The Unidroit Principles of International Commercial Contracts : A Governing Law? [1 ed.] 9789047440413, 9789004167896

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Tha UNIDROIT Prinoiplas of Intarnational Commaroial Contraots: A Governing Law?

David Oser

MARTINUS

NIJHOFF

PUBLISHERS

Library of Congress Cataloging-in-Publication Data

Oser, David. The UNIDROIT principles of international commercial contracts : a governing law? / David Oser. p. cm. Includes bibliographical references and index. ISBN 978-90-04-16789-6 1. Conflict of laws-Contracts. 2. Conflict of lawsCommercial law. 3. Export sales contracts. 4. Commercial law. I. International Institute for the Unification of Private Law. II. Title. K7350.084 2008 340.9'2-dc22 2008015764 Copyright © 2008 Koninklijke Brill NY, Leiden, The Netherlands. Koninklijke Brill NY incorporates the imprints Brill, Hotei Publishers, IDC Publishers, Martinus Nijhoff Publishers, and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Brill provided that the appropriate fees are paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. Manufactured in the United States of America

TABLE OF CONTENTS

Acknowledgments . . About the Author

ix xi

List of Abbreviations

XtlZ

Chapter 1: I.

1

Introduction

The UNIDROIT Principles of International Commercial Contracts: An Overview . . . . . . . . . . . . . . . . . . 1. Subject Matter and Scope of the First Edition of the UNIDROIT Principles . . . . . . . . . . . . . . . 2. The Method Adopted by the Working Group 3. UNIDROIT Principles 2004-The Second Edition of the UNIDROIT Principles of International Commercial Contracts . . . . . . . . . . . . . . . . . 4. Content and Structure of the UNIDROIT Principles (2004) . . . . . . . . . . . . . . . . . . . . . . . .

II. The

UNIDROIT

Principles-A Restatement of Law

1 1 3

5 6 11

III. Restatement of Law and Conflict of Laws

13

IV. Course of the Study . . . . . . . . . . . . .

16

Chapter 2: I.

The UNIDROIT Principles Before Arbitral Tribunals . . . . . . . . . . . . . . . . . .

The Debate About the Lex Mercatoria. . . . . . . 1. Courts' Recognition of Arbitral Awards Based the Lex Mercatoria . . . . . . . . . . . . . . . . 2. Statutory Recognition of a Choice of the Lex Mercatoria . . . . . . . . . . . . . . . . . . . . . 3. The Notion of "Rules of Law" . . . . . . . .

. on .

21

. .

23 26

II. Choice of the UNIDROIT Principles of International Commercial Contracts 1. Arbitral Practice . . . iii

19 19

27 28

iv • UN/DROIT Principles of International Commercial Contracts 2. The UNIDROIT Principles' Test in Enforcement Proceedings . . . . . . . . . . . . . . . . . . . . .

29

III. Specific Choice-of-Law Clauses and the Relevance of

the UNIDROIT Principles . . . . . . . . . . . . . . . 1. Exclusive, Express Choice of the UNIDROIT Principles as the Law Governing the Contract a. Article 1.6: "Issues Within the Scope of the Principles but Not Expressly Settled by Them Are as Far as Possible to Be Settled in Accordance With Their Underlying General Principles" . . . . . . . . . . . . . . . . . . . 1. Applicability of Article 1.6(2) . . . . . ii. "Within the Scope of the Principles" A Example: Set-Off Claims . . . . . . B. Limitation of Actions (Prescription) C. Conditions and Joint v. Several Liability . . . . . . . . . . . . . . . . . iii. The Methodology Underlying Article 1.6(2) in Identifying and Deriving General Principles and Specific Rules . . . . . . . b. Issues Beyond the Scope of the Principles: General Principles Underlying the UNIDROIT Principles Not Identifiable . . . . . . . . . . . i. The Doctrine of a Negative Choice of Law by the Parties . . . . . . . . . . . . . . . . .. ii. Choice of the UNIDROIT Principles and the Doctrine of a Negative Choice of Law . .. 2. The UNIDROIT Principles and the Parties' Reference to the Lex Mercatoria, General Principles of Law, General Principles of Equity, or the Like . . . . . . . . . . . . . . . . . . . . . . . . . . a. Overview of Doctrine and Arbitral Case Law b. Analysis of Doctrine and Arbitral Practice i. Reference to the Lex Mercatoria . . . . . ii. Reference to General Principles of Law, General Principles of Equity, or the Like . . . . . . . . . . . . . . . c. Conceptual Approach: A Proposal i. Lex Mercatoria . . . . . . . . . .

31 33

37 37 37

38 39 40

43

44

47 48

49 49

53 54

55 56 56

Table of Contents • v General Principles of Law or Equity . . . iii. Bridging the Gap Between the Two Concepts Through the General Principles of Law's Corrective Function . . . . . . .. iv. Conclusions . . . . . . . . . . . . . . . . .. 3. The UNIDROIT Principles and an Exclusive Choice of a Domestic Law by the Parties . . . . . . . . . 11.

IV. The Relevance of the UNIDROIT Principles Absent a Choice of Law . . . . . . . . . . . . . . . . . . . 1. Application of "Transnational Law" Before Publication of the UNIDROIT Principles . a. Recognition in Arbitral Practice b. Recognition in International Doctrine c. Statutory Recognition . . . . . . . . . . 2. The UNIDROIT Principles-Conclusions a. The UNIDROIT Principles as "Rules of Law" b. Scope of Application of the UNIDROIT Principles . . . . . . . . . . . . . . . . . . . . . 1. General Considerations . . . . . . . . . . 11. The Impact of Procedural Rules Prepared by Institutional Arbitration Organizations lll. Article 187 PlLA in Particular . . . . Chapter 3: I.

The UNIDROIT Principles Before State Courts . . . . . . . . . . . . . . . . . . .

The Parties' Choice of the UNIDROIT Principles as the Law Governing the Contract. . . . . . . . . . . . . . 1. Point of Departure . . . . . . . . . . . . . . . . . 2. The judiciary's Strict Obligation to Apply State Law .. . . . . . . . . . . . . . . . . . . a. Law as a Decree by the Sovereign 1. Trade Usages . . . . . . . . . . A. General Analysis . . . . . . B. Trade Usages and the UNIDROIT Principles . . . . 11. Judicial Lawmaking .......... A. General Analysis . . . . . . . . . . B. Judicial Lawmaking and the UNIDROIT Principles . . . . . . . . . . . . . . . . ..

57 59 59 60 61 61 61 62 62 64 64 65 65 67 68 71 71 71 76 76 77 77 80 81 81 84

vi • UN/DROIT Principles of International Commercial Contracts b. State Law as the Exclusive Guarantor of a Balanced Social and Economic Order . . . i. The UNIDROIT Principles as a Self-Contained, Coherent, and Balanced System of Law . . . . . . . . . . . . . . . A. The UNIDROIT Principles' Systematic Nature . . . . . . . . . . . . . . . . . B. The UNIDROIT Principles: Balancing the Parties' Competing Interests 11. The UNIDROIT Principles' Procedural Legitimacy. . . . . . . . . . . . . . . . 3. The Notion of "Law" in Conflict-of-Laws Rules on Party Autonomy . . . . . . . . . . . . . . . . . . .. a. The Evolution of and the Changing Rationale for the Principle of Party Autonomy. . . . .. i. General Analysis . . . . . . . . . . . . . . . ii. The Changing Rationale and the UNIDROIT Principles . . . . . . . . . . . . . . . . . . . b. Relativization of the Notion of Law Through Extensions of the Principle of Party Autonomy . . . . . . . . . . . . . i. The Instrument of Depe~age . . . A. General Analysis . . . . . . . B. Depe~age and the UNIDROIT Principles . . . . ii. Stabilization Clauses lll. Opt-in Clauses ... 4. Conclusions . . . . . . . . . II. The UNIDROIT Principles in the Absence of a Choice of Law as the Law Governing the Contract 1. Point of Departure . . . . . . . . . . . . . 2. Supplementation and Interpretation ... 3. The UNIDROIT Principles' Point of Entry: International Substantive Rules . . . . . . 4. International Substantive Rules: Permissibility De Lege Lata . . . . . . . . . .

a. Swiss Law . . . . . . . b. The Rome Convention

90

92 92 95 99 103 104 104 108 109 109 109 111 113 116 120 131 131 132 134 137 137 139

Table of Contents • vii Chapter 4: I.

The Limits of the UNIDROIT Principles' Application . . . . . . . . . . .

141

An Analysis of Article 1.4 in General

142

II. Article 1.4 and International Arbitration

146

III. Mandatory Rules of International Application-Displacement of Versus Interaction With the UNIDROIT Principles . . . . . . .

147

Chapter 5:

153

Summary and Conclusions

Bibliography

165

Index . . . .

179

ACKNOWLEDGMENTS

First and foremost I would like to express my gratitude to Prof. Dr. Dr. h.c. Frank Vischer, who introduced me to the intricacies of conflicts of laws and from whom I learned a great deal about practicing law. Without his encouragement and his support, this project would not have been initiated and not brought to an end. I must also thank the Swiss National Fund for Scientific Research and the Janggen-Pohn Foundation, whose financial support was essential for the success of this project. Their support made it possible for me to pursue a Master of Laws degree at Columbia University School of Law, where at the time Prof. Michael J. Bonell-chairman of the working group preparing the UNIDROIT Principles-happened to teach a class on international commercial contracts. My studies at Columbia Law School, as well as my subsequent experience as a practicing lawyer at a large New York law firm, had a great impact on the theses advocated in this book. A special thanks goes of course to my family, Andrea, Lena, and Emma, for their patience until this project finally came to fruition. The Law School of the University of Basel (Junstische Fakultiit) accepted this book as a doctoral thesis in June 2007. David Oser Zurich, December 2007

ix

ABOUT THE AUTHOR

David Oser is a Swiss and U.S. qualified lawyer practicing at the law firm of Homburger in Zurich, Switzerland. His practice focuses on domestic and international mergers and acquisitions, and on capital market transactions. Before joining Homburger, he was an associate at a leading U.S. law firm. David Oser graduated from Columbia Law School with an LL.M. degree and received a doctoral degree in law (summa cum laude) from the University of Basel, Switzerland. He is the co-author of one of the leading Swiss treatises on the conflict of laws of contracts (Internationales Vertragsrecht (2000)) and published articles on mergers and acquisitions and corporate law matters.

xi

LIST OF ABBREVIATIONS

AAA

American Arbitration Association

A.C.

Law Reports, Appeal Cases (England)

AG

Die Aktiengesellschaft (periodical)

AJP

Aktuelle Juristische Praxis

ALI

American Law Institute

AlIE.R.

All England Reports

A.L.R.

Australian Law Report/American Law Reports

AM.

J.

COMPo L. American Journal of Comparative Law

AM. REv. INT'L

American Review of International Arbitration

ARB.

ANN. INST. DR. INT'L

Annuaire de l'Institut de Droit International

ANN. SURV. INT'L & COMPo L.

Annual Survey of International and Comparative Law

ARB.

INT'L

ARCH. PHIL.

Arbitration International DR. Archives de Philosophie du Droit

J. INT'L & Arizona Journal of International and COMPo L. Comparative Law

ARIZ.

BGB

Biirgerliches Gesetzbuch of August 18, 1896, as amended (Germany)

BGE

Entscheidungen des Schweizerischen Bundesgerichts

BGH

Bundesgerichtshof (Germany)

BYIL

British Yearbook of International Law

c.i.c.

culpa in contrahendo

CAM

Centro de Arbitraje de Mexico xiii

xiv • UN/DROIT Principles of International Commercial Contracts

CaS

Causa Sport

CISG

U.N. Convention on Contracts for the International Sale of Goods of April 11, 1980

CMR

Convention relative au contrat de transport international de marchandises par route de 19 mai 1956 (Convention on the International Transportation of Goods)

Corte di Casso

Corte di Cassazione (Italy)

Cour Casso

Cour de Cassation (France) European Court of Justice

EGBGB

Einfuhrungsgesetz zum Burgerlichen Gesetzbuch

EU

European Union

EUR. J.L. REF.

European Journal of Law Reform

European Principles

Principles of European Contract Law

EuZW FIFA

Europaische Zeitschrift fur Wirtschaftsrecht Federation Internationale de Football Association (International Federation of Football Association)

FORDHAM L. REv.

Fordham Law

GPR

Zeitschrift fur Gemeinschaftsprivatrecht

RR

Roge Raad (The Netherlands)

ICC

International Chamber of Commerce

IClAIC

Inter-American Convention on the Law Applicable to International Contracts of March 17, 1994

I.L.M.

International Legal Materials

IND. J. GLOBAL LEG. STUD.

Indian Journal of Global Legal Studies

INT'L Soc. SCI.

International Social Science Journal

J. INT'L & COMPo L.Q.

International & Comparative Law Quarterly

ECJ

Re~ew

List of Abbreviations • xv IPR

In ternationales Privatrech t

IPRAx

Praxis des Internationalen Privat- und Verfahrensrech ts

IPRG

Bundesgesetz iiber das Internationale Privatrecht of December 18, 1987 (Switzerland), as amended

J. J. J.

CONT.

DR.

L.

INT'L

INT'L ARB.

Journal of Contract Law Journal de Droit International (Clunet) Journal of International Arbitration

JBL

Journal of Business Law

JW

Juristische Woche

L.Q. REv.

Law Quarterly Review

LAw & POL'y

Law and Policy of International Business

INT'L

Bus.

LCIA

London Court of Arbitration

LG

Landesgericht

LJ

Lord Justice

LLOYDs'

L. REp. Lloyds Law Reports

L. REv.

M&A

Loyola Law Review Mergers & Acquisitions

MEALEY'S INT'L

Mealey's International Arbitration Report

Loy.

ARB.

REp.

NJ

Nederlandse Jurisprudentje

NJB

Nederlands Juristenblad

OJ.

Official Journal

OGH

Oberster Gerichtshof (Austria)

OLG

Oberlandesgerich t (Germany)

PILA

Swiss Private International Law Act of December 18, 1987, as amended

Pra

Die Praxis des Bundesgerichts (Switzerland)

QB

Law Reports, Queens Bench Division

RABELSZ

Rabels Zeitschrift fiir ausHindisches und internationales Privatrecht

xvi • UNIDROIT Principles of International Commercial Contracts

REc. DES COURS Recueil des Cours de l'Academie de droit in ternational REv. D'ARB.

Revue d'Arbitrage

REv. CRIT. DR. INT'L PRIVE

Revue Critique de Droit International Prive

REv. DR. INT'L

& DR. COMPo

Revue de Droit International and Droit Compare

RG

Reichsgericht (Germany)

RIv. DIR. INT. PRIVE PROC.

Rivista di diritto internazionale privato e processuale

R1W

Recht der Internationalen Wirtschaft

Rome Convention

Rome Convention of June 19, 1980, on the Law Applicable to Contractual Obligations

Rt. Hon.

Right Honorable

sC. SIA

scilicet Schweizerischer Ingenieur- und Architekten-Verein (Swiss Association of Engineers and Architects)

SJ SZIER

Semaine Judiciaire

TEX. INT'L LJ.

Texas International Law Journal

Schweizerische Zeitschrift fUr internationales und europaisches Recht

TuL. J. INT'L & Tulane Journal of International and Comparative Law COMPo L. TuL. L. REv. UCC

Tulane Law Review U.S. Uniform Commercial Code

UCP

ICC Uniform Customs and Practice for Documentary Credits

UNCITRAL

United Nations Commission on International Trade

UNIDROIT

International Institute for the Unification of Private Law

UNIDROIT Principles

Unidroit Principles of International Commercial Contracts (1994 or 2004, as the case may be)

List of Abbreviations • xvii UNIF. L. REv.

Uniform Law Review

VAND. J. TRANSNAT'L L.

Vanderbilt Journal of Transnational Law

W.L.R.

Weekly Law Reports

WTO

World Trade Organization

Y.B. COMM.

Yearbook of Commercial Arbitration

ZEuP

Zeitschrift fur Europaisches Privatrecht

ZfRV

Zeitschrift fUr Rechtsvergleichung

ZVgIRWiss

Zeitschrift fUr Vergleichende Rech tswissenschaften

ARB.

CHAPTER 1

INTRODUCTION

I.

THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS: AN OVERVIEW

1. Subject Matter and Scope of the First Edition of the UNIDROIT Principles The International Institute for the Unification of Private International Law (Institut International Pour l'Unification Du Droit Prive, hereinafter UNIDROIT), which is located in Rome, is an independent inter-governmental institution that examines ways to harmonize and coordinate the private law of states and groups of states in preparation for the application of uniform private law. 1 In May of 1994, UNIDROIT published an official text: "The Principles of International Commercial Contracts" (hereinafter the "UNIDROIT Principles" or "Principles").2 Consisting of a Preamble, 119 articles, and divided into seven chapters,3 the 1994 edition spelled out, in a style of codifications familiar to the European lawyer, the basic rules of general contract law for international 1 Generally on the International Institute for the Unification of Private International Law, see UNIDROIT-FORTYYEARS OF SERVICE IN THE CAUSE OF THE UNIFICATION OF LAw 1926-1966 7 et seq. (1966). 2 As to origin and preparation of the UNIDROIT Principles, see MICHAEL JOACHIM BONELL, AN INTERNATIONAL RESTATEMENT OF CONTRACT LAw (3d ed.

2005). 3 The Principles published in 1994 have since been updated. The amended version appeared in 2004 and now includes, together with the Preamble, 185 articles. For an overview of the 2004 version of the Principles, see supra § I.3 and more generally Michael Joachim Bonell, Unidroit Principles 2004-The New Edition of the Principles of International Commercial Contracts adopted by the International Institute for the Unification of Private Law, UNIF. L. REv. 5 (2004).

1

2 • UNIDROIT Principles of International Commercial Contracts

business. The "codification" is-also after its revision in 2004 (see Section 1.3 below)-not meant to usurp any existing national contract laws. The UNIDROIT Principles are designed to create the relevant contract law for international business transactions4 that are not exclusively rooted in a national order but implicate, in some way, another legal regime. In both the 1994 and the 2004 versions, the concept of

"international" is to be given the widest meaning, so those cases where no international element is involved are ultimately excluded. 5 In addition, their scopes are limited to "commercial" contracts to exclude "consumer contracts" or contracts where one party is not acting in the course of its trade or profession. 6 The UNIDROIT Principles reflect the needs of the international trading community, aiming for specific solutions with an international commercial setting in mind, something that national laws do not achieve. In their desire to exclusively govern international commercial contracts, the UNIDROIT Principles are different from similar rules published around the same time, namely, the "Principles of European Contract Law" (hereinafter the "European Principles").7 The European Principles were released in three installments in UNIDROIT Principles, Preamble para. 1. UNIDROIT-INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAw, UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 2004, at 2 (2004). 4

5

6Id. 7 As to the European Principles, compare, in particular, FRIEDRICH BLASE, DIE GRUNDREGELN DES EUROPAISCHEN VERTRAGSRECHTS ALS RECHT GRENZUBERSCHREITENDER VERTRAGE 9 et seq. (2001); see also Friedrich Blase,

Leaving the Shadow far the Test of Practic~On the Future of the Principles ofEuropean Contract Law, http://wwwJus.uio.no/lm/leaving.the.shadow.for.the.test.of. practice.future.of.pec1.1999.friedrich.blase/sisu_manifest.htm1 at sec. 2; OLE LANDO & HUGH BEALE EDS., THE PRINCIPLES OF EUROPEAN CONTRACT LAW PART I AND II, PREPARED BY THE COMMISSION OF EUROPEAN CONTRACT LAw (1999); Katharina Boele-Woelki, European and Unidroit Principles of Contract Law, in EUROPEAN PRIVATE INTERNATIONAL LAW 70 et seq. (Bernd von Hoffmann ed., 1998); Katharina Boe1e-Woelki, Principles and Private International Law-The

Unidroit Principles and the Principles ofEuropean Contract Law: How to Apply Them to International Contracts, UNIF. L. REv. 652 (1996); OLE LANDO, THE

HARMONIZATION OF EUROPEAN CONTRACT LAw THROUGH A RESTATEMENT OF PRINCIPLES 22 et seq. (1997).

Introduction • 3 1995,82000,9 and 2003 10 by the Commission on European Contract Law. The Commission is a private organization founded by Ole Lando in 198211 to work out common principles of contract law for the countries of the European Communities. The European Principles' principal aim is not to provide the international trading community with a clear and balanced framework for their transactions, but rather to provide general rules of contract law that someday may replace their counterparts in the member countries. 12 Whether it is a cross-border or a domestic transaction does not matter, and it is therefore consequent, as the European Principles do, to include consumer contracts. In this study, the European Principles will be referred to only occasionally, as the study'S focus is on international transactions and the law applicable to it.

2. The Method Adopted by the Working Group The UNIDROIT Principles are the product of a group of legal experts and scholars, some of whom were also high-ranking judges or civil servants, assembled under the umbrella of the UNIDROIT. They represented the major legal and socio-economic systems of the 8 Containing the chapters on general provisions, terms and performance of the contract, non-performance of the contract, non-performance and remedies in general, and particular remedies for non-performance. 9 Revising some of the previous chapters and adding chapters on the authority of agents, validity, interpretation, and contents and effects. !O Containing additional chapters on plurality of parties, assignment of claims, substitution, transfer of contracts, set-off, prescription, illegality, conditions, and capitalization of interests. 11 See Ole Lando, Principles of European Contract Law, 56 RABELSZ 1 (1992). 12 See Blase, supra note 7, at sec. 4; see also Oliver Remien, Die UNIDROITPrinzipien und die Grundregeln des Europiiischen Vertragsrechts-ein vergleichender Blick, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 65, 66 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). The European Principles share that goal with another project, the European Contract Code prepared by the Pavia Group around Guiseppe Gandolfi; for the various efforts currently being undertaken with a focus on the situation within the European Union, see, for example, HOUSE OF LORDS, EUROPEAN UNION COMMITTEE, 12TH REpORT OF SESSION 2004-05, EUROPEAN CONTRACT LAW-THE WAY FORWARD? REpORT WITH EVIDENCE, at 13 et seq. (2005).

4 • UNIDROIT Principles of International Commercial Contracts world. 13 The UNIDROIT Working Group's members' contributions were personal. No one represented government interests. 14 The Principles are inspired by existing domestic laws and international conventions, with emphasis on more recent codifications or compilations oflaw, such as the U.S. Uniform Commercial Code (UCC), the U.S. Restatement (Second) of the Law of Contracts, the drafts of the new Dutch Civil Code and of the new Civil Code of Quebec, and, naturally, the Vienna Convention on the International Sale of Goods (CISG).15 However, as emphasized by those involved in the preparation of the Principles,16 its rules and principles were not drafted by slavishly restating the m~ority position contained in domestic legal systems or international conventions under consideration. The working method foremost encompassed a comparison of various legal systems in light of their adequacy for the special needs of international trade practice. As a result, some of the provisions reject traditional, long-established principles in favor of more recent developments or even take a step further by modifying existing or creating entirely new rules. Examples of this latter approach are, for instance, the provisions on: (1) the' 'battle of forms" (Article 2.22), which for the case of conflicting standard terms takes a conciliatory stance between the two extremes of there being no contract at all or then exclusively on the terms of the party "firing the last shot," by stating that a contract is concluded on the basis of the individual terms and those standard terms they have in common; (2) public permissions (Article 6.1.14 et seq.), which determine which party is obliged to take the necessary measures to obtain a public permission and what the consequences of a delay or a refusal of the permission are; or (3) hardship (Article 6.2.1 et seq.), with detailed procedures 13 See UNIDROIT, supra note 5, at x (in relation to the 2004 edition of the Principles) and xviii (in relation to the 1994 edition of the Principles); for further details on the composition of the working groups responsible for the preparation of the UNIDROIT Principles, see BONELL, supra note 2, at 28 et seq. 14 See UNIDROIT, supra note 5, at xiv. 15 BONELL, supra note 2, at 32 et seq. 16 See id. at 47 et seq.; if. also Roy Goode, Usage and its Reception in Transnational Commercial Law, 46 INT'L & COMPo L.Q. 1, 19 et seq. (1997); Maria del Pilar Perales Viscasillas, Unidroit Principles of International Commercial Contracts: Sphere ofApplication and General Provisions, 13 ARIz. J. INT'L & COMPo L. 383, 404 et seq. (1996).

Introduction • 5

all of which are designed to uphold the contract to the fullest extent possible.1 7 3. UNIDROIT Principles 2004-The Second Edition of the UNIDROIT Principles of International Commercial Contracts

In 2004, the Governing Council of the UNIDROIT approved a new enlarged version of the UNIDROIT Principles. IS With very few exceptions, the focus of the second edition was on overcoming gaps rather than on revising existing rules. Topics added to the 2004 edition were adopted based on the same methodology as those of its 1994 predecessor. Again, the drafters did not stop at the existing rules of law in the areas newly included in the new version of the Principles. For example, on the topic of agency, while principally following the model of the 1983 Geneva Convention on Agency in the International Sale of Goods and rejecting the distinction found in many civil law systems between direct and indirect representation and instead relying on whether the agency was disclosed or not, the rules depart from that model in that, even in case of default of the agent, the undisclosed principal does not have a direct right of action against the third party.19 These new provisions, as well as the other new articles introduced in the 2004 edition, are part of the summary below. 20 For further examples, see supra § 1.3. See Bonell, supra note 3, at 5 et seq.; Michael Joachim Bonell, Unidroit Principles 2004-A Further Step Towards a Global Contract Law, UCC LJ. 49 (2004); EckhardtJ. Br6dermann, Die erweiterten Unidroit Principles 2004, RIW 721 (2004); Viola Heutger, Unidroit Principles of International Commercial Contracts 2004, 13 EUR. REv. PRIV. L. 83 et seq. (2005); Peter Schlechtriem, Die Unidroit Grundregeln der internationalen Handelsvertriige 2004, in KODIFIKATION, EUROPAISIERUNG UND HARMONISIERUNG DES PRIVATRECHTS 31 et seq. (Blaho & Svidron eds., 2005). 19 Bonell, supra note 3, at 21. 20 For a synoptic overview of the 1994 and the 2004 edition of the UNIDROIT Principles, see Thomas Probst, The UNIDROIT Principles of International Commercial Contracts 1994 and 2004: A Brief Introduction with a Synoptic Overview, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 17 et seq. (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). One may anticipate that further editions will appear; see Michael Joachim Bonell, The UNIDROIT Principles a Decade After 17

IS

6 • UN/DROIT Principles of International Commercial Contracts 4. Content and Structure of the UNIDROIT Principles (2004) The first chapter of the UNIDROIT Principles contains basic legal notions and principles that deal with such fundamentals as freedom of contract, freedom of form and proof, pacta sunt servanda, good faith and fair dealing, inconsistent behavior, or the relevance of usages and trade practices in international trade. The following nine chapters include provisions relating to the conclusion of contracts,21 including the authority of agents ("Formation and Authority of Agents"), the effects of contracts ("Validity"), construction and interpretation of contractual stipulations ("Interpretation"), the contents of contracts and third party rights ("Contents and Third Party Rights"), performance ("Performance"), non-performance (breach) of contract and remedies for non-performance ("Non-Performance"), set-off ("Set-off'), assignment of rights, assumption of obligations and assignment of entire contractual relations ("Assignment of Rights, Transfer of Obligations, Assignment of Contracts"), and finally extinctive prescriptions ("Limitations Periods"). The "black-letter-rules" are complemented by short commentary-like explanations and, occasionally, explanatory illustrations. They form an integral part of the Principles. 22 The Principles do not, however, indicate what the sources were that the drafters of a particular rule or principle drew their inspiration from. The Principles thus do not have comparative references to existing statutory provisions of domestic laws, international conventions, or arbitral or judicial sources after which the rules and principles of the UNIDROIT Principles were modeled. In that respect, the First Appearance: What Have They Achieved and What are Their Prospects for the Future?, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 259, 261-62 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). 21 The 2004 edition adapted certain provisions in that chapter to the practice of electronic contracting. In Articles 1.2 and 2.1.18 the term "writing" is no longer used; instead the term is replaced by "a particular form;" in Article 2.1.8(1) any specific reference to telegrams or letters was deleted so as to cover all means of communications. The comments and illustrations further include situations specific to electronic contracting. 22 BONELL, supra note 2, at 62.

Introduction • 7 Principles are different from the U.S. Restatement (Second) of the Law of Contracts. 23 The Restatement contains "notes" that evidence the authorities on which a particular rule is based. The drafters of the Principles have intentionally refrained from doing so to emphasize the Principles' international character and detachment from any legal system of national origin, a trait reinforced by an effort to deliberately seek to avoid using terminology peculiar to any given domestic legal system. 24 UNIDROIT

While the vast majority of the rules are of a default nature, some of the Principles' provisions are mandatory, that is, the parties cannot derogate from these provisions if the contract is governed by the Principles. This is sometimes characterized by the phrase "The parties may not exclude or limit this duty" (Article 1.7 (2) ). This foremost covers the general principle of good faith and fair dealing but then is expanded to rules emanating from this general principle, such as a party's right to avoid a contract in case of fraud (Article 3.8 and Article 3.19), in case of threat (Article 3.9 and Article 3.19) or where contract terms give an unfair advantage to the other party (Article 3.10 and Article 3.19), the reduction of grossly excessive payments for non-performance (Article 7.14.13(2)) or unilaterally set excessive prices (Article 5.7 (2)), or the limitations on exemption clauses (Article 7.1.6). In addition, certain rules included in the second edition of the UNIDROIT Principles are mandatory by their very nature, such as the rules on incongruent behavior (Article 1.8) and limitation periods (Article 10.3). The particular rules of the UNIDROIT Principles are guided by a few fundamental, overarching principles. One particular characteristic of many provisions contained in the Principles is the attempt to uphold the contract whenever possible. Emanations of this "favar contractus" are, to mention just the more innovative ones, the principles on modifications of contractual terms through sending a confirmation after conclusion of the contract (Article 2.1.12), the validity of a contractual agreement without consideration (Article See Detlev F. Vagts, Harmonizing Divergent Laws: the American Experience, L. REv. 711 (1998); see also Richard Marty, Conflits d'application entre les principes d'Unidroit et la loifrancaise applicable au contrat, DALLOZ AFFAlRES 97, 101 23

UNIF.

(1997). 24

See

BONELL,

supra note 2, at 65.

8 • UNIDROIT Principles of International Commercial Contracts 3.2), the principles on renegotiation in the event of hardship (Article 6.2.1 et seq.), or excuse of performance in the event of force majeure (Article 7.1.7). Other fundamental, equally important ideas underlying the UNIDROIT Principles are: freedom of contract, expressed in its purest form in Article 1.1 ("The parties a free to enter into a contract and determine its content") and elaborated on in subsequent provisions, in particular Article 1.5, which states that "[t]he parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles;" the Principles' openness to usages and trade practices-the Principles recognize trade usages may be binding even absent an explicit agreement by the parties, provided the usage is widely known to, and regularly observed in, international trade by parties in the particular trade concerned (Article 1.8(2)); the various requirements of observance of good faith and fair dealing, including a limited duty to negotiate in good faith (Article 2.15); and their tendency to police the parties' bargaining behavior, as in Article 3.8 and Article 3.9 on fraud and threat, or the substance of the agreement in case of marked unfairness, as in Article 3.10 according to which a party may avoid the contract or an individual term of it if the contract or term unjustifiably gave an excessive advantage to the other party. It is not only through provisions directly dealing with procedural and substantive fairness that the UNIDROIT Principals try to achieve a balanced solution. In addition, the Principles rely on a drafting technique that makes full use of innovative opening devices such as reasonableness, unfairness, or circumstances of the case,25 thus leaving plenty of room to take account of the particulars of the situation. For example, the innovative provision on trade usages mentioned earlier, which in some circumstances mandates the application of trade usages even though they have not been expressly incorporated into the contract (Article 1.8(2)), is tempered by a proviso that authorizes an arbitrator or judge to deny effect to a usage because of its "unreasonableness." This technique is remarkable for a body of rules whose stated purpose is to serve as a sort of new "jus commune" of the international trade community. 25 Not surprisingly, this very fact is criticized; see, e.g., Hernany Veytia, The Requirement ofJustice and Equity in Contracts, 69 TUL. L. REv. 1191, 1195 (1995).

Introduction • 9

Classical trade law, as reflected in trade practices and prefixed contract terms elaborated by trade associations, is less concerned with the equity or fairness of its rules, but rather contents itself with ensuring an efficient international trade. To this end, it generally relies on clear-cut rules that avoid any doubts as to their application in an individual situation. On the whole, the substance of the UNIDROIT Principles has found very favorable reception worldwide. 26 There are only few rules that have been exposed to substantial criticism. Perhaps most controversial has proved Article 7.2.4, which authorizes a court ordering a party to specific performance (for both a monetary and delivery obligation) to also direct this party to pay a penalty if it does not comply with the order.27 The provision is inspired by the French astreinte, unknown in other legal systems, particularly in the common law, and therefore thought inappropriate for a set of rules like the UNIDROIT Principles. Of particular concern to its critics is the fact that the penalty is to be paid to the creditor (unless the law of the forum provides otherwise). It is feared that courts might be tempted to award disguised punitive damages, notwithstanding the unavailability of punitive damages in the contractual setting in U.S. contract law. Oliver Remien 28 has rightly pointed out though that under Article 7.2.4, the right of a creditor to receive the penalty is subject to the mandatory provisions of the lex fori. In addition, while the rule aims at increasing the power of international arbitration tribunals, ultimately, the recognition and enforcement will be subject to the review of the competent courts. 26 Bone1l, supra note 3, at 21; generally critical with respect to the contents of the UNIDROIT Principles, Richard Hill, A Businessman's View of the Unidroit Principles, 13 J. INT'L ARB. 163 (1996); see also Imtyaz M. Sattar, The Unidroit Principles of International Commercial Contracts and the lVI'o: Between an "International Restatement" and a "Globalization" of Contract Law? A Review of an International Restatement of Contract Law, 5 IND. J. GLOBAL LEG. STUD. 375 (1994).

Sometimes it is criticized that the Principles do not provide for more rules specific to certain contracts; see, e.g., Philippe Kahn, Les contrats internationaux de cooperation scientijique et technique inter-entrepnses face aux Principes d'Unidroit, UNIF.

L. REv. 519, 524 (1998).

27 Cf Ingeborg Schwenzer, Specific Performance and Damages According to the 1994 Unidroit Principles of International Commercial Contracts, 1 EUR. J.L. REF. 289, 302 (1998/1999). See also SVEN SCHlLF, ALLGEMEINE VERTRAGSGRUNDREGELN ALS VERTRAGSSTATUT 108 (2005). 28 Remien, supra note 12, at 74.

10 • UNIDROIT Principles of Intemational Commercial Contracts

Other criticism is more technical. For example, it has been said that Article 7.2.1, read literally, would entitle a party to request payment independently of whether it is capable of performing its own obligation. 29 It is doubtful whether a court or arbitral tribunal would indeed have to arrive at this conclusion. There are sufficient corrective tools in the Principles themselves, in particular the general principle of good faith according its Article 1.7, to ensure an appropriate outcome in the individual case. There is no need to revert to the domestic law applicable by reference to the relevant conflict of laws rule. 30 Another rule that has been exposed to objections is Article 7.4.2(2), according to which a party may request compensation for non-pecuniary harm. 31 Mostly it is held that this rule goes beyond what is recognized in most domestic laws and that it will be emminenly difficult to value non-pecuniary harm in monetary terms. 32 Other provisions against which fundamental criticism has been leveled are those dealing with behavioral or substantive fairness of the contract. Some have criticized that they would go too far and allow for avoidance of a contract in situations not warranted for; others seem to take exception to provisions aiming to achieve a fair balance of the contract in general,33 At the heart of these objections is the view that international business law ought not to be concerned with the equity of a particular contract or dispute, but rather with the efficiency and expediency of international trade. To proponents of this view, a rule like Article 3.10-which in some circumstances allows a party to avoid the contract because it has been excessively disadvantaged, or Article 6.2.1 et seq. on hardship, which in the event of a fundamental disequilibrium of the contract provide for renegotiation and, in some circumstances, for termination or adaptation of the contract-are anathema and perceived as too 29

SeeSchwenzer, supra note 27, at 295. Cf. aisoScHILF, supra note 27, at 106 et

seq.

But see SCHILF, supra note 27, at 107. Jiirgen Basedow, Die Unidroit Prinzipien der intemationalen Handelsuertriige und das deutsche Recht, in GEDACHTNISSCHRIFT FUR ALEXANDER LUDERITZ 21 (Haimo Schack ed., 2000). 32 See SCHILF, supra note 27, at llS. 33 Cf. Veytia, supra note 25. 30

31

Introduction • 11 great a risk to an efficient conduct of international business transactions. As will become clear from the further course of this study, these worries are false. On the contrary, it is only the UNIDROIT Principles' aim to ensure equity that makes it at all feasible for them to become operative in the way the drafters intended them to.

II. THE UNIDROIT PRINCIPLES-A RESTATEMENT OF LAW Enthusiasm for the Principles has been significant. They have been the subject of numerous scholarly writings and, more noteworthy, have made their entry into arbitral and judicial proceedings. 34 This is all the more remarkable considering their most striking feature: The UNIDROIT Principles have not been clad in the form of an international convention or similarly binding instrument. They present themselves as a "restatement of law," though, as mentioned, not being developed by simply copying existing national rules, but by an innovative comparison of the leading systems of contract law. The Principles thus do not have binding force by their very nature. They are not rooted in public international law or governmental authority. Their authority rests solely on the standing of the preparing institution, the UNIDROIT, and on the quality of the rules they propose. 35 The Principles thus take up a model first initiated earlier last century by the American Law Institute (ALI),36 an institute founded in 1923 by the American Bar Association in conjunction with judges and law teachers, and transpose it from a purely national to a global level. The present state of affairs in the field of international commercial transactions indeed lends itself to such an analogy. U.S. lawyers,judges, and scholars in the late 1920s were unsatisfied with the cumbrousness and inconsistency of the ever-increasing number of precedents of the various states and therefore set out to distill the 34 See infra Chapters 2 and 3. 35 See, for a more detailed account of this aspect, BONELL, supra note 2, at 9 et seq.; KLAus PETER BERGER, THE CREEPING CODIFICATION OF THE LEx MERCATORIA 143 et seq. (1999); Boele-Woelki, supra note 7, at 67 et seq. 36 Cf E. ALLAN FARNSWORTH & WILLIAM F. YOUNG, SELECTIONS FOR CONTRACTS 89 (1998); Thomas Schindler, Die Restatements und ihre Bedeutungfiir das Privatrecht, ZEuP 277 (1998).

12 • UNIDROIT Principles of International Commercial Contracts

existing case law into general, abstract rules, thereby necessarily making a selection among the different approaches offered by the various state laws. 37 Similarly, despite numerous efforts to harmonize the rules applied to international commercial transactions, in particular by means of adopting international conventions, these rules paint a similarly unsatisfactory picture. The means of unification through adoption of international conventions has considerable deficiencies. 38 The conventions are, by their nature, very selective and fragmentary, confined to a particular area of law. Not only does this approach automatically lead to inconsistencies and incongruities, above all, it does not satisfy the genuine need in international trade for direct access to a legal framework containing the basic general rules common to all commercial transactions, irrespective of their legal qualification. 39 Those questions are still to be solved by a complicated conflict-of-Iaws reference to national legal systems, which are by virtue of their national origin not tailored to the exigencies of cross-border transactions. Although, undoubtedly, many will accept the almost axiomatic thesis that national laws are not well suited to international commercial transactions,40 that rules of private international law at best should play a transitional role,41 and that parties to an international commercial contract would be better off if their relations were governed by a set of international substantive rules,42 as many will wonder about the approach the drafters of the 37 KURT ZWEIGERT & HEIN KC)TZ, AN INTRODUCTION TO COMPARATIVE LAW 251 (3d ed. 1998). 38 Cf, e.g., Stefan Leible, Aussenhandel und Rechtssicherheit, 97 ZVgIRWiss 286, 309 et seq. (1998); Hans-Joachim Mertens, Nichtlegislatorische Rechtsvereinheitlichung durch transnationales Wirtschaftsrecht und Rechtsbegriff, 56 RABELSZ 219, 220 et seq. (1992). 39 Cf Mertens, supra note 38, at 220 ("nicht bedarfsgerecht"). 40 Michael Joachim Bonell, Das autonome Recht des Welthandels-Rechtsdogmatische und rechtspolitische Aspekte, 42 RABELSZ 485, 497 (1978); Ole Lando, Some Issues Relating to the Law Applicable to Contractual Obligations, 7 KING'S C. LJ. 55, 62 (1996/1997); Hans Stoll, Rechtliche Inhaltskontrolle bei internationalen Handelsgeschiijten, in FESTSCHRIFT FUR GERHARD KEGEL ZUM 75. GEBURTSTAG 623, 637 (Hans-Joachim Musielak & Klaus Schurig eds., 1987). 41 Frank Vischer, The Relevance of the Unidroit Principles for Judges and Arbitrators in Disputes Arising out of International Contracts, 1 EUR. J.L. REF. 203, 216 (1998/ 1999). 42 Lando, supra note 40, at 74.

Introduction • 13

UNIDROIT Principles have chosen. Why did they prepare a non-binding instrument instead of presenting to the community of nations an international convention open for signature? The aversion against a unification of general contract law by "legislative" means bears upon several considerations. A primary concern is that it is highly uncertain the ambitious project would have worked at a diplomatic level. Experiences from previous occasions have shown that unsatisfactory compromises are inevitable. The drafters moreover were well aware of the risk that the instrument could share the fate of various international conventions that have, for many reasons, never come into force. Even more importantly, however, the drafters have rightly recognized that the advantage of harmonization by way of a convention goes along with a certain degree of "ossification," that is, a non-responsiveness to the need to revise the law as times change. 43 "Unification by non-legislative means" avoids many of these shortcomings. The success of the UNIDROIT Principles is not dependent on the willingness of states to adopt them. Decisive is, in the long run, the acceptance the Principles enjoy with the interested business communities. Their character as a restatement almost by itself implies that it is a continuous and progressive endeavor. Newly emerging topics may be included; existing provisions may be revised and redrafted at any time. The working method UNIDROIT has chosen, to assemble an independent group of experts in the field of contract and international trade law, expressing their personal views, unaffected by an official mandate to represent the interest of a particular government, ensures that this vital task can be achieved within a reasonable time in an efficient manner.

III. RESTATEMENT OF LAW AND CONFLICT OF LAWS To embark upon the project of an international restatement would, however, have made little sense if not rooted in the deep conviction that notwithstanding its non-binding character, it could achieve its very purpose: to provide contracting parties with international substantive rules and thus cut short the fallback to 43 See BONELL, supra note 2, at 17 (with numerous references); besides the authors cited supra note 38, see also Frank Vischer, General Course on Private International Law, 232 REc. DES COURS 13, 134 (1992).

14 • UN/DROIT Principles of International Commercial Contracts conflict-of-Iaws rules that generate references to national laws varying in content and thus suitability to govern these relations. The drafters therefore needed to decide how the Principles could be transformed from a mere academic endeavor to the "real" world of international contract law. In view of their modeling after the V.S. Restatements of Law, one would have expected the Principles to be conceived as operating primarily within the framework of the otherwise applicable domestic law, in interpreting and supplementing it, in the same way as the V.S. Restatements have been influencing the courts in their adjudication of common-law-based claims.44 However, measured by the order of priority as laid down in the Preamble, the drafters of the Principles have taken a different route. Primary addressees to ensure that the Principles are applied are the parties to international commercial contracts, not the courts. The parties' agreement that their contract be governed by the Principles is the pivotal ground for an application of the Principles. The Preamble distinguishes between an express choice of the Principles45 and choice of "general principles of law," the "lex mercatoria," or the like 46 as the governing law. In the first instance, the Principles "shall be applied," whereas in the latter the Principles "may be applied," leaving it for the adjudicating body to decide whether the Principles may be regarded as an expression of the general principles of law or the lex mercatoria. Only after another conflict-of-Iaws-related ground for application, the impossibility of establishing the relevant rule of the applicable law and the absence of an express choice of law,47 the 44 For a comparison of the UNIDROIT Principles with the U.S. Restatements, see, for example, Arthur Rosett, Unification, Harmonization, Restatement, Codification and Reform in International Commercial Law, 40 AM. J. COMPo L. 683 (1992); the national reports of the United States by Arthur Rosett & Michael Wallace Gordon and the national reports of Denmark by Joseph Lookofsky, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 387, 389, and 71, 72, respectively (Michael Joachim Bonell ed., 1999). 45

UNIDROIT Principles, Preamble para. 2.

