commercial potential of the environment in which trade took place. For example, merchant courts, as opposed to non-merchant courts, willingly took merchant custom into consideration when making a decision. Oral testimony, unacceptable in non-merchant tribunals, was readily admitted before merchant judges. Informal hearings, not generally allowed in the ordinary courts of law, were common practice in merchant courts.

Even the judges of the Law Merchant were merchants. They were selected from the ranks of merchants and they applied the law in a way that recognized the needs of their colleagues. In each instance, the Law Merchant broke down rather than created barriers to trade and translated diverse cultural and linguistic heritages into the uniform language of commerce. Justice was rendered ex aequo et bono, equally and fairly, not in response to some higher sense of altruistic reason, but because the needs of trade demanded the application of equal and fair justice. Merchants who submitted to the jurisdiction of the Law Merchant expected to receive equal treatment and a fair settlement of their commercial disputes. To deny them their expectations would encourage merchants to shop around for a more sympathetic forum, thus bringing an end to the universal nature of the Law Merchant.

Under these influences, the spontaneous ordering of the Law Merchant continued for hundreds of years throughout the medieval period and, in many respects, is still present in the twentieth century. Many current legal and commercial practices owe their origins to the spontaneous evolution of the Law Merchant. For example, the practice of marine insurance evolved in medieval times as merchants sought to insure their vessels “...the Law Merchant broke down rather than created barriers to trade and translated diverse cultural and linguistic heritages into the uniform language of commerce.” and cargoes against the attacks of pirates, brigands, and the hazards of nature that constantly arose in the course of travel by sea. The growth of sophisticated commercial instruments (letters of credit, bills of exchange, and promissory notes) also occurred during the development of the medieval Law Merchant. Traders needed to finance their transactions in transregional ventures and they needed credit in order to exchange in distant markets. The development of commercial paper was a necessary step toward satisfying their desire to extend their trading networks. On these economic developments in general, see Roberto S. Lopez and Irvings W. Raymond, Medieval Trade in the Mediterranean World (Columbia University Press, 1955).

None of this is to suggest that the medieval Law Merchant was a flawless system. Unfortunately, spontaneous ordering is not always an assurance of perfect ordering. In fact, it can also be a source of potential disharmony. Not all commercial practices during the medieval period were uniform in nature, nor were all the usages developed by merchants fair and reasonable. Local merchant courts sometimes discriminated in favor of local merchants to the disadvantage of foreign traders. Procedures before merchant tribunals sometimes consumed needless time and cost, and hearings were occasionally more formal and complex than the circumstances justified. Nevertheless, none of these potential weaknesses destroyed the Law Merchant as a system of law. The acceptable characteristics of the system survived, namely those commercial institutions that had developed over many centuries through actual commercial experience.

Despite the growth of the nation-state in post-medieval times, the international flavor of the Law Merchant has prevailed to the present. The fragmentation of commercial law into state codes and diverse decisions of national courts has not completely destroyed the Law Merchant and some of its institutions still remain. International commercial arbitration in modern times responds to the same motives as the medieval merchant court: a desire to base legal decisions upon commercial usage, a concern to avoid complex legal procedures, and a need to conduct informal hearings ex aequo et bono. Thus, international merchants have found it useful to retain commercial custom and usage as the basis of their trade relations. They have included uniform trade terms in their contracts and incorporated the usages of the industry into their arrangements. They have also altered the conditions of each contract in response to the alterations in political, social and economic forces in the global domain. For example, world wars have led to the alteration of “war clauses” in trade contracts, while variations in import and export licensing have induced international merchants to modify their “government direction” clauses.

On the influence of the medieval Law Merchant on the development of modern commercial law, see John Honnold, “The Influence of the Law of International Trade on the Development and Character of English and American Commercial Law,” in The Sources of the Law of International Trade, with Special Reference to East-West Trade, ed. Clive M. Schmitthoff (New York: Praeger, 1964), pp. 70–87; Harold J. Berman and Colin Kaufman, “The Law of International Commercial Trans-