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GEORGETOWN UNIVERSITY LAW CENTER CENTER FOR TRANSNATIONAL

BUSINESS AND THE LAW

SYMPOSIUM ON THE 2010 UNIDROIT PRINCIPLES OF

INTERNATIONAL COMMERCIAL CONTRACTS: TOWARDS A “GLOBAL” CONTRACT LAW

Friday, October 28, 2011 9:00 am

Gewirz 12, 600 New Jersey Avenue NW, Washington D.C.

As of 9.26.11

PROGRAM

9:00 a.m. Welcome: William M. Treanor, Dean, Georgetown Law Professor Don Wallace and Visiting Professor David P. Stewart

9:30-10:00 a.m. The UNIDROIT Principles 2010: An International Restatement of

Contract Law Michael Joachim Bonell, Professor of Law, University of Rome I 10:00-10:30 a.m. The UNIDROIT Principles 2010: An American Perspective Henry Gabriel, Professor of Law, Elon University School of Law 10:30-11:00 a.m. Discussion 11:00-11:30 a.m. Break 11:30-12:00 p.m. The UNIDROIT Principles and the CISG: Two Complementary

Instruments Alejandro M. Garro, Professor of Law, Columbia University

12:00-12:30 p.m. The UNIDROIT Principles and International Long-Term Contracts

Neil B. Cohen, Jeffrey D. Forchelli Professor of Law, Brooklyn Law School

12:30-1:00 p.m. Discussion 1:00-2:30 p.m. Luncheon Keynote UNIDROIT Secretary-General José Angelo Estrella Faria

2:30-3:45 p.m. Roundtable (1): The Relevance of the UNIDROIT Principles in Disputes

3:45-4:00 p.m. Break

4:00-5:15 p.m. Roundtable (2): Current Experiences and Prospects for the Future Roundtable Participants:

• Lauro Gama, Jr., Professor of Law, Catholic University of Rio de Janeiro

• Prof. Dr. Eckart Brödermannann, Brödermann & Jahn, Hamburg

• François Dessemontet, Professor of Law, University of Lausanne

• Geneviève Saumier, Professor of Law, McGill University

• Hon. Bernard Fried , N.Y. State Supreme Court (Commercial Division)

• Matthew Kirtland, Esq., Fulbright & Jaworsky LLP, Washington

Michael E. Burke, Esq., Arnall Golden Gregory LLP, Atlanta and Chair of the ABA’s Section of International Law

5:15-6:30 p.m. Reception (sponsored by Winston & Strawn LLP)

William M. Treanor Professor of Law; Executive Vice President and Dean of the Law Center In 2010, Dean Treanor joined the Law Center from Fordham Law School, where he had been dean of the law school since 2002 and Paul Fuller Professor. He had been on the Fordham faculty since 1991. He has also been a visiting professor at the Sorbonne. From 1998-2001, Dean Treanor served as Deputy Assistant Attorney General in the Office of Legal Counsel, U.S. Department of Justice. From 1987-1990, he was associate counsel, Office of Independent Counsel, during the Iran/Contra investigation, and in 1990 he served as a special assistant U.S. attorney, Misdemeanor Trial Unit, Office of the U.S. Attorney for the District of Columbia. Dean Treanor was law clerk to the Honorable James L. Oakes, U.S. Court of Appeals for the Second Circuit, Brattleboro, Vermont. He has published widely, with a focus in constitutional law and legal history. David P. Stewart Visiting Professor of Law; Director, Global Law Scholars Program Co-Director, Center on Transnational Business and the Law Professor Stewart joined the faculty as Visiting Professor of Law following his retirement from the U. S. Department of State, where he served as Assistant Legal Adviser for Private International Law. In 2008 Prof. Stewart was elected to the Inter-American Juridical Committee, which advises the Organization of American States on juridical matters of an international nature and promotes the progressive development and the codification of international law. He is a member of the Board of Editors of the American Journal of International Law, vice-president of the American Branch of the International Law Association, and a member of the Executive Council of the ABA's Section of International Law. Professor Stewart directs the Global Law Scholars Program, co-directs the Center on Transnational Business and the Law, and teaches courses in public and private international law, foreign relations law, and international criminal law and civil litigation. Don Wallace Professor Emeritus and Adjunct Professor; Chairman, International Law Institute Professor Wallace specializes in the fields of international law and foreign affairs. He was the Regional Legal Advisor for the Middle East and Deputy Assistant General Counsel to AID in the Department of State from 1962-66, a founding board member of the International Development Law Organization in Rome, and has been the head of the International Law Institute since 1970. He chaired the Advisory Committee on World Trade and Technology to the Office of Technology Assessment of the U.S. Congress from 1976-79, and is currently a member of the Secretary of State's Advisory Committee on Private International Law, a U.S. Delegate to UNCITRAL, and a correspondent of UNIDROIT and the vice president of the UNIDROIT Foundation in Rome. He has also been chair of the Section of International Law and Practice of the American Bar Association and a member of the ABA House of Delegates. Recent and current activities also include assisting Rwanda with the preparation of its constitution and commercial law, teaching in China, directing a research and exchange project with Russia, and serving on boards involving academic activities in Egypt, in Indonesia, in Serbia and in Bulgaria.