46

Id., Preamble para. 3.

47 Id., Preamble para. 4; note that the wording of paragraph 4 has been revised in the 2004 edition. In the 1994 version, this paragraph made the Principles applicable if it was impossible to establish the relevant rule of the applicable law; under the 2004 version, the Principles can now become

Introduction • 15 Preamble recognizes the role the UNIDROIT Principles may play in interpreting and supplementing existing contract rules in the 1994 version in the limited context of international uniform law instruments and, since the 2004 revision, also in the context of domestic law. 48 What is the cause of this marked difference between the original U.S. model and its international offspring? Why is it the ALI never even approached the vehicle of choice-of-Iaw rules in order to promote its work? Why is it the drafters of the UNIDROIT Principles express a certain reluctance toward a court administered case-by-case application of the UNIDROIT Principles, considering the drafters' apparent belief that the Principles' solutions are better suited to international transactions? Some explanation is already at hand. The barrier to the entry of the Restatement (Second) of Contract's rules into the realm of "applied law" is arguably low. The U.S. Restatement operates within the boundaries of the United States' 50 state jurisdictions. The variations between states in contractual aspects are narrow. All states share a common heritage traceable to England, which has led to a high similarity both in content and, above all, in style. 49 Courts have traditionally been the driving force in adapting the law to new developments and exigencies in that they have actually "found" the law. In this creative process, judges, in particular in the field of contract law, have not been restrained by more or less rigid statutory language. A court, at least of a higher instance, persuaded by a particular solution proposed in the Restatement, has great freedom to adopt it. In that regard, the rules of the Restatement stand almost on equal footing with precedents of another state jurisdiction, though their persuasiveness does not come from the authority of the bench, but from the knowledge that the rules have been written by judges, professors, and practitioners eminently learned in the particular subject. applicable whenever there is no choice oflaw, regardless of whether a particular rule of the applicable law can be established or not. 48 Id., Preamble para. 5. 49 See Vagts, supra note 23, at 712; see also Ralf Michaels, Privatautonomie und Privatkodifikation, 62 RABELSZ 580, 584 et seq. (1998).

16 • UN/DROIT Principles of International Commercial Contracts In contrast, a global setting does not offer the same fertile playground to the technique of a restatement of law. This is not to say that the variations in content are too vast. The very existence of the UNIDROIT Principles is proof of the existence of a core of contract law common to all or at least a large number of nations. The difficulty concerns methodology more than content. On a global level, contract law does not, as is the case within the United States, operate solely on a purely jurisprudential basis. Along goes a technique that, as a primary source, relies on statutes, codes, or other legislative tools. In those jurisdictions, courts have only a limited ability to adapt pre-set rules to the internationality of a particular transaction. General deference to the expressed legislative will, even though ranging from rigid textual ism to a liberally construing purposivism, stand in the way in the first place. More specifically, however, the ability of courts in those jurisdictions depends on the specific phrasing of the statutory basis. Whereas in one jurisdiction a particular issue may be governed by a general clause, leaving leeway for the courts to create innovative solutions, in another it is covered by very strict statutory language not susceptible to such constructions. These various degrees of susceptibility to an "internationally" minded interpretation and supplementation from one law to another are unsatisfactory since they are, at least to some extent, fortuitous and arbitrary. In effect they considerably hamper the goal of achieving uniformity in the law applicable to international commercial transactions.

IV. COURSE OF THE STUDY While there are thus persuasive reasons for the drafters to focus on the expediency of conflict of laws rules as the chief tool for the Principles' transposition into the world of "applied" law, the question is whether the technique will be enforceable in an actual setting of dispute settlement. This will be the subject of the considerations to follow. Above all, this study will explore whether the parties to an international commercial contract can effectively choose the UNIDROIT Principles in lieu and to the exclusion of a particular domestic law as the law governing a transaction. Since international trade contracts more and more often refer to arbitration as a means of dispute resolution, the study will initially examine the effective-

Introduction • 17

ness of the Principles' choice in that context. However, because the issue touches upon fundamental aspects of law, the study also focuses on the more "traditional" state court setting and discusses whether the Principles' choice in a contract according to which disputes are referred to the jurisdiction of a state court may (or should) be given effect as well. This discussion is limited to a choice with conflict-of-Iaws effect that purports to exclude the application of any other national law, including its (domestically) mandatory provisions. The qualitatively different substantive law reference, or incorporation into the contract, is not of interest here. There is no question that the parties are permitted to incorporate the UNIDROIT Principles into their contract by a simple reference, under reservation of the mandatory provisions of the otherwise applicable national law. Such a reference simply replaces the more strenuous process of copying article by article into the parties' document. 50 The second question is the role the Principles may play in the absence of a choice of law in the above sense. Remarkably, the Principles' Preamble in its 1994 version did not even mention this alternative. It thus departed from the "implementing" provisions of the Principles of European Contract Law, the set of rules mentioned earlier that in style and purpose highly resembles the UNIDROIT Principles. Confined regionally, it presents an attempt to bring the still diverse contract laws of the member states of the European Communities into conformity by non-legislative means. Pursuant to Article 1.101 (3)(b) , the European Principles maybe applied "when the parties have not chosen any system or rules of law to govern their contract. "51 The 2004 version of the UNIDROIT Principles has 50 There seems to be agreement that parties to an international transaction are allowed to incorporate the UNIDROIT Principles into their contract by a mere general reference; see, e.g., Ulrich Drobnig, The Unidroit Principles in the Conflict of Laws, UNIF. L. REv. 385, 386 (1998); Franco Ferrari, Defining the Sphere of Application of the 1994 "Unidroit Principles of International Commercial Contracts, " 69 TuL. L. REv. 1225, 1229 (1995); Vischer, supra note 41, at 203; as to the European Principles, see BLASE, supra note 7, at 193.

51 An earlier draft of the 1994 UNIDROIT Principles had already included a similar provision; see Filip de Ly, National Report of the Netherlands, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 203, 225 et seq. (Michael]. Bonell ed. 1999); according to BONELL, supra note 2, at 97 n.23, the

18 • UNIDROIT Principles of International Commercial Contracts closed this gap to the European Principles. Again, the study analyzes the potential of the Principles' application with conflict-of-Iaws effect both in the context of arbitral and state proceedings. The core test of this inquiry will be whether it is actually desirable that the UNIDROIT Principles be applied to international commercial contracts. In other words, the inquiry undertakes to analyze whether an application of the UNIDROIT Principles furthers the interests of international trade or, more specifically, whether it offers advantages over a purely interpretation-oriented adaptation of the otherwise applicable national law, which, as will be seen from the further course of this study, as the more conservative approach has already been put into practice and is generally thought to be permissible. respective omission in the Preamble of the UNIDROIT Principles "should not be considered as a veritable difference of policy."

CHAPTER 2

THE UNIDROIT PRINCIPLES BEFORE ARBITRAL TRIBUNALS

I.

THE DEBATE ABOUT THE LEX MERCATORIA

Long before the publication of the UNIDROIT Principles, the question whether the parties may choose rules of law not originating from a particular state has been the subject of rigorous debates. The discussion has centered on the so-called lex mercatoria, a hybrid body of rules associated with the notion that it is created and imposed by international trade itself and its institutions, and the main question still is what the sources and the contents of the lex mercatoria are. Its primary regulative sources are international trade customs and pre-fixed contract terms elaborated by business associations. Other proponents, however, have perceived the lex mercatoria more broadly and emphasized the need to complement the hard and fast rules of the business communities with more equitable solutions.! They suggest guidance from public international law, uniform laws, and general principles of law as recognized by civilized nations, rules of international organizations like the United Nations, and from case law dealing with international commercial transactions. 2 ! As to the different foundations of the lex mercatoria, see, for example, Felix Dasser, Lex mercatoria: Werkzeug der Praktiker oder Spielzeug der Lehre?, SZIER 299, 301 (1991). 2 Cf. Ole Lando, The Lex Mercatoria in International Commercial Arbitration, 34 INT'L & COMPo L.Q. 747, 749 et seq. (1985); there is, however, an immense spectre of opinions; cf., e.g., Harold J. Berman & Felix Dasser, The New Law Merchant and the Old: Sources, Content, and Legitimacy, in LEX MERCATORIA AND ARBITRATION, A DISCUSSION OF THE NEW LAw MERCHANT 76 (Thomas E. Carbonneau ed., 1998); UGO DRAETTA, RALPH B. LAKE & VED P. NANDA, BREACH AND ADAPTATION OF INTERNATIONAL CONTRACTS-AN INTRODUCTION TO THE LEx MERCATORIA 13 (1992); FILIP DE Ly, INTERNATIONAL BUSINESS

19

20 • UNIDROIT Principles of International Commercial Contracts

Legal positivists have always questioned the powers of the international merchant community to create a legal regime of their own. 3 Law is, according to this view, understood as the enactment of a state. The term is inextricably linked to a state's enforcement monopoly; recognizing a choice by the parties that puts a contract entirely outside state law would, contrary to that notion, effectively renounce control over what contractual claims should be deemed enforceable. In that view, trade usage and general contract terms can deploy their effect, therefore, best within the framework of the lex causae. 4 Arbitral tribunals have not been following these theoretical objections. Not only have they recognized the parties' reference to non-state sources of law, they also have actually based awards on rules and principles that do not emanate from a particular national LAw AND LEX MERCATORIA (1992); Emmanuel Gaillard, Trente ans de Lex Mercatoria-Pour une application selective de la methode des principes generaux du droit, J. DR. INT'L 5 (1995); Paul Lagarde, Approche critique de la lex mercatoria, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES, ETUDES OFFERTES A BERTHOLD GoLDMAN 125 (1987); EUGEN LANGEN, TRANSNATIONALES RECHT (1981); Andreas Lowenfeld, Lex Mercatoria: An Arbitrator's View, 6 ARB. INT'L 133 (1990); URSULA STEIN, LEX MERCATORIA (1995); PAUL-FRANK WEISE, LEX MERCATORIA-MATERIELLES RECHT VOR DER INTERNATIONALEN HANDELS SCHIEDSGERICHTSBARKEIT (1990). 3 Cf. Klaus Peter Berger, Die UNIDROIT Prinzipien fur Internationale Handelsvertrage, 94 ZVGLRWISS 217, 223 (1995): "Die fehlende Einbeziehung der nationalen Gesetzgeber nlttelt an den Grundfesten rechtstheoretischer Vorstellungen des Rechts als staatlich-souvecin dekretierte und sanktionierte Sozialkontrolle, als 'Inbegriff der in einem Staate geltenden Zwangsordnung'." 4 Cf., e.g., Andreas Spickhoff, Internationales Handelsrecht vor Schiedsgerichten und staatlichen Gerichten, 56 RABELSZ 116 (1992); Otto Sandrock, How Much Freedom Should an International Arbitrator Enjoy? The Desire for Freedom From Law v. The Promotion of International Arbitration, 3 AM. REv. INT'L ARB. 30, 46 et seq. (1992); Hans-Jiirgen Sonnenberger, Einleitung IPR, in MUNcHENER KOMMENTAR ZUM BURGERLICHEN GESETZBUCH VOL. 10, EINFUHRUNGSGESETZ ZUM BURGERLICHEN GESETZBUCH (ARTICLE 1-38), INTERNATIONALES PRIVATRECHT paras. 230 et seq., 241 et seq. (3d ed. 1998); cf. also Claus-Wilhelm Canaris, Die Stellung der Unidroit Principles und der Principles of European Contract Law im System der Rechtsquellen, in EUROPAISCHE VERTRAGSRECHTSVEREINHEITLICHUNG UND DEUTSCHES RECHT 8 et seq. (Jiirgen Basedow ed., 2000); for an extensive account of the objections against a recognition of the lex mercatoria as an autonomous source of law, cf. in particular KLAus PETER BERGER, THE CREEPING CODIFICATION OF THE LEX MERCATORIA 43 et seq. (1999).

UN/DROIT Principles Before Arbitral Tribunals •

21

system of "law."5 Even national courts, which have stepped in when recognition and enforcement was sought, have been prepared to accept the parties' substitution of state enacted laws by the lex mercatoria. Because these cases have been discussed plentifully in previous scholarly writing, I will limit my account of these "grands arrets."

1. Courts' Recognition of Arbitral Awards Based on the

Lex Mercatoria Pride of place must be accorded to the decision of the French Cour de Cassation in Societe Fougerolle v. Banque du Proche Orient. 6 The decision concerned an arbitral award in favor of an intermediary that had undertaken to negotiate a contract but whose agency had been terminated by the principal before completion of its mission. The intermediary was granted partial remuneration based on the services he had performed. The arbitral tribunal based its decision on "general principles of contract law generally applicable in international trade." The losing party resisted the attempt to enforce this award on the theory that the tribunal had exceeded its powers and rendered an award beyond the scope of what the parties had submitted to it. The Court upheld the arbitral award and acknowledged that an arbitral award based on the lex mercatoria, general principles of law, or the like, must not be equated with a decision on equity but that general principles of law applicable in international trade were part of the law. The Court thus recognized the legal nature of general principles applicable in international trade. 7 Other jurisdictions concurred. Earlier on, the Swedish Supreme Court, in General National Maritime Transport Company (Tripoli) v. 5 See, for a detailed account of arbitral jurisprudence, Felix Dasser,

Internationale Schiedsgenchte und Lex Mercaturia 180 et seq. (1989); updated in Dasser, supra note 1, at 312 et seq. 6 Cour Cass., Dec. 9, 1981, REv. ARB. 183 et seq. (1982), note Couchez (Fr.); 109 J. DR. INT'L 931 et seq. (1982), note Oppetit (Fr.). 7 See Andreas Bucher, Transnationales Recht im IPR, in AKTUELLE FRAGEN ZUM EUROPARECHT AUS DER SICHT IN- UND AUSLANDISCHER GELEHRTER 11, at 45 (Fritz Schwind cd., 1986); Frank Vischer, General Course on Private International Law, 232 REc. DES COURS 13, 143 (1992).

22 •

UNIDROIT Principles of International Commercial Contracts

GOtaverken Arendal AB (GOteborg),8 had expressed a similar opinion. The Italian Corte di Cassazione followed in the Damiano case;9 in the Norsolor cases, which have been pertinently described as a true "bataille" over the lex mercatoria,1O both the Austrian Supreme CourtJl and the French Cour de Cassation12 finally upheld the arbitrators' award of damages solely inferred from the general notion of good faith, regarded as the cornerstone of the lex mercatoria. The lower Viennese Court,13 in contrast, had initially somewhat derisively questioned the legal authority of the lex mercatoria. It correspondingly had held that the arbitrators, since not authorized to decide in equity, by applying the lex mercatoria had gone beyond the scope of the submission to arbitration and had refused to grant enforcement. English courts initially approached the question whether parties should be permitted to eschew the application of a national system of law by choosing internationally recognized principles of law with similar skepticism. In Bank Mellat v. Helleiniki Techniki SA,14 the Court of Appeals firmly declared, "Our jurisprudence does not recognize the concept of arbitral procedures floating in the transnational firmament unconnected with any municipal system of law." However, in Deutsche Schachtbau- und Tiejbohrgesellschaft mbH v. Ras Al Khamah National Oil Co. ,15 English jurisprudence alike retreated from that position and acknowledged in arbitral proceedAug. 13, 1979, REv. ARB. 555 (1988). Feb. 8, 1982, Fratelli Damiano s.n.c. v. August Topfer & Co. GmbH, 18 RIv. DIR. INT'L. PRIVE. PROC. 835 (1982), note Giardina ("deve ritenersi che esista una lex mercatoria"); the decision is translated into English in Francesco Galgano, The New Lex Mercatrma, 2 ANN. SURV. INT'L & COMPo L. 99,108 (1995). 10 See Berthold Goldman, Une bataille judiciaire autour de La lex mercatoria: L'affaire Norsolor, REv. ARB. 379 (1983). Jl Oberster Gerichtshof (OGH), Nov. 18, 1982, RIW 868 (1983), note SeidlHohenveldern (Ger.); 4 IPRAx 97 (1984), note von Hoffmann (Ger.); 109]. DR. INT'L 645 (1983); 1984 Y.B. COMM. ARB. 159, note Mellis. 12 Oct. 9,1984,112]. DR. INT'L 679 (1985), note Kahn (Fr.); REv. ARB. 431 (1983), note Goldman (Fr.); Cour d'Appel de Paris, Dec. 15, 1981/Nov. 19, 1982, REv. ARB. 465, 470 et seq. (1983); Tribunal de Grande Instance de Paris, Mar. 4, 1981, 109 J. DR. INT'L 836., note Kahn (Fr.) (1983). 13 OLG Wien, Jan. 26, 1982, AG 165 (1982), note Dielmann (Ger.) ("Weltrecht von fraglicher Gehung"). 14 [1983] 3 W.L.R. 783. 15 Mar. 24, 1987, [1987] 3 W.L.R. 1023, 1035 (Donaldson MR). 8

9

UNIDROIT

Principles Before Arbitral Tribunals • 23

ings that parties and arbitrators are not confined to a choice of a national system of law. A few years later, the permissibility of a choice-of-Iaw clause designating "principles common to both English and French law, and in the absence of such common principles, such principles of international trade law as have been applied by national and international tribunals" as the law governing the contract, did not even become an issue in the Channel Tunnel case. 16 Considering the opinion was delivered by Lord Mustill, one of the exponents of the view hostile to the notion of the lex mercatoria as an autonomous body of law, Michael Furmston rightly observed "the behaviour of the dog that does not bark in the night is often highly significant."17

2. Statutory Recognition of a Choice of the Lex Mercatoria Modern arbitration statutes reflect the liberal attitude of the decisions highlighted above towards arbitrators' application of a-national rules authorized by the parties. The statutes' provisions on party autonomy offer the parties something in between a mandate to decide the case in strict adherence to a particular national system of law and, on an ex aequo et bono basis, something of 16 Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd., [1993] A.C.334; [1993] 2 W.L.R 262; [1993] 1 All E.R 664; [1993] 1 LLOYDS' L. REp. 291; however, Lord Mustill attributed considerable weight to the choice-of-Iaw clause in rejecting the application for interim relief; he explained: "The parties chose an indeterminate 'law' to govern their substantive rights; an elaborate process for ascertaining those rights; and a location for that process outside the territories of the participants. This conspicuously neutral, 'anational' structure may well have been the right choice for the special needs of the Channel Tunnel venture. But whether it was right or wrong, it is the choice which the parties have made. The appellants now regret that choice. [T]hey now wish to obtain far reaching relief through the judicial means which they have been so scrupulous to exclude. Notwithstanding that the court can and should in the right case provide reinforcement for the arbitral process by granting interim relief I am quite satisfied that this is not such a case, and that to order an il1iunction here would be contrary both to the general tenor of the construction contract and to the spirit of international arbitration ([1993] W.L.R 291}." As to the procedural aspects referred to by Lord Mustill, see THILO RENSMANN, ANATIONALE SCHIEDSSPRUCHE, EINE UNTERSUCHUNG ZU DEN WIRKUNGEN ANATIONALER SCHIEDSSPRUCHE 1M NATIONALEN RECHT 44 (1997). 17 Michael P. Furmston, Unidroit General Principles for International Commercial Contracts, 10 J. CONT. L. 1, 6 (1996).

24 •

UN/DROIT Principles of International Commercial Contracts

a "third way," so to speak. The term of art suggesting such a freedom of the parties has almost uniformly become' 'rules of law." States considered the leading arbitration centers have adopted statutes containing such language. I shall mention Article 1496(1) of the French New Code of Civil Procedure (1981),18 Article 187(1) of the Swiss Private International Law Act (1987),19 Article 1054(2) of the Dutch Code of Civil Procedure as amended in 1986,20 or Section 1051(1) of the German Code of Procedure (1998).21 England, widely regarded as the heart of the arbitration industry, has to be included in this list, too. Although the English Arbitration Act deviates from the "boiler plate" terminology and, in Section 46(1) of the 1996 Arbitration Act, instead uses the term "such other considerations,"22 this different terminology has the same effect. Also, significantly in the Latin-American context, until recently reluctant to the very concept of arbitration, Article 10 of the 1998 18 "L'arbitre tranche Ie litige conformement aux regles de droit que les parties ont choisies; a defaut d'un tel choix, conformement a celles qu'il estime appropriees. " 19 "Le tribunal arbitral statue selon les regles de droit choisies par les parties ou, a dHaut de choix, selon les regles de droit avec lesquelles la cause presente les liens les plus etroits." 20 "Ingeval de partijen een rechtskeuze hebben gedaan, beslist het scheidsgerecht naar de door de partijen aangewezen regelen des rechts. Indien een dergelijke rechtskeuze niet heeft plaatsgevonden, beslist het scheidsgerecht volgens de regelen des rechts die het in aanmerking acht te komen." ("If a choice of law is made by the parties, the arbitral tribunal shall decide in accordance with the rules of law chosen by the parties. Failing such choice of law, the arbitral tribunal shall make its award in accordance with the rules of law which it considers appropriate.") 21 "The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict oflaws rules." ("Das Schiedsgericht hat die Streitigkeit in Ubereinstimmung mit den Rechtsvorschriften zu entscheiden, die von den Parteien als auf den Inhalt des Rechtsstreits anwendbar bezeichnet worden sind. Die Bezeichnung des Rechts oder der Rechtsordnung eines bestimmten Staates ist, sofern die Parteien nieht ausdnlcklich etwas anderes vereinbart haben, als unmittelbare Verweisung auf die Sachvorschriften dieses Staates und nicht auf sein Kollisionsrecht zu verstehen.") 22 "The arbitral tribunal shall decide the dispute- (a) in accordance with the law chosen by the parties as applicable to the substance of the dispute, or (b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal."

UNIDROIT

Principles Before Arbitral Tribunals • 25

Agreement on International Commercial Arbitration of MERCOSUR provides that "the parties may choose the law that shall be applied to resolve the dispute based on private international law rules and principles, as well as on international trade law." Also this terminology will have a similar effect as the "rules of law" language. 23 There is consensus today that the phrase "rules oflaw" makes it abundantly clear that the parties, as to their choice of law, are not confined to national laws but may resort to rules not sanctioned by a national or supra-national legislator, such as the hybrid lex mercatoria general principles of law or equity, etc. 24 It is difficult to see this any other way. The term was first filled with a liberal meaning in French practice and, cognizant of the connotation it had engendered there, was then promoted as the adequate standard for other nations' arbitration statutes, not the least through adoption of the UNCITRAL Model Law of 1985. At an international level, Article 28(1) of the UNCITRAL Model Law states "The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. "25 The Model Law was recommended to the UNCITRAL member states for transformation, and indeed, a multitude of states have done so by revising or drafting from scratch their respective arbitration statutes. 26 In a sense, therefore, the Model Law may well be said to be an expression of the worldwide acceptance of the application of transnational law in the context of international commercial 23 MichaelJoachim Bonell, Soft Law and Party Autonomy: The Case of the Unidroit Principles, 31 Loy. L. REv. 229, 242 (2005). 24 As to the French and Swiss legislation, compare Pierre Lalive, L'arbitrage international et les Principes Unidroit, in CONTRATTl COMMERCIALI INTERNAZIONALI E PRINCIPI UNIDROIT 71, 76 (Michael J. Bonell & Franco Bonelli eds., 1997); see also Pierre A. Karrer, Commentary on Article 187 PlLA, in

KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-INTERNATIONALES PRIVATRECHT para. 63 et seq. (Heinrich Honsell, Nedim Peter Vogt & Anton K. Schnyder eds., 1996); but see, as to the new German arbitration legislation, Canaris, supra note 4, at 20 (UNIDROIT Principles cannot be considered "rules of law" but represent only the basis for an equity decision by the arbitrators). 25 Emphasis added. 26 Compare, for example, the arbitration statutes mentioned supra § 1.2.

26 • UN/DROIT Principles of International Commercial Contracts arbitration (to the extent the parties have made a respective choice of law}.27

3. The Notion of "Rules of Law" Despite agreement in doctrine and practice on the basic effect of the term "rules of law," that the parties to an international contract are given the authority to select a "law" not sanctioned by any national or supra-national legislator, there appears not to have been any debate as to whether the term "rules of law" does or should entail any formal or substantive elements for a set of rules to become available as the governing statute in international commercial practice. As an example, the UNIDROIT Principles and the "classic" lex mercatoria are distinctly different, not only in their appearance but more importantly in their respective authority; yet both bodies of rules are, at least in scholarly writings, indistinguishably held to be available to the parties under the "rules of law" language in modern arbitration statutes. 28 It is not necessary to explore the issue further at this stage of the study. The focus here is exclusively on whether current arbitration practice allows the UNIDROIT Principles to become the governing law of the contract if chosen by the parties. The issue will become relevant, however, in the context of whether parties are allowed to choose the UNIDROIT Principles as the governing law before state courts. The question then becomes, are the differences alluded to above sufficient to elevate the UNIDROIT Principles to the status of "law" as opposed to "rules of law?" For the very moment, it must suffice to emphasize that a contract designating a body of rules held to be falling within the "rules of law" category of an arbitration statute is of a different quality than a contract delegating arbitrators to apply principles of equity or to act as amiable compositeur. It remains a contract based on legal principles. It is significant that modern arbitration statutes make this subtle distinction. 27 BERGER, supra note 4, at 80. 28 See the references supra § 1.2.

UN/DROIT Principles Before Arbitral Tribunals •

27

II. CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS Considering the present state of affairs, there is therefore hardly any question that arbitrators will acknowledge a choice of the UNIDROIT Principles by the parties as the law governing the transaction29 and that such an award will stand the test of an enforcement proceeding. Considering some of the hallmarks of the Principles, in particular its systematic, homogenous, and well-balanced nature, they may even be regarded as a "plus" to the lex mercatoria. The above assumption is certainly true for awards made by a tribunal having its seat in a state whose arbitration law expressly uses the term "rules of law;" in the absence of such explicit recognition of the parties' wide-ranging freedom in the state of the tribunal's seat and/or of the court where recognition and enforcement is sought, the fate of an award honoring the parties' choice of the UNIDROIT Principles may, at the outset, seem less clear; however, as has been pointedly remarked, in view of the modern tendency evidenced in the mentioned decisions of arbitral tribunals and courts alike, it is highly improbable that arbitrators will decline the parties' mandate to apply the UNIDROIT Principles; it also strongly suggests the enforcement of such an award. 30 29 Cf. MICHAEL JOACHIM BONELL, AN INTERNATIONAL RESTATEMENT OF CONTRACT LAw, at 192 et seq. (3d ed. 2005); Andrea Giardina, L'application des Principes Unidroit aux contrats internationaux, in UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEX MERCATORIA? 143, 14748 (Institute of International Business Law and Practice ed., 1995) (provided that the relevant conflict of laws rules permit a decision based upon rules of law); Alexander S. Komarov, The Unidroit Principles of International Commercial Contracts: A Russian View, UNIF. L. REv. 247, 253 (1996); Paolo Michele Patocchi & Xavier Favre-Bulle, Les Principes Unidroit relatifs aux contrats du commerce international: Une introduction, 34 SEMAINEJUDICIAIRE 569,600-01 (1998); Ulrich Drobnig, The Unidroit Principles in the Conflict of Laws, UNIF. L. REv. 385, 386 (1998); as to the European Principles, see FRIEDRICH BLASE, DIE GRUNDREGELN DES EUROPAISCHEN VERTRAGSRECHTS ALS RECHT GRENZUBERSCHREITENDER VERTRAGE, at 198 (2001). 30 Cf. BONELL, supra note 29, at 195. A different conclusion is reached by SVEN SCHILF, ALLGEMEINE VERTRAGSGRUNDREGELN ALS VERTRAGSSTATUT 188 (2005) (arguing that due to the different interpretation of the terms "law," "rules of law," and "equity" in domestic arbitration statutes, there is a considerable recognition and enforcement risk if a-national rules are chosen).

28 • UNIDROIT Principles of International Commercial Contracts

1. Arbitral Practice In actual practice so far, there have indeed already been a few published instances in which an arbitral tribunal sanctioned the parties' choice of the UNIDROIT Principles as the law governing the contract. Most of the contracts in dispute, though, originally did not contain a choice-of-Iaw clause instructing the arbitrators to make their decision based on the Principles. Either the contract initially contained no agreement at all on the applicable law31 or the parties, in that respect, had originally relied on loosely defined formulae such as "principles common to both English law and French law, and in the absence of such common principles, such general principles of international trade law as have been applied by national and international tribunals. "32 The parties, however, agreed, once the dispute had arisen and the arbitral tribunal had been constituted, to apply the UNIDROIT Principles. The arbitrators could thus avoid embarking on the difficult task of identifying the applicable law by weighing the contacts the contract had to the jurisdictions involved or to test the workability of the vague guidelines the parties' agreement provided. There are, however, two notable arbitral awards that have been applying the UNIDROIT Principles by virtue of their choice from the outset. In a decision of the Centro de Arbitraje de Mexico (CAM), dated November 30, 2006, the parties' contract, a distributor contract, contained an arbitration clause in which the parties expressly referred to the UNIDROIT Principles as the law governing 31 ICC Award No. 8331 of 1996,J. DR. INT'L 1041 (1998), note Yves Derains (Fr.); Award No. 1795, Dec. 1, 1996; cf al50 UNIF. L. REv. 602 (1997), Award No. 116, Jan. 20, 1997, if. BONELL, supra note 29, at 281 et seq.; Award of the ad hoc arbitration in Paris of Apr. 21, 1997, cf BONELL, supra note 29, at 281-82; see generally, as to these awards, MichaelJoachim Bonell, The Unidroit Principles of

International Commercial Contracts, Nature, Purpose and First Experience in Practice

V.3.(c) (1999) (unpublished). 32 Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd. [1993] A.C. 334, 2 W.L.R 262; for further details on the arbitral proceedings in the Eurotunnel dispute, see Peter Schlechtriem, Unidroit-Principles (Einheitliche PrinziPien fur Vertriige) und Werkvertragsrecht, in DEM BAURECHT EIN FORUM, FESTSCHRIFT ruR GOTZ VON CRAUSHAAR ZUM 65. GEBURTSTAG 157 (Klaus Vygen & Peter Boggering eds., 1997).

UNIDROIT

Principles Before Arbitral Tribunals • 29

the substance of any potential dispute. 33 The Mexican arbitral tribunal expressly confirmed the validity of the parties' choice of the Principles and their quality as "rules of law" within the meaning of Article 1445 of the applicable Mexican Commercial Code. Earlier on, the Tribunal of International Commercial Arbitration at the Ukrainian Chamber of Commerce and Trade was to rule on a contract including a reference by the parties to the CISG, the lex mercatoria, and the UNIDROIT Principles. 34 Considering the only sporadic publication of arbitral awards, it is difficult to assess the frequency with which parties today are referring to the UNIDROIT Principles as the governing law. UNIDROIT has been trying to overcome this "flaw," which is not in the interest of further developing the discussion in international commercial law, and has begun to collect some reliable data independent of actual arbitral decisions through an electronically accessible database (http://www.unilex.info) and to address possible users of its projects with questionnaires. Of those replying in a 1999 survey, 27 percent indicated they made use of the Principles by referring to them in a choice-of-Iaw clause. 35 2. The UNIDROIT Principles' Test in Enforcement Proceedings

The UNIDROIT Principles already have stood a first test of enforcement proceedings in national courts. The arbitration award was rendered under the auspices of the ICC,36 place of arbitration being Zurich, Switzerland, and involved a state contract entered into by an Iranian state agency and a U.S. company. The contract contained a stabilization clause, stating "This agreement shall be 33 Centro de Arbitraje de Mexico (CAM), Nov. 30, 2006, http:// www.unilex.info. 34 Tribunal of International Commercial Arbitration at the Ukrainian Chamber of Commerce and Trade, Dec. 22, 2004, http://www.unilex.info; no further details on the choice-of-law clause are available. In addition, according to the excerpt on the Unilex webpage, the decision was ultimately rendered based on Ukrainian law. 35 MichaelJoachim Bonell, The UNIDROIT Principles in Practice-The experience of the first two years, http://www.cisg.law.pace.edu/cisg/biblio/pr-exper.html. On this questionnaire, see also the information given by SCHILF, supra note 30, at 300, 304. 36 ICC Award No. 7365, May 5, 1997, UNIF. L. REv. 796 (1999).

30 • UNIDROIT Principles of International Commercial Contracts

construed and performance thereof shall be determined in accordance with the laws of the Government of Iran in effect at the date of this Contract." However, both parties eventually agreed to the complementary and supplementary application of "general principles of international law and trade usage." The UNIDROIT Principles came into play by the panel's decision to flesh out the evasive notion of general principles of international law by reference to the UNIDROIT Principles. Upon finding that Iran was entitled to its claim to some extent, Iran petitioned the U.S. District Court for the Southern District of California to confirm the award. 37 The U.S. party opposed enforcement of the award amongst others on the ground that the application of the UNIDROIT Principles exceeded the scope of the submission to arbitration. The court's rejection of this argument is remarkable. Obviously, the court was of the opinion that the UNIDROIT Principles reflected "general principles of international law. "38 That aspect of the decision will need further assessment when exploring the role the UNIDROIT Principles may play when the parties' choice-of-Iaw clause refers to "general principles of law," the lex mercatoria, or the like. 39 However, in the current context, the general significance of the Californian court's decision is to be emphasized. Above all, it accepted an arbitral award based, though only on a supplementary basis, in substance on rules of a non-state character (as authorized by the parties), thus setting forth the tradition of cases like Fougerolle,40 Norsolor,41 Damiano,42 37 Ministry of Defense & Support v. Cubic Defense Sys., 29 F. Supp. 2d 1168; 1998 U.S. Dist. LEXIS 19608; 99 Daily Journal DAR 2924; see also UNIF. L. REv. 799 (1999); for an extensive discussion of the arbitral award, supra note 36, and the decision of the U.S. District Court of the Southern District of California, see Michael J. Bonell, UNIDROIT Principles: a Significant Recognition by a United States District Court, UNIF. L. REv. 651, 658 (1999). 38 Bonell, supra note 37, at 662 ("the Court confirmed the implicit assumption of the arbitral tribunal that the UNIDROIT Principles represent a source of 'general principles of law,' the 'lex mercatoria,' or the like, to which judges and arbitrators may resort even in the absence of an express authorization by the parties.") 39 See supra § 1.2. 40 Societe Fougerolle v. Banque du Proche Orient, supra note 6. 41 Societe Narsolor v. Societe Pabalk Ticaret Sirketi, supra note 12; as to the parallel exequatur in Austria, see Oberster Gerichtshof (OGH), supra note II. 42 Fratelli Damiano s.n.c. v. August Topfer & Co. GmhH, supra note 9.

UNIDROIT Principles Before Arbitral Tribunals • 31

GOtaverken,43 and Deutsche Schachtbau- und Tiefbohrgesellschaft m.b.h. 44 The decision of the U.S. court denotes the entry of the UNIDROIT Principles to that prong of decisions, thereby specifically sanctioning the legal character of the Principles within the realm of arbitration. It is true that no party ever raised the issue in the course of the proceedings as to whether such a choice of law was permissible; yet, in light of the principal question to be decided, one can be confident that the court did not overlook this fundamental Issue.

III. SPECIFIC CHOICE-OF-LAW CLAUSES AND THE RELEVANCE OF THE UNIDROIT PRINCIPLES Putting aside the fundamental question of whether the parties' choice of the UNIDROIT Principles will be given choice-of-Iaw effect in arbitration and recognized in subsequent enforcement proceedings, there remains a variety of subtler issues to be determined. Broadly speaking, these issues may be grouped under the topoi of interpretation, complementation, and supplementation. More specifically, the question is in what circumstances an arbitrator should apply the rules of the UNIDROIT Principles and by what rules they should be supplemented if they do not provide an immediate answer to a particular issue. At least at present, the Principles may not be considered a comprehensive body of contract rules. They contain only provisions of general contract law, to some extent comparable to the "General Part" of certain national codifications such as the German BGB or the Swiss Code of Obligations. Even in that regard, however, certain issues still remain to be dealt with. Moreover, they do not explicitly regulate specific types of contractual obligations. 45

43 General National Maritime Transpurt Company (Tripoli) v. Giitaverken Arendal AB (Giiteborg), supra note 8. 44 Deutsche Schachtbau- und Tiejbohrgesellschaft m.b.H. v. Has Al Khamah National Oil Co., supra note 15. 45 See the criticism of Philippe Kahn, Les contrats internationaux de cooperation scientifique et technique inter-entrejlrises face aux Principes d'Unidroit, UNIF. L. REv. 519,524 (1998); Catherine Kessedjian, Un exercice de rertovation des sources du droit des contrats du commerce international: Les Principes proposes par l'Unidroit, REv. CRIT. DR. INT'L PRIvE 641, 657 (1995).

32 • UN/DROIT Principles of International Commercial Contracts

The Principles' application should not be a matter left to the arbitrators' discretion if the parties have chosen them explicitly as the law governing the contract. Correspondingly, the Principles mandate the tribunal to apply the Principles by employing the term "shalL "46 The principal difficulty in these cases is therefore rather where to turn to if the Principles fail to address a question relevant to the dispute, and the parties did not indicate a subordinate set of rules. The Principles themselves give some, but not conclusive, guidance in Article 1.6(2): "Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles." Evidently, much will depend on the proper interpretation of what is to be regarded as falling "within the scope" of the Principles, a conclusion that leads to a case-by-case process of discerning the general principles underlying the UNIDROIT Principles. While this technique might not come to the surprise of those familiar with international commercial law instruments-unmistakably Article 7 (2) CISG looms behind it-its practical application may cause considerable difficulties. At any rate, for questions beyond the scope of the Principles or not retraceable to a general principle, the more fundamental issue will arise where to look for a solution in the alternative. Ultimately, the issue boils down to whether the arbitrators should determine the dispute by reference to rules of national origin applicable pursuant to traditional conflict-of-Iaws rules or whether they should, instead, be free to apply non-state sources of "law." The second, already highly debated question is whether the Principles may also be applied if the parties in their choice-of-Iaw clause refer to the lex mercatoria, general principles of law, general principles of equity, or if they use a "tronc commun" technique, as the parties did in the Channel Tunnel case by designating the "principles common to both English law and French law, and in the absence of such common principles, such general principles of international trade law as have been applied by national and international tribunals" as the applicable law. The Principles do not claim to be equated with those standards of law. But by stating they 46 UNIDROIT

Principles, Preamble para. 2.

UNIDROIT

Principles Before Arbitral Tribunals • 33

"may be applied,"47 the Principles regard themselves as a source of inspiration for purposes of determining the content of such choice-of-Iaw clauses. The extent to which the Principles lend themselves to such an approach will be addressed in more detail below. I will distinguish between clauses stipulating the applicability of the lex mercatoria, general principles of contract law, and a bespoke tronc commun clause. Not only the legal doctrine's but also the parties' understanding as to the meaning of such clauses may differ. A uniform solution would be inappropriate.

1. Exclusive, Express Choice of the UNIDROIT Principles as the Law Governing the Contract UNDROIT has provided a model clause for parties desiring the UNIDROIT Principles to govern their agreements. The proposal invokes the boilerplate language "This contract shall be governed by the Unidroit Principles (2004)." An addition states that the contract shall be "supplemented when necessary by the law of [jurisdiction X]. "48 The model clause gives rise to a number of observations. Notably, UNIDROIT urges the parties to indicate which version they are referring to in their choice of law. Indeed, such drafting is to be recommended. It avoids, from the outset, any dispute over possible transitory problems should the present version of the Principles be revised again and new topics be included in the future. Yet more remarkably, the Model Clause in its alternative suggests the parties also provide for the application of the law of a particular jurisdiction to which the arbitrators could refer when necessary, that is, when the Principles do not address a particular issue in dispute. 49 Bonell, in his treaty on the Principles, concurs, 47 UNIDROIT Principles, Preamble para. 3. 48 UNIDROIT-FoRTYYEARS OF SERVICE IN THE CAUSE OF THE UNIFICATION OF LAw 1926-1966, at 1 (1966). 49 "This contract shall be governed by the UNIDROIT Principles (1994) [except as to Articles . . . ], supplemented when necessary by the law of (jurisdiction Xl." Orsolya Toth, The Unidroit Principles of International Commercial Contracts as the Governing Law-Reflections in Light of the Reform of Article 3 of the Rome Convention, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE

34 • UN/DROIT Principles of International Commercial Contracts considering it "advisable to add the domestic law to regulate questions not covered by the UNIDROIT Principles."50 These proposals indeed appear to be reasonable. They obviously strive to carry forward the Principles' distinct and much-praised advantage over the classic lex mercatoria or general principles of law, that is, that well-defined, precise rules are available, which can be easily applied by arbitrators, irrespective of the particular topic. However, there remain doubts whether a choice amalgamating the Principles with a domestic law will find its place in the commercial contract setting. Practical reasons are the main obstacle. As has been observed many times by lawyers advising in cross-border transactions, which are, as a matter of principle, in great need of well-drafted choice-of-Iaw clauses, it may be difficult to reach an agreement on such a clause. 51 While both parties understand the desirability of identifying in advance the legal rules governing their contract, each party wants, often at all cost, to ensure that its own law or a system of law it is familiar with (e.g., common law or civil law, or vice versa) is applied. The question of choice of law is also a matter of prestige,52 in particular if states are involved. Moreover, the party not familiar with the other party's law may see itself put at a disadvantage. Although these worries may seem, to a certain ISDC COLLOQUIUM (8/9 JUNE 2006) 201,205 et seq. (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007) (referring to the rules on the determination of damages, interest, and impossibility) argues that under the proposed revised Article 3(2) of the Rome Convention parties would no longer be able to choose a national law for filling gaps of the UNIDROIT Principles. It is doubtful whether this conclusion is right. 50 BONELL, supra note 29, at 174; critical with regard to such a cumulative choice-of-law clause for practical reasons, see Ulrich Spellenberg, Comments preceding Article 11 EGBGB, in MUNCHENER KoMMENTAR ZUM BURGERLICHEN GESETZBUCH VOL. 10, EINFUHRUNGSGESETZ ZUM BURGERLICHEN GESETZBUCH (ARTICLE 1-38), INTERNATIONALES PRIVATRECHT para. 24 (3d ed. 1998); Drobnig, supra note 29, 385, 392. 51 See the illustrative remarks of Rayner M. Hamilton, in THE UNIDROIT PRINCIPLES: A COMMON LAw OF CONTRACTS FOR THE AMERICAS? 274 (UNIDROIT ed., 1998). 52 See with reference to Channel Tunnel case, for example, J.M. Perillo, UNIDROrr Principles of International Commercial Contracts: The Black Letter Text and a Review, 63 FORDHAM L. REv. 281, 283 (1994).

