What Does International Trade Law Have To Do With The Delaware LLC Act?

Yesterday, I mentioned Section 18-1104 of the Delaware Limited Liability Company Act which provides the following default rule: "In any case not provided for in this chapter [Chapter 18, Title 6], the rules of law and equity, including the law merchant, shall govern."  In Auriga Capital Corp. v. Gatz Properties, LLC, 40 A.3d 839 (Del. Ch. 2012), Chancellor Leo E Strine, Jr. focused on the statute's reference to equity.

In providing for the application of law and equity, there is nothing particularly unusual about Section 18-1104.  A very similar provision can be found in Sections 107 of the Uniform Limited Liability Company Act (Revised) and the Uniform Limited Partnership Act (2001).  What I do find unusual is the Delaware statute's express reference to the law merchant.

The law merchant, in Latin lex mercatoria, was not legislated, but the product of custom and practice among traders in various countries.  As U.S. Supreme Court Justice Swayne observed, "The law merchant was not made.  It grew."  Merchants' Bank v. State Bank, 77 U.S. 604, 651 (1870).

Although the law merchant and the common law are both evolutionary, they differ in at least one key respect.  The law merchant is characterized by its international, not national, nature.  One hundred years before the Merchants' Bank decision, Sir William Blackstone described this characteristic in his Commentaries on the Laws of England:

For, as these are transactions carried on between subjects of independent states, the municipal laws of one will not be regarded by the other.  For which reason the affairs of commerce are regulated by a law of their own, called the law merchant, or lex mercatoria, which all nations agree in and take notice of.  And in particular it is held to be part of the law of England, which decides the causes of merchants by the general rules which obtain in all commercial countries . . . .

In 1622, more than century before Blackstone and only two years after the founding of the Plymouth colony in New England, the English merchant Gerard Malynes made much the same observation in Consultudo Vel Lex Mercatoria or the Ancient Law Merchant:

[I]t is a Customary Law approved by the authoritie of all Kingdomes and Commonweales, and not a Law established by the Soveraigntie of any Prince, either in the first foundation or by continuance of time."

Given these historical and international antecedents, it is more than surprising that the Delaware General Assembly would impose the law merchant as a "gap filler" to the modern creation of the limited liability company.  More importantly, I expect that members, managers and others would be astonished to find that their relationships could be governed by trading practices developed by English and European merchants. However, the risk of this happening may not be high as I haven't found a single Delaware decision in which the court purports to apply the law merchant to an LLC pursuant to Section 18-1104.  Nor have I found any case applying the law merchant to a limited partnership pursuant to a similar provision in Del. Code Ann., tit. 6, § 17-1105.

The Uniform Commercial Code, of course, also incorporates the law merchant.  See, e.g., Cal. Comm. Code § 1103(b) and Del. Code Ann., tit. 6, § 1-103(b).  However, the UCC is concerned with commercial trade and was drafted against the background of historical trading customs and rules, including the law merchant.  The same is not true of the Delaware LLC Act.