Michael Joachim Bonell Professor Emeritus of the University of Rome I "La Sapienza" Law Degrees Honoris Causa University of Louvain-La Neuve and University of Basel; Visiting Professor, among others, at the Columbia University School of Law, the University of California School of Law at Davis and the University of Oxford; Consultant at the International Institute for the Unification of Private Law (UNIDROIT), Rome; Chairman of the Working Group for the preparation of the UNIDROIT Principles of International Commercial Contracts; former Representative of Italy to the United Nations Commission on International Trade Law (UNCITRAL); Membre titulaire of the International Academy of Comparative Law; Member of The American Law Institute ("Member of the Legal Profession from Foreign Countries"); Editor in chief of the database “UNILEX - International Case Law & Bibliography on the UN Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts” at http://www.unilex.info. Henry Gabriel, Professor of Law; Elon Law School Prof. Gabriel is an elected member of the Governing Council of the International Institute for the Unification of Private Law (UNIDROIT) in Rome. He is also a delegate from the United States to the United Nations Commission on International Trade Law Working Groups on Electronic Commerce and Transport Documents. As the reporter for the revisions of the sales and leases articles of the Uniform Commercial Code, he recently completed the first revisions of these parts of the Code in 50 years. In addition, he chaired the Uniform Commercial Code Revision Committee for Documents of Title, and he was also on the drafting committee of the Uniform Electronic Transactions Act. Gabriel has significant international experience as a visiting professor at law schools around the world. He has taught international commercial law at Catholic University of Portugal, Kyushu University in Japan, University of Padua in Italy and the University of Lapland in Finland. Gabriel has also held visiting professorships at the International Islamic University of Malaysia and at Victoria University, University of Queensland, Monash University, Murdoch University and Deakin University in Australia. He has also served as a visiting professor at Tulane University and the University of the Pacific.