UNIDROIT

Principles Before Arbitral Tribunals • 35

extent, irrational,53 it may nevertheless, in actual practice, prove illusory to persuade the parties to supplement their choice of the UNIDROIT Principles with a particular national law. Of course, as will certainly be pointed out, the impasse could be overcome by the choice of a "neutral" law, a choice that is overwhelmingly recognized in modern conflict-of-Iaws doctrine.54 However, what has been done regularly and therefore might be considered a practical solution to the dilemma does face objections. National laws on commercial relations, including commercial contract law, are primarily drafted from a purely domestic perspective and, therefore, are not specifically tailored to the needs of international transactions. 55 This flaw certainly has contributed its share to practicing lawyers' recommendations that their clients adopt choice-of-Iaw clauses designating a non-state body of rules as the governing law. The UNIDROIT Principles have been prepared to meet these needs and correspondingly strive to provide parties to an international contract with direct access to substantive, succinctly defined rules of genuinely international character. To supplement a choice of the Principles with a reference to domestic law is at odds 53 To give an example from my own experience: In an M&A transaction between a Swiss seller and a U.S. purchaser regarding the sale and purchase of a worldwide business operating in the chemical field, the parties could not agree on the applicable law until the day of signing. During negotiations, the seller insisted on Swiss law, whereas the purchaser wanted either to have the transaction governed by English or, alternatively, New York law. As counsel to the Swiss seller, we had English and u.S. counsel review the various drafts to indicate to us the changes that would need to be made if English or U.S. law were to become the applicable law. In the context of an M&A share and asset purchase agreement, it turned out that there were almost no differences at all between Swiss, English, and New York law. The main differences related to the (implied) good faith obligations and, above all, the availability of a specific performance remedy. The Swiss party considered the specific performance remedy in particular of utmost importance. 54 See, e.g., Lawrence Collins, Contracts, General Rules, in DICEY & MORRIS, THE CONFLICT OF LAws 1214 (Lawrence Collins et al. eds., 12th ed. 1993); FRANK VISCHER, LUCIUS HUBER & DAVID OSER, INTERNATIONALES VERTRAGSRECHT para. 81 (2000) with further references. 55 See Michael Joachim Bonell, Das autonome Recht des Welthandels-Rechtsdogmatische und rechtspolitische Aspekte, 42 RABELSZ 485, 497 (1978); Ole Lando, Some Issues Relating to the Law Applicable to Contractual Obligations, 7 KING'S C. LJ. 55, 62 (1996/1997); Hans Stoll, Rechtliche Inhaltskontrolle bei internationalen Handelsgeschiiften, in FESTSCHRIFT FUR GERHARD KEGEL ZUM 75. GEBURTSTAG 623, 637 (Hans-Joachim Musielak & Klaus Schurig eds., 1987).

36 • UNIDROIT Principles of International Commercial Contracts

with the general trend of relying on non-legislative instruments as a means to displace the relevance of domestic law. The objective is most evidently put at risk should the proposition of a Dutch conflict-of-Iaws scholar gain recognition. According to Katharina Boele-Woelki, a choice of the Principles combined with a domestic law would automatically qualify as a substantive law reference. 56 All mandatory provisions of the national law chosen would override the Principles' rules, a consequence clearly running counter to the need to delimit domestic mandatory rules in accordance with the goal and the specific nature of international trade. At least if the parties make use of the proposed model clause, there should be no doubt as to the choice-of-Iaw effect of a reference to the UNIDROIT Principles. Recourse to the national law is only to be made "when necessary." The wording of the Model Clause unambiguously implies the subsidiary, gap-filling role national law should play. Whatever the reasons, practical or conceptual, the parties to an international contract will not consistently follow the advice of UNIDROIT on the proper drafting of a choice-of-Iaw clause according to which the UNIDROIT Principles' choice should be combined with that of the law of a particular jurisdiction.57 If not for other reasons, at least for these "pathological" cases, it is interesting to examine how an arbitral tribunal should proceed with respect to issues not expressly covered in the Principles. Katharina Boele-Woelki, Principles and Private International Law-The Principles of International Commercial Contracts and the Principles of European Contract Law: How to Apply Them to International Contracts, UNIF. L. REv. 652, 663 (1996). 57 See, for example, the clause cited in Bonell, supra note 23, at 229, 244, included in the membership agreement of COVISINT, an electronic marketplace recently set up among DaimlerChrysler, Ford, General Motors, Nissan, Peugeot, and Renault for their suppliers: "The Product Agreement shall be construed in accordance with the UNIDROIT Principles of International Commercial Contracts, with the exception of Section 4.6 ['Contra proferentem rule'] which is excluded due to the difficulty of providing explicit language to cover each possible interpretation that may arise in a multi-national setting." 56

UNIDROIT

UN/DROIT

Principles Before Arbitral Tribunals • 37

a. Article 1.6: "Issues Within the Scope of the Principles but Not Expressly Settled by Them Are as Far as Possible to Be Settled in Accordance With Their Underlying General Principles"

i.

Applicability of Article 1.6(2)

The official comment on Article 1.6 suggests that the gap-filling provision in paragraph 2 should not apply if the parties have agreed on a particular national law to which reference should be made for supplementing the Principles. 58 In this broadness, the statement seems questionable. The extent to which Article 1.6 should come into play ought to be dependent on the particular choice-of-Iaw clause. The necessity test of the Model Clause59 calls for the application of the Principles as far as possible, thus including their underlying general principles. On the other side, a choice of law limiting the Principles' governance to all matters coming expressly within their scope,60 whereas for the rest, national law is to apply, clearly excludes Article 1.6's methodology. Generally, it is the meaning attached to it by the parties that should be controlling. ii.

"Within the Scope of the Principles"

As a first step under the process adopted in Article 1.6(2), a tribunal must determine whether a legal issue concerns a matter that, though not expressly settled, falls within the scope of the Principles. The Preamble delineates the Principles' scope very broadly as setting forth rules for international commercial contracts. However, resort to the underlying general principles by measure of this standard, that is, everything that is contractual, of commercial nature, and peculiar to the international relation, clearly overstretches the procedure envisaged by Article 1.6(2). In that respect, it is noteworthy that the Principles' text itself or at least the comments place certain matters unambiguously outside their reach. 58 PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS art 1.6, cmt. 4 (International Institute for the Unification of Private Law (UNIDROIT) ed., 2004). 59 Cf. supra note 49. 60 Compare the choice-of-Iaw clause proposed by Patrick Brazil, UNIDROIT Principles of International Commercial Contracts in the Context of International Commercial Arbitration, 11 MEALEY'S INT'L ARB. REp. 31, 35 (1996).

38 • UNIDROIT Principles of International Commercial Contracts Pursuant to Article 3.1, the Principles do not deal with invalidity arising from lack of capacity or immorality. Comment 3 on Article 1.3 relegates effects the contract might have on third parties to an evaluation "under the applicable law."61 These explicit exemptions aside, though, it is unclear where to draw the line. The comments offer as a guide the subject-matter index. 62 A few examples shall illustrate the implications of such a measurement. A.

Example: Set-Off Claims

Considering the 1994 Principles' dedication of a whole chapter to performance, it could be argued at the time that set-off claims (which have only been added to the Principles in the 2004 edition) are "within the scope" of the Principles and therefore to be appraised by resorting to their underlying general principles. Set-off claims effect in an at least partial extinction of the other party's claim, and hence they may well be viewed as a form of "performing" or fulfilling one's obligation. More specifically, set-off could be predicated on Article 6.1.4, which requires the parties to perform their respective obligations, if feasible, simultaneously. Implicitly, it could be read into Article 7.3.6's order of concurrent restitution on termination of contract. Yet, set-offwas at that time one of the topics being studied by the Working Group as a desirable topic to be included in the second, enlarged and revised edition of the Principles. 63 One therefore could as well have taken the position that it would be premature to identify the underlying general principles on which the UNIDROIT Principles are based at this stage. Indeed, it has been claimed that the institute of set-off is too complex and the approaches in the various domestic laws too divergent to leave it to judicial development to fill the Principle's lacunae in that respect. 64 This is one of the reasons why for the CISG, whose Article 7(2) has played the point of reference in 61

PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS

Institute for the Unification of Private

62 Id., Comments to art. 1.6, 63 See supra Chapter 1, § 1.3.

at

Law

12

(UNIDROlT) ed.,

(International

2004).

17.

64 Cf CHRISTIANE WEIDEMANN, LUCKENFULLUNG UND RICHERTERLICHE RECHTSFORTBILDUNG NACH ARTIKEL 1.6 II DER UNIDROIT-PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS, METHODE UND BEISPIELE: RUCKGEW AHRSCHULDVERHALTNISSE, POSTVERTRAGLICHE PFLICHTEN, OBJEKTIVE BEWEISLAST 106 et seq. (2001).

UNiDROIT

Principles Before Arbitral Tribunals • 39

drafting Article 1.6, it is widely believed that set-off claims should be governed by the domestic law determined by virtue of the rules of private international law. Interestingly, though, some scholars have advocated a limited exception for claims that both result from a elSG-governed contractual relationship.65 This at least suggests that the task of crafting specific rules for set-off claims by judicial development might be feasible after all. B.

Limitation of Actions (Prescription)

Another example of an institute not expressly covered by the Principles in its 1994 version but potentially falling within the scope of the Principles at the time was the institute of prescription or limitation of actions. The initial difficulty here to overcome was one of classification. While in continental European law the rules on prescription form part of the substantive contract law, English and U.S. laws as to limitation of actions have traditionally regarded this instrument as procedural, though there is a tendency, at least in England, to position statutory limitations as substantive defenses that extinguish the right itself.66 The rules on prescription of the 2004 UNIDROIT Principles are exclusively aimed at limitation periods of an extinctive character. At any rate, for conflict-of-Iaws purposes the tendency has overwhelmingly been, even in parts of the United States, to classify rules on prescription as substantive, with the result that the issue is determined based on the rules of the lex causae, irrespective of this law's own classification for domestic purposes. From that perspective, it is plausible to take the view that prescription is within the scope of the UNIDROIT Principles. As mentioned previously, the Principles contain a detailed chapter on performance, and one "inherent" aspect of any claim for performance is that it is subject to a certain time limitation. However, even if one had been prepared to accept this analysis, the question remained whether one could determine a general point in time after which a claim may no longer be raised, despite the fact that domestic laws contain a wide range of periods of limitation. At least one arbitral tribunal that decided to base its 65 Cj. Ulrich Magnus, Die allgemeinen Grundsiitze im UN-Kaufrecht, 59 469, 489 (1995) with further references. 66 See VISCHER, HUBER & OSER, supra note 54, at para. 1146.

RABELSZ

40 • UN/DROIT Principles of International Commercial Contracts

award on the UNIDROIT Principles has, from what I understand, gone down this route and, quite creatively, chosen the average of the time periods of the national laws having a substantial contact with the contract. 67 Apart from perhaps being overcreative, this methodology must be criticized, as it did not deduce the time limitation by any underlying principle of the UNIDROIT Principles. This would have been a difficult endeavor, as at that time there were no rules in the Principles stating specific time periods. What the arbitral tribunal could have done, alternatively, is to develop its own time limitation as an expression of what is reasonable in international trade under the specific circumstances. As seen before, reasonableness is one of the fundamental tenets underlying the Principles. In that process, the arbitral tribunal could have taken inspiration from international instruments, in particular Article 8 of the Convention on the Limitation Periods in International Sales. 68 It is imperative that the tribunal honor the justified expectations of the parties and, in that respect, relying on an international instrument may be the most appropriate solution. C.

Conditions and Joint v. Several Liability

The publication of the 2004 edition of the UNIDROIT Principles should not be taken to mean that the Principles do not contain any gaps anymore. Even within the framework of general contract law, as a continental European lawyer would know it, there are two important features that are not addressed at all in the Principles. One is the law of conditions: A contractual obligation may be made conditional upon the occurrence of an uncertain future event, so that the obligation takes effect only if the event occurs (" condition precedent") or comes to an end if the event occurs (" condition subsequent"). If for example the issue is whether a 67 Ulrich C. Mayer, Die Unidroit-Prinzipien fur intemationale Handelsvertriige-Zieisetzung, Anwendungsbereich und ihre Bedeutung fur die schweizerische Rechtspraxis, 4 AJP 499, 5lO (1996), reports of an arbitral award according to which the principle that actions are limited in time is part of the lex mercatoria. 68 See also ICC Award No. 7110, ICC ARB. BULL. 56 (Feb. 1999), where the tribunal did not apply a general rule on time limitation but decided to admit the claims despite a delay of 11 years based on the particulars of the case. This award is criticized by SCHILF, supra note 30, at 313 ("a decision based on equity rather than based on rules of law").

UNIDROIT

Principles Before Arbitral Tribunals • 41

condition should be deemed fulfilled because a party prevented it from occurring, should an arbitrator or judge decide the matter based on the general principles underlying the UNIDROIT Principles or resort to the applicable national law for lack of an express rule on conditions in the UNIDROIT Principles? At the core of the arbitrator's or judge's analysis will be the reasons for the parties' behavior and whether the reasons may be said to be in accordance with the party's good faith and fair dealing obligations. This is clearly within the scope of the Principles and generally addressed in Article 1.7 and Article 1.8. In other words, only because the Principles have not adopted express provisions relating to conditions precedent and conditions subsequent, this should not be taken to mean that any issue arising in that context is outside the scope of the Principles. Another issue not taken up in the Principles, not even in the 2004 edition, are rules on whether several obligors are liable jointly or severally and how, as among themselves, the liability is apportioned. Where in a contract parties share in an obligation and the question arises whether that obligation is joint or several, this is arguably one of interpretation. Accordingly, the UNIDROIT Principles are conclusive, as they contain a whole chapter on that subject matter. When it comes to the issue of apportionment and recourse among jointly liable obligors, however, reliance on the interpretation rules of the Principles may not be as easy. Often, the contract will not include any clause on the internal apportionment and claim procedures. May it indeed be assumed that absent the parties' agreement in the contract, jointly liable obligors are liable in equal shares among themselves? In specific circumstances, this may be inferred from the practices established between the parties and usages (Article 5.1.2(b». Would it also be appropriate to simply base this rule on the reasonableness standard in the same Article (Article 5.1.2 (b» for determining implied obligations? How about the issue of whether ajointly liable obligor who has performed more than its share may claim the excess from any of the other obligors to the extent of each obligee's unperformed share, together with a share of any costs reasonably incurred? What if a jointly liable obligor is unable, despite all its reasonable efforts, to recover contribution from another jointly liable obligor? Is the share of the remaining jointly liable debtors, including the one who has performed, to be increased proportionally? While these are all

42 • UNIDROIT Principles of International Commercial Contracts reasonable principles and can be found in the laws of many nations, would it indeed be appropriate to use the reasonable standard or any other vague principle in the UNIDROIT Principles to arrive at these principles? Putting the specific examples above aside, I would submit the better argumen ts are generally in favor of a wide notion of what may be considered "within the scope" of the Principles. fi9 Such an approach would eventually lead to ajudicial refinement and further development of the Principles, which I believe is in line with the very idea of the Principles to reduce as far as possible the need to resort to national laws. The tribunal should have the liberty to take into account the internationality of the transaction and cast the rule accordingly. Michael J. Bonell has cogently argued that Article 1.6 indeed should be interpreted as "a clear invitation to fill any lacunae in the UNIDROIT Principles by judicial development of the law and by legal comparison."70 He rightly highlights the omission of any reference to the domestic law applicable according to conflict-of-Iaws rules in Article 1.6. In that respect, Article 1.6 stands in sharp contrast to the model provision of Article 7(2) CISG.71 By establishing arbitral precedents dealing with issues not expressly dealt within the UNIDROIT Principles, a process could be started where the Working Group in turn could take guidance when consolidating and expanding the Principles. 69 But see, for example, Alejandro Garro, The Eason-Weinmann Colloquium on International and Comparative Law: The Contribution of the Unidroit Principles to the Advancement of International Commercial Arbitration, 3 TUL. J. INT'L & COMPo L. 93, 104 (1995), who takes a narrower view. Similar to this study U rs Portmann, Alles was Recht ist-Die Rechtswahl der UNIDROIT-Prinzipien und deren Liickenfiillung im schweizerischen IPRG, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON

CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 191, 197, 199 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007) (arguing in addition that under Article 5 of the Swiss Private International Law Act, a choice of law is exclusive). 70 Michael Joachim Bonell, in 1 EUR. J.L. REF. 333 (1998/1999) (view expressed at the Conference in Basle, Switzerland, on November 7-8, 1997, "UNIDROIT Principles of International Commercial Contracts as a Legal Framework for International Business Transactions," organized by the Europainstitut Basle). 71 See also M.E. Storme, Applications possihles et caracteres ge-ni:raux des principes de droit uniforme des contracts, 72 REv. DR. INT'L & DR. COMPo 309, 321 (1995).

UN/DROIT Principles Before Arbitral Tribunals • 43 iii.

The Methodology Underlying Article 1.6(2) in Identifying and Deriving General Principles and Specific Rules

Once the permissibility to resort to general principles underlying the UNIDROIT Principles has been established, that is, when it has been determined that a particular topic falls within the scope of the UNIDROIT Principles, the next question arises as to how these principles, methodologically, are to be identified. The process under Article 1.6 does not fundamentally differ from that under Article 7 (2) CISG and may be compared to reverse engineering. 72 The judge or arbitrator must essentially redesign the general blueprint, so to speak, from which the drafters drew the detailed rules contained in the Principles and the Convention, respectively. Ulrich Magnus has pointedly illustrated the method by reference to Article 79 CISG.73 The provision determines the cases in which the obligor is discharged from its obligation. It has been drafted very narrowly and thus rests on the assumption that, in general, the obligor must fulfill his or her obligations, a principle commonly associated with the notion of pacta sunt servanda. In a next step, the principle identified has to be applied to the particular situation. Obviously, basic standards such as pacta sunt servanda need further specification. It is not entirely clear how a court, or, in our context, an arbitral tribunal, should give a judiciable content to such a standard. Certainly, it is permissible to take inspiration in a particular provision of the Principles, which expresses the general principle and is susceptible to an analogous application. However, it is an open question whether, alternatively, a comparative law method that takes into account the solutions in domestic legal systems is a valid approach.74 Strictly speaking, the 72 On this process, see also SCHILF, supra note 30, at 268 et seq.; Toth, supra note 49, at 201, 204. 73 Cf. Magnus, supra note 65, at 478; for a further detailed account as to the interpretation technique of Article 7(2) CISG, see Ernst A. Kramer, Uniforme Interpretation von Einheitsprivatrecht-mit besonderer Beriicksichtigung von Artikel 7 UNKaufrecht, in ERNST A. KRAMER, ZUR THEORIE UND POLITIK DES PRIVAT- UND WIRTSCHAFTSRECHTS, BEITRAGE AUS DENJAHREN 1969-1996401 et seq. (1997); WEIDEMANN, supra note 64, at 116 et seq.

74 Strongly opposed, for example, by Franco Ferrrari, General Principles and International Uniform Commercial Law Conventions: A Study of the 1980 Vienna Sales Convention and the 1988 Unidroit Convention on International Factoring and Leasing and the Unidroit Principles, 1 EUR. J.L. REF. 217, 232 (1998/1999).

44 • UN/DROIT Principles of International Commercial Contracts wording of Article 1.6 mandates that the role of a comparative approach be confined to the specification of general principles already identified, whereas in the process of the identification of the general principles underlying the UNIDROIT Principles, no resort could be taken to national legal systems. 75 From a practical point of view, this distinction is purely theoreticaP6 The national concepts we have grown up with will always influence our thinking. Lawyers from distinct national legal orders will bring with themselves their respective understanding of legal concepts. Even if we were to pursue the ideal of an autonomous identification of the general principles underlying the UNIDROIT Principles, this restraint would not have a great impact. The need to resort to national rules is anyhow most strongly felt when it comes to finding a specific rule to the particular question decisive for the outcome of the case. In that context, it would be illusory to force an arbitrator to disregard the various experiences made in national or supra-national legal systems. The method seems specifically legitimate with regard to the UNIDROIT Principles, as it effectively sets forth the methodology by which the Principles have been "compiled" in the first place. b. Issues Beyond the Scope of the Principles: General Principles Underlying the UNIDROIT Principles Not Identifiable

Following the method outlined above, there will be only limited need to resort to the "otherwise applicable law:" either the subject matter is not dealt with at all in the Principles, or a general principle is not identifiable. Only in these cases, the question arises what other sources of law an arbitral tribunal should use. Is it necessarily the national legal system pointed to by the rules of private international law that the tribunal deems appropriate? 75 See also Gert Brandner, Admissahility of Analogy in Gajrfilling under the CISG, BA.a(bb) (Sept. 1999), http://www.cisg.law.pace.edu/cisg/biblio/brandner. html. 76 Cf. Ingeborg Schwenzer, in 1 EUR. J.L. REF. 342 (1998/1999) (view expressed at the Conference in Basle, Switzerland, on November 7-8, 1997, "UNIDROIT Principles of International Commercial Contracts as a Legal Framework for International Business Transactions," organized by the Europainstitut Basle).

UNIDROIT

Principles Before Arbitral Tribunals • 45

Article 1.6(2) itself, as has been rightly emphasized by Michael]. Bonell,77 makes no direct reference to domestic law. The alternative would then be to resort to other rules of law not rooted in a particular national legal system. Methodologically, their application could be predicated on the theory of a silent, negative choice of the parties, a theory, which is enjoying strong support in modern arbitration practice. Putting aside the doubts about the legitimacy of such an assumption for the moment, such an approach, above all, faces the concern that the arbitral tribunal would essentially be left with the only vaguely defined broad notion of general principles of law recognized by civilized nations in the sense of Article 38(1) (c) of the Statute of the International Court of Justice. All the difficulties inherent in an application of non-state rules of law as they existed before publication of the Principles would be reinstated. To some degree, this may not be in line with the goal the drafters of the Principles pursued. On the other hand, there have been various efforts-apart from the UNIDROIT Principles-designed to help arbitrators determine the contents of such broad concepts as pacta sunt servanda or good faith. The European Principles have already been mentioned. 7s They are also clad in the form of a restatement, though primarily aiming at the harmonization of the various contract laws within the European Communities. By and large, the groups entrusted with the preparation of these sets of rules have yielded identical results. However, the European Principles contain provisions not included in the UNIDROIT Principles. Examples are the rules on conditions precedent and conditions subsequent or those on joint and several liability.79 As mentioned above,so there is no respective counterpart in the UNIDROIT Principles. Other attempts are more informal. The most comprehensive one is based on a concept of "creeping codification," as proposed by Klaus Peter Berger. S1 From his perspective, essentially in line with 77 See supra note 70. 7S

See supra Chapter 1, § I.l.

79 Chapter 16 and Chapter 10 of the Principles of European Contract Law,

respectively. 80 Cf supra § III.l.a.iLC. 81 BERGER, supra note 4, at 206 et seq.

46 • UNiDROIT Principles of International Commercial Contracts

the fathers of the lex mercatoria doctrine, Goldman,82 Fouchard,83 Kahn,84 and Schmitthoff,85 the Principles are at odds with the very idea of the lex mercatoria as a set of principles and rules progressively coming into existence. As a way out of the codification predicament, he instead advocates an evolving process in which a list of rules and principles that reflect the present state of transnational commercial law would continuously be established. The list purports to emphasize less comparative research than arbitral case law. So far, its contents comprise almost 80 rules and principles, thereby consolidating and further amending the stock of rules already identified through the studies of Musti1l86 and other international arbitration scholars.87 It would be unfortunate to regard these conceptually different approaches as mutually exclusive. The characteristics of the Principles as a codification do not preclude resort to other attempts to 82 Compare, in particular, Berthold Goldman, Frontw-es du droit et lex mercataria, ARCH. PHIL. DR. 177 (1964); further developed, amongst others, in Berthold Goldman, Lex Mercatoria, FORUM INTERNATIONALE 3 (1983); Berthold Goldman, La lex mercataria dans les contrats et l'arbitrage internationaux: realiti et perspective, J. DR. INT'L 475 (1979); Berthold Goldman, The Applicable Law: General Principles of Law-The Lex Mercataria, in CONTEMPORARY PROBLEMS IN INTERNATIONAL ARBITRATION 113 Uulian D.M. Lew ed., 1986); Berthold Goldman, Nouvelles Riflexion sur la Lex Mercataria, in ETUDES DE DROIT INTERNATIONAL EN L'HoNNEUR DE PIERRE LALIVE 241 (Christian Dominice, Robert Patry & Claude Reymond eds., 1993). 83 PHILPPE FOUCHARD, L'ARBITRAGE COMMERCIAL INTERNATIONAL 423 et seq. (1964); as to later writings, see, for example, Philippe Fouchard, Les usages, l'arbitre et le juge-A propos de quelques recents arrets fran~ais, in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES, ETUDES OFFERTES A BERTHOLD GOLDMAN 67 (1987). 84 PHILIPPE KAHN, LA VENTE COMMERCIALE INTERNATIONALE 365 (1964); for the further development of his view compare, for example, Philippe Kahn, Droit international economique, droit du developpement, lex mercataria: concept unique ou pluralisme des ordre juridiques? in LE DROIT DES RELATIONS ECONOMIQUES INTERNATIONALES, ETUDES OFFERTES A BERTHOLD GOLDMAN 97 (1987). 85 CLIVE M. SCHMITTHOFF, THE EXPORT TRADE: THE LAw AND PRACTICE OF INTERNATIONAL TRADE (1962); Clive M. Schmitthoff, The New Sources of the Law of International Trade, 15 INT'L Soc. SCI.J. 259 (1963); Clive M. Schmitthoff, Das Neue Recht des Welthandels, 28 RABELSZ 47 (1964). 86 Lord Justice Mustill, The New Lex Mercataria: The First Twenty-five Years, in LIBERAMICORUM FOR THE RT. HON. LORD WILBERFORCE 149 et seq. (Maarten Boos & Ian Brownlie eds., 1987). 87 For detailed references, see BERGER, supra 4 at 215.

UN/DROIT

Principles Before Arbitral Tribunals • 47

denationalize the law of international transactions. On the contrary, the Principles are conceived as a momentary depiction of the state of the law of international transactions, which need constant refinement and amendment over time. As the list put together so far 88 has been influenced by the formulation of the rules in the Principles, as evidenced by the comparative notes identifying the utilized sources, the list itself would inspire the ongoing codification process through the Principles. Assuming the desirability and, above all, feasibility of a resort to non-state normative sources for matters not dealt with in the UNIDROIT Principles, a closer look needs to be taken at the principal theory upon which such an additional denationalization would be based: the doctrine of an implied negative choice of law. i.

The Doctrine of

a Negative Choice of Law by the Parties

In its purest form, the doctrine has come into play where the parties to an international contract could not agree on the choice of a particular legal system. 89 In this situation, the parties are assumed to have, by tacit agreement, refrained from designating any state law as applicable and to have authorized the arbitral tribunal to resort to a-national sources of law. The principal foundation of the theory is ICC Case No. 5953, In re Compania Valenciana de Cementos Portland (SPain) v. Primary Coal Inc. (New York).90 On the issue of a direct application of the law merchant, without the express approval of the parties, the tribunal held: "Non seulement elles n'ont voulu ni du droit Espagnol ni du droit de l'Etat de New York mais on est meme fonde a penser que du fait, qu'elles ont ecarte Ie droit anglais, elles n'ont pas voulu d'un droit quelconque et qu'elles ont prefere un droit purement international." 88

[d., 278 et seq.

89 REv. ARB. 663 (1990), note Paul Lagarde (Fr.); on which, see Klaus-Peter Berger, Les mercatoria in der internationalen Wirtschaftsschiedsgerichtsbarkeit: Der FaU 'Compania Valenciana: 13 IPRAx 281 (1993). 90 For a detailed account of the theory, compare Marc Blessing, Regulations in Arbitration Rules in Choice of Law, in PLANNING EFFICIENT ARBITRATION PROCEEDINGS-THE LAW APPLICABLE TO INTERNATIONAL ARBITRATION 391, 396 (Albert van den Berg ed., 1996).

48 • UN/DROIT Principles of International Commercial Contracts

The doctrine has been called merely hypothetica1. 91 Indeed, it seems not justified to generally infer from the parties' failure to agree on the application of a particular domestic law that they did not want to have any domestic law applied to their transactions. 92 Especially in the common situation in which the parties' claims as to a choice of their "own" legal system clash against each other, the final omission of such a choice-of-Iaw clause most likely is devoid of any conflict-of-Iaws considerations. The more likely rationale is that the parties did not want to risk the deal by disagreeing over the applicable law. It would therefore be premature to draw any inference from the history of the pre-contractual negotiations as to the matter of the applicable law. It is exactly the task of the arbitrators to determine autonomously what law should be applied. Only then, by an analysis of the nature of the transaction, which includes factors such as whether the relationship is strongly rooted in a particular legal system or in contrast has no unambiguous connection with a single national legal order, may the tribunal come to the conclusion that the contract should not be submitted to one of the relevant national laws.93 Choice of the UN/DROIT Principles and the Doctrine of Choice of Law

ii.

a Negative

In the situation under discussion, however, the indications for an assumption of an "implied negative choice" seem to be fairly stronger. The parties have expressed their will to denationalize their contractual relationship, although they have done so in a very particular way. Under many alternatives to do so, they have given preference to a work of precise rules that provides a balanced legal solution over only loosely defined, spontaneously evolving rules. At the same time, they have not complemented their choice of the UNIDROIT Principles with a reference to a specific national legal regime. In light of the progress that has been made in identifYing See VISCHER, HUBER & OSER, supra note 54, at para. 306. See Klaus Peter Berger, Party Autonomy in International Economic Arbitration: A Reappraisa~ 4 AM. REv. INT'L ARB. 1, 32 (1993); if. also Filip de Ly, National Report of the Netherlands, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL 91

92

CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 219-20 (Michael Bonell ed., 1999). 93

See infra § N.2

J.

and Chapter

3, § 11.2.

UNIDROIT

Principles Before Arbitral Tribunals • 49

the content of transnational legal principles, it should therefore need only little evidence to corroborate the conclusion that the parties concurrently intended the arbitral tribunal to base its award on non-state rules of law in its entirety.94 It is certainly enough if the parties set at naught the advice of their legal counsels to follow the recommendation of UNIDROIT and to provide for the auxiliary application of the law of a particular domestic jurisdiction. It also should suffice to establish that the parties were aware of the incompleteness of the Principles, but they nevertheless did not revise their choice-of-Iaw clause by referring to the otherwise applicable domestic law. Beyond that, conclusive inferences are impossible. Simple oversight of the question or ignorance of its relevancy certainly does not give rise to such an assumption. In these and other cases, an application of non-state law may only be predicated on an objective approach that takes account of the impossibility or inappropriateness of a localization of the contract in a single legal order. 95 2. The UNIDROIT Principles and the Parties' Reference to the Lex Mercatoria, General Principles of Law, General Principles of Equity, or the Like

a. Overview of Doctrine and Arbitral Case Law The role the Principles may play in the situation in which the parties refer to the lex mercatoria, general principles of the law, general principles of equity, or the like has already been the subject of intense debate. Scholars who have taken a view on the issue unanimously emphasize that the Principles are only "an indication of the existence of a transnational legal rule, [... J a possible source of the lex mercatoria, "96 and should therefore not automatically be 94 Cf also Anton K. Schnyder & Pascal Grolimund, "opting in" otier "Opting out': Anwendung tier UNIDROIT Principles of International Commercial Contracts in schiedsgerichtlichen Verfahren, in FESTSCHRIIT FUR PETER SCHLECHTRIEM ZUM 70. GEBURTSTAG 395, 406 (Ingeborg Schwenzer & Gunther Hager eds., 2003). 95 Cf infra § IV.2 and Chapter 3, § II.

96 BERGER, supra 4, at 179; similarly, for example, Philippe Kahn, Les principes comme droit applicable aux contrats internationaux, in CONTRATTl COMMERCIAL! INTERNAZIONAL! E PRINCIPI UNIDROIT 41, 45 (Michael]. Bonell & Franco Bonelli eds., 1997); Michael Joachim Bonell, in 1 EUR. J.L. REF. 329 (1999) (view expressed at the Conference in Basle, Switzerland, on November 7/8,

50 • UN/DROIT Principles of Intemational Commercial Contracts

applicable in case of such a reference. Indeed, it would be presumptuous for a work being prepared by a group of leading experts and academics such as the UNIDROIT Principles to lay claim to being the genuine expression of the law merchant. The Principles rightly do not demand such an exclusive status and correspondingly only stipulate that they may be applied when the parties have chosen the lex mercatoria, general principles of law, or the like.97 There is, however, great uncertainty how arbitrators should actually assess whether the Principles' rules do reflect the lex mercatoria, general principles of law, or whatever formula with a similar effect the parties have used. Some arbitral decisions have, in view of this apparent difficulty, foregone any verification process and instead adopted the UNIDROIT Principles in their entirety as a genuine expression of the parties' particular choice. Thus, a choice of "principles of natural justice" has prompted an ICC arbitral tribunal to conclude that the parties intended their contract to be governed by rules and principles, "which, though not necessarily enshrined in any specific national legal system, are specifically adapted to the needs of international transactions and enjoy wide international recognition," and that such rules and principles "were primarily reflected by the UNIDROIT Principles ofInternational Commercial Contracts. "98 Similarly, another arbitral tribunal, held under the auspices of the ICC, faced a choice-of-Iaw clause referring to "Anglo-Saxon principles of law" as the governing law and applied, without further elaboration on its justification, the 1997, "UNIDROIT Principles of International Commercial Contracts as a Legal Framework for International Business Transactions," organized by the Europainstitut Basle) ("additional source of wisdom"); see also Blessing, supra note 90 (though personally tempted to directly apply the Principles in their entirety, but referring to further analysis). 97 UNIDROIT Principles, Preamble para. 3. 98 ICC Award No. 7110, July 13, 1995, Selected Case Law Relating to the Unidroit Principles of International Commercial Contracts, 1, 12 (Feb. 22, 2000), http://www.unilex.info = Unif. L. Rev. 812 (1997) = Michael Joachim Bonell, The Unidroit Principles of International Commercial Contracts, Nature, Purpose and First Experience in Practice, V.3.(c). The award, including the dissenting opinion, which apparently criticized the equation of natural justice with the UNIDROIT Principles, is extensively discussed in de Ly, supra note 92, at 216 et seq.; if. also Lalive, supra note 24, at 85 et seq.; Boele-Woelki, supra note 56, at 661.

UNIDROIT Principles Before Arbitral Tribunals • 51

UNIDROIT Principles, in particular the rules on interpretation. 99 In another matter reported by Pierre Lalive,loo the award flatly declared that "general rules and principles enjoying wide international consensus, applicable to international commercial contractual obligations and relevant to the [c]ontracts, are primarily reflected by the Principles of International Commercial Contracts adopted by Unidroit." Other tribunals have taken a more cautious approach. Representative for this line ofreasoning is an ICC award of June 5, 1996. The tribunal acknowledged that the Principles "contain in essence a restatement of 'principes directeurs' that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice." At the same time, it cautioned that "the UNIDROIT Principles, as now laid down, have not as yet, in all their detail, stood the test of detailed scrutiny in all their aspects, and thus it is at least conceivable that a particular rule would not seem to reflect the international consensus." In its preliminary award on the issue of the applicable law, the tribunal held that it would take into account the UNIDROIT Principles but added the qualification "as far as they can be considered to reflect generally accepted principles and rules. "10l Another example of this line of reasoning is an ICC award rendered on May 5, 1997.102 At the outset of the proceedings, the parties, a U.S. company and the Ministry for the Armed Forces of the Islamic Republic of Iran, agreed to the complementary and supplementary application of general principles of international law and trade usages. Left with this vaguely defined legal standard, the tribunal sought guidance from the UNIDROIT Principles. In deciding the merits of the case, the tribunal did rely on the Principles on a number of occasions. 103 99 Award rendered by the London Court of Arbitration in 1995, summarized in Michael Joachim Bonell, Die Unidroit-Prinzipien der internationalen Handelsvertriige: Eine neue Lex Mercatoria?, 37 ZFRV 152, 157 (1996). 100 Lalive, supra note 24, at 87. 101 ICC No. 7375, Award on Preliminary Issues,June 5, 1996; if. 11 MEASLEY'S INT'L ARB. REp. A-I (1996); see also UNIF. L. REv. 598 (1997). 102 UNIF. L. REv. 796 et seq. (1999). 103 See the analysis of Bonell, supra note 37, at 659 et seq.

52 •

UN/DROIT Principles of International Commercial Contracts

However, it rejected the solution offered by the UNIDROIT Principles with respect to the date from which interest is to be awarded. To a large extent, the tribunal predicated its rejection on the clear contradiction to the primarily applicable Iranian law. However, the arbitrators also considered whether the UNIDROIT Principles actually did reflect generally accepted principles. Their point of reference was the jurisprudence of the Iran-U.S. Claims Tribunal. Although the tribunal normally awarded interest from the time payment was due and thus certainly inspired Article 7.4.9, in other cases interest had been awarded only after the creditor demanded payment or filed suit with the tribunal. The arbitrators regarded the precedents of the Iran-U.S. Tribunal as authoritative in view of the involvement of the Iranian ministry and a private U.S. company in the dispute, and therefore were not prepared to go beyond the jurisprudence of this judicial body in their holding what consensus had been reached internationally on the particular issue. At the same time, their opinion seemed to be that the drafters of the UNIDROIT Principles were not in a position to arrogate such a role, at least not in the limited context of their case. Other provisions of the UNIDROIT Principles that have undergone arbitral scrutiny under the aspect of representing widely recognized and generally accepted legal principles are those of force majeure and hardship. The arbitral tribunal referred to above, which in a partial award considered the UNIDROIT Principles to reflect "naturaljustice,"104 dismissed in its final award, composed in part of new members,105 the claimant's assertion that reasons amounting to force majeure or hardship excused the non-performance of its payment obligation on the ground that "the theory of changed circumstances did not form part of widely recognized and generally accepted legal principles."I06 The tribunal did not mention at all the UNIDROIT Principles' provision on hardship (Article 6.2.1 through 6.2.3) and thus did not even attribute them prima facie evidence with respect to the present state of general contract law principles. Irrespective of the ultimate conclusion of the tribunal, the award must be criticized that it did not support its findings with any reasoning. 104 Supra note 98. 105

See Bonell, supra note 37, at 654.

106

Id.

UN/DROIT

Principles Before Arbitral Tribunals • 53

Another ICC award, rendered in 1997, supplies the underlying reasons.107 Although Spanish law governed the contract in this case, the claimant argued that Article VII of the 1961 Geneva Convention on International Arbitration and Article 13(5) ICC Rules of Arbitration and Conciliation, which mandate the tribunal to take account of international trade usages, triggered the application of the UNIDROIT Principles in general and the provisions on hardship in particular. The arbitrators conceded the tendency in certain branches to stipulate a hardship clause with some regularity. Nonetheless, their opinion was that in commercial reality, the obligation to reinstate the equilibrium of the contract, if necessary by intervention of a third person, still accounted for the exception, and, therefore, contractual stipulations detailing the premises and consequences of situations amounting to hardship could not be dispensed with. Consequently, the tribunal held: II est done exclu que l' on puisse considerer les dispositions en matiere de hardship contenues dans les 'Principes UNIDROIT' com me des usages du commerce. II s'agit, au contraire, de regles qui ne correspondent pas, au moins a I'etat actuel, a la pratique courante des affaires dans Ie commerce international et qui ne seront par consequent applicables que lorsque les parties y ont fait une reference expresse, ce qui n' est pas Ie cas ici. l08

b. Analysis of Doctrine and Arbitral Practice The few published arbitral awards that have undertaken an analysis of the extent to which the UNIDROIT Principles reflect today's international trade practice represent the theoretically sound approach. It admittedly implicates a rather complicated process of verification,l09 which, among others, would include an in-depth analysis of arbitral and state decisions on the particular issue and, above all, actual non-contentious practice as evidenced in international standard form contracts and general trade conditions. Additional guidance would have to be gained from instruments 107 ICC No. 8873/1997, 125]. DR. INT'L 1017, 1018 (1998), note Dominique Hascher (Fr.). 108 Id. at 1019. 109 See, in particular, BERGER, supra note 4, at 224 et seq.

54 • UNIDROIT Principles of International Commercial Contracts

drafted by international institutions, such as the "Incoterms,"l1o the "ICC Uniform Customs and Practices for Documentary Credits,"lll or the "ICC Uniform Rules for Demand Guarantees."112 International conventions, at least if widely adopted, could present another backdrop against which to identify the degree to which the UNIDROIT Principles correspond to generally accepted principles and rules in the business community. In addition, arbitrators should attribute great weight to the parties' understanding of their respective choice-of-Iaw reference. ll3 Contrasting a choice pointing to the lex mercatoria with a choice of general principles of law shall illustrate this point. i.

Reference to the Lex Mercatoria

Traditionally, the lex mercatoria is associated with a law in constant flux and of undogmatic and unsystematic character. Its main legal sources are, above all, trade usages and pre-fIxed contract terms, elaborated by trade associations and varying from branch to branch. The single rules that these sources have engendered are, in the first place, designed to ensure "friction-free international trade"114 and are thus less concerned with the adequacy and equity of the solution in the particular case than with the hard-and-fast resolution, or even avoidance, of an existing dispute. From that perspective, it is certainly at odds with the parties' choice of law to generally base the substance of the dispute on the Principles if it is demonstrated that the parties meant to apply the "classical" lex mercatoria. The Principles rely amply on innovative opening devices, such as reasonableness, unfairness, or circumstances of the case,ll5 which leave plenty of room to take account of the individual situation; in that regard, the UNIDROIT Principles certainly are not 110 INCOTERMS: INTERNATIONAL RULES FOR THE INTERPRETATION OF TRADE TERMS (ICC Pub. No. 560a (2000). III UCP 500 (ICC Pub. No. 500). 112 ICC Pub. No. 458. 113 See also Canaris, supra note 4, at 14. 114 Frank Vischer, The Relevance of the Unidroit Principles for Judges and Arbitrators in Disputes Arising out of International Contracts, 1 EUR. J.L. REF. 203, 207 (1998/ 1999). 115 Not surprisingly, this very fact is criticized; see, e.g., Hernany Veytia, The Requirement ofJustice and Equity in Contracts, 69 TuL. L. REv. 1191, 1195 (1995).

UN/DROIT Principles Before Arbitral Tribunals •

55

an element of the "law" as chosen by the parties. Rather, the tribunal would be required to embark upon a largely empirical inquiry of the pertinent trade usage and clausal law in the particular branch involved and to apply those rules. ii.

Reference to General Principles of Law, General Principles of Equity, or the Like

In contrast, a reference to the general principles of law recognized by civilized nations, principles of equity, or the like raises other considerations. In many instances, the parties to an international contract associate with such references a certain degree of fairness. The fairness function becomes apparent in "state contracts," where the parties have agreed on the application of the state party's system of law as the primarily applicable law, but have tempered that choice of law with a reference to general principles of law. It is generally understood as a counterbalance to a potential misuse of the states' legislative authority. It shall ensure basic notions of fairness in the contractual relationship concerned. ll6 The broad principles that have been used to this purpose encompass fundamentals such as pacta sunt seroanda, abus de droit, rebus sic stantibus, or venire contra factum proprium. Here, the UNIDROIT Principles would indeed be of great practical value. The precise content of these general principles is uncertain. The UNIDROIT Principles would bring about the urgently needed specification and thus remedy one of the strongest weaknesses of an implication of these principles. On its face, it seems therefore more legitimate to apply the Principles in this context.l 17 They are not merely a compilation of international trade usages and clausal law. As already explained, they are the product of a careful comparison of the existing legal systems, a creation savante in the sense that the drafters obviously had to decide which one from several conflicting rules must be regarded as the most persuasive or best suited for cross-border transactions. lIB In that evaluation, the aim to achieve a balanced and equitable solution must have taken on prominence. It is, above all, evidenced & OSER, supra note 54, at para. 130. See also Canaris, supra note 4, at 15. BONELL, supra note 29, at 34.

116 VISCHER, HUBER 117 lIB

56 • UN/DROIT Principles of International Commercial Contracts

in the many rules that include, as a sort of a safety valve, a reference to the relative standards of reasonableness, fairness, or circumstances of the case. Arguably, these characteristics of the UNIDROIT Principles precisely perform the function the parties ascribed to the complementary reference to general principles of law in conjunction with a choice of the law of a particular state. An arbitrator's equation of the general principles as chosen by the parties with the rules contained in the UNIDROIT Principles would therefore seem to be reasonable and legitimate.

c. Conceptual Approach: A Proposal i.

