Police, Courts, and Prisons

Part 6 – The Medieval Law Merchant

Lee Friday

I recommend reading Parts 1 through 5 before reading this essay

The State had no influence over the development of commercial law in the Middle Ages, because the State did not exist. In the passage that follows, the phrase “geographic specialization” refers to the Division Of Labour.

The history of long-distance trade in medieval and early modern Europe is the story of sequentially more complex organization that eventually led to the “Rise of the Western World.” In order to capture the gains associated with geographic specialization, a system had to be established that lowered information costs and provided for the enforcement of agreements across space and time. Prior to the revival of trade in the Early Middle Ages, few institutions underpinned commercial activity; there was no state to enforce contracts . . .[1]

Bruce Benson continues the story:

. . . medieval commercial law, lex mercatoria, or the “Law Merchant,” effectively shatters the myth that government must define and enforce “the rules of the game.” Because the Law Merchant developed outside the constraints of political boundaries and escaped the influence of political rulers for longer than many other Western legal systems, it provides the best example of what a system of customary law can achieve.

By the end of the eleventh century, the Law Merchant had developed to such a degree that it governed virtually every aspect of commercial transactions in all of Europe (and in some cases outside Europe). In fact, the commercial revolution of the eleventh through the fifteenth centuries that ultimately led to the Renaissance and industrial revolution could not have occurred without the rapid development of this system of privately adjudicated and enforced customary law.

The reciprocity necessary for the recognition of commercial law arose due to the mutual gains generated by exchange.

Fairness was a required feature of the Law Merchant precisely because obligation to obey it arose voluntarily from recognition of mutual benefits. No one would voluntarily recognize a legal system that was not expected to treat him fairly.[2]

Merchants “governed” without the coercive authority of a state by forming their own courts to adjudicate disputes. As Wooldridge explained, merchant

court decisions were generally respected even by the losers; otherwise people would never have used them in the first place. . . . Merchants made their courts work simply by agreeing to abide by the results. The merchant who broke the understanding would not be sent to jail, to be sure, but neither would he long be a merchant, for the compliance exacted by his fellows, their power over his goods, proved if anything more effective than physical coercion[3]

Merchant court decisions were backed by the threat of ostracism, a very effective boycott sanction. If a merchant court ruled that a London-based merchant had breached a contract with a merchant from Cologne at a trade fair in Milan, for example, the London merchant had strong incentives to pay the compensation the court judged appropriate. If he did not, other merchants would no longer trade with him. But this sanction, while a real threat, was not often required. “Good faith was the essence of the mercantile agreement,” Trakman concluded. “Reciprocity and the threat of business sanctions compelled performance. The ordinary undertakings of merchants were binding because they were ‘intended’ to be binding, not because any law compelled such performance.”[4]

By the early thirteenth century the Law Merchant was an integrated system of principles, concepts, rules, and procedures.[5]

Overall prosperity rests on the right of individuals and merchants to freely exchange goods. In this vital area of human activity, the Law Merchant facilitated a peaceful, well-functioning social order. Success was a product of the benefits accruing to all participants, which in turn incentivized each of them to support the system.

The Law Merchant was the mechanism through which merchants conducted their legal affairs. Disputes were handled through arbitration, with its attendant costs, but the reciprocal nature of the institution incentivized merchants to absorb these expenses. However, when incentives change, behaviour also changes. Desirous of more revenue and power, kings enticed merchants to use the kings’ courts by reducing their costs. Benson explains:

When merchants judged and enforced their law, they had to bear the full cost themselves; if the royal authority was willing to enforce merchants’ own law and bear part of the enforcement cost, then the merchants would benefit.

The merchants certainly would find this to be an attractive arrangement, given that the public courts enforced the law as the merchants had developed it. When the common law or public court procedures departed too far from what merchants desired and began to generate costs to merchants that exceeded the benefits associated with the costs, commercial arbitration surfaced again. It follows that under these circumstances, commercial arbitration should enforce virtually the same laws recognized by the public sector, but the causation actually flows in the opposite direction. Public courts enforce virtually the same laws as commercial arbitrators do. If they did not, the public court bureaucracy would lose its commercial business because businessmen would use their own courts (as they are).[6]

Benson’s observation here is notable. He properly points out that ‘merchant law’ was not an independent creation of kings (or the State). Rather, the State (kings) copied the customary laws of the Law Merchant, just as kings did with Anglo-Saxon customary law.[7]


Commercial arbitration is widespread today. Some of the reasons disputants favour private arbitration are:

1) much faster and flexible process compared to public courts

2) significant savings on legal fees for lawyers in the convoluted public system

3) the freedom to choose arbitrators

4) confidentiality

The Law Merchant did not fade into oblivion. It survives today, especially in the realm of international commerce:

International commercial law is a universal law. It has moved away from the restrictions of national law, thus overcoming the difference in the political and authoritarian legal systems of the world. “Moreover, the demand for uniform principles of international trade law, acceptable to the international community of merchants at large, looms ever larger in a world dominated by an uncertain balance of political-economical power.”[8]

The merchants themselves are the only potential source of such uniformity, of course, and their agreements have to produce that uniformity since agreements between governments are unlikely.

Arbitration and mediation are the means of resolving disputes in international trade. The decisions and agreements that arise are not backed by government, but by the reciprocal arrangements of the international commercial community. Many international trade associations have their own conflict resolution procedures. Other traders rely on the International Chamber of Commerce (ICC), which has established a substantial arbitration institution. Experts in international commerce, ICC arbitrators are typically chosen from a different national origin than those of the parties in the dispute. ICC procedures are speedy and flexible reflections of commercial interest.

The Law Merchant has certainly changed substantially since its medieval beginnings, but it is still firmly in place governing international trade. . . . The international Law Merchant, free from the dominant influences of governments and localized politics, has developed and grown much more easily and effectively than has the intra-national commercial law of most nation-states.[9]

Go to Part 7


[1] Paul Milgrom, Douglass North, and Barry Weingast, “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs,” Economics and Politics 2 (1990): 1-23

[2] Bruce L. Benson The Enterprise of Law (The Independent Institute, 2011) pp 30-31, 33

[3] Ibid., p 33 (source provided by Benson: William C. Wooldridge , Uncle Sam, the Monopoly Man, New Rochelle, N.Y., Arlington House, 1970 pp 95-96)

[4] Ibid., p 33 (source provided by Benson: Trakman, The Law Merchant, p 10)

[5] Ibid., p 34

[6] Ibid., pp 60, 278

[7] See Benson, The Enterprise of Law p 281 – 82: Much of common law was simply a codification of the basic norms common to Anglo-Saxon society (that is, from customary law). But common law was also royal law; therefore, even during its earliest periods of development some aspects of it were legislated by kings. The basic character of much common law can be traced back to such royal legislation, which was designed to either enhance the power of the kingship or to increase government revenues.

[8] Benson, The Enterprise of Law p 229 (source provided by Benson: Trakman, The Law Merchant, p 43)

[9] Benson, The Enterprise of Law p 229

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