Lex Mercatoria

A general assumption that the UNIDROIT Principles are a contemporary expression of the lex mercatoria disregards the conflicting theoretical foundations on which the UNIDROIT Principles and the classic lex mercatoria rely. It is indispensable that an arbitrator evaluates, on a rule-by-rule basis, whether or not the UNIDROIT Principles satisfy the needs and practice of commerce in the particular area of business and geographical region concerned, and he or she states the reasons for his or her conclusion as to the applicability of the UNIDROIT Principles. A verification process, in the way set out above and indispensable with respect to a reference to the lex mercatoria, will greatly burden arbitrators. 119 There is a big question mark whether international arbitral tribunals are really capable of undertaking an as thorough analysis as required from a theoretical point of view. Moreover, even if they were, the analysis is fraught with uncertainty, an element that the UNIDROIT Principles meant to reduce significantly. Instead of providing the coveted concretization of the relatively vague and general principles of law constituting the existing "international trade law," this technique essentially views the Principles only as an additional source of wisdom to which an arbitrator can resort based upon a more or less elaborated reasoning. There is no guarantee that it will result in consistent awards. Not only will arbitrators differ in their assessment of the lex mercatoria character of single provisions of the UNIDROIT Principles, 119

Cf Lalive, supra note 24, at 82.

UN/DROIT Principles Before Arbitral Tribunals • 57

but they will also necessarily have to distinguish between the various branches of international business. Yet, the hope must be that over time a host of valuable precedents develops, which in turn could and should be considered by other tribunals in their respective analysis. It is conceivable that over time a core of rules of the UNIDROIT Principles will develop, which presumptively are part of the lex mercatoria. This, however, necessarily implies that the awards are reasoned and, foremost, are easily accessible to the public. 120 ii.

General Principles of Law or Equity

The question is whether, in the context of a reference to general principles of law or equity, such an approach is mandated by equally compelling reasons as with respect to choice-of-Iaw clauses implicating the lex mercatoria. I believe the rules contained in the UNIDROIT Principles should be regarded as prima facie evidence of the current state of the general principles of international contract law. An element that supports this conclusion certainly is the above-mentioned intention with which parties to an international commercial contract are commonly referring to general principles of law. 121 It is not that they associate the "legal system" they have chosen with specific substantive rules; to the contrary, they have most likely no idea about the precise content of these rules. Rather, they trust that the chosen legal system as a whole will produce equitable solutions in the settlement of possible disputes in the future. It is no question that an application of the UNIDROIT Principles will meet these expectations. As explained, achieving a well-balanced decision in the individual situation is one of the characteristic features of the Principles. On the other hand, such a presumption seems justified in light of the working method with which the Principles have been prepared historically. The members of the Working Group entrusted with the project essentially represented the major legal systems of the world. The Working Group assembled the leading experts in the field of international contract law. The Principles themselves have 120 Cf also SCHILF, supra note 30, at 270. Critical to such a role of arbitral tribunals, see Lalive, supra note 24, at 89; see also BLASE, supra note 29, at 265. 121 See supra § II1.2.b.ii.

58 • UN/DROIT Principles of International Commercial Contracts been developed on the basis of extensive comparative law studies, taking into account both common and civil law as well as international conventions and international non-legislative instruments prepared by leading institutions or trade associations. An at best cursory "second-guessing" of the arbitrators, amply illustrated by the arbitral decisions that have gone into the issue discussed here,122 as to the extent of the UNIDROIT Principles' actual reflection of generally accepted principles of law would almost be arbitrary. At least in the context under discussion, it seems therefore more appropriate for arbitrators to demonstrate deference to the expertise with which the UNIDROIT Principles have been prepared, unless evidence submitted by the parties clearly substantiates that a different rule constitutes the generally accepted rule in relation to the dispute concerned. 123 There is even less reason to question the application of the Principles as a valid expression of general principles of law in the recognition and enforcement stage of an arbitral award. Setting aside, as it is structured in most states, particularly in those that have ratified the New York Convention ofJune 10, 1958, on the Recognition and Enforcement of Foreign Arbitral Awards, implies a limited review. It would result in substituting the court's own view of the law for those of the arbitrators, which would hardly be compatible with the applicable deferential standard. The mentioned decision of the U.S. District Court for the Southern District of California124 was therefore right in not entertaining a closer analysis on whether the UNIDROIT Principles actually do reflect "general principles of law." UNIDROIT

122 See supra § III.2.a et seq. 123 See also Jiirgen Basedow, Uniform Law Conventions and the Unidroit Principles

of International Commercial Contracts, UNIF. 1. REv. 129, 138 (2000) with respect to uniform law: "In conclusion, it is submitted that national courts, when interpreting uniform law Conventions and supplementing their internal gaps, take their departure from the rebuttable presumption that the Unidroit Principles give evidence of general principles of international commercial law. " See also BLASE, supra note 29, at 265. 124 Ministry of Defense & Support v. Cubic Defense Sys., supra note 37.

UNIDROIT Principles Before Arbitral Tribunals • 59

iii. Bridging the Gap Between the Two Concepts Through the General Principles of Law's Corrective Function

It is the notion of general principles of law that could mark the entry of the UNIDROIT Principles into the realm of the lex mercatoria and bridge the conceptual differences between the "classical" lex mercatoria and the UNIDROIT Principles. Although the law merchant emphasizes, in the first place, the law developed through actual business practice, it has been acknowledged, even by some of its most ardent proponents,125 that general principles of law recognized by civilized nations in the sense of Article 38(1) (c) of the Statute of the International Court of Justice are an integral part of the law merchant. As a matter of interest, they are being characterized as a law subjacent to the primarily applicable trade customs and clausal law, and correcting the injustices that originate from the insensitivity of the mechanical rules of the law merchant to the individual situations. 126 They thus perform exactly the function the parties commonly ascribe to their express choice of the general principles of law in combination with a particular state law. The UNIDROIT Principles, therefore, could apply the same way. In effect, this would attenuate the theoretical differences between a choice of the lex mercatoria and the general principles of law.

However, differences remain. In the first place, any question at issue must be solved through the lex mercatoria s primary regulative sources, that is, international trade customs and pre-fixed contract terms of business associations. The Principles would only come into playas a corrective tool where a particular solution is insensitive to acknowledged notions of justice and fairness. iv. Conclusions

The relationship between the UNIDROIT Principles and transnationallaw in a broader sense cannot be captured definitively. One of the reasons is the characteristic spontaneity and the continuing development in this field of law. While by this time the UNIDROIT Principles may be just an element in a wide array of various other sources, it is conceivable that the UNIDROIT Principles will at some See Goldman, Nouvelles Rijlexion . . . , supra note 82, at 243 et seq. See GEORGES RIPERT & RENE ROBLOT, TRAITE DE DROIT COMMERCIAL para. 72 (14th ed. 1991). 125

126

60 • UNIDROIT Principles of International Commercial Contracts

point in the future be entitled to the claim of authentically expressing the law merchant. This, however, takes, in the first place, a wide acceptance in the relevant business community and a respective degree of dissemination in actual business practice. 127 3. The UNIDROIT Principles and an Exclusive Choice of a Domestic Law by the Parties If the parties choose a particular national law, they bindingly mandate the tribunal to base its decision upon the chosen legal framework. Considering legitimate party expectations, it could well be argued that a court or an arbitral tribunal should not be authorized in that situation to accommodate the law to the internationality of the transaction, for example by taking inspiration from the UNIDROIT Principles. 128 This is not, however, the position of international arbitration institutions. It is well established that international arbitrators may take account of the relevant trade usages in all cases, that is, even when the parties have made an exclusive choice of a particular national law. l29 Similarly, the more recent Inter-American Convention on the Law Applicable to International Contracts of March 18, 1994 (ICLAIC) appears to reject the inference that principles of transnational law have to stay out of consideration if the parties have chosen a particular domestic law. Pursuant to its Article 10, in order to discharge the requirements of justice and equity in the particular case, a court, or an arbitral tribunal for that matter, must apply guidelines, customs, and principles of international commercial law as well as commercial usages and practices generally accepted even if the parties have made a choice of a particular national law. A more careful look at the language of the provision indicates that even under this progressive Convention, it is possible to take the parties' expectations into considerations. After all, the UNIDROIT Principles or other generally accepted principles of 127 Cf Beda Wortmann, Choice of Law by Arbitrators: The Applicable Conflict of Laws System, 14 ARB. INT'L 97, 103 (1998); see also, the general conclusion of Luiz Olavo Baptista, The Unidroit Principles for International Commercial Law Projects: Aspects of International Private Law, 69 TuL. L. REv. 1209, 1219 (1995). 128 In that sense, see Vischer, supra note 114, at 212; see also Garro, supra note 69, at 124-25. 129 See, e.g., art. 17(2) of the ICC Rules.

UN/DROIT Principles Before Arbitral Tribunals • 61

international commercial law could only displace a particular solution of the applicable national law if justice and equity in the particular case so require. This suggests a tribunal would have to balance all relevant interests. The expectations of the parties certainly are an important element within that process. 130 The ICLAIC preserves a degree of flexibility, which, on balance, seems the more reasonable approach.

IV. THE RELEVANCE OF THE UNIDROIT PRINCIPLES ABSENT A CHOICE OF LAW 1. Application of "Transnational Law" Before Publication of the UNIDROIT Principles

a. Recognition in Arbitral Practice Before publication of the UNIDROIT Principles, a number of arbitral tribunals determined cases on the basis of rules of a transnational character, even though the parties had failed to authorize them to do so. Most notably, the Norsolor award,131 which after a long journey through various courts in France and Austria had finally been held enforceable, was not based on a respective reference. In the Valenciana case ,132 the arbitrators faced the same situation but avoided taking on the issue of the legitimacy of basing the award on non-state sources of "law" without the parties' authorization. They somewhat speculatively133 assumed the existence of an "implicit negative intention" of the parties to exclude the application of all national laws and to rely instead on the application of transnational rules of law. 130 With respect to that aspect, see Johannes Christian Wichard, Die Anwendung der UNIDROIT-Prinzipien fur internationale H andelsvcrtriige durch Schiedsgerichte und staatliche Gerichte, 60 RABELSZ 269, 291 (1996). 131 See supra note 12. 132 See supra note 88. 133 As to the criticism with respect to the assumption of an implied negative choice of law of the parties, see, for example, Klaus Peter Berger, The Lex Mercatoria Doctrine and the Unidroit Principles of International Commercial Contracts, 28 LAw & POL 'y INT'L Bus. 943, 986 (1997); Eric Robine, What Companies Expect of International Commercial Arbitration, J.INT'Li\RB. 31, 36 (1992); Frank Vischer, supra note 114, at 20tH)7; see also de Ly, supra note 92, at 219.

62 • UNIDROIT Principles of International Commercial Contracts

b. Recognition in International Doctrine Despite these positive precedents, international doctrine has been reluctant to allow arbitrators to refrain from the search for the applicable national law and instead to proceed directly to non-state sources of law. Underlying this position are concerns about the predictability and certainty of law. 134 In light of the specific nature of the lex mercatoria, its spontaneous, incomplete, and indefinite character, it is believed essential that the parties were aware of the particular risks and dangers associated with such a hybrid legal order.

c. Statutory Recognition Various relatively new legislations on international arbitration do not go along with the reported cases in which the arbitrators decided on the basis of sources of transnational law without authorization of the parties. Rather, they reflect the skeptical attitude of international doctrine. They do so by expressly requiring the arbitrators to apply a specific "law" as opposed to "rules of law," the term associated with the freedom of the arbitrators to resort to a system of law not originating from a particular state and used with the explicit purpose of widening the reach of party autonomy. The most significant evidence of this more cautious approach is Article 28(2) of the UNCITRAL Model Law on International Commercial Arbitration. It states: "Failing any designation [of rules of law] by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable."135 It is generally assumed that in cases governed by the Model Law or, more precisely, a national arbitration statute transforming the Model Law into national law, arbitrators do not have the power to base their awards on the lex mercatoria or other transnational sources of law. 136 134 See Howard M. Holtzmann, Application of the Unidroit Principles of International Commercial Contracts in Arbitrations Governed by the UNCITRAL Model Law on International Commercial Contracts, in THE UNIDROIT PRINCIPLES: A COMMON LAw OF CONTRACTS FOR THE AMERICAS? 161, 165 (Frederique Mestre & Patricia de Seume eds., 1998).

135

136

Emphasis added. See BONELL, supra note 29, at 212 with further references.

UN/DROIT Principles Before Arbitral Tribunals • 63

Recent examples that have followed the Model Law in this respect are the English and German arbitration statutes. Section 46(3) of the English Arbitration Act 1996 requires arbitrators to apply "the law," which is "determined by the conflict oflaws rules" the tribunal "considers applicable." The Departmental Advisory Committee thereby stated the following reason for its decision to retain the more traditional approach of the Model Law where there is no choice of law by the parties: "In such circumstances the tribunal must decide what conflicts of law rules are applicable, and use those rules in order to determine the applicable law. It cannot simply make up the rules for this purpose. "137 The report echoes strong doubts about normative rules that arise outside the institutional framework of national states. 138 Similar reasons seem to underly Section 1051 (2) of the German Code of Civil Procedure, entered into force on January 1, 1998, which in even more absolute terms restricts the arbitrator's search for the applicable law: the search exclusively extends to "the law of the state with which the subject matter of the proceedings has the closest connection."139 The solution comes as no surprise. German doctrine has always been hostile toward the idea of an autonomous transnational commercial law. It has been recognized only within the strict limits of decisions in equity, which is only permissible when the parties have authorized the arbitrators to do SO.140 The decision of the English and the German legislators to implement the "more cautious" approach of the Model Law is remarkable. It perpetuates the state of affairs when the Model Law was agreed upon in 1985, and this despite more recent developments that point in the opposite direction by admitting the application of transnational principles of law even in the absence of the parties' choice. At an international level, this trend finds its expression in the Resolution on Transnational Legal Principles, adopted by the 137

DEPARTMENTAL ADVISORY COMMITTEE ON ARBITRATION LAW, REpORT ON

THE ARBITRATION BILL,

50, at para. 225 (1996).

138 See the comments by Stewart R Shackleton, The Applicable Law in

International Arbitration Under the New English Arbitration Act 1996, 13 ARB. 375, 379 et seq. (1997). 139 Emphasis added. 140 BERGER, supra note 4, at 58.

INT'L

64 • UNIDROIT Principles of International Commercial Contracts

International Law Association at its 65th conference on April 26, 1992, in Cairo. 141 It provides that where the parties remain silent with respect to the applicable law, "the fact that an international arbitrator has based an award on transnational rules (general principles of law, principles common to several jurisdictions, international law, usages of trade etc.) rather than on the law of a particular state should not in itself affect the validity or enforceability of an award." The Resoll!tion follows the position taken by a number of domestic arbitration laws, which, most significantly, have been enacted by states with great concern for their respective arbitration industry. France, as early as in 1981, expressly authorized the arbitrators to decide the dispute before them "conformement a celles [regles de droit] qu'il estime appropriees."142 The Dutch Code of Civil Procedure as amended in 1986143 and the Swiss Private International Law Act of 1987144 both use the term of "rules oflaw." By not deviating from the language on party autonomy, they recognize the arbitrators' right to employ rules of a transnational character on their own initiative.145 2. The UNIDROIT Principles-Conclusions

a. The

UNIDROIT Principles

as "Rules of Law"

In arbitrations held under the modern strand of arbitration statutes, that is, arbitration statutes that employ the "rules of law" language, an application of the UNIDROIT Principles is therefore possible. It is undisputed in international legal doctrine that the UNIDROIT Principles may be considered "rules of law" within the meaning of these statutes. l46 141 Reprinted in TRANSNATIONAL RULES IN INTERNATIONAL COMMERCIAL ARBITRATION 36 (ICC Publication No. 480/4, 1993). 142 Art. 1496 of the French Code of Civil Procedure as amended in 1981. 143 Art. 1054(2): "Failing such choice oflaw, the arbitral tribunal shall make its award in accordance with the rules of law which it considers appropriate." 144 Art. 187(1): "Le tribunal arbitral statue [... J selon les regles de droits avec lesquelles la cause presente les liens les plus etroits." 145 As to Swiss Law explicitly in this sense, see Karrer, supra note 24, at para. 63. 146 See, e.g., Boe1e-Woe1ki, supra note 56, at 672; de Ly, supra note 92, at 216; Vischer, supra note 114, at 209; as to Article 187 PILA, see Marc Blessing, Einleitung zum Zwii/ften Kapitel des IPRG, in KOMMENTAR ZUM SCHWEIZERISCHEN

UN/DROIT

Principles Before Arbitral Tribunals • 65

b. Scope of Application of the UNIDROIT Principles i.

General Considerations

A characterization of the UNIDROIT Principles as "rules of law," however, should not be misinterpreted. It certainly does not mean that an arbitrator can, par voie directe so to speak, resort to the Principles and declare them applicable as such, without further elaborating on the justification for their application. Some authors have gone so far as to admit the application of the UNIDROIT Principles only to the extent that they express generally accepted principles of law or are part of international trade usages. 147 I believe the latter proposition undervalues the role legal doctrine has been playing in developing international commercial law. It constitutes an important driving force behind its evolution, and it should therefore not be foreclosed from this process by requiring arbitrators to examine the extent to which the rules contained in the Principles, which to a large degree are the product of doctrinal work, reflect commercial practice. It would unnecessarily put a considerable restraint on the creativity of the arbitrators. Arbitrators should be admitted to take the view that the Principles provide suitable substantive "multi-national" rules that, in light of their origin and their genesis, should be applied. The proper limitation on the arbitrators' freedom to directly apply the rules of the UNIDROIT Principles, as the law governing the contract, follows from traditional conflict-of-Iaws considerations. The main aspect thereof has been alluded to in several arbitral awards, by referring somewhat mysteriously to the "internationality of the contract." Thus, it is stated in the Norsolor award: "Devant la difficulte de choisir la loi nationale dont l'application s'imposerait avec suffisamment de force, Ie Tribunal a estime qu'il convenait, compte tenue du caractere international du contrat, d'ecarter tout PRIVATRECHT-INTERNATIONALES PRIVATRECHT para. 226 (Heinrich Honsell, Nedim Peter Vogt & Anton K. Schnyder eds., 1996). 147 See Paolo Michele Patocchi & Xavier Favre-Bulle, Les Principes Unidroit relatifs aux contrats du commerce international. Une introduction, 34 SEMAINE JUDICIAIRE 569,603 (1998); see also Benedicte Fauvarque-Cosson, National Report of France, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 95, 114 et seq. (Michael Joachim Bonell ed., 1999).

66 •

UN/DROIT Principles of International Commercial Contracts

reference contraignante a une legislation specifique, qu'elle soit turque ou fran~aise, et d'appliquer la lex mercatoria internationale. "148 This jurisprudence rightly distinguishes contracts that do not have unambiguous contacts to a single national order, which are "floating" between the relevant legal orders involved in the particular dispute and those that are to the contrary strongly embedded in a particular state. The distinction imposes itself for different reasons. Denationalizing or delocalizing a contract that is plainly localized in a particular national legal order would clearly interfere with the legitimate claim of application of that legal order. More particularly, there is simply no need to disregard the solutions proffered by the contract law of that legal order. They have been specifically devised to regulate domestic commercial transactions. The basic assumption upon which the desirability and necessity of a transnational law partly rests, namely that domestic law is unfit for truly international transactions,149 is therefore inexistent, as the transactions' only material connections are within one single legal order. An application of transnational law would, moreover, possibly violate legitimate expectations of the parties as to the applicable law. If, under a traditional conflict-of-Iaws analysis, all relevant elements of the contract predominately point to a single legal order, an application of transnational legal standards could take the parties by surprise, in particular if they have taken actions based upon this law before the dispute arose. On the other hand, resorting to a body of rules not part of a particular state order in a situation in which it is difficult to establish a persuasive connection of an international commercial contract to 148 108J. DR. INT'L 836,839 (1981); see also ICC Award No. 6500,]. DR. INT'L 1015, 1016 (1992), which rejects an application of the lex mercatoria because the

contract is "fortement lie a un pays donne." 149 See Bonell, supra note 55, at 497 et seq.; Ole Lando, Some Issues Relating to the Law Applicable to Contractual Obligations, 7 KING'S C. LJ. 55, 62 (1996/1997); Hans Stoll, Rechtliche Inhaltskontrolle bci intemationalen HandelsgeschiiJten, in FESTSCHRIIT FUR GERHARD KEGEL ZUM 75. GEBURTSTAG 623, 637 (HansJoachim Musielak & Klaus Schurig eds., 1987); the assumption is, though, heavily questioned by M.V. Polak, Principles en ipr: geen broodnodig en pasklaar altematief 'recht,' 1996 WEEKBLAD VOOR PRIVAATRECHT, NOTARISAMBT EN REGISTRATIE No. 6225, at 391-92, referred to and summarized in de Ly, supra note 92, at 210 et seq.

UN/DROIT

Principles Before Arbitral Tribunals • 67

a particular state order seems compelling, at least more so than artificially localizing the transaction to a jurisdiction in which it is not clearly rooted. 150 The direct application of the UNIDROIT Principles in the absence of a choice of law by the parties therefore requires, as a prerequisite: (1) that the national arbitration statute governing the arbitration, generally the law at the seat of the arbitral tribunal, permit a decision to be taken on the basis of a non-state set of rules; and (2) that the contract have no unambiguous connection with a single legal order. That it is the UNIDROIT Principles and not some other body of a-national rules that the arbitrators decide to bring to application, provided that the above prerequisites are satisfied, may be justified on the basis of the particular quality of the UNIDROIT Principles. I will revert to that subject in connection with the assessment of the law character of the Principles for purposes of their application before state courts. 151 ii.

The Impact of Procedural Rules Prepared by Institutional Arbitration Organizations

The impact of whether the applicable national arbitration statute has adopted the "rules of law" terminology should not be overestimated. The significance of it is, to a certain extent, diminished by the wide use of institutional arbitration. Parties opting for this type of arbitrations very often choose to complement their principal decision to settle their disputes under the auspices of a certain institution, like the ICC, the AAA, or the LCIA, with a choice of the respective institution's procedural rules. These rules generally include choice-of-Iaw provisions. In a streak of recent revisions, these rules have taken a flexible stance. They all provide, in essentially identical terms, that the arbitral tribunal, failing the parties' designation of the applicable law, "shall apply such laws or 150 Cf Frank Vischer, The Concept of the Characteristic Performance Reviewed, in E PLURIBUS UNUM-LIBER AMICORUM DROZ 499, 508 et seq. (Allegria Borras et al. eds., 1996). This aspect of "nationalization," which in traditional contlict-oflaws concepts still prevails, will be further explored in the context of an application of the UNIDROIT Principles before state courts in the absence of a choice of law. 151 Cf infra Chapter 3.

68 • UNIDROIT Principles of International Commercial Contracts

rules of law as it determines to be appropriate."152 The question therefore arises whether these rules take precedence over more conservative choice-of-Iaw provisions of the applicable arbitration statute. 153 Undoubtedly, rules on the law applicable to the dispute are not of a mandatory character. Rules of a mandatory character are generally limited to those ensuring the basic fairness of the arbitration proceedings. As default rules, they are amenable to alterations by mutual agreement of the parties. In consequence, the procedural rules issued by an arbitration institution, including the choice-of-Iaw provisions, prevail over the choice-of-Iaw counterpart contained in the domestic arbitration statute; however, considering that the choice-of-Iaw provisions of the procedural rules are incorporated into the contract by reference, only if it is established that the parties were aware of the fact that under the institutional arbitration rules, the arbitrators would be free to apply transnational principles and rules of law instead of national law. 154 To dispense with any specific consensual element in that respect would unduly override the underpinning of an arbitration statute that deliberately refrained from granting the arbitrators the liberty provided for in institutional arbitration rules. iii.

Article 187 PILA in Particular

The other remark that should be added to the general conclusions reached above concerns a particularity of Article 187 of the Swiss Private International Law Act (PILA). In contrast to its 152 Article 28(1) of the AAA, as amended and effective on April 1, 1997 (emphasis not in the original); cf. also Article 17(1) of the Rules of Arbitration of the International Chamber of Commerce, effective as of January 1, 1998; Article 14(2) of the LCIA Rules, effective as of January 1, 1998. 153 See also Schnyder & Grolimund, supra note 94, at 403. 154 In this sense expressly, see Vischer, supra note 114, at 326, 327 (view expressed at the Conference in Basle, Switzerland, on November 7-8, 1997, "UNIDROIT Principles of International Commercial Contracts as a Legal Framework for International Business Transactions," organized by the Europainstitut Basle); without such a restriction, see de Ly, supra note 92, at 226 (with reference to the dissenting opinion in the ICC Award No. 7l10,July 13, 1995, supra note 98). More generally favoring an application of the transnationallaw principles, see Jean-Paul Beraudo, Les principes d'Unidroit relatifs au droit du commerce international, 18 LA SEMAINE JURIDIQUE 189, 192 (1995).

UNIDROIT

Principles Before Arbitral Tribunals • 69

counterparts in the French and the Dutch arbitration laws, which both provide that the arbitral tribunal shall apply the rules of law "which it considers appropriate," the provision retains the "closest connection" formula widely used in conflict-of-Iaws statutes for state court proceedings. Literally, this wording implies the relevance of territorial considerations, which, one might conclude, would preclude the inferences drawn from the inclusion of the "rules of law" language. The predominant opinion, however, pays no attention to this element of Article 187 PILA. It founds the admissibility of a decision on the basis of a non-state normative set of rules, even though the parties have chosen none, solely on the meaning generally associated with the idiom of "rules of law." I do not want to disagree. However, the conclusion necessarily implies that the "closest connection" notion encompasses considerations other than strictly territorial ones, notably elements such as the "true international character of the transaction" hinted at above, and thus calls for an explanation why the same notion in the context of state court proceedings contained in Article 117(1) PILA is interpreted differently. The question will be more closely considered in Chapter 3, which generally embarks upon an analysis of the possible significance of the UNIDROIT Principles before a state court.

CHAPTER 3

THE UNIDROIT PRINCIPLES BEFORE STATE COURTS

I.

THE PARTIES' CHOICE OF THE UNIDROIT PRINCIPLES AS THE LAW GOVERNING THE CONTRACT

1. Point of Departure While in most countries it is thus recognized that arbitrators can be authorized to apply principles of law of a transnational character, the same cannot be said with respect to proceedings before state courts. The predominant opinion on the contrary precludes the possibility of an application of a legal system not sanctioned by a sovereign state or by the international community. A state court is, under this view, required to apply the "law" directed to by the conflict-of-Iaws rules, whereby law in a positivistic manner is equated with state. The only admissible form of bringing a-national rules of law into the courts is by way of a substantive law reference.! ! See generally CHRISTIAN VON BAR, INTERNATIONALES PRIVATRECHT, ERSTER BAND, ALLGEMEINER TElL para. 114 (1987); Andreas Spickhoff, Internationales Handelsrecht vor Schiedsgmchten und staatlichen Gerichten, 56 RABELSZ 116, 133-34 (1992); Paul Lagarde, Le nouveau droit international prive des contrats apres ['entree en vigeur de la Convention de Rome du 19 juin 1980, 80 REv. CRIT. DR. INT'L PRIVE 287, 300-01 (1991); Lawrence Collins, Contracts, General Rules, in DICEY & MORRIS, THE CONFLICT OF LAWS 1218 (Lawrence Collins et al. eds., 12th ed. 1993); in particular with regard to the UNIDROIT Principles, see Franco Ferrari, Defining the Sphere of Application of the 1994 "Unidroit Principles of International Commercial Contracts," 69 TuL. L. REv. 1225, 1228 (1995); Ulrich Drobnig, The Use of the Unidroit Principles by National and Supranational Courts, in THE UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEx MERCATORIA? 223, 225 (Institute of International Business Law and

71

72 • UNIDROIT Principles of International Commercial Contracts Attributing conflicts-of-Iaws effect to a choice of the UNIDROIT Principles by the parties would have a considerable advantage over mere treatment of the reference as an incorporation of the Principles into the contract. 2 This is so despite that a comparison between the major legal systems and the UNIDROIT Principles will hardly reveal major differences. 3 But the court would still have to embark on the search for the applicable law, which is particularly intricate if the parties have not complemented their choice of the UNIDROIT Principles with a subsidiary reference to a specific state law. To do away with the uncertainty which of the various legal orders having a contact with the contract governs the dispute was precisely one of the purposes the drafters of the Principles pursued. Moreover, it would inevitably lead to irreconcilable conflicts. Behavioral norms regulating the effect of fraud or threat cannot be Practice ed., 1995); Ralf Michaels, Privatautonomie und Privatkodif'tkation, 62 RABELSZ 580, 597 (1998); Dieter Martiny, Commentary on Article 27 EGBGB, in MUNCHENER KOMMENTAR ZUM BURGERLICHEN GESETZBUCH VOL. 10, EINFUHRUNGSGESETZ ZUM BURGERLICHEN GESETZBUCH (ARTICLE 1-38), INTERNATIONALES PRIVATRECHT para. 30 (3d ed. 1998). 2 But see Jiirgen Samtleben, Versuch fiber die Konvention von MexiJw fiber das auf internationale Schuldvertriige anwendbare Recht, 18 IPRAx 385, 391 (1998); see also Gian Paolo Romano, Le choix des Principes UNIDROIT par les contractants l'epreuve des disposition imperatives, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 35, 36 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007); as in this study, see SVEN SCHILF, ALLGEMEINE VERTRAGSGRUNDREGELN ALS VERTRAGSSTATUT 131 (2005); Eva Lein, La portee pratique des Principes UN/DROIT: une perspective allemande, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 169, 174 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007) (referring to the rules on the determination of damages, interest, and impossibility) . 3 See, for example, as to Swiss law, Franz Werro & Eva Maria Belser, Die Unidroit Grundregeln der internationalen Handelsvertriige, Eine Wiirdigung aus schweizerischer Sicht, in SWISS REpORTS PRESENTED AT THE XVTH INTERNATIONAL CONGRESS OF COMPARATIVE LAw 510, 565 (Swiss Institute of Comparative Law ed., 1998). As to German Law, see Jiirgen Basedow, National Report of Germany, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS, 125, 131 (Michael Joachim Bonell ed., 1999).

a

UNIDROIT Principles Before State Courts • 73

governed by more than one rule. 4 Also, different liability concepts-strict liability for non-performance5 versus liability on the account of fault6-may not be easily reconciled with each other. Most importantly, however, it would ultimately reintroduce the mandatory rules of the "objectively" applicable state law altogether and thus frustrate the UNIDROIT Principles' drafters' achievement to properly delimit the mandatory rules in accordance with the goal and the specific nature of international trade. 7 Moreover, the distinction between the resolution of disputes arising out of international contracts before state judges and arbitrators in term of the applicable rules of law is, in the long run, unsatisfactory.8 It does not contribute to further developing and refining international commercial law, particularly since arbitration awards will continue to be published only sporadically. The justification given for the discrepancy-courts are an organ of the state, draw their authority ultimately from the state, and therefore can apply as law only what is accepted and enforced by the state; arbitration, on the other hand, has its origin in the will and the agreement of the parties, and, in consequence, it is the parties, as the creators of the arbitral tribunal, who define its metes and bounds-does not stand up to scrutiny.9 These characterizations 4 Frank Vischer, The Relevance of the Unidroit Principles for Judges and Arbitrators in Disputes Arising out of International Contracts, 1 EUR. J.L. REF. 203, 215 (1998/

1999). 5 Art. 7.4.1 UNIDROIT Principles. 6 This is the concept followed in Europe; see, e.g., art. 97 Swiss Code of Obligations. 7 See, for example, in that respect, the German discussion on how to limit the scope of the "AGB-Gesetz" (on the thesis that the Principles cannot be a law governing the contract) summarized by FRIEDRICH BLASE, DIE GRUNDREGELN DES EUROPAISCHEN VERTRAGSRECHTS ALS RECHT GRENZUBERSCHREITENDER VERTRAGE 235 et seq. (2001). 8 Compare the reply by the International Institute for the Unification of Private Law (UNIDROIT) to Question 8 in the Questionnaire sent out by the Commission of the European Communities with respect to the Green Paper on the Conversion of the 1980 Rome Convention of the Law Applicable to Contractual Obligations Into a Community Instrument and its Modernization, at sec. 5.2. 9 As to the different theories on the nature of arbitral adjudication, see, for example, Alejandro Garro, The Eason-Weinmann Colloquium on International and Comparative Law: The Contribution of the Unidroit Principles to the Advancement of International Commercial Arbitration, 3 TuL. J. INT'L & COMPo L. 93, 108 (1995);

74 • UN/DROIT Principles of International Commercial Contracts

draw an incomplete picture. First, the parties' mandate to the arbitral tribunal cannot be authoritative and effective unless there is some form of delegation or at least toleration of the state. IO It is exactly this function that arbitral statutes, vacation, and enforcement proceedings perform. By the same token, the equation of law with what is accepted and enforced by the state begs the question whether a state could not simply authorize a state court to apply rules of law not sanctioned by a particular state. Just as the principle of party autonomy draws its effects from the conflict-of-Iaws rules of the forum, the same vehicle delineates the reach of party autonomy. If it were to extend the reach to the choice of a-national rules, these rules would receive, even under a positivistic view, the necessary sanction by the state to qualify as law. ll

It has not lacked attempts to establish that the reference to "law" in provisions on party autonomy in conflict-of-Iaw statutes encompasses a broader, more liberal understanding. They are commonly driven by a belief that national legal systems are not well suited to international disputes in general, regardless of whether brought before an arbitral tribunal or a state court. In both scenarios, there is believed to be equal need for a legal regime that takes account of the particularities of international transactions. An argument widely relied on in European legal doctrine is the difference in the language of Article 3 (1) and Article 4 (1) of the Rome Convention on the Law Applicable to Contractual Obligations of 1980. Whereas Article 3(1) on party autonomy merely refers to "the law chosen by the parties," Article 4(1), addressing the situation where the law applicable to the contract has not been chosen in accordance with Article 3, states, "The contract shall be governed by the law of the country with which it is most closely JULIAN D.M. LEw, APPLICABLE LAw IN INTERNATIONAL COMMERCIAL ARBITRATION: A STUDY IN COMMERCIAL ARBITRATION AWARDS 51-61 (1978);

Thomas Carbonneau, Arbitral Adjudication: A Comparative Assessment of Its Remedial and Substantive Status in Transnational Commerce, 19 TEX. INT'L LJ. 33 (1984); Georges Sauser-Hall, L'arbitrage en droit international prive, 47(11) ANN. INST. DR. INT'L 394, 398-99 (1957). 10 Vischer, supra note 4, at 203, 210. II Johannes Christian Wichard, Die Anwendung der UNIDROIT-PrinziPien fur internationale Handelsvertriige durch Schiedsgerichte und staatliche Gerichte, 60 268, 283 (1996); see also Stefan Leible, Aussenhandel und Rechtssicherheit,

RABELSZ

97 ZVgIRWiss 286, 315 (1998).

UNIDROIT

Principles Before State Courts • 75

connected." On the premise that the inclusion of "state" in Article 4(1) must have been made purposefully, it is argued that parties, as opposed to judges on their own initiative, are entitled to choose rules of law not sanctioned by a particular national legislature. 12 The same argument could be made with regard to a number of other private international statutes. Swiss law, for example, likewise fails to refer to the law of a state in its regulation of party autonomy (Article 116(1) PI LA) , in contrast to the terminology used in Article 117(1), which mandates the judge to apply the "the law of the state with which the contract has the closest connection. "13 It is questionable whether the omission of "state" in Article 3( 1) was made deliberately. The official report on the Rome Convention by Mario Giuliano and Paul Lagarde is silent on this question. 14 Moreover, it is hardly satisfying to answer the issue at hand solely based upon a textual argument. The question touches upon the fundamental issue of what law is and thus requires a substantive discussion of the underlying notions associated with the meaning of "law." The following part of this study tries to analyze (1) the main elements that are traditionally considered to be indispensable constituents of "law," both from a substantive and a conflict-of-Iaws perspective and (2) the extent to which these constituents may be found in the UNIDROIT Principles. 12 In this sense, compare Wichard, supra note 11, at 268,282; A.S. Hartkamp, The Use of the Unidroit Principles of International Commercial Contracts by National and Supranational Courts, in THE UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEX MERCATORIA? 253, 256 (Institute of

International Business Law and Practice/International Chamber of Commerce ed., 1995) (with reference to a decision of the Dutch Hoge Raad (HR, 5.26.1989, NJ 1992, 105, in which the Court interpreted the reference to an international convention, in case the CMR, in the sense of a conflict-of-Iaws reference); Andreas Kappus, "Lex mercatoria" als Geschiiftsstatut vor staatlichen

Gerichten im deutschen internationalen Schuldrecht, 13 IPRAx 137, 139 (1993);

Basedow, supra note 3, at 146 et seq. 13 As to the Private International Law of Quebec, see the the national report of Quebec by Frederique Sabourin, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS, 237, 245 (Michael Joachim Bone11 ed., 1999). 14 Mario Giuliano & Paul Lagarde, Report on the Convention on the Law Applicable to Contractual Obligations, OFFICIAL JOURNAL OF THE EUROPEAN COMMUNITIES 1 et seq. (1980).

76 • UNIDROIT Principles of International Commercial Contracts

2. The Judiciary's Strict Obligation to Apply State Law a. Law as a Decree by the Sovereign While much has been and still is being debated as to what is or constitutes "law," there seems to be common ground with respect to one particular aspect: Predominately, the notion associated with the term "law" is a pre-determined and positivistic one. "Law" is inextricably identified with "state." "Law" is what has been determined, decreed, and enforced by the state. 15 Traditional (continental) European doctrine thereby limits its recognition of what constitutes a legitimate source of law essentially to "statutes" promulgated by the state legislator, sometimes making a limited exception with respect to customary law. 16 The judge's perceived role is one of cognitively applying the statute, extricating the intentions of the historic legislator and, having determined it, applying it mechanically to the individual situation before him or her.!' As a result, ajudge's ruling's normative relevance lies solely in the persuasiveness of its dogmatic foundation rather than in the judgment itself. 18 Clearly, under a strictly positivistic concept, there is no room for recognizing the UNIDROIT Principles as "law" that can be chosen as the law governing the contract. It is, however, an open question whether a strictly positivistic notion of what constitutes "law" is sustainable. 19 From an empirical point of view,20 in particular, two 15

See, for example, the dissenting opinion of Justice Wendell Holmes in

Black & lWlite Taxicab & Transfer Co. v. BrlJWn & YellllW Taxicab & Transfer Co., 276 U.S. 518, 533, 535 ("law in the sense in which courts speak of it today does not exist without some definite authority behind it; the only authority behind it is the state)." 16 See art. 1 para. 2 of the Swiss Civil Code; if. Heinrich Honsell, Commentary on Article 1 Swiss Civil Code, in BASLER KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-ZIVILGESETZBUCH I para. 19 (Heinrich Honsell, Nedim Peter Vogt & Thomas Geiser eds., 3d ed. 2006). 17 For a relativization of this characterization of the continental law finding process, compare KURT ZWEIGERT & HEIN KOTz, AN INTRODUCTION TO COMPARATIVE LAw 256 et seq. (3d ed. 1998). 18 See, for example, from today's perspective, Claus-Wilhelm Canaris, Die Stellung der Unidroit Principles und der Principles of European Contract Law im System der Rechtsquellen, in EUROPAISCHE VERTRAGSRECHTSVEREINHEITLICHUNG UNO DEUTSCHES RECHT 10 et seq. (Jiirgen Basedow ed., 2000) 19 See the detailed overview on this topic in SCHILF, supra note 2, at 244 et seq.

UN/DROIT Principles Before State Courts • 77

distinct phenomena give rise to doubts: one is the existence of an international trade usage that may be a particular form of international customary law; the other is the existence of principles and rules that truly originate in or are brought to life through the judiciary rather than the "map" the state legislator has set out in the statutory law. These phenomena shall be analyzed below, followed by an examination of their bearing on the qualification of the UNIDROIT Principles as "law."

i.

Trade Usages

A.

General Analysis

Trade usage may be defined as a practice or pattern of behavior among merchants established by repetition that has in some degree acquired normative force. 21 The traditional theory on the nature of (unwritten) trade usage is that it takes effect as an implied term of a contract. The view is prevalent,22 to take just one example, in Swiss law23 and has, more recently, been adopted by Article 9(2) of the U.N. Convention on Contracts for the International Sales of Goods (CISG), according to which "the parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade." Obviously, under a contractual theory, trade usages cannot obtain the status of "law," which is why proponents of the lex mercatoria have traditionally been hostile to it. 24 In their view, a trade usage is a particular form of international customary law. The contract theory is, first of all, believed to be artificial in that it 20

Cf Michaels, supra note 1, at 610 et seq.

21 Roy Goode, Usage and Its Reception in Transnational Commercial Law, 46 INT'L

& CaMP. L.Q. 1, 7 (1997). 22 See Spickhoff, supra note 1, at 129-30. 23 See Wolfgang Wiegand, Commentary on Article 18 Swiss Code of Obligations, in BASLER KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-OBLIGATION ENRECHT I paras. 31, 83 (Heinrich Honsell, Nedim Peter Vogt & Wolfgang Wiegand eds., 2006). 24 See the references in the article of Goode, supra note 21, at 8.

78 • UNIDROIT Principles of International Commercial Contracts ascribes to the parties knowledge of a usage that they simply may not have. From a purely theoretical point of view, there may indeed be some truth in this particular criticism, but in its practical effect, the distinction between the two theories in this respect appears to be only minor. Even under the contractual theory, the terms of a particular usage are not interpreted according to the subjective intention of the parties but as a reasonable person would have understood it. 25 For an international trade usage to acquire the status of "law," it is, at any rate, not sufficient that a pattern of repetitive behavior has been established among merchants. In that regard, formulations such as Article 9(2) CISG are misleading. They fail to mention that a pattern of repetitive behavior must actually be observed from a sense of a somehow binding, though not necessarily legally binding, obligation. 26 This is not necessarily the case with any pattern of usage regularly observed. A usage may be followed purely as a matter of habit, courtesy, or convenience,27 or "even a desire to accommodate one's business counterparty where it is not detrimental to one's own business interests. "28 Only in the first scenario may the parties have the expectation of actually having a right to demand a certain course of conduct. To add this extra layer of normative force, there apparently needs to be an element in addition to usus. In that regard the parallel drawn by proponents of the lex mercatoria to international customary law seems on point. In conjunction with usus, customary law requires an opinio iuris sive necessitatis to establish a rule or principle of customary law. The question then is where the usage's opinio iuris, its normative force, may come from. Traditional opinion takes the view that those participating in a particular form of international trade establish the normative force. The participants, according to that view, would necessarily include the judicial, arbitral, or even legislative authorities that have spoken to the issue.29 The position is, to some extent, a 25 Id., at 8. 26Id.

27 Cf General Reinsurance Corp. v. Forsakringsaktiebolaget Fennia Patria, 1983 Q.B. 856, 874 (per Slade LJ). 28 Goode, supra note 21, at 10. 29 See, e.g., BGE 105 (1979) Ia 84.

UN/DROIT Principles Before State Courts • 79

paradox. It must lead to the conclusion that before a usage has been formally recognized, it does not exist, for its normative force is dependent on an authoritative decision by a court, tribunal, or even the legislator. The view seems hard to square with the fact that the trade usage must affect the rights of the parties under an international contract even before any decision has been made. 30 Moreover, it conflicts with traditional notions attributed to "decisionallaw" (as discussed below), first, in that it is said the function of the court is to declare the law rather than to create it and, second, in that any court pronouncement is principally not binding for third parties. The alternative position, that the ruling by a court or arbitral tribunal in favor of a usage is purely declaratory in nature, thus appears to be the preferable approach. .

Considering modern trading practices, it may indeed be appropriate to dispense with any form of authoritative approval. The relevant sector of the mercantile community may observe a particular trade usage not primarily because it has the expectation that, if need be, the right to demand it would be authoritatively sanctioned. Such a view would attribute too little weight to the many vehicles found in international trade practice, designed to avoid conflicts from the outset, from agreeing to international arbitration and "voluntarily" complying with the award to the sanctioning mechanisms initiated by trade associations, such as "black lists," withdrawal of membership rights, forfeiture of bonds, etc., or the simple meta-legal incentive of a participant in international trade not to put his or her commercial reputation and standing within the relevant mercantile community or the market at large at risk by not abiding by the negotiated and agreed contractual terms.3! These phenomena of regulating trade relations through consensus may not have the same quality as state-promulgated regulations with their inherent threat of eventually forcing a defaulting party to perform. They may, however, be sufficient to establish the necessary sense of obligation required for the establishment of international customary law. 30 See Goode, supra note 21, at 10 et seq.; see also Berthold Goldman, Annotations to Cour d'Appel de Paris, premiere chambre (13 juilliet 1989),]. DR. INT'L PRIVE 435 (1990).

3! See

KLAus PETER BERGER, THE CREEPING CODIFICATION OF THE LEX

MERCATORIA

29 (1999); see also

SCHILF,

supra note 2, at 262.

80 • UNIDROIT Principles of International Commercial Contracts B. Trade Usages and the UNIDROIT Principles

Accepting that an international trade usage may take the form of international customary law means that the parties' choice to designate it as the law applicable to the contract may have to be given effect. Customary law is, even according to traditional categories, "law" after all. Whether general principles formulated by international organizations, including UNIDROIT, qualify as customary law in that sense is another matter. If the Principles were to be considered an element of an international trade usage, this would need to be established first, for example, by a showing of empirical evidence that they are consistently adopted in cross-border commercial transactions. At this time, this might be challenging, for the Principles are still a relatively new phenomenon in international trade and thus constitute at best an usus jerendum rather than an usus tatum, although, admittedly, the spread of, and the enthusiasm for, the UNIDROIT Principles has been remarkable, not only in terms of the rate of contractual adoption but also in terms of their application in a number of arbitrations and even court decisions. 32 Yet, there is reason to question a categorization of general principles of law as an international trade usage, and thus to further pursue the endeavor that the UNIDROIT Principles are law in the sense that they constitute an element of international trade usages. A trade usage's scope of application is characteristically confined to a particular sphere of international trade, such as international banking, the international sales of goods, international construction contracts, etc. General principles of law, on the other hand, typically apply irrespective of any particular form of international trade, one of their very purposes being to extract from the trade-specific rules of an international usage the underlying principles by which they are all linked with each other. They are in that respect more of an intellectual endeavor and not a rule of normative content that is being created through the practice of the international mercantile community. 32 See Michael Joachim Bonell, Unidroit Principles 2004-The New Edition of the Principles of International Commercial Contracts adopted by the International Institute for the Unification of Private Law, UNIF. L. REv. 6 et seq. (2004).

UN/DROIT Principles Before State Courts • 81

These inherent differences in the nature of a trade usage and general principles of law appear to preclude a classification of the UNIDROIT Principles as a trade usage and thus, over due course of time, customary law. Trade usage, customary law, and general principles of law are all elements of transnational commercial law but each of a different type. It may well be that some of the specific rules contained in the UNIDROIT Principles have the status of trade usage, perhaps even in the form of customary law, but the rule or principle has that status on the strength of its content, which happens to coincide with the practice in a particular field of trade, not because it is part of a compilation that has been prepared by an organization of a certain standing and authority in international trade law. ii.

Judicial Lawmaking

A.

General Analysis

Positivists in continental Europe still cling to the notion that a court simply declares the law but does not create it. The rules of law applied by the judiciary are thought to be nothing but the statutory texts. The positivistic idea in its extreme is, in the words of Jeremy Bentham, "a fiction from beginning to end."33 At best, it could be said that the existing statutory law, that is, on the Continent, the codifications, represents a framework within which the judge has considerable power to "create" law. The assumption that rules and institutions cannot be called "law" unless the state legislator is the source of the provisions is, particularly with respect to international relations, thoroughly a-historic and essentially a by-product of the Enlightenment. In Roman law, for example, to adjudicate the legal relationships of Romans to foreigners, that is, international relations, the praetor peregrinus developed a jus gentium of universal purport. The jus gentium drew chiefly from customs of international commerce, foreign law, and the less formalistic elements of Roman law itself. 34 33 4 JEREMY BENTHAM, COLLECTED WORKS 483 (1981). See also A.W.B. Simpson, The Common Law and Legal Theory, in A.W.B. SIMPSON, OXFORD ESSAYS IN JURISPRUDENCE (2d series). 34 See Berthold Goldman, Lex Mercatoria, 3 FORUM INTERNATIONALE 3 (1985); critical with respect to the comparison of the lex mercatoria to the jus gentium, see

82 • UN/DROIT Principles of International Commercial Contracts From the 12th to the 18th centuries, informal mercantile courts throughout continental Europe dealing with the "international transaction" of yore took notice of the lex mercatoria as a number of usages, each of which existed among merchants and persons engaged in mercantile transactions. Point of reference was not only the trade usage prevailing in the court's own jurisdiction. The court extended its inquiry to the mercantile world at large at least to the extent that a usage had reached a certain acceptance. Over time, the various usages at the prevailing markets grew into dominant codes of custom of transterritorial proportions. 35 Europe at the time enjoyed, on the whole, a unity of legal outlook under the jus commune. Despite the relevancy of local statutes promulgated by distinct political entities, continental Europe shared a common heritage and understanding of rules and principles developed on the basis of Roman law, in particular on the exegesis of justinian's Corpus Juris, which continued to be applied by the courts over and above these local statutes. 36 Similarly, for the purpose of developing maritime law, English admiralty courts relied on the best available sources, be they domestic, foreign, or simply trade practices. 37 With the Enlightenment and, more particularly, the idea of codification taking root in continental Europe, however, the judge's authority to "rely on the best available sources," whatever their provenance, lost a great share of its previous significance. The notion of the "creative" judge seemed incompatible with the very idea of codification, the idea that the diverse traditional law should be replaced by comprehensive legislation, consciously pre-planned in a rational and transparent order. What judges were left with was to merely refine the preexisting system. As a result, ajudge's ruling's FILIP DE Ly, INTERNATIONAL BUSINESS LAw AND LEx MERCATORIA, at 9 et seq. (1992). 35 See Friedrich K. Juenger, American Conflicts Scholarship and the New Law Merchant, 28 VAND. J. TRANSNAT'L L. 487, 490 et seq. (1995). 36 See FRIEDRICH K.JUENGER, CHOICE OF LAw AND MULTISTATEJUSTICE 92 et seq. (1993); see also Spickhoff, supra note 1, at 118 et seq.; Uwe Blaurock, Ubernationales Recht des Internationalen Handels, ZEuP 247, 249 et seq. (1993); the oveIView given by SCHILF, supra note 2, at 204 et seq. 37 SeeJuenger, supra note 35, at 491; see also the references at SCHILF, supra note 2, at 209.

UNIDROIT

Principles Before State Courts • 83

normative relevance lay solely in the persuasiveness of its dogmatic foundation rather than in the judgment itself. 38 With the great codifications' coming of age, the conception of the judiciary as a mere "guardian" of the law but not itself a source of it has again lost plausibility in reality. The codifications have been overlaid by a gloss of case law to an extent that the rules and principles developed by the courts must be regarded as an integral part of the statutory provisions. 39 Without them, a practitioner would simply be unable to advise his or her client what the "law" actually is in a given situation. Although done under the disguise of "statutory construction," many of these principles and rules are pure judicial creations. For example, in Swiss law, the various kinds of culpa in contrahendo liability, a liability based on the principles of reliance, are said to be rooted in Article 2 of the Swiss Civil Code; yet, this provision says in quite general terms nothing more than that everyone must observe in the exercise of his or her rights and in the performance of his or her duties what is required by good faith. This provision is formally the peg for a raft of other important pieces of Swiss contract law, the doctrine of rebus sic stantibus (hardship) beingjust one of the more prominent ones, that indeed it might not be entirely wrong to say that Swiss contract law has obtained the quality of a case law not so dissimilar to the common law. The common law, in its traditional form, is historically undoubtedly the creation of the judiciary, thus not a law determined, decreed, and enforced by the state, but rather a "law that is revealed to and by the courts";40 yet it is unanimously agreed that its rules and principles have the status of a legal source. While there are statutes in the area of commercial law too, they either have been enacted specifically to change individual rules developed by the case law that to the Parliament seemed inconvenient or impractical, or they were simply "codifying statutes," that is, orderly presentations of existing rules that likewise had been pre-developed by the 38 See, for example, from today's perspective Canaris, supra note 18, at 10 et seq. 39 Cf ZWEIGERT & KOTZ, supra note 17, at 256 et seq. 40 Lord Justice Mustill, The New Lex Mercatoria: The First Twenty-five Years, in LIBER AMICORUM FOR THE RT. HON. LORD WILBERFORCE 149, 155 (Maarten Boos & Ian Brownlie eds., 1987).

84 • UNIDROIT Principles of International Commercial Contracts

courts.41 In the realm of commercial law, statutory sources thus fulfill a mere supplementary, sometimes corrective, function, often only to be understood against the backdrop of the "unwritten" case law. B.

Judicial Lawmaking and the UNIDROIT Principles

Placing the emphasis on the rules and principles developed by the judiciary in addition to those of the legislature does not provide an immediate answer to the question at issue here: are the UNIDROIT Principles "law" to be recognized by the courts, to be given effect in the event of a respective choice-of-Iaw clause? A theory of legal sources encompassing judicially created law would lead to a definition of "law" such as the assemblage of principles, propositions, and rules that is being applied and recognized by the courts. The inherent problem with this is one of circularity. A choice of law referencing the UNIDROIT Principles could only be recognized if the "assemblage of principles, propositions, and rules" contained therein had already been applied and thus recognized by courts. Yet, at the outset, a court obviously requires guidance as to the criteria for recognition of rules of law not directly emanating from a state legislature, something that the theoretical discussion on what sources of law ought to be recognized cannot supply. At the heart of such an inquiry is the veritas not the formal auctoritas of those rules of law. 42

The Role of Doctrine--General Considerations. When it comes to the veritas, judges in many parts of the world do not exclusively rely on their own wisdom when "crafting" the rules and principles that later become fully entrenched in a legal system. In evolving and developing the existing law, courts have, to considerable extent, taken inspiration from established trade practices and, above all, solutions proposed by legal doctrine. 41 As to the latter category, it follows, for example, that it is permissible for the courts to go back to judicial decisions made before the statutes came into force if there is any doubt as to the meaning of a particular provision. 42 As to the distinction between veritas and auctoritas, compare Canaris, sUfrra note 18, at 14 et seq.; Michaels, sUfrra note 1, at 617 (ratione imperii v. rationis imperiz). The principle "auctoritas, non veritas facit legem" goes back to Thomas Hobbes.

UNIDROIT Principles Before State Courts •

85

In English law, judges have historically drawn upon a broad reservoir of principles and rules, which, above all, included trade practices acknowledged as binding in trade circles. It is indeed being touted as one of the distinctive qualities of the common law that allowed keeping it "up to date and intellectually sound."43 In American law, the influence the various Restatements of Law (which were being prepared primarily by leading scholars) had on the case law of the states has already been mentioned. 44 In continental Europe, doctrine as a provider of veritas is expressly acknowledged in the plan set out by the legislator. Most prominent is Article 1 (2) of the Swiss Civil Code, according to which the judge, if no relevant provision can be found in a statute, must, absent customary law, decide in accordance with the rule that he or she would, were he or she the legislator, adopt. In so doing, he or she must pay heed to accepted doctrine and tradition. The provision, pursuant to its wording, does not allow the judge to fill the gap in the law on the basis of what would be just in the particular case before him or her. He or she is bound to decide the case predicated on a general rule. In order to find this rule, accepted doctrine and tradition, which includes usage, are his or her guidelines. 45 There are numerous examples in which the judge filled a gap in this manner. In the field of contract law, modern types of contracts provide a perfect illustration of this phenomenon. Leasing-, franchise-, factoring-, management-, or production-sharing agreements, widely used in today's economy, domestically and internationally, do not fit any of the types of contracts covered in the Swiss Code of Obligations, so judges had to be more creative and apply provisions designed for other types of contracts expressly dealt with in the Code by analogy, apply solutions developed abroad, or adopt a proposal advocated in doctrine. 46 To a large extent, though, general con tract conditions have assumed the function of party-created 43 44

45

See Roy GOODE, COMMERCIAL LAW IN THE NEXT MILLENNIUM 100 (1998). Cf supra Chapter 1, § II. Cf Heinrich Honsell, Commentary on Article 1 Swiss Civil Code, para. 37, in

BASLER KOMMENTAR ZUM SCHWEIZERlSCHEN PRIVATRECHT-ZIVILGESETZBUCH

(Heinrich Honsell, Nedim Peter Vogt & Thomas Geiser eds., 2006). 46 Cf FELIX DASSER, VERTRAGSTYPENRECHT 1M WANDEL (2000).

I

86 • UNIDROIT Principles of International Commercial Contracts

"default rules." Culpa in contrahendo, a more encompassing general liability based on reliance, in particular with respect to liability within groups of companies, and rebus sic stantibus are other examples. At the beginning of the reception process of many of these legal institutes was their support in scholarly writings. Doctrine thus has been playing a considerable role, in particular on the Continent, in developing and evolving the codified domestic legal system. In a sense, the UNIDROIT Principles, as an assemblage of principles and rules elaborated by experts in international commercial law, are just a continuation of these efforts, albeit in an unusual form and for a particular purpose only.47 Viewed this way, there is therefore no question that a court has the power to give this "creation savante" effect via devices rooted in domestic legal systems such as Article 1 (2) of the Swiss Civil Code. One of the prerequisites to "apply" them then would be a court's finding that a particular issue is not covered by the relevant code, leaving it to the court to find an appropriate solution of the particular case before him or her. Such a finding will obviously differ from jurisdiction to jurisdiction, depending on how a particular issue was framed by the legislator at the time, that is, whether the legislator has left some leeway to the judge to take account of the particularities of international trade or whether the issue has not been covered at all.

Doctrine as a Means to ''Internationalize'' Default Concepts of National Law. Despite its limitations, the extent to which doctrine may be received into law through open-textured concepts, such as Article 1 (2) of the Swiss Civil Code, for purposes of "internationalizing" domestic concepts is generally underestimated. A key point in the analysis is to recognize the inherent limitation of domestic legislation. While on the surface an issue at dispute may well be covered by 47 See also Roy Goode, International Restatement and English Contract Law, UNIF. L. REv. 231, 247 (1997) ("More generally, the Principles serve to rekindle an awareness of the contribution of scholars and of doctrine to the development and enrichment of jurisprudence. English law, like other legal systems, will benefit from their publication."); Boris Schinkels, Grundfragcn-Die (Un-) zuliissigeit einer koUisionsrechtlichcn Wahl der Unidroit Principles nach Rom I: Wirklich nur eine Frage der Rechtspolitik?, GPR 106, no (2007) (UNIDROIT Principles must be regarded as a persuasive authority as they are being used by scholars to develop and refine one's own legislation in the field of civil law.).

UN/DROIT Principles Before State Courts • 87

a particular provision in the Code, the provision may only be pertinent to the domestic context. 48 Ole Lando 49 has given the illustration of the Danish seller who has sold goods to a German purchaser but delivered them after the specified date. Under the then-applicable Danish law, Article 27 of the Scandinavian Sale of Goods Act as in force in Denmark, a buyer who seeks to make a claim arising out of late delivery must give notice immediately on arrival of the goods to preserve its claim. No such strict rule applies in Germany and, anyhow, it is unusual and inappropriate internationally. The buyer's claim should not be considered barred due to its failure to give timely notice. The Scandinavian rule is a purely internal one, not fit for international transactions, and therefore the Danish seller should not be allowed to take advantage of a law out of sync with the general expectations in international trade. Instead, the courts should apply a rule requiring notice within a reasonable period of time, such as Article 7.1.5 of the UNIDROIT Principles. Resort to the Principles would be admissible as a solution propounded by (international) doctrine. Similar examples may be found. Swiss law50 allows the aggrieved party to terminate a contract in case of defective performance after an additional period of time set by it has expired. In international 48 This approach is being advocated above all by Antonio Boggiano, La soluci6n de controversias: los Principios de Unidroit como normativa aplicable a los contratos comerciales internacionales por los jueces nacionales y por los flrbitros, in THE

UNIDROIT PRINCIPLES: A COMMON LAW OF CONTRACTS FOR THE AMERICAS? 167, 171 (Frederique Mestre & Patricia de Seume eds., 1998). Cf also SCHILF, supra note 2, at 132. 49 Ole Lando, The Lex Mercatoria in International Commercial Arbitration, 34 INT'L & COMPo L.Q. 747, 753 (1985); cf. also Andreas F. Lowenfeld, Lex Mercatoria: An Arbitrator's View, 6 ARB. INT'L 133, 137 (1990); Jan Ramberg, The

Creativity of Arbitrators in the Context of the UNIDROIT Principles of International Commercial Contracts, UNIF. L. REv. 651, 653 et seq. (1998). 50 For further examples under Swiss law, see Fran{:ois Dessemontet,

L 'utilisation des Principes UNIDROIT dans le cadre le la pratique contractuelle et de l'activite arbitrale-L'exemple de La Suisse, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 159, 161 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007) (referring to the rules on the determination of damages, interest, and impossibility) .

88 • UNIDROIT Principles of International Commercial Contracts transactions, restitution is an impracticable and expensive remedy. In most cases, the aggrieved party can be compensated for its losses through payment of damages. In line with this rationale, the general commercial rule requires a fundamental non-performance for the aggrieved party to terminate the contract. Again, a Swiss court faced with the question should acknowledge the inapplicability of the Swiss concept to international transactions and create, in application of Article 1 (2) of the Swiss Civil Code, the concept advocated by international doctrine in the form of Article 7.3.1 of the UNIDROIT Principles. Another example may be taken from an arbitration award reported by Frank Vischer. 51 In a contract between a non-Swiss firm and a non-Swiss agent regarding representation in Hong Kong, which was governed by Swiss law on the account of the parties' choice, it must be admissible to contractually preclude the agent from claiming compensation for loss of customers on termination of the contract, despite Article 418u of the Swiss Code of Obligations according to which the right to compensation for loss of customers is mandatory. Article 418u is a purely internal rule not fit for the international dimension. In a situation with no intrinsic link whatsoever to Switzerland and absent a showing of genuine need for the protection of the agent, the general principle of freedom of contract (Article 1.1 of the UNIDROIT Principles) must prevail. Conclusions. The view expressed here, that is, that purely internal concepts might be accessible to a "teleological reduction" with a view to the international dimension, might be controversial with respect to some of the examples given above (Section 1.2 (a)(ii) (B)(2)). In particular the last one would result in the displacement of a mandatory rule, in contrast to the other incidents that in effect only "internationalize" default concepts of the applicable law. Yet, the important point here is to illustrate the degree to which the UNIDROIT Principles may be "received" into law by judicial evolution and development of a jurisdiction's legal system. In their capacity as a product of doctrine, they constitute "law" as much as the more traditional doctrinal contributions do. While the statement made above, that the theoretical discussion on what sources of law ought to be recognized, cannot conclusively 51

Vischer, supra note 4, at 203, 213 n.ll.

UN/DROIT Principles Before State Courts •

89

provide an answer to the fundamental question at stake here, whether the axiomatic link between state and law indeed extends to the international commercial relation thus remains valid, a wider notion not only encompassing the principles and rules developed judicially but reflecting the process through which these rules and principles enter the judicial domain tentatively affirms at least the UNIDROIT Principles' general potential to become law without any involvement of the state legislator. 52 Contrary to a widely held opinion, their potential in that respect is the greater the more innovative, that is, the more internationally minded, a particular principle or rule is. Of course, the potential to become law through adoption by the judiciary through open-textured devices does not extend to the UNIDROIT Principles as such. Judicial adoption will be limited to a single principle or rule of the UNIDROIT Principles or perhaps even a few of their rules or principles. It has been followed from this that, since it is conceptually impossible that a court adopts the Principles in their entirety, thereby sanctioning their legal character, a genuine choice of the Principles with conflict-of-Iaws effect is out of the question. 53 The conclusion may not be per se mistaken, as the further course of this study may demonstrate, but it pre-supposes that the limits imposed on the judge through the categorization of rules of law into legitimate sources of law must necessarily apply even when it is not the judge who taps the UNIDROIT Principles' potential but the parties to an international contract. After all, the theory of the sources of law bears in the first place on the relationships between the different sources of law, its main addressee thus being the judge. If it is the parties that act as the conduit in lieu of the judge, it seems however imperative that the discussion be complemented by substantive (see Section 1.2(b)), and, above all, genuine conflict-of laws considerations (see Section 1.3). 52 Cf also Hans-Joachim Mertens, Das lex mercatoria-Problem, in FESTSCHRIIT FUR WALTER ODERSKY ZUM 65. GEBURTSTAG AM 17. JULI 1996, 857, 864 (Richard Bottcher, Gotz Hueck & Burkhard Jihnke eds., 1996). 53 Cf Canaris, supra note 18, at 17 et seq.

90 • UNIDROIT Principles of International Commercial Contracts

b. State Law as the Exclusive Guarantor of a Balanced Social and Economic Order

Proponents favoring a substantive transnational commercial law have always been confronted with the assertion that a balanced social and economic order can only be guaranteed through state law and its procedural safeguards, in particular the institutionalized legislative process through which a certain democratic legitimacy is achieved. A "law" that has been developed outside and in circumvention of these structures would lack the necessary fairness, justness, certainty,54 and predictability, and thus not amount to a coherent, genuine "legal system." Failing a guarantee that these standards of law are satisfied would make the "law" unsuitable as a basis for evaluating the conduct of the parties. 55 The criticism thus is essentially two-pronged, though the two prongs are inextricably intertwined. One goes to a non-state law's inherent lack of a certain quality or justness that is thought to be essential for any system of principles and rules to be considered "law;" the other implies the procedural legitimacy of such a "law." These qualitative attributes of state law are generally accentuated in sharp relief to the alleged characteristics of transnational trade law. The following discussion will therefore focus on whether the core of these objections may be maintained in light of the emergence of a soft law like the UNIDROIT Principles. 54 See, for example, the pointed statement of Andrew Dickinson, Response to the Green Paper of the Commission of the European Communities on the Law Applicahle to Contractual Obligations Into a Community Instrument and its Modernization, http:/ / ec.europa.eu/justice_home/ news/ consultin~public/ rome_if doc/ dinckinon _andrew_solicitor_advocate_london_en.pdf, at 5: "The concepts of 'general principles of law' and the' lex mercatoria' although applied in some international arbitrations, are in my view too vague to merit consideration and would undermine the certainty which Art. 3 [of the Rome Convention] currently requires. " 55 Compare the statement of the German Reichsgericht RG 5.28.1936, JW 1936, 2058, 2059, cited in Leible, supra note 11, at 315: "[N]ur eine [... ] uneingeschrankte Unterwerfung unter irgendeine gesetzgebende Gewalt [... ] die auch fUr das zwischenstaatliche Rechtsleben unentbehrliche Gewiihr dafiir [gibt], dass das Schuldverhiiltnis notigenfalls auch gegen den se1bstsiichtigen Willen [. . . ] auch beider Partner unter Beriicksichtigung der jeweiligen allgemeinen Belange ensprechend den gemeinsamen Rechtsanschauungen der durch die gleiche Gesinnung verbundenen Staaten geregelt wird."; if. generally BERGER, supra note 31, at 43 et seq.

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Principles Before State Courts • 91

Considering the criticism leveled against the classic lex mercatoria over time, the core elements of the qualifications a "legal instrument" would have to satisfy to counter the first prong of criticism can be identified without too great a difficulty. The legal instrument relied on by the parties would have to overcome the vagueness, incompleteness, and heterogeneity of the law merchant and amount to an assemblage of propositions that are readily detectable, homogenous, and comprehensive. 56 Comprehensiveness should not be taken to mean that the legal instrument is complete-notably not even traditional codifications of commercial contract law would meet such an expectation-but rather that it creates a coherent system of primary rules from which secondary, supplementary rules could be developed for the adjudication of the particularities arising in the individual dispute. 57 It is vital that the system could be changed and be brought up to date for new exigencies in international trade. With regard to its substance, it would have to provide a well-balanced set of rules that would be regarded fair in line with the basic concepts of the leading commercial laws. In particular, it would have to include norms that adequately take account of the principal protective norms agreed on by the international community of states with respect to the field of international trade. Authors favoring a state judge's recognition of the parties' choice of the UNIDROIT Principles as the governing law have asserted that the Principles are, above all, so remarkable because they satisfy for the first time the core elements of which the classic lex mercatoria was widely held deficient. It has been said that their quality, density, and homogeneity "in many respects even surpasses the quality of traditional national legal orders. "58 Indeed, as shall be

Cf

BERGER, supra note 31, at 89 et seq. 57 rr. JOSEF ESSER, GRUNDSATZ UND NORM 49 (4th ed. 1990); see also Katharina Boe1e-Woe1ki, Principles and Private International Law-The UNIDRorr Principles of International Commercial Contracts and the Principles of European Contract Law: How to Apply Them to International Contracts, UNIF. L. REv. 652, 667 (1996); SCHILF, supra note 2, at 264. 58 Vischer, supra note 4, at 211; if. also Gonzalo Parra-Aranguren, Conflict of Law Aspects of the Unidroit Principles of International Commercial Contracts, 69 TuL. L. REv. 1239, 1246 (1995); Wichard, supra note 11, at 286, 289; Max Planck Institute for Foreign Private and Private International Law-Comments on the European Commission's Green Paper on the Conversion of the Rome 56

92 • UN/DROIT Principles of International Commercial Contracts demonstrated, the Principles combine many of the attributes demanded by the opponents of an "autonomous" transnational commercial law for it to qualify as a "law."

a Self-Contained, Coherent, and

i.

The UN/DROIT Principles as Balanced System of Law

A.

The UNIDROIT Principles' Systematic Nature

The UNIDROIT Principles present the fundamental general principles and rules applicable to international commercial transactions in a truly systematic order. They are a system because each of the principles and rules contained therein become only operable in the context of a consistent framework of common values that lay open "the relative worth and importance of competing legislative grounds,"59 thus enabling ajudge to identify the appropriate rule in the case before him or her among a multitude of options available. The system is self-contained in that it allows a judge to develop and refine the "law" for issues not directly addressed in its rules by resorting to easily identifiable basic values and principles underlying its specific rules. Article 1.6 on supplementation discussed earlier (see Chapter 2, Section III.1.a) is just one of the vehicles at a judge's disposition; the Principles at the same time employ a technique that helped the civil law codifications overcome their original built-in rigor to obtain flexibility and adapt to ever-changing social and economic realities, an elasticity that ensured their survival over decades. Particularly Article 1.7, according to which each party must act in accordance with good faith and fair dealing in international trade, a blanket clause in style very similar to Article 2 of the Swiss Civil Code or Section 242 of the German BGB, may well be used by courts to "fine-tune" some of the Principles' provisions or even to proceed to the creation of new legal rules for newly arising situations. Such an openness and dynamic is vital for a "codification" of international trade law to accommodate the many legal issues of international trade, the continuing evolution of contract Convention of 1980 of the Law Applicable to Contractual Obligations into a Community Instrument and its Modernization, at 35 et seq. (2005). 59 Oliver Wendell Holmes, The Path of the Law, in COLLECTED LEGAL PAPERS, at 167 (Oliver Wendell Holmes ed., 1920).

UN/DROIT Principles Before State Courts • 93

practice, and the differing usages of the different branches of trade. 6O Whether the UNIDROIT Principles establish a system complete enough to be recognized before state courts is questionable, again with a view to their limitation to codifying a general contract law and the exclusion of rules pertinent to more specific contractual relationships, such as construction contracts or agency relationships. Even with respect to general contract law, there remain, as mentioned before, topics that have not been covered, such as rules on conditions or joint and several liability.61 Despite these shortcomings, there is hardly any doubt that judges will be able to find through the UNIDROIT Principles appropriate solutions for the vast majority of cases before them. Three factors give rise to such a conclusion. First, it must be stressed that the Principles have put to the past a characterization of the general principles of law as a body of rules that "may, on occasion, be useful to fill a gap but in the essence they are too elementary, too obvious and even too platitudinous to permit detached evaluation of conflicting interests, the specially legal appreciation of the implications of a given situation. "62 The UNIDROIT Principles have added a level of detail and richness not comparable to the content of the "old" lex mercatoria and the general principles of law, respectively. Second, the very fact that the Principles' rules are embedded in a veritable system greatly mitigates their incompleteness. Though incomplete, they are geared towards completion by evolution through the judiciary and, indirectly, legal doctrine. The third, and at the same time most important, reason why the Principles' incomplete character or rather their openness do not stand in the way of them becoming a viable "legal system" is today's prevailing contract practice in international trade. Strongly influenced by English and American drafting techniques, modern-day Cf. BERGER, supra note 31, at 94 et seq. See, e.g., JAN KROPHOLLER, INTERNATIONALES PRIVATRECHT, at 413 (2006) (the Principles lack a comprehensive system of justice). 62 Frederick Alexander Mann, Reflections on Commercial Law of Nations, 33 BYIL 20, 36 (1957). 60

61

94 • UN/DROIT Principles of International Commercial Contracts contracts in the field of international trade are often page-long agreements aimed at regulating every conceivable issue that may arise in the course of transacting business. To a very large extent, legal conflicts may be resolved solely on the basis of the express stipulations in the contract. In effect, this technique has made vast parts of domestic rules on contract law inapplicable or at least redundant. For instance, many of the issues that were added to the UNIDROIT Principles in its 2004 edition are typically expressly addressed in the contract. Rights of third parties are regularly explicitly excluded, assignments of rights prohibited unless specifically stated otherwise, in which case many contracts spell out a detailed regime on procedure and effect of assignments; ditto for the institute of set-off, which is either expressly excluded or otherwise regulated in detail. Moreover, rules designed for a specific type of contract are hardly ever needed or, even more importantly, may create havoc to the balanced system contractually agreed upon. 63 If at all, the contract has to be supplemented by general contract principles, such as those that relate to construction and interpretation of contractual stipulations (although many international contracts now include provisions specifying the most important canons by which construction and interpretation should be guided), consequences of errors and other irregularities in the formation stage of the contract, the particularities of restitution in the event of termination of the contract, or modification of the contractual equilibrium in light of changed circumstances. For these limited purposes, the UNIDROIT Principles provide ample material and may even be said to be better equipped than rules of domestic origin, as they take account of the international spirit of the contract. 64 63 A pertinent example is the statutory rules on implied warranties in codified sales statutes (e.g., Article 197 et seq. Swiss Code of Obligations), which parties in American-style share or asset purchase agreements largely intend to replace by specific contractual representations and warranties. Regularly, however, following the parties' disputes, counsel representing the purchaser is trying to reintroduce the statutory warranty rules. 64 A different assessment is given by Detlev F. Vagts, Arbitration and the Unidroit Principles, in Contractacwn Intemacional, COMENTARIOS A LOS PIuNCIPIOS SOBRE LOS CONTRATOS COMERCIALES INTERNACIONALES DEL UNIDROIT, 265, 276-77 (1998): "[The UNIDROIT Principles] are too general and too flexible to constrain arbitrators in deciding the sort of specific issues on which disagreements are likely to turn. They will be more helpful where the parties, their

UN/DROIT Principles Before State Courts • 95

B. The UNIDROIT Principles: Balancing the Parties' Competing Interests

As to their substantive content, it has not been questioned that the UNIDROIT Principles in their entirety constitute a legal framework that adequately balances the parties' competing interests. Critics have instead pointed to the absence of mandatory provisions either by rejecting the notion altogether that a "privately" edited instrument such as the UNIDROIT Principles could contain provisions of mandatory nature 65 or conversely by deploring the scarcity of them. It is indeed extraordinary for a non-binding instrument to state that some of its provisions are not at the parties' disposition. The critics' rejection of these provisions' effectiveness is ultimately a reflection of the axiom that it is the state legislator's prerogative to promulgate "law" in its strict sense. Yet, this analysis has been undertaken precisely with a view to critically examining whether it indeed is a dogmatic necessity to recognize only the state legislator's "commands" as judiciable bases in international trade. If there should be no such necessity, however, it would seem imperative for any framework to be used as a basis for commercial transactions to include provisions of mandatory nature. 66 In the end, fundamental notions of fairness can only be assured if they can be enforced despite the parties' contrary agreement. Otherwise, if gross contortions of the contractual equilibrium were tolerated, the very foundation of a transnational trade law, the principle of party lawyers and the arbitrator come from civil law jurisdictions, than in disputes across the common law-civil law divide. Their common legal heritage will enable them to flesh out concepts that the Principles only refer to in phrases too terse to give concrete guidance." 65 Cf Ulrich Drobnig, The Unidroit Principles in the Conflict of Laws, UNIF. L. REv. 385, 388 (1998); Catherine Kessedjian, Un exercice de renovation des sources

du droit des contrats du commerce international: Les Principes proposes par l'Unidroit,

REv. CRIT. DR. INT'L PRIVE 641, 658 (1995); but see Goode, supra note 21, at 27; Christian Larroumet, La valeur des principes d'Unidroit applicables aux contrats du commerce international, 14 LA SEMAINE JURIDIQUE 147, 149 (1997). 66 See also Philippe Kahn, Les principes comme droit applicable aux contrats internationaux, in CONTRATTI COMMERCIALI INTERNAZIONALI E PRINCIPI UNIDROIT 39, 48 (Michael]. Bonell & Franco Bonelli eds., 1997); Goode, supra note 47, at 231, 246; Michael Joachim Bonell, Soft Law and Party Autonomy: The Case of the UnidroitPrinciples, 31 Loy. L. REv. 229, 251 (2005); SCHILF, supra note 2, at 266.

96 •

UN/DROIT Principles of International Commercial Contracts

autonomy, would be at risk. 67 Consequently, all the Principles' mandatory provisions carry with them the notion of fundamental contractual fairness: Gross disparity as to the rights and obligations of the parties may, in light of the particular circumstances of the case, give rise to avoidance of the contract (Article 3.10); one-sided price determination is subject to judicial control if "manifestly unreasonable" (Article 5.7 (2)); grossly excessive penalty clauses may be reduced to a reasonable amount (Article 7.4.13(2)); standard terms are held to judicial scrutiny by declaring ineffective those terms that are of such character that the other party could not reasonably have expected it (Article 2.20). In addition, rules regulating fraud or threat are likewise mandatory by their very nature68 and so is, perhaps most importantly, the very foundation of all these articles, the general duty of good faith and fair dealing. 69 The blanket clause of good faith and fair dealing leaves room for judicial developments of corrective instruments addressing the particularities of the individual case. The real question thus is not whether, through an instrument of the UNIDROIT Principles, quality mandatory provisions can be promulgated-to the extent a true conflict-of-Iaws choice of law of the Principles is recognized, they would stand on par with any other legal order, thus allowing them to designate the principles and rules parties to an international contract cannot derogate from. What needs further examination is the assertion that the UNIDROIT Principles' mandatory rules are too few to be considered part of a true legal order. This concern seems largely misplaced, for two reasons: First, the large bulk of the mandatory provisions in domestic legal systems are aimed at consumer contracts. A comparison to the density of provisions of mandatory nature in domestic legal systems is thus skewed. The UNIDROIT Principles do not apply to consumer contracts, that is, contracts in which not both parties are acting in the course of their trade or profession. However, for commercial Cf infra § I.3.a.ii. Vischer, supra note 4, at 214. 69 See in particular E. Allen Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT Principles, Relevant International Conventions, and National Laws, 3 TUL. J. INT'L & COMPo L. 47 et seq. (1995). 67

68

UNIDROIT

Principles Before State Courts • 97

contracts, even in domestic legal systems, mandatory provisions are the exception rather than the rule and, as in the UNIDROIT Principles, limited to distortions of fundamental notions of fairness. Second, and more importantly, even though fewer in number, each domestic legal system embraces mandatory provisions of parochial character, which are ill at ease with the specific nature of international commercial transactions. The Swiss rule mentioned before, according to which in an agency relationship, the compensation for the loss of customers may not be excluded, may serve as a pertinent example. A truly transnational trade law therefore needs foremost to "condense" the mandatory norms in accordance with the goal and specific nature of international trade. 70 In light of the comprehensive comparative legal research, one may be confident that the Principles' mandatory provisions reflect the core commercial policy considerations of the world's leading legal systems. 7I Indeed, as Roy Goode rightly said, the mandatory provisions may well have the character of an international jus COgens.72 The blanket norm of Article 1.7 on the general duty of good faith in in ternational trade ensures that the Principles are not a closed system but remain open to new developments or unforeseen exigencies. The norm is clearly an instrument to further develop the policy considerations expressly recognized in the Principles. The limitedness of Principles' mandatory provisions thus is just a relative one. Emphasizing the "veritas" of the law over the formal" auctoritas" with which it has been promulgated as criterion for an assessment of the law quality of a set of rules not emanating from a state legislator has been sharply criticized, most prominently by Claus-Wilhelm Canaris. 73 While he does not contest the quality of the UNIDROIT 70 Cf. Frank Vischer, General Course on Private International Law, 232 REc. DES COURS 13, 138 (1992); cf. also Michael Joachim Bonell, Das autonome Recht des Welthandels-Rechtsdogmatische und rechtspolitische Aspekte, 42 RABELSZ 485 (1978); Lowenfeld, supra note 49, at 133, 137. 7I Besides those cited supra note 58, see Ole Lando, Some Issues Relating to the Law Applicable to Contractual Obligations, 7 KING'S C. LJ. 55, 62 (1996/1997); Wichard, supra note 11, at 285 et seq. 72 Goode, supra note 21, at 27. 73 Canaris, supra note 18, 19. Similarly also Ulrich Magnus & Peter Mankowski,Joint Responses to the Green Paper on the Conversion of the Rome Convention of 1980 on the Law Applicable to Contractual Obligations into a

98 • UN/DROIT Principles of International Commercial Contracts

Principles, he believes the permissibility of a choice of the UNIDROIT Principles with conflicts-of-Iaws effect would necessarily entail the recognition of the same effect to another "privately edited" set of rules. Nothing, he fears, would guarantee that the set of rules draws from the same expertise as the UNIDROIT Principles and thus would reach a comparable degree of quality. He deems it impossible to distinguish between "masterworks" and "sorry efforts. "74 Moreover, if a state court were allowed to entertain an assessment of the non-state legal order, its point of reference could only be its own domestic legal system. This, however, would in effect relegate the parties' choice to a mere substantive law reference. 75 Whether a set of rules qualifies as a legal system to be recognized by courts can only be determined by individual assessment. The charge that an evaluation of the legal order's balance would necessarily result in something of a bootstrapping endeavor-the legal order could only be gauged against the backdrop of a national legal system, which effectively would result in a substantive-law reference-misconceives the nature of such an assessment. It would not mean the non-state order would have to conform in its entirety with the mandatory provisions of the national order applicable in the absence of a choice by the parties. Such an assessment would only test the policy approach of the particular "legal system," to verify whether it will lead, on the whole, to equitable and fair solutions that are in line with the basic legal concepts of the forum state, or, more suitable considering the international setting, of the national laws having an interest in the case. community instrument and its modernization-COM (2002) 654 final, http:/ / ec.europa.eu/justice_home/ news/ consultin~public/ rome_i/ doc/ university_ hambur~en.pdf, at 13 (2005). 74 But see Schinkels, supra note 47, at 108, 110 (according to whom this concern may be allayed by attributing "law character" to those codifications that have obtained the status of a persuasive authority for purposes of developing or refining statutory texts of a particular national civil legislation). 75 See also BLASE, supra note 7, at 214 (arguing that there need to be general criteria when a certain body of rules would qualify as "law," and it would not be sufficient to merely state that the UNIDROIT Principles would satisfy the relevant requirements). SCHILF, supra note 2, at 382, on the other hand, argues that it would not be in line with the traditional notion of party autonomy if the application of a particular law were to be made subject to certain requirements of substantive nature.

UNIDROIT Principles Before State Courts • 99

From a Swiss perspective, the proposed test is not as novel as it may appear. It takes up the approach of Article 19 PI LA, which mandates Swiss courts to make the application of mandatory laws outside the lex causae dependent upon their policy and their consequences for a judgment that is fair according to the Swiss concept of law. 76 The proposition gives considerable discretion to a judge and, particularly interesting for our purposes, it authorizes him or her to form special international substantive rules that adequately take account of the mandatory provisions demanding application in a particular case. 77 Allowing a state court to recognize the choice of a set of rules, specifically designed for the needs of international trade, would effectively provide the judge with such international substantive rules. Instead of crafting them on an ad hoc basis, which is not in the interest of international trade, he or she would be merely asked to ensure that these rules adequately reflect the major policy considerations of a developed legal system. ii.

The UNIDROIT Principles' Procedural Legitimacy

The disparaging statement about "privately" edited legal frameworks referred to above 78 may, however, have been meant more as a criticism of the procedural legitimacy of transnational trade law in general, an objection to which the lex mercatoria has been traditionally exposed. 79 In light of the emerging trend to jump-start the systematization of international trade law through codified soft law, it appears indeed legitimate to ask whether potentially any set of rules, regardless of the "credentials" of its creators, may acquire the status of law provided that it satisfies a certain standard of quality or whether the set should not be 76 In its French wording, Article 19 PlLA reads: "Pour juger si une telle disposition doit etre prise en consideration, on tiendra compte du but qu'elle vise et des consequences qu'aurait son application pour arriver a une decision adequate au regard de la conception suisse du droit." 77 Vischer, supra note 70, at 13, 173; see also FRANK VISCHER, LUCIUS HUBER & DAVID OSER, INTERNATIONALES VERTRAGSRECHT para. 932 et seq., in particular para. 946 (2000). 78 See supra § I.2.b.i.B. 79 See, e.g., Felix Dasser, Lex mercatoria: Werkzeug der Praktiker oder Spiel:z.eug der Lehre?, SZIER 301 et seq. (1991); an overview of the objections to the lex mercatoria for its lack of procedural legitimacy is given by BERGER, supra note 31, at 64 et seq.

100 • UN/DROIT Principles of International Commercial Contracts

accompanied by some form of "law-making process" to achieve procedural legitimacy comparable to law emerging from domestic legislative procedures. 80 The process through which transnational trade law in its traditional sense is thought to be emerging, that is, the contract practice of the international community of merchants, is entirely lacking any functional equivalent to the domestic legislative process. The process is purely empirical, in no way consensual or even democratic. It only serves to determine an existing consensus but not to bring about a consensus on what might be most viable for the development of transnational trade law. Its only safeguard of a procedural nature may be seen in the principles' and rules' testing before arbitral tribunals, before which the vast majority of disputes arising out of international commercial contracts is brought in today's market practice. Yet, in comparison to state court jurisprudence, the international arbitral process is less capable of imparting the gloss of procedural legitimacy on these principles and rules. It lacks the institutional and hierarchical safeguards characteristic to domestic court systems that preserve the predictability, certainty, and development of the law. Most significantly, as a result of the absence of any true appeal stage and only sporadic publication of reasoned awards, no true body of arbitral jurisprudence of a comprehensiveness that is comparable to the system of legal precedents characteristic to court jurisprudence has been building Up.8!

The process, through which codified soft law "emerges," on the other hand, brings the prospect of a layer of procedural legitimacy in addition to that derived through the forensic quality of the international arbitration process. Codified soft law may draw legitimacy from the standing and authority of the organization or institution preparing it and, perhaps more significantly, from the procedure followed to establish the rules and principles contained Cf also Mertens, supra note 52, at 872. More recent attempts to disperse these reservations may have correctly pointed to the increasing publication of arbitral awards, along with a growing tendency of international arbitrators to use prior arbitral awards as legal precedents. Yet, even there it is acknowledged that the "precedential value of arbitral awards does not yet have the quality of court precedents." BERGER, supra note 31, at 73. 80

8!

UN/DROIT

Principles Before State Courts • 101

in it,82 Both considerations are closely dependent upon each other, as the standing and authority of the "formulating agency" in turn heavily bears on the procedure established to bring about consensus on the content of the legal instrument to be adopted. 83 The UNIDROIT Principles may have such an extra layer of legitimacy. They have been drafted with the mandate and approval of an acknowledged international organization, the UNIDROIT, an organization of considerable standing and authority when it comes to the elaboration of uniform private laws. Contrary to Claus-Wilhelm Canaris's assertion, the Principles are not merely some private set of rules drafted by people arrogating for themselves the position of having expertise in the field of international commercial transactions. The UNIDROIT Principles, for that matter, cannot even be clearly categorized as a private or, to use another label regularly employed, non-legislative legal framework as predominately done in scholarly writings. 84 The UNIDROIT, under whose auspices the Principles have been prepared, is an independent, inter-governmental organization with close to 60 member states. According to Article 1 of the organic statute, the purpose of the Institute is "to examine ways of harmonizing and coordinating the private law of states and groups of states." This must not necessarily take the form of an international convention or a veritable model law. The vague phrase "ways of harmonizing and coordinating the private law" on the contrary gives the Institute the flexibility to draft "soft law" instruments, which by their very definition need not be formally approved by governments or ratified by parliaments to become adoptable in practice. 85 The Governing Council, the Institute's highest body to whom the General Assembly delegated the task of formulating the Institute's policy and supervising the work of its working groups, decided in 1971 accordingly to include in the Institute's Work Program an "essai d'unification portant sur la 82 83 84

Cf Vischer, supra note 4, at 211. Cf BERGER, supra note 31, at 69. See, e.g., Michaels, supra note 1, at 590 et seq.; Wichard, supra note 11, at

270 et seq. 85 MICHAEL JOACHIM BONELL, AN INTERNATIONAL CONTRACT LAW 38, n.l7 (3d ed. 2005).

RESTATEMENT

OF

102 • UNIDROIT Principles of International Commercial Contracts

partie generale des contrats (en vue d'une Codification progressive du droit des obligations 'ex contractu'}."86 The General Assembly thereafter approved the new Work Program and, at the expiry of each subsequent triennium, confirmed its decision to keep the project on the Institute's Work Program. 87 In May 1994, the Governing Council gave its formal imprimatur to the UNIDROIT Principles and recommended their widest possible distribution in practice. 88 Furthermore, UNIDROIT, in preparing the Principles, adopted an extraordinarily inclusive method, which was designed to ensure the broadest possible participation. A Working Group of selected experts representing all major legal and socio-economic systems of the world took an initial stab at drafting the various chapters of the Principles. 89 Already at this stage, the Working Group did not consider itself exclusive but invited outside assistance. 9o Following internal procedures to discuss the preliminary drafts, they were circulated, together with a list of issues that had proved most controversial and an invitation to comment on the drafts among a wider group of academics and practitioners throughout the world, including the more than 100 correspondents of the UNIDROIT. 91 Subsequently, a revised version reflecting the comments that had been received was prepared, which then was examined by the Governing Council. The revised version was also submitted to the governments of all member states of the Institute. 92 Though not expressly requested to comment on it, a number of them expressed UNIDROIT 1971, C.D. 50TH SESS., at 93. See BONEll, supra note 85, at 28 n.5. 88 Cf UNIDROIT 1994, C.D. (73) 18, at 22. As to the cntlclsm on this procedure, see Hilmar Raeschke-Kessler, Should an Arbitrator in an International Arbitration Procedure Apply the Unidroit Principles?, in UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEx MERCATORIA?, ICC PuBLICATION No. 490/1, at 167, 172 (Institute of International Business Law and Practice eds., 1995); Kessedjian, supra note 65, at 641, 652 (each arguing the Council exceeded its competence by not presenting the Principles to governments for comments); for a rebuttal of the criticism, see BERGER, supra note 31, at 67. 89 See, e.g., BONELL, supra note 85, at 31 et seq. 90 Id. at 24 et seq. 91 Id. at 27 et seq. 92Id. at 28. 86

87

UNIDROIT Principles Before State Courts • 103

their opinion. 93 Moreover, seminars and colloquia were held before the adoption of the final version of the Principles, such as the seminars held in January 1992 at the Law School of Miami,94 in December 1993 in Rome organized by the Centre for Latin American Studies and the Centre for Comparative and Foreign Studies,95 and in February 1994 at the Law School of Tulane University in New Orleans. 96 While it is not suggested here that the Principles in light of their official sanctioning by an inter-governmental organization and/or the legislative-like procedure accompanying the drafting process, particularly by granting broad influence to the circles interested in the particular project, amount to a quasi-state assemblage of principles and rules,97 it may be said the Principles' prominent provenance and their exemplary adoption procedure distinctly define them against other initiatives of a purely private character.

3. The Notion of "Law" in Conflict-of-Laws Rules on Party Autonomy It was stated at the very beginning of this chapter that it is unsatisfactory to answer the conflict-of-Iaws question as to whether parties are allowed to bindingly mandate a court of law to apply the UNIDROIT Principles as the contract's exclusive governing law based on the purely textual argument that the omission of the word "state" in statutory texts, such as Article 3 of the Rome Convention or Article 116 of Swiss Private International Law, was made deliberately. This has prompted an attempt to entertain an analysis of the term "law" and the notions underlying it, both in its formal [d. at 28 n.15. See 40 AM.]. COMPo L. (1992), containing contributions by Michael Joachim Bonell, Ulrich Drobnig, E. Allan Farnsworth, Marcel Fontaine, M.P. Furmston, Richard Hyland, D. Maskov, A Rosett, and Denis Tallon. 95 PRINCIPI PER I CONTRATTI COMMERCIALI INTERNAZIONALI, E IL SISTEMA GUIRIDICO LATINOAMERICANO (Michael Joachim Bonell & S. Schipani eds., 1996), containing contributions by]. Adame Goddard, E. Aimone Gibson, E.C. Banchio, L.O. Baptista, F. Hinestrosa, A Leon Steffens, ].C. Moreira Alves, L.G. Paes Be Barros Leaes, G. Parra-Aranguren, S. Rippe,].C. Rivera, and H. Veytia. 96 3 TUL.]. INT'L & COMPo L. (1994), containing contributions by E. Allan Farnsworth, A Hartkamp, Michael Joachim Bonell, AM. Garro, Ole Lando, and Michael Evans. 97 See also BLASE, supra note 7, at 216. 93 94

104 • UNIDROIT Principles of International Commercial Contracts

and substantive implications. Equally needed, however, is to explore the connotations the term engendered in conflict of laws, in particular as regards the proper scope of the principle of party autonomy (evidently, apart from the very question of whether to permit the parties to choose a set of rules of transnational character). This is the subject matter of the following sub-section of this study. The relevant considerations shall then be put in context with the contradictions and relativizations identified previously, following which tentative conclusions shall be drawn on the very question at stake here: do the UNIDROIT Principles constitute a "law" that parties to an international commercial contract can by their choice designate as the law governing their contract in proceedings before state courts?

a.

The Evolution of and the Changing Rationale for the Principle of Party Autonomy

i.

General Analysis

Party autonomy, the principle that parties are free to select the law governing their contract, is a relatively new phenomenon. Until well into the early part of the 20th century, it has not met with universal acceptance. Most fundamentally, the principle's legitimacy was resisted because "at their will [parties] can free themselves from the power of the law which would otherwise apply,"98 or because "it involves permission to the parties to do a legislative act,"99 thus allowing the parties to become the masters instead of subjects of the law. Apart from purely logical reasons, it was feared permitting the parties to stipulate the law that should regulate the contract would afford the parties an artificial device for avoiding the policies of the law otherwise applicable. loo While the prevailing view came soon to realize that this particular criticism was largely misplaced because it assumed a rule of party autonomy without any limitation,lol it came to treat an express choice of law as merely one element pointing to the "proper law," or as only prima facie evidence, as only one factor but by no means the only one to be taken into account. The parties' 98 JOSEPH H.

BEALE, A TREATISE ON THE CONFLICT OF LAws, 1080 (1935).

Id., 1079. 100 Cf Siegelman v. Cunard White Star Ltd., 221 F.2d 189, 192 (2d Cir. 1955). 101 EUGENE F. SCOLES & PETER HAY, CONFLICT OF LAws, 660 (2d ed. 1992).

99

UNIDROIT

Principles Before State Courts • 105

expression as to the governing law was regarded as a mere starting point for the judge to determine the "proper law," which every contract was governed by from the outset. 102 The view was rooted in the firm belief that every contract had a center of gravity that may be found through a combination of subjective and objective elements. Considerations pertaining to the protection of the parties' expectation have eventually given way to a more predictable conflict-of-Iaws rule. In the English leading case, Vita Food Products Inc. v. Unus Shipping Co. Ltd., Lord Wright, speaking for the Privy Council, accordingly said that "where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible. "103 As a result, not only in England, it came to be recognized that an express choice of law was to be considered conclusive for the benefit of certainty in commercial transactions. 104 Yet, around the same time, courts had established the requirement that there be some link between the law chosen and the parties or the transaction. 105 The requirement was meant to prevent the parties from evading mandatory rules of the law "otherwise" applicable, that is, the law with which the legal relationship has the closest connection due to its inherent nature. 106 Even this last bastion of restriction on the principle of party autonomy was, however, gradually eroded. In Vita Food Products Inc. v. Unus Shipping Co. Ltd., where it had been argued that a choice of English law was not valid because the transaction contained nothing to connect it to England, Lord Wright said that "connection with English law is not as a matter of principle essential.' '107 Similarly, the Swiss Federal Tribunal, which earlier itself had established a 102 See, e.g., Anselme Dewavrin Fils et Cie v. Wilson and North-Eastern Ry. Shippings Co. Ltd. (1931) 39 Lloyd's L.R 289. The term "proper law" was coined by the English lawyer Westlake. 103 [1939] A.C. 277, 290 (P.C.). 104 See also the statement by Judge Harlan in Siegelman v. Cunard White Star Limited, supra note 100, at 189 ("A tendency toward certainty in commercial transactions should be encouraged by the courts."). 105 See, e.g., BGE 78 II 86 = Pra 41, 169 ("des attaches naturelles et de quelque importance"). 106 Cf 8 FRIEDRICH CARL VON SAVIGNY, SYSTEM DES HEUTIGEN ROMISCHEN RECHTS 28 (1849). 107 See supra note 103, at 290.

106 • UNIDROIT Principles of International Commercial Contracts

requirement that the chosen law have some connection to the parties or the transaction,I°s attenuated the requirement by demanding the parties have a reasonable interest for their choice. 109 In its practical application, this approach put almost no limitation on the parties' autonomy. According to the Swiss Federal Court, the choice was to be admitted, for example, when the chosen legal system was particularly elaborated for the contract in question; when the parties wanted to submit themselves to well-probed trade usages of the chosen law; when the contract was connected with other contracts that were governed by the chosen law; or when the parties relied on the law of the forum when pleading their respective case. Finally, when in Europe attempts to codify the judicially developed conflicts-of-Iaws rules succeeded, the statutory rules dropped any of the limitations previously in place and granted the parties virtually unfettered freedom to designate the law applicable to the contract by adopting very broad and simplistic formulae in style all very similar to Article 3 of the Rome Convention, which simply states: "A contract is governed by the law chosen by the parties." The only remaining qualification is that the contract is of an international character. Mter all, conflict-of-Iaws rules are only triggered if the situation at hand involves a choice between the laws of different legal systems. As a consequence, parties are now permitted to submit their contract even to a "neutral" law, that is, a law with no territorial or substantive connection whatsoever to the parties or the transaction. To take an extreme example, if the parties so desire, a contract entered into by a German and an Austrian company may be governed by Malaysian law, regardless of what the parties' rationale for their choice was. Thus, in contrast to the practice of the Swiss Federal Tribunal before the Swiss Private International Law Act's entry into force, it would not matter, for example, whether the parties considered the chosen legal system as particularly elaborated for their contract in question. There is no requirement that the parties have a reasonable interest for their choice or that the parties' agreement be "bona fide," as stated by Lord Wright in the Vita Food decision. llo See supra note 105. BGE 91 II 44 (Ades v. Internationale Filmvertriebsgesellschaft, Mar. 23, 1965). 110 See supra note 103. lOS

109

UN/DROIT Principles Before State Courts • 107

There are a variety of reasons for the gradual expansion of the principle of party autonomy. Chiefly responsible was the acceptance that the principle served best the paramount need of the commercial community for predictability and certainty of law. On the other hand, the principle must have seemed especially justified because international contracts often have no real seat, no unequivocal center of gravity, but, on the contrary, affect the economy of a number of states. The "otherwise applicable law" or the "proper law" of the contract, which, initially, the principle of party autonomy was thought to be prima facie evidence of, and, later, resurfaced in the requirement that the chosen law have some connection to the parties or transaction, proved to be fictitious at best. The acknowledgment of unrestricted freedom of the parties to choose the law governing their contract thus relieved state courts from the uncertainties of traditional conflict of laws methodology to localize the contract to one of the many equivalent contacts it might have. With there being no "proper law" or "otherwise applicable law" that, a priori, has a rightful claim for application, the basis for the principle has undergone significant change. In lieu of being regarded as a mere assistant of the judge in its determination of the applicable law, the principle is today, above all, a "doctrine of convenience and business efficacy"11l for the commercial community, a practical tool in the hands of the individuals participating in international commerce, a tool that allows them to avoid any uncertainties as to what law applies to their transaction. This remarkable state of detachedness from the state, that is, the rule's overwhelming emphasis on the parties' ability to foretell with accuracy what the rights and duties under the contract will be at the cost of the interests of the state and its regulations, is ultimately only possible on account of the basic assumption that the contract laws of the world, as a rule, do not differ fundamentally but are functionally equal, adhere in their very basic notions to the same values of justice and fairness, and thus are really interchangeable. ll2 III VAN HEeKE, PROBLEMESJURIDIQUES DES EMPRUNTS INTERNATIONAUX, 126 (Bibl. Visseriana, Vol. 18 (1955)). 112 See BonelI, supra note 70, at 485, 496; for further references, see Wichard, supra note 11, at 269, 285.

108 • UNIDROIT Principles of International Commercial Contracts

ii.

The Changing Rationale and the UN/DROIT Principles

The gradually expanding liberal character of the principle, which, in the last resort, is only explainable by the aforementioned phenomenon that the law of contracts is regarded, to some extent, as detached from the state and that the contractual relationship has a certain individuality of its own,113 raises the question of whether it would be indeed a step of such enormous boldness, as those adhering to a more positivistic notion of law suggest, to allow parties to an international commercial contract to choose a well-balanced, non-state body of rules in lieu of a national law. It could well be argued, as it indeed has been,114 that a well-balanced non-state body of rules might be preferable to a state legal order, however distant or unconnected, however "undeveloped," however obscure. If the equality and interchangeability is the guiding principle that justifies the enormous freedom granted to the international business community, there should be no theoretical objection against the recognition of a choice of a law that, though not being a state law, shares the fundamental values essential to developed systems of contract law, is of a quality and homogeneity in content at least equal to traditional national contract laws, may be easily applied by the adjudicator, and at the same time satisfies the parties' interest with respect to their particular transaction. With a view to the evolution of the concept of party autonomy highlighted above (Section 1.3. (a)(i)), with its general tendency not to restrict the "pool" of laws that parties to an international transaction may choose from, such a recognition would ultimately be nothing but a reflection of the other rationale for the principle of party autonomy-that merchants and business people can be trusted to know which law is qualified for a certain kind of transaction. In the end, as has been emphasized many times, it is the business community that decides whether an instrument such as the UNIDROIT Principles should become successful or not, and, as B.A. Wortley pointed out, they can usually be relied on not to make fantastic choices.115 113 Frank Vischer, The Antagonism Between Legal Security and the Search for Justice in the Field of Contracts, 2 REc. DES COURS 38 (1974). 114 Vischer, supra note 4, at 203, 21l. 115 B.A. Wortley, Aspects of the 1951 Hague Conference on Private International Law, in FESTSCHRIFf LEWALD 407, 411 (1953).

UNIDROIT Principles Before State Courts • 109

b. Relativization of the Notion of Law Through Extensions of the Principle of Party Autonomy Arguably, the term "law" as used in modern conflict-of-Iaws rules on party autonomy has experienced extensions or relativizations (from the viewpoint of strict positivists at least) to an extent that in fact, already today, courts are exposed to principles and rules that can hardly be qualified as of strictly national character. The parties' authority to choose a rationally ordered conglomerate of principles and rules like the UNIDROIT Principles, which have been mostly modeled on existing domestic laws, may therefore not be as unique as it might appear. Three "derivatives" of the doctrine of party autonomy come to mind: dipe~age, stabilization clauses, and opting-in clauses.

i.

The Instrument of Depe9age

A.

General Analysis

The concept of dipe~age is traditionally not linked to the principle of party autonomy. In its original sense, the concept referred to the phenomenon that it was not the same law that governed each and every issue arising out of a contractual relationship. For example, the Swiss Federal Tribunal,ll6 up to 1951, and the U.S. Restatement (First) of the Conflict of Lawsll7 directed matters bearing upon the validity of the contract to the lex loci contractus and matters bearing upon the effects and performance of the contract to the lex loci solutionis, thus splitting the contract into two main issues for which different laws apply (so-called "grosse Vertragsspaltung," "great [zssure"). In addition, in applying the lex loci solutionis for matters relating to the performance of the contract, a second split occurred in contracts with two main performances at issue when the places of performance were not identical with respect to the parties' obligations (so-called "kleine Vertragsspaltung," "small fissure"). The possibility that the parties themselves could submit different parts of the contract to different legal orders, on the other hand, is a more recent phenomenon. Conflict-of-Iaws doctrine has long been skeptical to so extend the principle of party autonomy, 116

117

Cf BGE 56 II 48 (1930). U.S. RESTATEMENT (FIRST)

OF THE CONFLICT OF LAWS

§§ 332, 355, 358.

110 • UNIDROIT Principles of International Commercial Contracts

possibly because of its attitude to the instrument of "depe~age" in its traditional sense. The main objection was that a contract consisted of a net of reciprocal rights and duties, and that it therefore would be only natural to decide the legal issues arising out of a single law. liB Because of the discredit the concept of splitting the governing law had received in doctrine, the dominant view attributed to the parties' depe~age only the weight of a substantive law reference, with the consequence that the legal order selected by the parties for a particular part of the contract could deploy its effects only within the boundaries of the mandatory provisions of the principally governing law. 1I9 Today, with the conceptual splitting of issues definitively overcome, it has been broadly accepted that where different laws are chosen to govern different parts of the contract, both choices may have been meant as true choices of law. 120 Having accepted that the parties themselves may split the law governing the contract, the controversy has shifted to new ground. It is unclear what the proper limits to a choice of different laws for different parts of the contract should be. Generally, it is held that the choice of different laws must be logically consistent, in the sense that the choice must relate to elements that can be governed by different laws without giving rise to contradictions.l2l If the chosen laws cannot be reconciled in some reasonable way, for example through resort to the instrument of adaptation (a conflict-of-Iaws precept that is chiefly aimed at harmonizing various legal orders that are applicable to different, but inter-connected, legal issues),122 the issue must, depending on the particular circumstances, be decided by the principally governing law or the law applicable in the absence of a choice of law by the liB

Vischer, sUfrra note 113, at 54.

119 FRANK VISCHER,

INTERNATIONALES VERTRAGSRECHT-DIE

KOLLISIONS

53 (1962). 120 See, for the Rome Convention, Lagarde, sUfrra note 1, at 287, 302; M.E. Storme, Applications possihles et caracteres generaux des principes de droit uniforme des contracts, 72 REv. DR. INT'L & DR. COMPo 309, 313 (1995). 121 Giuliano & Lagarde, sUfrra note 14, at 17. 122 See, e.g., Spickhoff, sUfrra note I, at 116, 123. RECHTLICHEN REGELN DER ANKNUPFUNG BEl INTERNATIONALEN VERTRAGEN

UNIDROIT

Principles Before State Courts • 111

parties.l 23 This will rarely be necessary though, because again, as with the principle of party autonomy as such, businesspeople again may generally be trusted not to make fantastic choices. It is doubtful for another reason, however, whether there will be much practical application for these guiding principles. The true relevance of a depec;age created by the parties themselves may lie somewhere else. It is not necessarily whole parts of a contract that the parties may want to submit to a different, separate law; rather, the parties may want to avoid the application of a very specific mandatory provision of the principally governing law and therefore use the instrument of depec;age to have that pertinent part of the contract to which the mandatory provision would claim application governed by a more liberal system of law. To take a by now familiar example,124 an international agency contract that, by the parties' choice, is submitted to Swiss law could provide that with respect to the issue as to whether the agent is entitled to compensation for loss of customers upon termination of the contract, another law shall apply, which, other than Swiss law, does not know a provision of mandatory character in that respect. B.

Depe(}age and the UNIDROIT Principles

In other words, the instrument of depec;age may be used by the parties to delimit the scope of application of mandatory rules that are inconsistent with the needs and usage of international commerce and that were adopted by individual states with internal, not international, transactions in mind. They could pick and choose those legal orders that would not invalidate their contractual stipulations. On reflection, the assemblage of principles and rules created by the parties through their combination of different legal systems may thus not be fundamentally different to a choice of principles and rules of non-state origin or, for that matter, of a whole codification of principles and rules of non-state origin. For the combination of different laws applicable to one particular contract may lead to an entirely "novel" legal order that in this particular form is simply non-existent in any of the "recognized" 123 VISCHER, HUBER & OSER, supra note 77, at para. 97. 124 See supra § I.2.ii.B "Doctrine as a Means to 'Internationalize' Default

Concepts of National Law."

112 • UNIDROIT Principles of International Commercial Contracts

legal systems of the world. l25 Also, it confirms that a "system of law" that parties to an international commercial contract may refer to under modern systems of conflict of laws must not necessarily be one that is capable of regulating a contractual relationship homogenously and comprehensively.126 Of course, it shall not be suggested here that the parties' be limitless. Multiple choices may indeed lead to unacceptable results that a court may not want to give its imprimatur to. This might be because the depe~age would result in an assemblage of principles and rules that is, in effect, so incoherent as to make impossible a sensible application to the issues arising out of the contract in question, and, in this respect, it is certainly reasonable to limit the depe~age to parts of the contract that can be isolated and dealt with independently.127 This might also be, however, because it would mean the judge would be asked to apply a "system" of principles and rules that in its substance is unjust, unfair, or even arbitrary. The court's first priority therefore must be to examine whether this "unique" system will lead, on the whole, to equitable and fair solutions respecting the fundamental policies of the forum (to the extent they pertain to transactions of international character).128 The test is identical to the one suggested above applying to the (individual) assessment of a non-state body of rules, such as the UNIDROIT Principles, which the parties to an international contract chose as the law governing the contract. l29 This goes to show that a qualitative evaluation of a system of principles and rules may not be depe~age

125 MICHAEL SCHWIMANN, GRUNDRISS DES INTERNATIONALEN PRIVATRECHTS

68 et seq. (1982); see also Ana M. Lopez-Rodriguez, The Revision of the Rome Convention of 1980 on the Law Applicable to Contractual Obligations-A Crucial Role Within the European Contract Law Project?, http://ec.europa.eu/justice_home/ news/ consultinlLpublic/ rome_if doc/ university_aarhus_en. pdf, at 14; Schinkels, supra note 47, at 108, 109. 126 Andreas Bucher, Transnationales Recht im IPR, in AKTUELLE FRAGEN ZUM EUROPARECHT AUS DER SICHT IN- UND AUSLANDISCHER GELEHRTER 43 (Fritz Schwind ed., 1986). 127 See supra text at note 120. 128 Similar Vischer, supra note 70, at 142, according to whom "the widely accepted diper;age indicated the courts' willingness to admit the authority of the parties to avoid the application of compulsory rules, at least as long as no public interests of the forum State are involved." 129 See supra § I.2.b.i.B.

UN/DROIT Principles Before State Courts • 113

as unfamiliar to courts as it is often suggested. 130 Moreover, the very fact that a law's policy considerations ultimately are used to control the parties' use of the instrument of depe~age renders moot any suggestion that the "substitution" of provisions of a mandatory nature through use of the instrument of depe~age would result in a true "contrat sans loi. "131 ii.

Stabilization Clauses

Stabilization clauses are designed to preclude later changes to a legal order that has been chosen as the law governing the contract. The governing law is expressed to be that prevailing as of the date of the agreement; the parties must perform the terms of the agreement notwithstanding any subsequent alterations of the law; or, in state contracts, the state party agrees not to modifY the terms of the agreemen t. 132 The effect of stabilization clauses is still being disputed in modern doctrine. Some still view the instrument with suspicion and therefore assert that all such clauses do is to incorporate the provisions of the chosen law as in effect at a certain time into the contract, with the consequence that any subsequent change in the governing law will have to be given immediate (and thus retroactive) effect to the extent that the provisions of the new law are of mandatory nature. 133 The more moderate, possibly dominant view, on the other hand, accepts that in state contracts, that is, in contracts in which one party to the contract is a state or an entity controlled by a state, stabilization clauses may have a different, true conflict-of-Iaws effect: mandatory provisions of the designated law promulgated after the cut-Off date set in the contract have no immediate bearing on the parties' rights and duties;134 the new mandatory provisions may have 130 See Canaris, supra note 18, 19. 131 Cf Vischer, supra note 70, at 141, with reference to Hans Stoll, Rechtliche

Inhaltskontrolle bei internationalen HandelsgeschiiJten, in FESTSCHRIIT FUR GERHARD KEGEL ZUM 75. GEBURTSTAG 647-48 (Hans-Joachim Musielak & Klaus Schurig eds., 1987).

132 VISCHER, HUBER & OSER, supra note 77, at para. 132 et seq. 133 See, e.g., Collins, supra note 1, at 1219; Lagarde, supra note 1, at 287, 303. 134 The position is reflected in a 1979 resolution of the Institut de Droit

International, which in its Article 3 states: "The parties may agree that domestic

114 • UNIDROIT Principles of International Commercial Contracts

to be taken into account if the mere fact of their existence creates a fait accompli that simply cannot be negated without committing a gross injustice to those affected by them. They thus may have to be given effect in a way similar to the lois d'application immediate of third states. 135 Most progressive is the view that would even recognize conflict-of-Iaws effect to stabilization clauses in international contracts between private parties, including disputes that are brought before state courts. l36 The latter is hardly of relevance for state contracts since arbitral tribunals will decide the vast majority of disputes arising out of state contracts. If it is, however, accepted that the parties' freedom to designate a system of law as the law governing their contract includes the possibility of freezing it in time, even if only in limited circumstances, this raises the question of whether such a law really is a system of law of the quality positivists insist the principle of party autonomy as enshrined in the Rome Convention or the Swiss Private International Law Act must be limited to. While the parties do not create a completely novel system of law, as they can with the instrument of dipefage, the use of a stabilization clause allows them to avoid the application of mandatory provisions of the law principally governing their contractual relationship.

Admittedly, the avoidance of mandatory provisions by means of a stabilization clause may appear less offensive to positivists than the choice of a non-state body of rules. In particular in state contracts, the parties do not specifically target existing mandatory provisions that seem "unwelcome" in light of the intended structure the contractual balance of rights and duties shall take. On the contrary, the parties' intention is often a noble one: it shall preclude the state party from succumbing to the temptation to get out of a contractual law provisions referred to in the contract shall be considered as being those in force at the time of the conclusion of the contract." 135 Frank Vischer, Veriinderungtm des Vertragsstatuts und ihre Folgtm, in FESTSCHRIIT MAX KELLER 547 (Peter Forstmoser, Anton Heini, Hans Giger & Walter R. Schluep eds., 1989). 136 Id. at 552; see also Marc Amstutz, Nedim Peter Vogt & Markus Wang, Commentary on Article 116 PlLA, in KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-INTERNATIONALES PRIVATRECHT para. 24 (Heinrich Honsell, Nedim Peter Vogt & Anton K. Schnyder eds., 1996).

UN/DROIT

Principles Before State Courts • 115

obligation by taking advantage of its authority to promulgate laws rendering its obligation null and void, for example, through nationalization. Yet, despite these differences, the fact remains that part of the chosen law is being fixed in time to deprive the principles and rules of transitory nature of their effect, something that could not only not be achieved through a reference to any other legal system but, more significantly, results in a law fundamentally at odds with the notion that any system of law is necessarily a "living organism, "137 in constant flux to accommodate the socio-economic changes occurring over the course of time. It is a law "out of date" and therefore necessarily exposed to the charge that the parties, through the device of a stabilization clause, are given the power to put their contract over the law. 138 The tendency to accept the device of stabilization clauses, in particular state contracts, bears significantly on considerations of justice and fairness. As explained, it is thought of as a legitimate and effective means to insulate the contract from a potential misuse of the state party's legislative authority. Such insulation may hardly be effected by having the state agree to the application of a law other than that of the state concerned. 139 Often, a state will insist on the application of its own domestic law. Ultimately, the doctrine's acceptance thus appears again to rely on a qualitative assessment of the "system of law" the instrument of stabilization clause engenders; other than with depe~age, however, the assessment occurs ex ante rather than ex post. It is therefore an open question whether changes in the law (of mandatory character) entirely unrelated to the very purpose of a stabilization clause, that is, at least in state contracts, the protection of the investment made by the non-state party, must necessarily go unaccounted for. It seems indeed reasonable, as Vischer, supra note 70, at 138. Dieter Martiny, in INTERNATIONALES VERTRAGSRECHT, at para. 70 (Christoph Reithmann & Dieter Martiny eds., 5th ed. 1996); compare also the Institut de Droit International's 1991 resolution on "The autonomy of the Parties in International Contracts Between Private Persons or Entities" adopted at the session of Basle, according to which a stabilization clause should only be understood in the sense that the parties inserted in their contract the provisions of the law as it existed at the time of agreement. The Institut was particularly influenced by the argument that applying an out of date law would be equal to a "contrat sans loi." 139 But see Collins, supra note 1, at 1219. 137 138

116 • UN/DROIT Principles of International Commercial Contracts suggested,140 to take account of mandatory provisions enacted subsequent to the cut-off date in the same way certain mandatory provisions of the forum and third states may eventually come into play. Chief among the considerations guiding their application must again be a substantive criterion, that is, whether the content of the provision, the values and policy considerations inherent in it, represent shared values of the international community of states in the field of commercial law. iii.

Opt-in Clauses

The vehicle of "opting-in" occurs when the parties choose, as the law governing their contract, an international convention, even though the contract would not trigger its application since the contract would fall outside the convention's own geographical scope of application. 141 The Dutch Supreme Court, in a decision dated May 26, 1989,142 has ruled that the parties' opting-in of an international convention setting forth uniform law is to be recognized as a true conflict-of-Iaws reference; the uniform law thus must be regarded as the "law" governing the contract, there being no need to further localize a system of law of national origin. Vischer, supra note 135, at 552. A similar scenario mentions Frank Vischer, Die kollisionsrechtliche Bedeutung der Wahl einer nichtstaatlichen Ordnung filr den staatlichen Richter am Beispiel der Unidroit Principles ofInternational Commercial Contracts, in FESTSCHRIFT FUR PETER SCHLECHTRIEM ZUM 70. GEBURTSTAG 445,450 (Ingeborg Schwenzer & Gunther Hager eds., 2003). He rightly refers to Article 1(I)(b) CISG pursuant to which the Convention applies to contracts for the sale of goods between parties whose places of business are in different states when the rules of private international law lead to the application of the law of a contracting state. Part of the relevant rules of international private law also is the principle of party autonomy. A court may therefore have to recognize by virtue of the forum's recognition of a choice of law the application of the CISG even though the forum has not adopted the CISG. 142 NJ 1990, 105 (commented by J.C. Schultsz). The parties' choice referred to the Convention on the International Transportation of Goods (CMR); for a more detailed account, see also L. Strikwerda, Kroniek van ket international privaatrecht, 70 ~B 408 (1996)(with an English summary); Katharina BoeleWoelki, Die Anwendung der UNIDROIT-Principles auf internationale Handelsvertriige, IPRAx 1997, 161-71 (1997). See also the decision of the French Court de Cassation of February 4,1992, REv. CRIT. DR. INT'L PRIVE 495 (1992) with note Paul Lagarde (Fr.), in which the highest French court ruled that the parties are capable of choosing the Hague-Visby Rules as the law governing the contract. 140

141

UNIDROIT Principles Before State Courts •

117

Recognizing choice-of-Iaw effect to the parties' reference to an international convention once again raises the question of whether a governing law, limited to the contents of an international convention, does not go beyond purely positivistic notions. Not necessarily, positivists might object. In the case before the Dutch Supreme Court, for instance, The Netherlands, the forum state, in fact had ratified the international convention in question. Other than privately edited legal frameworks, such as the UNIDROIT Principles, the principles and rules laid down in the convention thus had received the necessary sanction of the Dutch legislator. Such an analysis may be accurate from a perspective that emphasizes the formalities with which state law is promulgated and implemented. However, from a more substantive point of view, a law comprised solely of uniform law contained in an international convention may be distinctly different from the choice of a law of national origin. What gives rise to such an assessment is the distinct deficiency of mandatory provisions in international conventions. The vast majority have only very few,143 if any at all. In effect, the parties, through the instrument of opting-in in an international convention, are effectively given yet another tool allowing them to pick and choose and, at the same time, to limit the scope of application of mandatory rules that are believed to be inconsistent with the needs and usages of in ternational commerce; from treating a choice of an in ternational convention as the law governing the contract as a true choice of law, it necessarily follows that all mandatory provisions of the legal orders having a close connection to the contractual relationship become automatically displaced, with the exception of mandatory norms claiming application irrespective of the otherwise applicable law. The latter category is only a limited one, encompassing in the first place provisions characterized by a particularly close relation143 The Hague-Visby Rules referred to above, for example, do contain mandatory provisions; accordingly, the French Court de Cassation in its ruling referred to in note 142 held that choosing them as the governing law is tantamount to ruling out the possibility of deviating from the mandatory provisions contained therein.

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ship to governmental policies, yet excluding the many mandatory provisions designed to protect the parties' private interest. 144 Secondly, recognizing that the parties' reference to an international convention may have choice-of-Iaw effect questions, as in the instance of the instrument of dipe~age, the very assertion of positivists that a "system oflaw," which parties to an international commercial contract may refer to under modern conflict of laws statutes, must necessarily be one that, conceptually, is capable of regulating a contractual relationship homogenously and comprehensively. International conventions are, by their very nature, very selective and fragmentary, confined to a particular area of law. Most significantly, none of them contains the very basic rules common to all commercial transactions. The acceptance of the Dutch Supreme Court's decision on the ground that the international convention at issue, the 1956 CMR Convention, had been approved by the Dutch parliament gives rise to the question of whether it would be fundamentally different had that convention not been part of the Dutch legal system. The case in which the convention has not been ratified by the forum state but by other states may hardly be distinguishable. Not only has the legal instrument gone through a formalized process recognized by the international community of states, more particularly a long process of official negotiations by governments, but it has also been approved by other national parliaments whose formal law-making competence is beyond doubt. The real test is the case in which parties want to have their contract governed by uniform law contained in an international convention that has been completed and is ready for ratification but has yet to be adopted by any state or received the prerequisite number of ratifications. The difference is obvious: the legal instrument has not been approved by any national parliament or, more broadly, any institutionalized body whose law-making competence is recognized by public international law. Is the approval by a national parliament a conditio sine qua non for a state court to recognize the international convention as the exclusively governing 144

See infra Chapter 4 (introductory paragraphs).

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119

law?145 Or may the legal instrument's extensive preparation involving representatives from all over the world, including leading experts in the respective field, and, at the very end, its adoption at a diplomatic conference, impart sufficient authority on the legal instrument for such recognition? To some extent, a distinction as to whether a particular convention has been approved by a state legislator would be rather artificial. A choice that designates as the governing law the rules and principles contained in a particular international convention is aimed at a law that is decidedly detached from any particular national law. One of the practical implications of this detachedness is that a court faced with such a choice is prohibited from treating the international convention as if it were embedded within the law of a particular state. To take the particular circumstances under which the Dutch Supreme Court made its ruling, the Court, at least in theory, should not have been allowed to rely exclusively on the interpretation the convention had engendered in the forum. It should have been required to extend its examination to the case law of other member states and, by way of comparison, to analyze the solutions reached under domestic law on its compatibility with the international spirit of the parties' agreement. This state of detachedness is, as must be emphasized, not limited to the situation of the Dutch Supreme Court case in which the international convention had been approved by the legislator of the forum, but it applies generally, irrespective of whether the convention has become part of a national legal order as a result of that state's adoption of the convention or even its transformation into its domestic law. The requirement that the uniform law embodied in the international convention be "grounded" in a national law thus seems at odds with the parties' own perspective of their particular choice of law, and, as explained, this is true with respect to all three situations discussed here, although it cannot be conclusively said that an international convention's extensive preparation and formal adoption process imparts sufficient authority on the legal instrument. However, the required standing and authority of the organization or institution under whose auspices the uniform law was prepared, together with the elaborated procedure followed to 145

This seems to be the position of Drobnig, supra note 65, at 392.

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establish it, ought, at any rate, to provide assurance that the parties' choice does not extend the concept of party autonomy to a legal order of an unbalanced, even arbitrary character. The ordinary limits on the application of a law other than the forum's law, particularly public policy and regulatory concerns, should suffice as a safeguard to the interests of the forum state. These instruments are, of course, always reserved, regardless of what kind of law is applicable according to the parties' choice.

4. Conclusions The analysis undertaken in this part of the study has been fraught with uncertainties. The examination of such fundamental jurisprudential issues such as "What is law?" and "What are the sources oflaw?" has not led to immediate answers, but rather raised new ones. Is it exclusively the sanction by the sovereign, thus a formal element, that determines whether a normative rule may be characterized as "law," or should considerations of a more substantive nature be the decisive test? Under the second assumption, is it sufficient that a "legal order" is homogenous, balanced, comprehensive, at least in the sense that it is systematic and thus geared toward completion and evolution through the judiciary and legal doctrine? Or does it, even if the "legal order" is not directly coming from the sovereign, matter whether a legal order has been prepared by an international organization with a certain standing for and authority in the development of international commercial standards? One of the few things that may be said unequivocally is that rules of law of the type represented by the UNIDROIT Principles do not fit any of the established categories of sources of law, even under a notion of law that goes beyond that accepted by strict positivists and includes judge-made law and, under some circumstances, trade usage as genuine sources of law. Some of the specific rules contained in the Principles may obtain the status of "law," either by being or eventually becoming a trade usage or, alternatively, by being applied by a court of law in exercise of its power to create law within the statutory framework. The UNIDROIT Principles in their entirety, however, are unlikely to receive such treatment ever. On the other hand, the analysis has also shown, though perhaps less unequivocally, a dichotomy in many domestic legal systems

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between the notions of law being followed for purely internal relations, on the one side, and that for international relations, on the other. It seems as if the freedom of parties to regulate their matters within a legal order is judged fundamentally different from the parties' autonomy to choose the applicable law in an international situation-a clear-cut "test of pedigree"146 on the one hand, ambiguous relativizations of it, mostly through derivatives of the principle of party autonomy itself, on the other. The matter is complicated, however, by the fact that many of these relativizations have, for the most part, not been made by a concerted effort but are merely the by-product of the promotion of genuine conflict-of-Iaws values. For instance, the gradual expansion of the principle of party autonomy toward the recognition of a choice of a law that is neither connected to the parties nor the transaction is, in the first place, driven by considerations pertaining to conflict of laws, most of all the security in law and the predictability of the result. These considerations are also the foundation of outgrowths of the principle, such as the instrument of depe~age or stabilization clauses. At the same time, the conflict-of-Iaws analysis has also shown that the chosen law is actually individually exposed to a scrutiny of state courts that bears considerably on considerations of a substantive or qualitative nature. The legislator or, more often, courts themselves, through their jurisprudence, may have liberally accepted the parties' power to avoid the application of mandatory state rules; yet, courts have retained the ultimate control over a law that, due to the parties' extensive use of the principle of party autonomy, may no longer be described as a law in its strictest sense. This may not be conclusive as to the relevancy of a substantive test for normative rules to obtain the status of "law;" but it may be taken to mean that it is feasible for state courts to embark on an inquiry into the homogeneousness, balance, and fairness of non-state law. Finally, to come to the last question raised above, that is, whether the presence of some form of procedural legitimacy may impart on a body of rules the status of recognized law-be it through the standing and authority of the organization or institu146

Cf Canaris, supra note 18, at 13, with reference to RONALD at 22 et seq., 29 et seq. (1977).

TAKING RIGHTS SERIOUSLY,

DWORKIN,

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tion preparing the rules of law, the procedure followed to establish the rules or a combination of the two--the considerations entertained in this chapter are perhaps the least definitive. If there is a precedent at all pointing vaguely in the direction that a legal instrument of international character, with a certain form of official recognition, may stand out among other bodies of normative rules of non-state character, it may be seen in the Dutch precedent on the application of an international convention solely on the ground of the parties' respective reference to it, regardless of whether the convention would have been implicated pursuant its rules on the scope of application. On the other hand, it certainly cannot be concluded that soft law prepared by an institution of a lesser standing than UNIDROIT must automatically be disqualified; the boundaries in that respect remain unsharp, perhaps necessarily so to maintain the flexibility to take account of new developments. Also, as the highly similar Principles of European Contract Law show, excellence in substance may indeed not require the sponsorship of an international organization. 147 At least in its original form, the scholars grouped around their chairman, Ole Lando, have not acted under the umbrella of any organization. Nevertheless, the legal instrument's procedural legitimacy should not be too easily discarded. It may well take on significance in the course of a court's evaluation of a legal instrument's qualitative attributes, as a court may regard the approval of an international organization as at least indicative of whether the instrument satisfies the aforementioned test of homogeneousness, balance, and fairness. On balance then, although this is to some extent unsatisfactory, none of the considerations entertained here may be said to strictly require jurisprudence, in the sense that a different route would be inaccurate, to move away from attributing the status of "law" only to a rule of law that falls into one of the traditionally established sources of law. The position may continue to be taken that a compilation of rules of law, which originates from an instance other 147 SCHILF, supra note 2, at 385, argues, however, that a choice of the European Principles could not (yet) constitute a true choice of law because they have not reached an acceptance level in international arbitration comparable to the UNIDROIT Principles.

UNIDROIT Principles Before State Courts • 123

than the sovereign, is not "law" purely on the ground that on the basis of a theory that the sources of the law are exhaustive and thus conclusive, any other instance does not have the necessary competence to "legislate." On the other hand, any contention that this is necessarily so, that the element of the sanction by the sovereign must be determinative alone, is no longer defendable. There are many elements that as of today argue in favor of attributing a "law" character to a soft law in the form and substance of the UNIDROIT Principles. Indeed, it seems that, on balance, of all the elements examined in this chapter, the least pertinent for assessing the law character of a set of rules in the international context is the established formal canon of sources of law. In relation to cross-border transactions, it appears inappropriate to disallow the application of rules and principles on the ground that they do not conform to one of the "hard" law sources recognized in one's own national law; the selectiveness in one's own national law may not even necessarily extend to rules and principles recognized in some other national law, and, yet, a judge at the forum would not question the principles' and rules' character of "law. "148 More importantly, the main addressee of the categorization into legitimate sources of law is the judge, and it is questionable whether the limitations implicated thereby should necessarily apply when it is the parties to an international commercial contract themselves that tap the UNIDROIT Principles' potential to serve as the baseline against which their relationship should be measured. In this scenario, it seems it is more persuasive to have substantive and genuine conflict-of-Iaws considerations decide whether the rules so implicated should be allowed to serve as the governing law. This recognizes that it is a matter of degree and not a question of black and white that needs determination. Admittedly then, it is a question of policy149 whether to accept a choice-of-Iaw clause referring to the UNIDROIT Principles in pro148 See also Schinkels, supra note 47, at 108, 109 (arguing that the essential element for a choice of law to be recognized is not that a law has been sanctioned by a national legislator but its normative character). 149 SCHILF, supra note 2, at 384, reaches a similar conclusion; however, it attempts to identity two general criteria that should give guidance whether a set of rules can be recognized as "a governing law:" (I) the text chosen as the

124 • UN/DROIT Principles of International Commercial Contracts

ceedings before a court. Having said this, I must emphasize that I believe the current state of affairs in (private international) law does already allow the recognition and application of the UNIDROIT Principles by a state court today. I do not think that it would need the express sanction of the legislator. It is a matter of further developing and qualifying the notion of law for purposes of conflict oflaws and instilling into it the multinational context within which it must become operable. This is not an as extraordinary step as it may first appear. It is in line with Rabelian tradition to quality certain terms of a conflict-of-Iaws rule autonomously, with a view to satisfactorily addressing the implication of multiple legal systems. At the same time, it may be viewed as only taking the next consequential step in extending the various liberal forms of applying the instrument of party autonomy. It is true that such an approach hardly connotes with the understanding of the fathers of, for example, the Rome Convention l50 or the Swiss Private International Law Act. However, though cognizant of the today's dominance of legalism, textualism, and similar approaches to legal instruments, it should be remembered governing law must in its systematics and substantive reach at least satsify the standards set by international conventions (such as the CISG); and (2) the text must have been continously sanctioned as "law" through case law (particularly through the case law of international arbitration tribunals). While these criteria may be helpful-considering the fragmentary nature of many international conventions, it is doubtful though whether it is appropriate to use them as the relevant bar-they cannot be conclusive and replace an overall balancing of all relevant factors, as advocated in this study. The criteria Schilf proposes have been taken up, for example, by Urs Portmann, Rechtswahl der UNIDROITPrinzipien und deren Luckenfullung im schweizerischen IPRG, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 191, 193 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). 150 CJ Michaels, sujlra note 1, at 580, 597; Franco Ferrari, Das Verhiiltnis zwischen den Unidroit-Grundsiitzen und den allgemeinen Grundsiitzen internationaler Einheitsprivatrechtskonventionen, JURISTENZEITUNG 9, 17 (1998); compare also very pointedly Franco Ferrari, 1 EUR. J.L. REF. at 332 (1998/1999) (view expressed at the Conference in Basle, Switzerland, on November 7/8, 1997, "UNIDROIT Principles of International Commercial Contracts as a Legal Framework for International Business Transactions," organized by the Europainstitut Basle); see further BGE 132 (2006) III 285, 287.

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Principles Before State Courts • 125

what has been stated by Frank Vischer, notably president of the expert commission responsible for the Swiss Private International Law Draft Bill: "[S]tatutory texts become divorced from their historical background and begin a life of their own. This should be borne in mind for the question at hand. "151 The emergence of the UNIDROIT Principles has redefined the historical landscape on the background of which the Rome Convention and the Swiss Private International Law Act have been drafted. The lack of any suggestion in the travaux preparatoires in that regard is thus hardly particularly significant. The desirability of having direct access to an equitable legal order with an international character has long been recognized. Yet, the lack of any well-defined set of rules has made it unadvisable so far, at least for state court proceedings, to permit a judge to honor the parties' choice of some source of non-state rules, as, for example, the lex mercatoria. When it comes to the Principles, however, these legitimate concerns seem no longer relevant. In view of the wording of Article 116 PIlA or Article 3 of the Rome Convention, which do not seem to preclude a refinement of the definition of the term "law" for purposes of international contract law, and evidence of private international law instruments, as for instance Article 19 PIlA and Article 7 of the Rome Convention, which both acknowledge the importance and admissibility of policy considerations in the conflict of laws system, even through an individual assessment, this change should not go unaccounted for. Notably, the great codifications of private substantive law have survived the strain of time precisely because they have remained open to new developments and exigencies not yet existing at the time of their enactment. The same must be valid for codifications of private international law. A recognition and application of a choice of the UNIDROIT Principles by state judges will not pose insurmountable difficulties. It is hardly more intricate than, for instance, being faced with a choice of Malaysian law in a Swiss-German contract, a choice that 151 Vischer, supra note 4, at 212; see also THOMAS PETZ, DIE UNIDROIT PRINZIPIEN FUR INTERNATIONALE HANDELSVERTRAGE, EINFUHRUNG-ANwEN DUNGSBEISPIELE-TEXT 128 (Doctoral Thesis 2001) (arguing in favor of a "dynamic" interpretation of the Rome Convention); the same line of reasoning can be found by SCHILF, supra note 2, at 361; Schinkels, supra note 47, at 108,

111.

126 • UNIDROIT Principles of International Commercial Contracts according to European and Swiss Private International Law would be permissible absent a requirement that there be any reasonable link between the law chosen and the parties or the transaction. 152 In contrast to such a choice, which legally disregards any social and economic implications of the transaction, a choice of the UNIDROIT Principles properly takes account of the multinational phenomenon of international commercial contracts and, by the wide use of terms as reasonable, etc., enables state judges to consider the social and economic sphere in which the particular transaction takes place. And finally, there is reason to believe that a modern legislator would permit the parties' choice of the UNIDROIT Principles. 153 Evidence for such an assumption may be seen in one of the more recent international instrument on contract choice-of-Iaw rules, the Inter-American Convention on the Law Applicable to International Contracts (ICLAlC). Article 7(1) sets an end to the controversial sl. j ,s of the principle of party autonomy in Latin American legal literature and practice, stating, "The contract shall be governed by the law chosen by the parties." Although the wording of the provision is almost identical to Article 3(1) of the Rome Convention and Article 116(1) PILA, other provisions strongly indicate "that the parties are free to stipulate to the general principles of international commercial law."154 Articles 9 and 10, 152 Cf. also Boele-Woelki, supra note 57, at 666. 153 BONELL, supra note 85, at 186 also points to Comment 2 of Section 1-302

(as revised in 2001) of the U.S. Uniform Commercial Code. Therein, it is stated that "parties may vary the effects of the [Uniform Commercial Code's] provisions by stating that their relationship will be governed by recognized bodies of rules or principles applicable to commercial transactions. Such bodies of rules or principles may include for example those that are promulgated by intergovernmental authorities such as UNCITRAL or UNIDROIT (see, e.g., UNIDROIT Principles of International Commercial Contracts) [... ]. While remarkable, the provision deals only with the principle of freedom of contract and not with the parties' right to designate the applicable law." In other words, the mandatory provisions of the relevant U.S. state law would prevail over the UNIDROIT Principles. As an example, Bonell refers to UCC Section 2-201, which still upholds the statute of frauds. 154 Friedrich K Juenger, The Inter-American Convention on the Law Applicable to International Contracts: Some Highlights and Comparisons, 42 AM. J. COMPo L. 381, 392 (1994); if. also Jean-Paul Beraudo, The Inter-American Congress on the Unidroit Principles,8 ICC INT'L COURT ARB. BULL. 48, 50 (1997); Leible, supra note 11, at 317; Gonzalo Parra-Aranguen, Conflicts of Law Aspects of the Unidroit Principles of International Commercial Contracts, 69 TUL. L. REv. 1239, 1251 (1995); Anye

UN/DROIT Principles Before State Courts • 127

though not expressly addressing the question of whether the parties can replace national law by an instrument as the UNIDROIT Principles,155 elevate "general principles of international commercial law recognized by international organizations,"156 and, even more amply, "guidelines, customs, and principles of international commercial law as well as commercial usages and practices generally accepted"157 to a legitimate source in the decision-making process of the court. Moreover, from a European perspective, perhaps even more significant, the Commission of the European Communities has submitted a definitive proposal for a regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome J). Formally, the Commission intends to convert the international treaty of the Rome Convention in a European Union (EU) instrument, most likely taking the form of a council regulation. While the Commission's intention is not to establish a completely new set of rules, it proposes to amend the substance of the Rome Convention "to modernize certain [of its] provisions."158 In the context discussed here, the amendments to Article 3 of the Rome Convention, the statutory peg for party autonomy in member states of the EU, are noteworthy. According to the revised paragraph 2, Baumann, Japan, Rom, Mexico City-Fortschritte?, in DAS RECHT DEUTSCHLANDS UND DER SCHWEIZ 1M DIALOG V 2, 30 (Michael R. Will ed., 1996); Harold S. Burman, International Conflict of Laws, The 1994 Inter-American Convention on the Law Applicable to International Contracts, and Trends for the 1990s, 28 VAND.]' TRANSNAT'L L. 367 et seq. (1995); the conclusion is, however, not universally shared; see Diego P. Fernandez-Arroyo, La Convention interamRricaine sur la loi applicable aux contrats internationaux: certains chemins conduizent au-dila de Rome, 84 REv. CRIT. DR. INT'L PRIVE 178, 182 (1995); Antonio Boggiano, La Convention interamencaine sur la loi applicable aux contrats internationaux et les Principes d'UNIDROIT, UNIF. L. REv. 219, 224 et seq. (1996); reluctant also Lando, supra note 71, at 55, 63. 155 For a more detailed account of the meaning of these provisions, see infra

Chapter 4 (introductory paragraphs). 156 Article 9(2) LCIA. 157 Article 10 LCIA. 158 Commission of the European Communities, Proposal for a regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I), COM(2005), 650 (final), 3, available at http://eurlex.europa.eu/LexUriserv/site/en/com/2005/com2005_0650enO1.pdf.

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the parties may choose as the applicable law the principles and rules of the substantive law of contract recognized internationally or in the Community. However, questions relating to matters governed by such principles or rules which are not settled by them shall be governed by the general principles underlying them or, failing such principles, in accordance with the law applicable in the absence of a choice under this Regulation. 159 In its commentary, the Commission openly acknowledges that the amended provision is meant to "further boost the impact of the parties' will" by authorizing "the parties to choose as the applicable law a non-state body oflaw. The form of words used would authorize the choice of the UNIDROIT Principles, the Principles of European Contract Law or a possible future European Community instrument, while excluding the lex mercatoria, which is not precise enough, or private codifications not adequately recognized by the international community. "160 If the proposal were indeed to be adopted, it would give a tremendous boost to the often-claimed trend of denationalization of private, or more specifically, contract law. 161 Apart from expressly recognizing the law character of a body 159 With respect to the amended Article 3, see also Stefan Leible, Der Varschlag fur eine Rom I-Verardnung, EuZW 78 et seq. (2006); Stuart Dutson, A dangerous proposal-the European Commission's attempt to amend the law applicable to contractual obligations, JBL 608 et seq. (2006).

160

Commission of the European Communities, supra note 158, at 5.

161 See Green Paper on the Conversion of the 1980 Rome Convention on the Law Applicable to Contractual Obligations into a Community Instrument and its Modernization: Reply by the International Institute for the Unification of Private Law (Unidroit) to Question 8, Rome, July 25,2003, suggesting that the phrase "the principles and rules of the substantive law of contract recognized internationally or in the Community" be replaced by "internationally recognized principles and rules of contract law." Generally, the responses to item # 8 of the questionnaire sent out by the Commission ("Should the parties be allowed to directly choose an international convention, or even general principles of law? What would be the arguments for or against this solution") were mixed; in particular, governments were reluctant to support an amendment of the Rome Convention that would allow the parties to choose an anational body of rules. Academic institutions, such as the Max Planck Institute for Foreign and Private International Law, on the other hand, were much more supportive. However, even some academics expressed strong disagreement with the Commission's approach. For example, Prof. Ulrich Magnus and Prof. Peter Mankowski of Germany argued that "a conflictual [sic] choice of non-national

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of rules such as the UNIDROIT Principles, the proposed language even takes the step that any lacunae in such a body of rules should foremost be filled by reference to the general principles underlying it. This is even more remarkable as it transposes a rule like Article 1.6 of the UNIDROIT Principles to the level of a conflict-of-Iaws instrument, thus giving a national court immediate authority to form substantive rules of an international character. 162 On the grounds given above (Section 1.4), 1 believe therefore that already today a choice of the UNIDROIT Principles should be given effect in a contract subject to the jurisdiction of a state court, particularly the jurisdiction of a Swiss court or a court bound to apply the Rome Convention. 163 Having said this, it should be noted that, in relation to Switzerland, the Swiss Federal Tribunal, Switzerland's High Court, held in a 2006 decision that a choice of "the FIFA rules and Swiss law" only constituted an incorporation of the FIFA rules into the parties' contract (so called materielle Rechtswahl), thus making these rules subject to all mandatory provisions of Swiss law as the rules (like the UNIDROIT or the European Principles of Contract Law) should not be admitted, nor a conflictual [sic] choice outside its own scope of application. A materiellrechtliche Verweisung as it has ever been possible nicely does the job required and is entirely sufficient. A lex mercatoria does not exist and can thus not be a proper object of a choice of law or of a materiellrechtliche Verweisung." See also Schinkels, supra note 47, at 106 (citing the response by the Bundesrechtsanwaltskammer of February 2006 according to which a denationalization of the applicable law would not contribute to the overall goal of certainty of law). See also IPRAx 11 (2007), according to which the proposal to permit the parties to choose "the principles and rules of the substantive law of contract recognized internationally or in the Community" is unlikely to be implemented in the definite version of Rome I. 162 On Article 3(2) of the proposed revised Article 3(2) of the Rome Convention, see also Orsolya Toth, The Unidroit Principles of International Commercial Contracts as the Governing Law-Reflections in Light of the Reform of Article 3 of the Rome Convention, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 201,205 et seq. (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). 163 A short overview of the German and other scholars advocating the permissibility of a choice of the UNIDROIT Principles with a true choice of law effect is given by SCHILF, supra note 2, at 140.

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underlying law applicable to the contract. l64 At issue was whether the parties could abbreviate the ten-year prescription period under Swiss law. According to Article 129 of the Swiss Code of Obligations, prescription periods in that title of the Code are mandatory and can neither be extended nor abbreviated by the parties. It is worth noting the issue would also have come up had the parties chosen the UNIDROIT Principles. Contrary to Swiss law, the general limitation period under the Principles is three years (Article 10.2). Ivo Schwander, in his annotations to the decision, has read the Federal Tribunal's holding broadly, arguing that under Swiss Private International Law as in force today, it would be generally impermissible to have a contract governed by rules of a-national character, including the "so called international lex mercatoria."I65 I believe this mischaracterizes the decision. It is true that the Swiss High Court referred to scholarly writings arguing that given the balance, fairness, and systematic nature of the UNIDROIT Principles, a choice of this body of rules should be treated as a true choice of law. Yet, the precedents the Federal Tribunal is referring to in its holding that denies the FIFA rules the character of law are rulings dealing with body of rules prepared by groups with vested interests, such as the rules of the SIA, Switzerland's association for engineers and architects representing the interest of Switzerland's construction industry, and the code of conduct of the Swiss Ski Federation, another special interest association. These bodies of rules do not stand on par with the UNIDROIT Principles. l66 They have not been prepared by an institution and experts with a standing and a comprehensive comparative background as the UNIDROIT and the members of the Working Group responsible for the preparation of the UNIDROIT Principles,167 are not specifically aimed at the truly international contract (where the traditional conflict of laws principles are particularly unsatisfactory), and, above all, in view of 164

BGE 132 (2006) III 285, 288.

165 Ivo Schwander, Anmerkungen zu BGE 132 (2006) III 285, Urteil des

Bundesgerichts vom 20. Dezember 2005, AJP 613, 615 (2006). 166 See also Christa Rempfler, Fifa-Reglement als anationales materielles Recht, CAS 237, 239 (2004). 167 This is rightly emphasized by the European Commission in its report mentioned supra note 158 by requiring that a non-state body of law be recognized internationally or by the EC.

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the vested interests that the associations the Federal Tribunal referred to typically pursue, cannot be afforded, a priori, a presumption that they provide an overall balanced, fair, and internationally recognized approach. In other words, many of the components highlighted in this chapter that may impart on a certain body of rules the character of law are not found. In light of these significant differences, therefore, I do not believe the Federal Tribunal decision must be taken to mean that a choice of the UNIDROIT Principles as the governing law would not be recognized before a Swiss court. The issue has not been decided.

II. THE UNIDROIT PRINCIPLES IN THE ABSENCE OF A CHOICE OF LAW AS THE LAW GOVERNING THE CONTRACT 1. Point of Departure Other than the conflict-of-Iaws rules on party autonomy, the conflict-of-Iaws rules regarding the law governing the contract absent a choice of law by the parties refer explicitly to the law of a state. Article 4 (1) of the Rome Convention states, "[T] he con tract shall be governed by the law of the country with which it is most closely connected. Article 117(1) of the Swiss Private International Law Act even more conspicuously refers to "the law of the state."I68 For the vast majority of authors, even though occasionally lamenting their conclusion,169 the wording precludes any further analysis as to any possible applications of the UNIDROIT Principles. According to the more liberal authors, the UNIDROIT Principles might possibly come in by means of the mechanism of interpretation and supplementation as a means of "internationalizing" the applicable domestic law.170 As discussed, such a unilateral approach may equally enable the courts to take account of the particularities of international transactions, though only to the limited extent that the domestic law, determined on the basis of a conflict-of-Iaws analysis, is susceptible to an "international" interpretation. In the 168

Emphasis added.

169 Wichard, supra note 11, at 294. 170 Besides Wichard, supra note 11, compare Michaels, supra 1, at 602; Boele-

Woelki, supra note 57, at 672.

132 • UNIDROIT Principles of International Commercial Contracts

first place, this depends on the existence of open-textured devices or lacunae in the statutory texts of the respective contract laws. 2. Supplementation and Interpretation Despite the drawbacks alluded to earlier in this study,171 this role of the UNIDROIT Principles, which curiously did not appear in the Preamble in the 1994 version of the Principles, cannot be valued enough. Significantly, the UNIDROIT Principles have entered state courts predominately under this title of application. The collection of international case law available at UNILEXI72 indicates that there are, as of the end of 2007, more than 80 cases in which the UNIDROIT Principles have been referred to for purposes of interpreting and supplementing domestic law or international uniform law instruments. Hughes Aircraft Systems International v. Airservices, 173 a decision by the Federal Court of Australia, is one of the first of this type. The court was asked to rule on the applicant's submission that pre-award contracts in procurement cases would generally implicate a duty of good faith and fair dealing. In support of its affirmative decision, after reviewing the split judicial and scholarly opinion in the matter, Finn]. stated: "It has been propounded as a fundamental principle to be honoured in international commercial contracts: see e.g. UNIDROIT, Principles of International Commercial Contracts, Article 1.7 (International Institute for the Unification of Private Law, Rome, 1994)."174 171 See supra Chapter 1, § 1.4. 172 Http://www.unilex.info. 173 146 A.L.R. 1 et seq. (1997); for a summary of the decision, see Selected

Case Law Relating to the UNIDROIT Principles of International Commercial Contracts, http://www.unilex.info. 174 There have since been additional court rulings in Australia referring to the UNIDROIT Principles in support of the appropriateness of a particular rule; see, e.g., Tan Hung Nguyen v. Luxury Design Homes, June 11, 2004, Supreme Court of New South Wales-Court of Appeal, http://www.unilex.info.An overview of the Australian case law referring to the UNIDROIT Principles is given by Martin Sychold, The Impact of the UNIDROIT Contract Principles on Australian Law, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 149 et seq. (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007).

UN/DROIT

Principles Before State Courts • 133

Another example is the decision of the French Cour d'Appel de Grenoble in Societe Harper Robinson v. Societe Internationale de Maintenance et de Realisations Industrielles (SIMRI) et autres. 175 The Court held a reference made in the contract to general terms invalid on the ground that "the general terms clause limiting liability to a nominal sum so low as to constitute virtually no compensation at all ran counter to the principle of acceptance of liability spelled out in the contract." While the conclusion apparently rested on an application of French law, the Court reinforced its considerations by stating "that there was a principle, in international trade law, that 'in the event of incompatibility between a standard clause and a non-standard clause, the latter prevails' (UNIDROIT Principles, Article 2.21) and that 'if contract terms are unclear, an interpretation against the party that supplied them is preferred' (UNIDROIT Principles, Article 4.6)." Other provisions of the Principles or broader concepts underlying the single provisions of the Principles that have found their way into the case law of courts over the instrument of supplementing or confirming interpretation are Article 6.1.6 regarding the place of performance,176 Preamble, Comment 1, which interprets the concept of an "international contract,"177 the understanding of the notion of good faith in international trade ,178 the principles of set-off (Articles 9.1.10(1) and 9.1.13 (2) ), or the issue of whether evidence as to negotiations between parties to a contract leading up to the making of that contract may be admissible for the purposes of interpretation (Article 4.3).179 175 UNIF. L. REv. 181 et seq. (1997); see also Selected Case Law Relating to the UNIDROIT Principles of International Commercial Contracts, http:// www.unilex.info. 176 See Cour d'Appei de Grenoble, Oct. 23, 1996, SCEA GAEC Des Beauches Bernard Bruno v. Societe Teso Ten Elsen GmbH & CoKG, http:// www.unilex.info. 177 Venzuela-Supreme Court (Political and administrative court), Oct. 9, 1997, Bottling Companies v. Pepsi Cola Panamericana, SA., http:/ / www.unilex.info. 178 Tibunal of Zwolle (Netherlands), Mar. 5, 1997-No. HA ZA 95-640, CME Cooperative Etaploize SA.C.V. (France) v. Bos Fishproducts Urk BV (Pays-Bas), http://www.unilex.info. 179 The Square Mile Partnership Ltd. v. Fitzmaurice McCall Ltd., Dec. 18, 2006, Court of Appeal (Civil Division), http://www.unilex.info; compare, as to the entry of the UNIDROIT Principles to the jurisprudence of English courts, A.

134 • UN/DROIT Principles of International Commercial Contracts

3. The UNIDROIT Principles' Point of Entry: International Substantive Rules Contrary to the authors referred to above (Sections 11.1 and 11.2), I believe the UNIDROIT Principles may play a considerably greater role in the decisional process of a state court,180 even absent a choice of law, than by being the source to turn to when fleshing out open terms or lacunae in the domestic law. The relevant peg is again a conflict of laws concept, this time the concept of the characteristic performance and the presumption associated therewith in European and Swiss private international law to localize the center of gravity of an international contract absent a choice by the parties. The concept is not always appropriate. It is often an adequate tool in the field of ordinary contracts of services. They are functionally and economically linked with the legal order of the country where the performing party has its habitual residence or place of business and carries out the services in question. For many other contracts, the concept is and will remain a useful device. However, there is a category of international contracts that is neither rooted in a particular legal order nor has an unequivocal seat or center of gravity. The contracts equally touch upon the economies of all countries involved. 181 Sales contracts, for example, affect the economy of both the exporting and the importing country. Giving one of these contacts preference over the other can hardly be explained rationally. It is admittedly a solution of embarrassment. Those contracts are to a great degree standardized and dominated by pre-fixed terms elaborated by trade organizations. Regularly, the parties even change their respective roles in the transaction and act alternately as exporter or importer. If truly international contracts not rooted in a particular legal order are not to be "nationalized," any alternative trying to avoid arbitrary and schematic results must almost inevitably lead to an approach that, in one way or another, takes into consideration the laws having some bearing on the transaction. International legal Berg, Thrashing through the Undergrowth, 122 L.Q. REv. 354 (2006) and Michael Joachim Bonell, The UNIDROIT Principles and CISG-Sources of Inspiration for English Courts?, UNIF. LAw REv. 305 (2006). 180 Cf also VISCHER, HUBER & OSER, supra note 77, at para. 297 et seq. 181 See Bonell, supra note 70, at 490.

UNIDROIT Principles Before State Courts • 135

doctrine has long recommended establishing "truly international facts [... J substantive rules, which enjoy universal recognition or at least seem compatible with the laws of the states directly interested in the settlement of the case at hand."182 Admittedly, a law-finding process based upon a comparative analysis of the relevant domestic legal order, congruent above all with the mandatory provisions demanding application, is difficult. The UNIDROIT Principles could help with this. They may be used as an instrument providing substantive multinational rules that-in view of the methodology with which the Principles have been prepared, that is, the comparative analysis of important legal system of contract law and the composition of the expert group entrusted with their elaboration-could, in the sense of a rebuttable presumption, be relied upon to provide a transnationally valid solution. To a considerable extent, the Principles thus would obviate the need to craft international substantive rules on an ad hoc basis. Having said this, it must be emphasized that the proposition does not equate the UNIDROIT Principles with the "proper law" of the contract. It is rather to be understood in the sense in which the Inter-American Convention on the Law Applicable to International Contracts of March 18, 1994 (ICLAlC)183 has approached the problem of strict nationalization of international contracts. The Mexico Convention has blended a conflict of laws with a substantive approach. It retains the well-known formula of the closest connection, but it supplements this conflicts rule in Article 9(2) by stating: "It (sc. the court) shall also take into account the general principles of international commercial law recognized by international organizations." Additionally, Article 10 generally provides, regardless of whether the parties have agreed on the applicable law: "In addition to the provisions in the foregoing articles, the guidelines, customs and principles of international commercial law as well as commercial usages and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case." Apparently, it was expressly noted during the Mexico Conference at which the Mexico Convention was finally approved 182 [d. at 509. 183 33 I.L.M. 732 (1994).

136 • UNIDROIT Principles of International Commercial Contracts

that these references were meant to encompass the Principles. 184

UNIDROIT

Article 9(2) and Article 10 of the Mexico Convention thus seem to go beyond a mere "internationally minded" interpretation and supplementation of the lex causae. It is more accurate to characterize the provisions as material rules with international application,185 conferring upon the judge a relatively wide margin of appreciation and control of the result in light of the internationality of the transaction in question. 186 Such an approach would have considerable advantages: in particular, it would permit taking account of the international character of the transaction uniformly, irrespective of the applicable law and whether the particular law lends itself to an adaptation. 187 184 See Hernany Veytia, National Report of Mexico, in A NEW APPROACH TO INTERNATIONAL COMMERCIAL CONTRACTS-THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 193, 199 et seq. (Michael Joachim Bonell ed., 1999), referring to Jose Luis Siqueiros Prieto, Los Principios del Unidroit y la ConvenciOn Interamericana Sobre el Derrecho Aplicable a los Contratos Intemacionales, in CONTRATACION INTERNATIOANAL, COMENTARIOS ALOS PRINCIPIOS SOBRE LOS CONTRATOS COMERCIALES INTERNACIONALES DEL UNIDROIT, at 228 (1998); HernanyVeytia, The Requirement ofJustice and Equity in Contracts, 69 TUL. L. REv. 1191, 1195, 1206 (1995); see aL50Juenger, supra note 154, at 381, 391; Jiirgen Samtleben, Ver.such wer die Konvention von Mexiko iiber das auf intemationale Schuldvertriige anwendbare Recht, IPRAx 385 et seq. (1998). 185 But see Boggiano, supra note 48, 172. On the controversy on the meaning of Article 9 and 10 of the Mexico Convention, see, in particular, SCHILF, supra note 2, at 353 et seq. 186 See also Jean-Paul Beraudo, The Inter-American Congress on the Unidroit Principles, 8 ICC INT'L COURT ARB. BULL. 48, 50 (1997). 187 It is remarkable that it is sometimes suggested that the parties to an international contract themselves adopt such an approach contractually; see the examples in Bonell, supra note 66, at 244-45: "(1) This Agreement is governed by the laws of . . . (2) The Agreement shall be performed in a spirit of good faith and fair dealing. (3) In the interpretation of the Parties' right and obligations under this Agreement, due weight shall be given to applicable practices in international trade. When defining these practices, reference shall be made, inter alia, to the Unidroit Principles of International Commercial Contracts."

UNIDROIT

Principles Before State Courts • 137

4. International SUbstantive Rules: Permissibility De Lege Lata

The question is whether the proposed approach is a valid one under the existing sources of private international law in the European Union and Switzerland.

a. Swiss Law Swiss law offers a possible basis in Article 15 PILA. The provision is designed as a means to delimit the reach of the regular conflict-of-Iaws rules for atypical cases; it permits a deviation from those rules "if under all circumstances the case clearly has only a slight connection with the designated law and a much closer connection with another law." Notably, there is no specific reference to the law of a state but merely to "law," thus differing from Article 117 PILA.I88 Nevertheless, the predominant opinion in legal doctrine wants to restrict the element of flexibility that Article 15 PILA incorporates into the rigid system of the statute to territorial, personal, or time considerations. It is widely held that the rule does not authorize courts to consider the material implications that would result from accepting the reference of the relevant conflict-of-Iaws rule. 189 Such a discretionary power of the courts IS associated with the widely discredited "better law" approach. 188 The assertion that Article 15 PILA would, in the context of international contract law, be interchangeable with Article 117(1) PILA and vice versa is therefore hardly sustainable; but see ANTON K. SCHNYDER, DAS NEUE IPR-GEsETz 34, 108 (1990); if. also Monica Miichler-Erne, Commentary on Article 15 PlLA, in KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-INTERNATIONALES PRIVATRECHT para. 20 (Heinrich Honsell, Nedim Peter Vogt & Anton K. Schnyder eds., 1996). 189 Cf Max Keller & Daniel Girsberger, Commentary on Article 15, IPRGKOMMENTAR, KOMMENTAR ZUM BUNDESGESETZ UBER DAS INTERNATIONALE PRIVATRECHT (IPRG) YOM 1. ]ANUAR 1989 para. 88 (Anton Heini et aI., 1993) ("Es ist aber grundsatzHch weder Aufgabe der Ausweichklausel materiellrechtHche Harten zu vermieden, noch das materiell beste Recht anzuwenden."); CESAR E. DUBLER, LA CLAUSE D'EXCEPTION EN DROIT INTERNATIONAL PRIVE, 99 (1983) (.oLe contenu de droit materiel ne doit pas non plus etre pris en consdereration dans Ie cadre de la clause d'exception."); see also Monica Machler-Erne, Commentary on Article 15 PlLA, in KOMMENTAR ZUM SCHWEIZERISCHEN PRIVATRECHT-INTERNATIONALES PRIVATRECHT para. 9 (Heinrich Honsell, Nedim Peter Vogt & Anton K. Schnyder eds., 1996).

138 • UNIDROIT Principles of International Commercial Contracts Yet, the Swiss Federal Tribunal has left the door open for a more liberal application of Article 15 PILA that includes substantive considerations. In Chilon Valeurs Inc. v. Financial Construction Company Inc.,19O the court described, in an obiter dictum, that the escape clause was introduced into the statute "pour permettre au juge de trouver, dans l'interet des parties, la solution la plus adequate dans une cause donnee." Frank Vischer, a representative of the minority view, has argued that the judge should have the freedom to adapt the law upon reflection on the material result to which a particular reference in the Swiss Private International Law Act would eventually lead. 191 He emphasizes that such an approach corresponds to the distinct tendency of the Swiss Private International Law Act, expressed in many provisions, to "materialize" the conflict solution. The apogee of this goal is Article 19(2), which-with regard to the situation where a provision of a law other than the primarily applicable law claims immediate application-states as the ultimate goal for the law-finding process a result that is fair and equitable according to the guiding principles of Swiss law. Swiss law would thus offer a statutory basis predicated on which court could accommodate the applicable rules to the situation under review if, upon consideration of modern principles of international commercial law, it has reached the conclusion that particular rules of the law called upon by Article 117 PILA are inadequate for the legal questions raised by the case. 192 Such a test arguably would meet the policy instructions of the Swiss Federal Court. It effectively takes account of the doctrinal assertion that domestic law regularly would not be suitable in the context of in ternational transactions. 190

Dec. 17, 1991, BGE 117 II 494.

191 See Frank Vischer, Kollisionsrechtliche Verweisung und materielles Resultat,

Bemerkungen zur Auslegung der Ausnahmeklausel (Article 15 IPRG), in 65. GEBURTSTAG 479,485 et seq. (Issak Meier et al. eds., 1995); Vischer, supra note 70, at 109; cf. alsoIvo SCHWANDER, EINFUHRUNG IN DAS INTERNATIONAL PRIVATRECHT 183-84 (1990). 192 A similar test has been proposed by Stoll, supra note 131, at 623, 636.

RECHTSKOLUSIONEN, FESTSCHRIFT FUR ANTON HEINl ZUM

UNIDROIT Principles Before State Courts • 139

b. The Rome Convention While Swiss law, premised upon the willingness of the courts, leaves open the door for judicial development of an international contract law essentially in line with the proposal of Article 9(2) and Article 10 of the Mexico Convention, the Rome Convention is a more difficult matter. The Convention is limited in its scope to questions of international contract law and consequently does not include a general escape clause in the style of the Swiss legislation. Such a device is the by-product of a comprehensive codification technique that aligns, before opening the parenthesis including the special provisions, those rules with a more general reach. In a multinational convention where its subject matter just lays down rules of private international law regarding international contracts, there is arguably no need for an instrument with such broad application. The instrument of an escape clause is not completely unknown to the Rome Convention however. It is used to delimit the presumption of the characteristic performance, which "shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country" (Article 4(5)). Yet, the explicit reference to "country" seems again to preclude any relevance of the UNIDROIT Principles in the law-finding process. Moreover, in the draft Rome I regulation, the Commission of the European Communities proposes that, in light of the emphasis on the principle of freedom of choice, the escape clause or the exception clause be abolished "to enhance certainty as to the [applicable] law."193 The result is not without irony. It stretches the concept beyond the limits regarded reasonable by the proponents of that doctrine. Most significantly, Frank Vischer, who to a considerable extent systematized the concept,194 in his more recent publications has deemed the doctrine of the characteristic performance no longer adequate for truly international contracts,195 193

Commission of the European Communities, supra note 158, at 5.

See VISCHER, supra note 119, at 112 et seq.; the doctrine essentially goes back to the work of ADOLF F. SCHNITZER, HANDBUCH DES INTERNATIONALEN HANDELs-, WECHSEL- UND CHECKRECHT 304 et seq. (1938); for further details as to the historic development of the concept, see VISCHER, HUBER & OSER, supra note 77, at para. 218 et seq. 195 See, in particular, Frank Vischer, The Concept of the Characteristic Performance Reviewed, in E PLURIBUS UNUM-LIBER AMICORUM DROZ 499, 508 et seq. (Allegria Borras et al. eds., 1996) 194

140 • UNIDROIT Principles of International Commercial Contracts

the category at the center of this study, and instead he favors the idea "that courts should have a certain latitude in adapting State law to the special needs of the parties to an international commercial contract."l96 It must be regretted that the Rome Convention, and even more so, the current draft Rome I regulation, in contrast to Swiss law, whose jurisprudence considerably influenced the decision to adopt the characteristic performance test, does not seem to leave any viable opportunity for making the primarily applicable law adaptable to new circumstances. One could conceive of "teleologically reducing" the norm of Article 4(1) with a view to the international dimension of certain contracts. However, in the absence of an accomplished competence of the European Court of Justice to interpret the Rome Convention,197 and in light of the revised Article 4 of the draft Rome I regulation, such a judicial development, which would be predicated not upon a conflict-of-Iaws instrument, but on a distinctly German legal doctrine, is hardly feasible. It almost inevitably would engender conflicting jurisprudence within the member states of the European Communities and thus work against the goal of a uniform interpretation and application of the Convention, as expressly stipulated in Article 18. 196 Vischer, supra note 70, at 137. 197 Two protocols were signed in 1988 to deal with the conferment on the

European Court ofJustice to give preliminary rulings on the proper interpretation of the Rome Convention; as to these protocols, see the report of Prof. Tizziano in [1990] OJ. C219, September 3, 1990, 1 et seq.

CHAPTER 4

THE LIMITS OF THE UNIDROIT PRINCIPLES' APPLICATION

While, in the course of this study, I have tried to demonstrate that the UNIDROIT Principles may become the law governing the transaction independent of the mandatory rules of a particular national legal order, this must not be taken to mean that certain issues arising out of a contractual arrangement may not become subject to rules other than those laid down in the UNIDROIT Principles. The Principles themselves address this issue by acknowledging that their applicability "shall not restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law" (Article 1.4). The question is to which rules of mandatory character Article 1.4 refers. Having concluded that arbitral tribunals and courts alike should be authorized to apply the Principles with a true choice-of-Iaw effect, at least in the event that the parties have made a respective choice, it follows that not all mandatory rules of the laws having some connection to the transaction are to be applied over and above the Principles. Otherwise, the choice of the Principles would effectively be but a substantive incorporation by reference. 1 The reservation in I But see Franz Werro & Eva Maria Belser, Die Unidroit Grundregeln der internationalen Hanrklsvertriige, Eine Wiirdigung aus schweiz.erischer Sicht, in SWISS

REpORTS PRESENTED AT THE XVTH INTERNATIONAL CONGRESS OF COMPARATIVE

LAw 510, 525 (Swiss Institute of Comparative Law ed., 1998), who seem to suggest all mandatory rules of Swiss law would take precedence over the Principles.

141

142 • UNIDROIT Principles of International Commercial Contracts Article 1.4 of the UNIDROIT Principles therefore must be interpreted differently.

I.

AN ANALYSIS OF ARTICLE 1.4 IN GENERAL

A closer analysis of Article 1.4 makes clear that the Principles themselves do not want to conclusively qualify the nature of the mandatory rules of law that remain applicable in spite of the parties' express will to elevate them to the law governing the contract. The provision leaves the qualification to "the relevant rules of private international law," that is, the conflict-of-Iaws rules in force at the forum in question. Considering the emphasis of Article 1.4 on the relevant rules of private international law, it would be wrong to conclude that the Principles themselves do not intend to displace any mandatory law. 2 What mandatory law remains applicable is to be determined not based on the character of a particular rule in its domestic context, but on whether the private international law of the forum mandates application of a particular rule of its domestic legal system in the international context. The relevant rules before a court or arbitral tribunal in Switzerland or a member state of the European Communities are Articles 18 and 19 PIlA and Articles 7 and 16 of the Rome Convention, respectively. These rules reserve the application of "mandatory rules" of the forum and/or certain third states irrespective of the otherwise applicable law. 3 2 This seems, however, to be the position of Klaus Peter Berger, Vom jrraktischen Nutzen der Bechtsvergleichung, Die 'international brauchbare''Auslegung nationalen Bechts, in FESTSCHRIFr FUR OTTO SANDROCK ZUM 70. GEBURTSTAG, at 49, 53 (Klaus Peter Berger et al. eds., 2000); for a rebuttal, see FRIEDRICH

BLASE, DIE GRUNDREGELN DES EUROPAISCHEN VERTRAGSRECHTS ALS RECHT GRENZUBERSCHREITENDER VERTRAGE 207 (2001); see also Gian Paolo Romano, Le choix des Principes UNIDROIT par les contractants l'epreuve des disposition imperatives, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 35 et seq. (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007).

a

3 Article 1.103 of the European Principles is more precise than Article 1.4 UNIDROIT Principles: "(1) Where the otherwise applicable law so allows, the parties may choose to have their contract governed by the Principles, with the effect that national mandatory rules are not applicable. (2) However, effect should be given to those mandatory rules of national, supranational and

Limitations of UNIDROIT Principles' Application • 143 While this is not the place to elaborate on the intricacies of these provisions,4 it should be highlighted here that a qualification of a particular rule as mandatory within the sense of Articles 18 and 19 PIlA and Articles 7 and 16 of the Rome Convention does not conclusively settle the issue whether it must be applied to the transaction in question. Other considerations are to be entertained as well, which may be grouped under the tag of a policies' weighing process. This is particularly so with respect to mandatory rules being implicated neither by the lex causae nor the law of the forum but a third state. Courts and doctrine alike agree that the category of mandatory rules foremost aimed at by Articles 18 and 19 PIlA and Articles 7 and 16 of the Rome Convention are those rules and enactments that are closely linked to governmental policies and express a particularly important economic, social, or regulatory concern, such as anti-trust laws, export and import regulation, insider trading, or regulation of takeovers, etc. 5 These rules and enactments are typically, though not necessarily, promulgated in the form of a public law. In allusion to this origin, doctrine, in particular its international law which, according to the relevant rules of private international law, are applicable irrespective of the law governing the contract." 4 See, e.g., FRANK VISCHER, LUCIUS HUBER & DAVID OSER, INTERNATIONALES VERTRAGSRECHT, at 418 et seq. (2000). 5 Cf. Peter Mankowski, Strukturfragen des internationalen VerbrauchmJerlragsrechts, RIW 287 et seq. (1998); Jan KROPHOLLER, INTERNATIONALES PRIVATRECHT 431 (6th ed. 2006); Dieter Martiny, Commentary on Article 34 EGBGB, in MUNcHENER KOMMENTAR ZUM BURGERLICHEN GESETZBUCH VOL. 10, EINFUHRUNGSGESETZ ZUM BURGERLICHEN GESETZBUCHE (ARTICLE 1-38), INTERNATIONALES PRIVATRECHT para. 79a (3d ed. 1998); NATHALIE VOSER, DIE THEORIE DER LOIS D'APPLICATION IMMEDIATE 1M INTERNATIONALEN PRIVATRECHT 58 et seq., 164 et seq. (1993); Nathalie Voser, Mandatory Rules of Law as a Limitation on the Law Applicable in International Commercial Arbitration, 7 AM. REv. INT'L ARB. 319, 325 (1996); Frank Vischer, General Course on Private InternationalLaw, 232 REc. DES COURS 13, 159 (1992); others, however, advocate an immediate application of provisions in favor of the weaker party; see Lawrence Collins, Contracts, General Rules, in DICEY & MORRIS, THE CONFLICT OF LAws 1295 (Lawrence Collins et al. eds., 12th ed. 1993); Paul Lagarde, Note to BGH, 3.19.1997-VIII ZR 316/96, 87 REv. CRIT. DR. INTERN. PRo 619, 628 (1998); Bernd von Hoffmann, Inliindische Sachnormen mit zwingendem internationalen Anwendungsbereich, 9 IPRAx 261, 267 et seq. (1989); cf. also Mario Giuliano & Paul Lagarde, Report on the Convention on the Law Applicable to Contractual Obligations, OFFICIAL JOURNAL OF THE EUROPEAN COMMUNITIES 28 (1980).

144 • UNIDROIT Principles of International Commercial Contracts

French progeny, tends to label these norms lois de police. 6 Due to their special nature and their substantive content, they are thought to be opposed to the inter-exchangeability of the laws, the very idea of modern international contract law.' As a consequence, they are put outside the ordinary conflict-of-laws regime. It is not a system of bilateral rules that makes them operable internationally, but the particular content of the norm that delimits its international reach. The classification of a mandatory provision to one or another category has considerable consequences. Whereas mandatory rules of private commercial law only apply if they are part of the legal regime that is governing the international transaction, that is, by virtue of the parties' choice or an objective localization of the transaction by a court or arbitral tribunal, mandatory rules that pursue particularly important state interests cannot be excluded, not even by a choice of another system of law by the parties. They are immediately applicable whenever an international transaction comes within their scope. Accordingly, in the context of a choice of the UNIDROIT Principles, the Principles would be applicable exclusively, however, subject to the intervention of those rules demanding immediate application because of a particular important governmental interest of a state with which the contract has a close connection. The picture drawn here is, however, incomplete. Large parts of doctrine and court practice want to further extend the reach of the (internationally) mandatory law category reserved by Articles 18 and 19 PILA and Articles 7 and 16 of the Rome Convention. In particular, rules protecting the "weaker" party in contractual relationships are thought to be part of the mandatory law category. According to established doctrine and (above all German) court practice, this would encompass legislation commonly labeled as "consumer protection" and, more importantly in the context of this study, mandatory rules of commercial character, such as the agent's mandatory right to compensation for loss of customers upon Cj. Pierre Mayer, L'interfereT!ce des lois de police, in L'APPORT DE LA 31 (Institut du droit et des pratiques des affaires internationals 1986). 6

JURISPRUDENCE ARBITRALE

, FRIEDRICH CARL VON SAVIGNY, SYSTEM DES HEUTIGEN ROMISCHEN RECHTS

32 (1849).

Limitations of UNIDROIT Principles' Application • 145 termination as set forth, for example, in Article 418u of the Swiss Code of Obligations. 8 Rules aimed at the protection of one of the parties to the transaction should not be qualified as mandatory within the meaning of Articles 18 and 19 PIlA and Articles 7 and 16 of the Rome Convention. 9 From a private international law perspective, such an approach would create havoc to the established bilateral system of conflict of laws. Not only would it result in a considerable increase in protective norms being implicated, but above all would the cumulative co-existence of mandatory rules of the governing law, the forum, and, possibly, third states lead to conflicts that may hardly be reconcilable? Moreover, in the context of this study, with its focus on establishing an effective mechanism to allow courts and arbitral tribunals alike to apply the rules set forth in the UNIDROIT Principles, excluding mandatory rules that aim to ensure the equilibrium of the contract from sources other than the primarily applicable lex contractus is particularly imposing. As explained, it seems preferable to warrant the basic fairness of an international transaction by the mandatory rules contained in the UNIDROIT Principles, as they have been specifically tailored to the needs of international trade. Otherwise, parties to an international contract are constantly running the risk of being exposed to mandatory 8 Cf Claude Ferry, Contrat international d'agent commercial et lois de police, J. DR. INT'L 299,303 et seq. (1993), Dieter Martiny, Internatonales Vertragsrecht zwischen Rechtsgefalle und Vereinheitlichung, ZEuP 67, 87 (1995); NORBERT REICH, GRUNDGESETZ UND INTERNATIONALES VERTRAGSRECHT, NJW 2130 et seq. (1994); see also Peter Jung, Der Einjluss der UNIDROIT Principles auf das Gemeinschaftsrecht, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE,JURISPRUDENCE AND CODIFICATION, REpORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 77, 83 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007); for further references, see VISCHER, HUBER & OSER, supra note 4, at 421 et seq.; according to Alejandro Garro, The Eason-Weinmann Colloquium on International and Compara-

tive Law: The Contribution of the Unidroit Principles to the Advancement of International Commercial Arbitration, 3 TUL. J. INT'L & COMPo L. 93, 97 (1995),

Article 1.4 also encompasses rules who aim at the protection of consumers. 9 See Vischer, supra note 5, at 154.

146 • UNIDROIT Principles of International Commercial Contracts requirements of parochial or contradicting nature. This latter problem is well illustrated by the recent tendency of the member states of the European Community to juxtapose their legislation concerning the control of general contract terms, which do not only cover consumer contracts but extend to the subject matter at issue here, with one-sided conflict-of-Iaws rules that demand application irrespective of whether the legislation is part of the lex causae. The contents of the legislation as well as the conditions of their application differ greatly in each member state. IO Whether such an approach is really in the interest of cross-border transactions must be questioned. I believe the proposition advocated here would provide a more reliable and thus more efficient legal framework for international commercial transactions.

II. ARTICLE 1.4 AND INTERNATIONAL ARBITRATION Notably, Article 1.4 does not distinguish between transactions subject to ordinary court proceedings and arbitration. As a matter of fact, however, arbitration statutes, even the more recent ones, do not contain principles or rules as those set forth in Articles 18 and 19 PIlA and Articles 7 and 16 of the Rome Convention; these rules are only to be observed immediately by a state court that must decide a dispute relating to an international commercial transaction.ll The question is whether the lack of legislation immediately applicable to arbitral proceedings should be taken to mean that there are none of the limitations indicated above. The answer must be negative. 12 Considering the vital interest states regularly pursue in adopting true lois de police, which in the 10 Cf. Eric Jayme, Klauselrichtlinie und Internationales Privatrecht-Eine Skizze, in LEBENDIGES RECHT-VON DEN SUMERERN BIS ZUR GEGENWART, FESTSCHRIFT ruR REINHOLF TRINKNER ZUM 65. GEBURTSTAG 575 (1995).

11 See, for example, the decision of the Swiss Federal Tribunal in SZIER 545, 548 (1996) (in which the Federal Tribunal seems to argue that Article 19 is not applicable in the context of arbitration, not even analogously; see Daniel Hochstrasser, Choice of Law and "Foreign" Mandatory Rules in International Arbitration, 11 J. INT'L ARB. 57 et seq.(1994); compare, more generally, for an overview of the various positions in scholarly writings CHRISTINA UNGEHEUER, DIE BEACHTUNG VON EINGRIFFSNORMEN IN DER INTERNATIONALEN HANDELSSCHIEDSGERICHTSBARKEIT 168 et seq. (1996). 12 Cf. Hans-Joachim Mertens, Das lex mercatoria-Problem, in FESTSCHRIFT FUR WALTER ODERSKY ZUM 65. GEBURTSTAG AM 17. JULI 1996, 857, 872 (Richard

Limitations of UN/DROIT Principles' Application • 147 state court context fall within the scope of Article 1.4 of the UNIDROIT Principles-as mentioned, anti-trust laws, export and import regulations, insider trading, or regulation of takeovers-an arbitral tribunal certainly cannot simply ignore such laws or negate de facto effects such laws may have on the transaction or the position of one particular party to the transaction. Recent case law even suggests that, to some extent, arbitral tribunals will have to apply such truly international mandatory laws ex officio, even if no party has argued its application. 13 This obligation not only extends to rules of law with international ordre public character, but above all to anti-trust laws. 14 Otherwise parties will face the risk that an award will not be recognized when enforcement is sought. Given that the principles set forth in Articles 18 and 19 PILA and Articles 7 and 16 of the Rome Convention are not immediately applicable to arbitral tribunals, however, an arbitrator may, to some extent, have greater latitude in absorbing the effects these laws may have on the resolution of the case at issue. In particular, he or she is not bound to any domestic system of law but may seek to render a decision that is appropriate given the international setting, including the substantive contract rules applicable to it.

III. MANDATORY RULES OF INTERNATIONAL APPLICATION-DISPLACEMENT OF VERSUS INTERACTION WITH THE UNIDROIT PRINCIPLES Where a court or an arbitral tribunal finds that a certain matter falls within the scope of a particular domestic rule that must be applied irrespective of the otherwise applicable law, this does not Bottcher, GOtz Hueck & BurkhardJiihnke eds., 1996); cf. also Andrea Giardina, Les Principes UNIDROIT sur les contrats intemationaux,j. DR. INT'L 547,553 et seq. (1995); VISCHER, HUBER & OSER, supra note 4, at para. 950 et seq. (with further references); specifically with respect to the UNIDROIT Principles, see Ole Lando, Assessing the Role of the Unidroit Principles in the Harmonization of Arbitration Law, 3 TuL.j. INT'L & COMPo L. 129, 141 etseq. (1994); cf. also Michael Joachim Bonell, Soft Law and Party Autonomy: The Case of the Unidroit Principles, 31 Loy. L. REv. 229, 248-49 (2005). 13 European Court of Justice, Eco Swiss China Time Ltd. (Hong Kong) V. Benetton International NY (Netherlands), June 1, 1999, RS C-126/97. 14 In addition to the ECJ decision referred to above, see also the decision by the U.S. Supreme Court in Mitsubishi Motors Corporation v. Soler Chrysler Plymouth Inc., 472 U.S. 614 (1985).

148 • UN/DROIT Principles of International Commercial Contracts

mean there is no role left for the UNIDROIT Principles (as the law governing the contract). For example, in an international mergers and acquisitions (M&A) deal, both top companies of the respective group have entered into a global master agreement. None of the local affiliates actually required to transfer assets are an immediate party to the master agreement. Under the master agreement, the purchase price must be paid in U.S. dollars. The purchase price clause has been drafted as an effectivo clause. When implementing the master agreement at a local level (by having the local affiliates enter into local asset purchase agreements), the parties discover that· in several jurisdictions a payment in foreign currency is not permissible. The relevant local exchange regulations or other mandatory rules prohibit payment in a currency other than the local one, and they do not permit settling the transaction outside the country through payment between the parents acting as agents of the local affiliates. They do not, however, address the contractual issue of what the rights and obligations of the obligor and the obligee are when an effectivo clause is not given effect by the lex loci solutionis. The issue needs determination, and doctrine of private international law mostly favors a determination based on the otherwise applicable law, that is, the lex contractus. 15 However, not many national legal orders will expressly address the issue where an obligor finds it impossible to make payment in the currency in which the obligation was expressed, as is the case in the example above, or where there is any other cause preventing the obligor from obtaining the required currency. Therefore, it will mostly fall to the court or arbitral tribunal to craft the appropriate rule. A court or arbitral tribunal may however take guidance by the rules proposed by the UNIDROIT Principles (as a court or tribunal must if the contract is actually governed by the Principles). Other than what one may conclude from the apodictic wording in Article 3.1-according to which the Principles do not deal with the invalidity arising from illegality-the Principles actually do include rules dealing with these scenarios. Article 6.1.9(2) gives the obligee the option of requiring payment in the currency of the place for payment, even if the contract contains an 15

Cf

VISCHER, HUBER

&

OSER,

supra note 4, at para. 975 et seq.

Limitations of UN/DROIT Principles' Application • 149

effectivo clause. As the comment on this article makes clear "This is an additional option open to the obligee who may find it acceptable or even advantageous in the circumstances. It does not preclude the exercise of any available remedy in the event of the obligor's inability to pay in the currency of account amounting to non-performance of the contract (e.g. damages)."16 One may add, though, that depending on the circumstances, not only the obligee but also the obligor should be entitled (as a matter of right) to perform the contract by paying in local currency. In some instances, as in the M&A example given above (assuming the payment concerns a less significant jurisdiction in the overall context), the obligee does not need protection other than its right to be made whole if it should sustain a loss as a result of payment in local currency. The Principles are flexible enough to accommodate such an adaptation, for example, by a court's or arbitral tribunal's application of the good faith principle in Article 1.7(1). The Principles go on to specify in Article 6.1.9(3) that payment in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due. The Principles thus determine the second issue regularly left open by parties that have agreed on an effectivo clause. They remain somewhat vague, by referring to the "applicable" rate of exchange-necessarily so it seems, as there may be different rates of exchange depending on the nature of the transaction. 17 Public enactments of an interventionist nature-as triggered by virtue of Article 19 PILA or Article 7 of the Rome Convention-are often part of a system that requires parties to obtain governmental permission. Apart from the requirements under the relevant mandatory statutes, several contractual issues arise, for instance who, between the parties, has the burden of filing the application and what is the time for filing. The "otherwise applicable law" or the lex causae must determine these issues. Again, most national legal orders do not contain any rules on these issues. 16 17

UNIDROIT UNIDROIT

Principles, Comment on Article 6.1.9, at 165. Principles, Comment on Article 6.1.9, at 166.

150 • UN/DROIT Principles of International Commercial Contracts

As a body of rules with particular focus on the international transaction, the UNIDROIT Principles provide for detailed provisions on this particular subject matter in Article 6.1.14 et seq .18

Where the law of a State requires a public permission affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise, (a) if only one party has its place of business in that State, that party shall take the measures necessary to obtain the permission; (b) in any other case the party whose performance requires permission shall take the necessary measures. 19 The party required to take the measures necessary to obtain permission must do so without undue delay, bear the expenses incurred, and, whenever appropriate, give the other party notice of the grant or refusal of such permission without undue delay.20 The UNIDROIT Principles also expressly address the legal consequences of failure to obtain governmental permission in due time or the rejection of an application. Public permission requirements of the lex fori or a long-arm statute of a third state do not deal with the issues, nor do most national legal orders. Under the rules of the UNIDROIT Principles, either party is entitled to terminate the contract if, notwithstanding that the responsible party has undertaken all efforts required, the permission has neither been granted nor refused within a reasonable time. 21 This right of termination is not given where the permission affects some terms only and if, having regard to the circumstances, it is reasonable to uphold the 18 These provisions are generally received favorably in legal literature; but see the criticism of Oliver Remien, Die UNIDROIT-Prinzipien und die Grundregeln des Europiiischen Vertragsrechts-ein vergleichender Blick, in The UNIDROIT PRINCIPLES 2004, THEIR IMPACT ON CONTRACTUAL PRACTICE, JURISPRUDENCE AND CODIFICATION, REPORTS OF THE ISDC COLLOQUIUM (8/9 JUNE 2006) 65, 73 (Eleanor Cashin Ritaine & Evat Lein, Swiss Institute of Comparative Law (ISDC) and International Institute for the Unification of Private Law (UNIDROIT) eds., 2007). 19 Art. 6.1.14 of the UNIDROIT Principles. 20 Art. 6.1.15 of the UNIDROIT Principles. 21 Art. 6.1.16(1) of the UNIDROIT Principles.

Limitations of UN/DROIT Principles' Application • 151 remainder of the contract. 22 A similar rule applies where the permission has not been granted. 23 Conclusively then, the provisions of the UNIDROIT Principles referred to above-as others, particularly the rules on hardship in Article 6.2.1 et seq.-include reasonable rules on the allocation of risks among the parties that arise out of the intervention of enactments of a public nature, be it of the lex contractus, the lex jori, or even a third state. While parties certainly should be encouraged to tailor this risk allocation more specifically to the statutes at issue and their particular circumstances, these rules are highly welcome default rules that should belong to any modern code on the law of contracts. These rules are rarely found in national legal orders and therefore constitute a useful resource for the adjudication of any international contract. If the contract is not governed by the UNIDROIT Principles, these rules may be applied indirectly by virtue of rules such as Article 19 PILA or Article 7 of the Rome Convention as international substantive rules. 24 In general, the rules referred to in this section will enable a court or an arbitral tribunal to reach an appropriate decision of the case at hand. Any criticism of these rules 25 should bear in mind that they leave ample room for accommodating specific circumstances, either by applying open-textured devices they themselves include (see, for example, Article 6.1.14(2): "circumstances"), or, more innovatively, by relying on the overall corrective function of the good faith principle in Article 1.17 to which all rules of the UNIDROIT Principles are subject. Based on that principle, it would, for example, be possible for a court to relocate the place of performance or to extend the term of payment (coupled with a compensatory remedy) in appropriate circumstances. It is highly commendable that the Principles recognize that, although mandatory laws of international character cannot be derogated in any form, 22 Art. 6.1.16(2) of the UNIDROIT Principles. 23 Art. 6.1.17 of the UNIDROIT Principles. 24 Cf VISCHER, HUBER & OSER, supra note 4, at para. 946. 25 See Hilmar Raeschke-Kessler, Should an Arbitrator in an International Arbitration Procedure Apply the Unidroit Principles?, in UNIDROIT PRINCIPLES FOR INTERNATIONAL COMMERCIAL CONTRACTS: A NEW LEX MERCATORIA?, ICC PuBLICATION No. 490/1, at 167, 176-77 (Institute ofInternational Business Law and Practice eds., 1995).

152 • UNIDROIT Principles of International Commercial Contracts

even by a set of rules of transnational character, the otherwise applicable law must, by way of default rules, take account of the effects such mandatory laws have on the parties and their respective rights and obligations vis-a-vis each other.

CHAPTER 5

SUMMARY AND CONCLUSIONS

This study has first tried to explore the extent to which the principles and rules of the UNIDROIT Principles have found application as the law governing international commercial transactions. It then went on to analyze what the foundations or justifications are, based on which such application has been-and should be-made; and finally, it has reached the conclusion that the potential of the UNIDROIT Principles' application in practice may be broader than it is generally acknowledged, in particular as regards the court (as opposed to the arbitration) setting. An analysis of both arbitral and court precedents has shown a considerable number of arbitral awards and court decisions that in some way or another referred to the UNIDROIT Principles. Many of these awards or decisions did not, however, apply the Principles as the governing law. The main reason for this is that they did not deal with clauses that designated the UNIDROIT Principles as the law governing the transaction. Rather, the transactions at dispute were either not subject to principles of transnational law at all, but their jurisprudential entry rested solely on the arbitrators' or judges' attempts to justify their findings by pointing to the international consensus evidenced by the rules in the UNIDROIT Principles, or, in the case of arbitration, they were subject to only vaguely defined concepts or formulae such as "principles of international trade law." Faced with the difficulty of determining the contents of such contractual stipulations, arbitrators welcomed access to a set of rules that claimed to reflect the status of international trade law as of today.

Of these two types of the Principles' application, only the latter falls within the scope of this study. The main difficulty there has been one of determining the extent to which the UNIDROIT 153

154 • UNIDROIT Principles of International Commercial Contracts

Principles may actually be held to reflect "principles of international trade law" or such other formulation as the parties to the transaction may have used. Arbitral tribunals have undergone different levels of scrutiny, sometimes going as far as simply proceeding on the assumption that the UNIDROIT Principles are the genuine expression of transnational trade law, sometimes entertaining a more in-depth analysis of the various practices found in the various branches of trade and comparing them to the rules and principles of the UNIDROIT Principles. While the latter approach is certainly theoretically sound, it constitutes an enormous challenge to arbitrators or judges alike. Therefore, it has been proposed in this study that the UNIDROIT Principles should be regarded as prima facie evidence of the international consensus on the law of international commercial contracts, unless one of the parties to the dispute substantiates evidence to the contrary; such a presumption may be justified on the ground that the UNIDROIT Principles are the product of a careful comparison of the existing legal systems that, on balance, generate fair and equitable solutions and thus meet the core expectations parties to an international trade contract have of their choice of law. The prima facie rule would be limited in its scope though, as it would only apply to choice-of-Iaw clauses designating general principles of law or an amalgamation of different national laws (" tronc commun" technique). If the parties have chosen to have their contract governed by the lex mercatoria, the conflicting theoretical foundations of the lex mercatoria and the UNIDROIT Principles-a hybrid body of rules foremost aiming at the hard and fast resolution of a business dispute, on the one hand, and rules and principles that attempt to ensure a certain degree of fairness and equity in the resolution of a business dispute, on the other-preclude a similar assumption. The arbitral tribunal will in that scenario therefore have to undergo an evaluation on a rule-by-rule basis to verify whether or not the Principles reflect the relevant practice of a particular business area in the geographical region concerned and, accordingly, state the reasons for its conclusions. One may hope that over time precedents will emerge that give guidance as to the lex mercatoria character of a particular principle or rule of the UNIDROIT Principles. Beyond that, it may be conceivable that the UNIDROIT Principles will be used

Summary and Conclusions • 155 as a corrective tool in situations in which the law merchant is offensive to the notions of international justice and fairness. The main instrument for the UNIDROIT Principles' practical application is the parties' express choice. The drafters of the UNIDROIT Principles have rightly conferred upon it pride of place among the various possible foundations and justifications for the Principles' application and did thus not follow the U.S. Restatement (Second) of the Law of Contracts, which leaves it up to the courts to adapt the law of the U.S. states to new developments and exigencies. While this may be a sensible approach within the U.S. legal system, which, at least in the realm of contract law, operates to a considerable extent on a jurisprudential basis, the same is not true for a body of rules that aims to be applied throughout the world, with various degrees of adaptability of the relevant rules to the needs of international trade from one system of law to another. The few published decisions reporting on international contracts that have been made subject to the UNIDROIT Principles from the outset should not be taken to mean that this is not being done in practice. The relative recent date of their publication needs to be borne in mind and, following from that, the backlog in judicial or arbitral decisions dealing with them. Moreover, more recent awards refute such an assumption, given the parties' apparent readiness to even agree on the Principles' application after execution of the contract at a time contentious issues have come up between them. They are a testimony to the relative success of the UNIDROIT Principles. The effectiveness of a parties' choice of the Principles is virtually assured if the parties have combined the choice with an arbitration clause. This is certainly true for an award made by a tribunal having its seat in one of the many jurisdictions whose arbitration statute expressly uses the term "rules of law;" in the absence of such terminology, the recognition of the parties' choice may, from a theoretical point of view, be less clear. There remains the possibility that an arbitral tribunal, or the court before which enforcement is sought, rejects the UNIDROIT Principles' application on the ground that is does not qualify as "law." Given the modern tendency in international arbitration for states not to intervene in arbitration proceedings unless fundamental policy issues are at stake, it is, however, unlikely that arbitrators will hold a choice of the Principles

156 • UN/DROIT Principles of International Commercial Contracts

invalid, or the court where recognition or enforcement is sought will reject recognition or enforcement of the award. The remaining challenges to a choice of the UNIDROIT Principles in an arbitral setting are mostly of a technical nature. Thus, the parties should consider whether their choice of the Principles should in addition provide for the application of a law other than the Principles. The purpose of such an auxiliary choice would be to have a fallback solution for issues that are not covered by the UNIDROIT Principles. The need for that may have been reduced somewhat since publication of the 2004 edition of the Principles, as the most essential shortcomings of the original edition, such as rules on limitation periods, have been addressed. This is a welcome development, for combining the choice of the UNIDROIT Principles with a domestic law is to some extent at odds with the goal of denationalizing an international contract. It risks reintroducing mandatory provisions of parochial character not suited to the international nature of the transaction that may override some of the Principles' more internationally minded rules. UNIDROIT

The study argues also, for other reasons, that a supplementary choice of a domestic choice may not always be adequate. On the one hand, it may be inadequate for practical reasons. To illustrate this, take the example of statutory sales laws. If the parties entered into an elaborate and comprehensive American-style sale and purchase agreement, applying statutory rules specific to sales contracts, such as statutory (implied) warranties, appears first unnecessary, as these issues will have been expressly addressed, and second, and perhaps more importantly, will increase the risk that conflicts arise between the express clauses agreed upon and the statutory texts of the domestic legal system. Precisely in the field of statutory (implied) warranties, this risk is significant. It may therefore be more appropriate if only general contract issues are being supplied by the supplementary underlying law (i.e., the UNIDROIT Principles) but not specific issues in a particular type of contract. On the other hand, and more generally, alternative sources of soft law may be better suited to fill gaps of the UNIDROIT Principles. The Principles themselves give some guidance in Article 1.6 on how to develop additional "default rules" through judicial development on a case-by-case basis. Methodologically, an application of sources

Summary and Conclusions • 157 of soft law beyond the UNIDROIT Principles may be justified, depending on the particulars of the case, on the doctrine of a negative choice of law by the parties. Here, it is assumed the parties have, by tacit agreement, refrained from designating any state law as the applicable law and to have authorized the arbitral tribunal to resort to a-national sources of law. To justifY such an assumption, however, corroboration by evidence is required; otherwise the doctrine is a mere hypothesis. Potential sources to turn to are the European Principles, which contain provisions not included in the UNIDROIT Principles, or the evolving list of transnational law principles proposed by Klaus-Peter Berger, which purports to emphasize arbitral case law more than comparative law research. Of course, international case law should always take pride of place in supplementing and further developing the UNIDROIT Principles. The effectiveness of the parties' choice of the UNIDROIT Principles before domestic courts is an entirely different matter. Fourteen years after the UNIDROIT Principles' initial publication, there continues to be considerable opposition, from academics, governments, and business alike, to an admission of a choice of the UNIDROIT Principles as the governing law that would substitute domestic law in the sense that even provisions of (nationally) mandatory character would be displaced. This has more recently been amply demonstrated by the various replies submitted to the Commission of the European Communities in reply to its questionnaire that, amongst others, raised the question whether parties should be able, in the context of a revised Rome Convention (or rather its successor Community instrument), to choose general principles of law or the like. The tenor of the opponents to such a revision of the Rome Convention has uniformly been that the concept of "general principles of law" is too vague to merit consideration and would undermine the certainty that Article 3 of the Rome Convention requires. This study, on the contrary, argues in favor of an admission of a true choice of law of the UNIDROIT Principles before state courts. While recognizing that none of the traditional criteria used for the determination of the law character of a normative system would attribute the character of law to the UNIDROIT Principles in itself, it concludes that the core policy considerations underlying each of the traditional criteria are on balance, or on a "weighing scale,"

158 • UNIDROIT Principles of International Commercial Contracts satisfied. The Principles provide a self-contained, coherent, and balanced system of rules of law, that is, a consistent framework of common values that lays open "the relative worth and importance of competing legislative grounds,"! thus allowing a court to develop and refine the "law." The Principles further include rules that ensure that the basic tenets of fairness and equity can be enforced, if necessary, even despite the contrary agreement of the parties. Above all, this is done through the drafters' innovative step to designate some of the Principles' provisions as mandatory and, more subtly (and partly overlapping), by including open-textured devices such as reasonableness, unfairness, or circumstances of the case. The latter adds an element of flexibility that is essential to ensure the notions of fairness and equity in the individual case. And finally, the Principles have been drafted with the mandate and approval of an internationally recognized organization. This imparts on the UNIDROIT Principles a certain layer of procedural legitimacy, distinctly different from the traditional law merchant. From the various components traditionally used to establish and ascertain the law character of a particular normative source, the established canons of sources of law as known in most domestic systems-statutes promulgated by the legislator, within limits customary law, and, in common law jurisdictions at least, case law-may admittedly not easily accommodate a view that attributes law character to a body of rules as the UNIDROIT Principles. However, even if the assertion should be correct that the established canons of law should be given considerable weight in determining whether a normative instrument constitutes "law," then, in turn, it should also be recognized that the UNIDROIT Principles in their capacity as a product of international doctrine are as much law as are more traditional notions of doctrinal contributions in domestic systems of law. The contributions of doctrine enter the judiciary domain if and to the extent that the courts take them up. This study argues that a notion not only encompassing the rules and principles developed judicially, but also the process through which these rules and principles enter the judicial domain affirms, at least tentatively, the UNIDROIT Principles' general potential to become law without any involvement of the state legislator. ! Oliver Wendell Holmes, The Path oj the Law, in COLLECTED LEGAL PAPERS, at 167 (Oliver Wendell Holmes ed., 1920).

Summary and Conclusions • 159 Yet, it is believed here that in the context of truly international transactions, the relevancy of the established canons of law is limited. The traditional notion that categorizes certain rules and principles as legitimate sources of law bears, in the first place, on the relationship amongst these different sources of law within a given jurisdiction, its main addressee being the judge in his or her determination of legal or, in the context of this study, contractual relationships rooted within that particular jurisdiction. For truly international transactions, the conduit for tapping a certain set of rules' potential to become law is not the judge but above all the parties, who either choose a particular system of rules or implicate it by the nature of the transaction they enter into. This study therefore argues that genuine conflict-of-Iaws considerations must be included in the assessment of the law character of a body of rules for the international setting and in fact given significant weight in that process. Relying on conflict-of-Iaws considerations has the welcome benefit that the issue at stake here-whether the character of law should be attributed to a particular source of rules-is treated as a matter of degree rather than a question of black and white. This study has therefore undertaken an analysis of the principle of party autonomy and in particular the various expansions thereof-absent a requirement that there be any connection of the law chosen to the parties or the transaction or a bona fide reason for choosing a particular system of law-as well as derivatives thereof, such as depe~age (the submission of different parts of the contract to different legal orders), opting-in clauses (the choice of an international convention-and not its implementing national legislation-as the governing law), and stabilization clauses (the freezing in time of a particular domestic system of law). The analysis has shown that as a result of the recognition of these forms of a choice of law, the parties may implicate in substance (e.g., by derogating with conflicts of laws effect from certain mandatory provisions of a particular domestic law through the instrument of dipe~age), without choosing an a-national body of rules in form, a system of rules that does not exist, in the sense of a living organism, anywhere in the world. Courts have been willing to recognize these forms of choices, in the first place, to further promote the principle's much touted advantage over any other form of determining the applicable law,

160 • UN/DROIT Principles of International Commercial Contracts

that is, security in law and predictability of the result. At the same time, courts have done so only because ultimately they have retained a certain control over the normative system of law presented to them. The control is only a limited one. The "foreign" or party-tailored rules and principles presented to a court are not scrutinized against the backdrop of each and every mandatory provision of the court's own domestic law but only on whether, overall, the results achieved under it (in a particular dispute) may be held to lead to equitable and fair solutions in line with the policy considerations of the forum state. By nature, this is an individual assessment. The assertion that law character must be derived based on general and abstract considerations (as is the case if the established canon of sources of law is considered controlling) may thus ultimately not be true. As the conflict-of-Iaws context and the roles courts are given in that system shows, it appears feasible to sanction a particular body of rules based on an individual inquiry. This study concludes that the substantive qualities of the Principles, as analyzed through its course, merit such an individual sanction, and it therefore submits that courts, as arbitral tribunals, should recognize the parties' choice of the UNIDROIT Principles as a true choice of law with conflict-of-Iaws effect. Of course, and this should always be considered, the general assessment reached here will never preclude courts from intervening in an individual case should particular policy considerations of the forum or even a third state so require. The situation is the same as where the parties have chosen a law other than that of the forum. Internationally mandatory rules of the forum and third countries prevail, and the instrument to ensure this, at least in the Swiss and European context, continues to be Articles 18 and 19 of the Swiss Private International Law Act and Articles 7 and 16 of the Rome Convention, respectively. UNIDROIT

The study has also considered whether the UNIDROIT Principles may become applicable in the absence of their choice by the parties. Again, it has found a certain dichotomy between the situation before arbitral tribunals and state courts, though more nuanced than in the context of party autonomy. For situations in which the parties have not designated the applicable law, arbitration statutes have not universally adopted the "rules of law" terminology that, in the context of party autonomy, is

Summary and Conclusions • 161 associated with a mandate of the arbitrators to sanction an application of transnational principles of law, or more specifically, the UNIDROIT Principles. In jurisdictions that have not, it is therefore hardly surprising that an application of the UNIDROIT Principles is commonly held out of the question. However, even in those jurisdictions that have adopted the notion of "rules oflaw," a direct application of the Principles by arbitrators is met with skepticism, mainly because the justification for an application of the body of rules of an a-national character is not merely found in the "rules of law" terminology, but, above all, in the will of the parties. This study concurs that it is inappropriate for arbitrators to resort to the UNIDROIT Principles without any particular justification for their application. Simultaneously, it does not share the opinion of other academics and practitioners that the Principles should only be applied to the extent they express generally accepted principles of law or are part of an international trade usage. Rather, it takes the position that an application of transnational principles of law in the absence of a choice of law must be justified by genuine conflict-of-Iaws considerations. Only transactions that do not have unambiguous contacts to a particular national order, that are "floating" between the relevant legal orders involved and thus are not strongly embedded in a particular jurisdiction, should be made subject to transnational principles. In this instance, no legitimate party expectations as to the applicable law will be violated, and, at the same time, resorting to a body of rules not part of a particular state order avoids an artificial localization of a transaction not rooted in any particular legal order. That it is the UNIDROIT Principles and not some other body of a-national rules that the arbitrators decide to bring to application may be justified on the basis of their particular quality. Considering the assessment reached as to the law character of the Principles in the context of their choice as the governing law before state courts, it appears justified that arbitrators give preference to the UNIDROIT Principles. Their quality merits a presumption that they establish, for truly international facts, the appropriate substantive rules. The quality and the comparative law background of the UNIDROIT Principles that justifies an arbitrator's finding that the Principles-and not some other set of a-national rules-should be applied to the transaction may also become relevant in the context

162 • UN/DROIT Principles of International Commercial Contracts of proceedings before state courts. The study picks up on the international doctrine that recommends establishing for "truly international facts [. . . ] substantive rules [that] enjoy universal recognition or at least seem compatible with the laws of the states directly interested in the settlement of the case at hand. "2 The reason for this recommendation is an acknowledgment of conflict-of-Iaws scholars that a localization of truly international contracts is a solution of embarrassment. Seeking an alternative to this process inevitably leads to a more substantive rather than a pure conflict of laws approach, such as the one cited above. Relying on the Principles as the provider for "establishing for truly international facts substantive rules" would have the advantage of not having to craft international substantive rules on an ad hoc basis. From a methodological point of view, an application by a court of the UNIDROIT Principles, even though the parties have not authorized it, should not be taken to mean that the UNIDROIT Principles constitute the proper law of the contract. Rather, an application should be triggered if a court concludes that given the internationality of the transaction in question and the requirements of international trade, a particular rule of the domestic law would not be suitable. This goes beyond a mere "internationally" minded interpretation and supplementation of the underlying law. It is a conflict of laws rule with a substantive element, conferring upon the judge a relatively wide margin of appreciation, similar to the approach found in the Inter-American Convention on the Law Applicable to International Contracts of March 18, 1994. According to Article 9(2), the court "shall also take into account the general principles of international commercial law recognized by international organizations." Additionally, Article 10 generally provides, regardless of whether the parties have agreed on the applicable law: "In addition to the provisions in the foregoing articles, the guidelines, customs and principles of international commercial law as well as commercial usages and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case." 2 Michael Joachim Bonell, Das autonome Recht des Welthande15-Rechtsdogmatische und rechtspolitische Aspekte, 42 RABELSZ 485, 509 (1978).

Summary and Conclusions • 163 This study recommends that this approach be adopted, at least in the future, recognizing though that in the European context, the current text of the Rome Convention may not accommodate it. In the Swiss context, it is argued that such an approach may be taken immediately. In the sense of the relevant policy consideration, the statutory basis may be seen in Article 19(2) of the Swiss Private International Law Act and the goal expressed by it that a fair and equitable result be reached according to the guiding principles of Swiss law, and, perhaps more immediately, in Article 15 of the same act, the general escape clause whose element of flexibility that it introduces in the more or less rigid conflict-of-Iaws system should not be limited to territorial considerations but also include genuinely substantive elements, thereby allowing a judge to "materialize" the proper conflict solution.

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K(lTz, HEIN,

AN INTRODUCTION TO COMPARATIVE LAw (3d

Index References are to page numbers Abus de droit, 55 Adaptation, 10, 18, 110, 136, 149 American Law Institute (ALI), 11, 15 Amiable compositeur, 26 Article 1 (2) Swiss Civil Code (gap filling), 85, 86, 88 Article 1.4 UNIDROIT Principles (mandatory rules), 141 et seq., 146, 147 Article 1.6(2) UNIDROIT Principles (gap filling), 32, 37, 43, 45 Article 7 (2) CISG (gap filling), 32, 42, 43 Assignment, 3, 6, 94 Astreinte, 9 Auctoritas, 84, 97 Avoidance, 10, 54, 96

Choice with conflict-of-Iaws effect, 17 CISG, 4, 29, 32, 38 et seq., 42 et seq., 77 et seq., 116, 124 Comments on the UNIDROIT Principles, 6, 37, 38 Commercial, 2, 11, 12 Commission of the European Communities, 73, 127, 139, 157 Commission on European Contract Law, 3 Compania Valenciana de Cementos Portland (Spain) v. Primary Coal Inc. (New York), 47 Conditions, 3, 40 et seq., 45, 93 Consumer contracts, 2, 3, 96, 146 Convention on the Limitation Periods in International Sales, 40 Corpus Juris, 82 Courts, see UNIDROIT Principles and state courts "Creation savante" , 55, 86

Battle of forms, 4 Black lists, 79 Black-letter-rules, 6 Channel tunnel case, 23, 32 Characteristic performance, 134, 139 et seq. 179

180 • UNIDROIT Principles of International Commercial Contracts

Creeping codification, 45 Currency, 148 et seq. Customary law, 76 et seq., 85, 158 Damiano case, 22 "Denationalization", 47, 128 Depe~age, 109 et seq., 121, 159 Deutsche Schachtbau- und Tiefbohrgesellschaft m.b.H. case, 22, 31 Effectivo clause, 148 et seq. European Principles, 2 et seq., 17 et seq., 45, 122, 129, 157 Fair dealing, 6 et seq., 41, 92, 96, 132, 137 Fairness, 8 et seq., 55 et seq., 59, 68, 90, 95 et seq., 107, 115, 121 et seq., 130, 145, 155, 158 Favor contractus, 7 Force Majeure, 8, 52 Forfeiture of bonds, 79 Fougerolle case, 21, 30 Gap filling, 36 et seq. Article 1.6(2) UNlDROrr Principles, 32, 37, 43, 45 Article 7(2) CISC, 32, 42 et seq. Article 1(2) Swiss Civil Code, 85, 86, 88 Implied negative choice, 47 et seq. Interpretation and supplementation, 16, 131, 136, 162

General principles of law, 14, 19, 21, 25, 30, 32 et seq., 45, 49 et seq., 54 et seq., 64, 80 et seq., 93, 128, 154, 157 and Unidroit Principles, 49 et seq. General meaning, 55 et seq. General principles of law recognized by civilized nations, 45, 55, 59 Geneva Convention on Agency in the International Sale of Goods, 5 Good faith, 6 et seq., 10, 22, 35, 41, 45, 83, 93, 96 et seq., 132 et seq., 136, 149, 151 Gotaverken case, 22, 31 Green paper on the conversion of the 1980 Rome Convention on the Law Applicable to Contractual Obligations into a Community Instrument and its Modernization (2003), 73, 90, 91, 97, 128 Hardship, 4, 8, 10, 52 et seq., 83, 151 Implied negative choice, 47, 49 Incorporation, 17, 72, 129, 141 Institutional procedural rules and choice of law, 67 et seq.

Index • 181 Inter-American Convention on the Law Applicable to International Contracts of March 17, 1994, 60, 126, 135 et seq., 139, 162 International, 2 et seq., 65 et seq. International Institute for the Unification of Private International Law (UNIDROIT), 1 International substantive rules, 12 et seq., 99, 134 et seq., 137, 151, 162 International trade customs, 19, 59 International unification of law, 12, 13 "Internationalization", 86 et seq. Internationally mandatory rules, 160 et seq. Interpretation, 6, 16, 18, 31 et seq., 41, 51, 94, 131 et seq. Joint and several liability, 41 et seq., 93 Judicial law making, 42, 81 et seq., 84, 88 et seq. Jus commune, 8, 82 Jus gentium, 81 Lacunae, 38, 42, 129, 132, 134, see also gap filling Law applicable absent a choke of law Arbitration, 61 et seq. State courts, 131 et seq. Law character, 76 et seq.

Limitation of actions, 6, 39, 130 Lois d'application immediate, 114, 141 et seq. Lois de police, 144, 147 Mandatory rules, 36, 73, 96, 105, 111, 117, 141 et seq., 147 131 et seq., 160 Allocation of risks, 151 Internationally mandatory rules, 160 Lois d'application immediate, 141 et seq. of the UNIDROIT Principles, 7, 9, 73, 88, 95 et seq., 141 et seq. Mexico Convention, 60, 126, 135 et seq., 139, 162 Model Clause, 33, 36 Negative choice of law, 47 et seq., 157 Neutral law, 35, 106 New York Convention of June 10, 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, 58 Norsolor cases, 22 Notion of "law", 76 Open-textured devices, 89, 132, 152, 158 Opinio iuris sive necessitates, 77, 78 Opt-in clause, 116 et seq. Pacta sunt servanda, 6, 43, 45,55

182 • UN/DROIT Principles of International Commercial Contracts

Party autonomy, 23, 62, 64, 74, 103 et seq., 107 et seq., 111, 114, 120 et seq., 124, 126 et seq., 131, 159 et seq. Praetor peregrinus, 81 Preamble of the UNIDROIT Principles, 1 et seq., 14 et seq., 32, 33, 37, 50, 132, 133, Prescription, 6, 39, 130 Principles of European Contract Law, 2, 17, 122, 128 Procedural legitimacy, 90, 99 et seq., 121 et seq., 158 Proper law, 104 et seq., 107, 135, 162 Public permissions, 4, 149 et seq. Rabelian tradition, 124 Rebus sic stantibus, 55, 83, 86 Resolution on Transnational Legal Principles (1992), 63 et seq. Restatement of law, 11, 13, 16 Rome Convention of June 19, 1980, on the Law Applicable to Contractual Obligations, 74 et seq., 103 et seq., 106, 114, 124 et seq., 131 et seq., 139 et seq., 142 et seq. "Rome I", 127, 139 et seq.

Rules of law, 23 et seq., 29, 45, 49, 61 et seq., 64 et seq., 71, 73 et seq., 81, 84, 89, 120, 122, 142, 147, 155, 158, 160 et seq. Scope of the UNIDROIT Principles Article 1.6(2) UNIDROIT Principles, 32, 37, 43, 45 International, 1 et seq. Commercial, 1 et seq. Consumer contracts, 2, 3, 96, 146 Negative Choice of Law, 47 et seq., 157 Set-off, 6, 38 et seq., 94, 133 Several liability, 41 et seq., 93 Soft law, 90, 100 et seq., 122 et seq., 156 et seq. Specific performance, 9, 35 Stabilization clause, 29, 109, 113 et seq., 121, 159 State contracts, 29, 55, 113 et seq. Statute of the International Court of Justice, 45, 59 State courts, see UNIDROIT Principles and state courts Substantive law reference, 17, 36, 71, 98, 110 Supplementary choice, 156 Supplementation, 16, 31, 92, 131 et seq., 136, 162 et seq. Swiss Code of Obligations, 31, 85, 88, 130, 145

Index • 183 Swiss Private International Law Act of December 18, 1987, 114, 124, 125, 126, 130, 131, 138 Systematic nature, 92 et seq., 120, 130 Trade usages, 8, 51, 53ff, 60, 65, 77 et seq., 80 et seq., 106 Transnational commercial law, 46, 63, 81, 90, 92 Tronc commun clauses, 32, 33, 154 Truly international contracts, 65 et seq., 66, 131, 134, 135, 139, 161, 162 u.S. Restatement (Second) on the Law of Contracts, 4, 7, 11 et seq., 155 Uncitral Model Law on International Commercial Arbitration (1985), 25, 62,62 Unfairness, 8, 54, 158 UNIDROIT Principles, and codifications, 1 et seq., 46 et seq. 81 et seq., 91, 92, 125 and conflict of laws, 13 et seq., 31 et seq., 103 et seq. and customary law, 76 et seq., 85, 158 and the U.S. Restatement (Second) on the Law of Contracts, 4, 7, 11 et seq., 155 and the principle of party autonomy, 103 et seq.

and the role of doctrine, 84 et seq. and trade usages, 8, 51, 53 et seq., 60, 65, 77 et seq., 80 et seq., 106 Content and structure, 6 et seq. "Creation savante': 55, 86 European Principles, 2 et seq., 17 et seq., 45, 122, 128, 157 judicial law making, 42, 81 et seq., 84, 88 et seq. Methodology, 3 et seq., 13, 16, 37, 40, 43 et seq., 57, 102, 107, 135, 156, 162 Procedural legitimacy, 90, 99 et seq., 121 et seq., 158 Restatement of Law character, 2 et seq., 11 et seq. Scope, 1 et seq. Unification by non-legislative means, 13,17, 36, 58, 101 Veritas, 84 et seq., 97 UNIDROIT Principles (1994 edition), 1 et seq. UNIDROIT Principles (2004 edition), 5 et seq., 94, 156 UNIDROIT Principles and Arbitration, Application of the UNIDROIT Principles absent a choice of law, 61 et seq. Arbitral practice and the UNIDROIT Principles, 28 et seq.

184 • UNIDROIT Principles of International Commercial Contracts

Principles and Arbitration-Cont'd Choice of the UNIDROIT Principles, 14 et seq., 19 et seq., 27 et seq., 31 et seq., 71 et seq. Choice of general principles of law, 54 Trone Commun Clauses, 32, 33, 154 Resolution on Transnational Legal Principles (ILA 1992), 63 et seq.

UNIDROIT

Uncitral Model Law on International Commercial Arbitration (1985), 25, 62, 62

UNIDROIT Principles and enforcement proceedings, 29 Valenciana case, 61 UNIDROIT Principles and state courts, 71 et seq. Application of the UNIDRoITPrinciples absent a choice of law, 61 et seq., 131 et seq. Fifa case (Switzerland), 129 et seq.