http://www.unilex.info/�

Alejandro M. Garro Adjunct Professor of Law; Senior Research Scholar, Parker School of Foreign and Comparative Law Prof. Garro's research and writing explores various aspects of Latin American legal systems from a comparative perspective. In 1983 he joined the Swiss Institute of Comparative Law in Lausanne as collaborateur scientifique. In 1993 and also in 2001, Garro was a visiting scholar (Max-Planck-Gesellschaft-Stipendiat) at the Max-Planck Institute of Foreign and Private International Law in Hamburg. Professor Garro has been a visiting professor at various universities in Europe and Latin America. During the 1980s Professor Garro consulted for the USAID and the UNDP on the improvement of the administration of justice in El Salvador, Costa Rica, and Guatemala; for the Institute of Liberty and Democracy in Lima (Peru) on land registration; and for the World Bank on secured transactions in personal property and international commercial arbitration. He contributed to the drafting of bills on commercial arbitration laws for Bolivia and Peru and to the preparation of a law on secured transactions for Puerto Rico. During the 1990s Garro was a member of the working group preparing the UNIDROIT Principles on International Commercial Contracts. Currently he represents Argentina before Working Group VI of UNCITRAL in charge of preparing a Legislative Guide on Secured Transactions. Neil B. Cohen Jeffrey D. Forchelli Professor of Law, Brooklyn Law School Neil B. Cohen teaches courses in domestic and international commercial law, contracts, and constitutional law. For two decades, Professor Cohen has been a key participant in major domestic and international law reform projects with respect to commercial transactions. He was the Reporter for Revised Article 1 of the Uniform Commercial Code and for the American Law Institute's Restatement of the Law of Suretyship and Guaranty; in honor of his accomplishments as Reporter for the Restatement, he was named as the Institute’s R. Ammi Cutter Reporter. Professor Cohen currently serves as the Director of Research of the Permanent Editorial Board for the Uniform Commercial Code. He is a Fellow and Regent of the American College of Commercial Finance Lawyers and an adviser for the American Law Institute's Principles of the Law of Software Contracts. In addition he has been a member of several drafting committees for revising various articles of the UCC. Professor Cohen has been active since 1995 in the modernization, harmonization, and internationalization of the law governing secured credit, serving as a member of United States delegation to the United Nations Commission on International Trade Law for its work on harmonizing and modernizing the law of secured credit and as an Observer for the work of the International Institute for the Unification of Private Law (Unidroit) in its development of principles for international contracts. In 2009, he was named to the United States Department of State’s Advisory Committee on Private International Law. José Angelo Estrella-Faria UNIDROIT Secretary-General José Angelo Estrella-Faria was appointed Secretary-General of UNIDROIT in 2008. Prior to this, he was a Senior Legal Officer with the International Trade Law Division (ITLD), which functions as the permanent secretariat of the United Nations Commission on International Trade Law (UNCITRAL) within the UN Office of Legal Affairs. Mr. Estrella-Faria was the secretary of the UNCITRAL Working Group on Electronic Commerce between 2001 and 2005 and was responsible for providing substantive support to the negotiations that led to the adoption by the UN General Assembly of the United Nations Convention on the Use of Electronic Communications in International Contracts in December 2005. Between 2005 and 2008 Mr. Estrella-Faria also supervised the secretariat support for UNCITRAL Working Group III (Transport Law), which prepared the draft of the UN Convention on the Carriage of Goods Wholly or Partly by Sea. At the beginning of his career with the UN, from 1992 to 1996, Mr. Estrella-Faria worked at the General Legal Division of the UN Office of Legal Affairs, in New York, which deals, inter alia, with commercial contracts, procurement and legal issues related to technical cooperation, development assistance, peace-keeping, humanitarian relief, and related operations of the United Nations. Before joining the UN, Mr. Estrella-Faria was an attorney in private practice in Brazil and specialized in commercial and trade law matters. Lauro Gama Jr. Professor of Law, Catholic University of Rio de Janeiro Member of the Working Group, UNIDROIT Principles 2010; Adjunct-Professor, Private International Law and Contracts, Pontifical Catholic University of Rio de Janeiro (PUC-Rio); Director, Brazilian Arbitration Committee (CBAr) – 2010-2013; Lawyer admitted to the Rio de Janeiro and São Paulo Bars; Partner at Binenbojm, Gama and Carvalho Britto. Eckart Brödermann Brödermann & Jahn, Hamburg In his practice, Professor Dr. Eckart Brödermann has concentrated both on international transactions (including M&A, joint ventures and international construction) and on international litigation and arbitration for 25 years. Before forming his own firm in 1996 Brödermann & Jahn, he received his LL.M. from Havard University, worked in Washington, D.C. and taught at Hamburg University. He is admitted to practice in New York and Hamburg, has served as an arbitrator, and has published numerous books and articles on issues of civil law, private international law, corporate law and European law, litigation and arbitration. François Dessemontet

Professor of Law, University of Lausanne Professor Dessemontet has had experience as a consultant and expert with several United Nations agencies, including the World Intellectual Property Organization (WIPO). He has been a member of the International Association for the Protection of Industrial Property, the Licensing Executives Society (International Delegate), the International League for Competition Law, the International Literary and Artistic Association, International Association for the Advancement of Teaching and Research in Intellectual Property (ATRIP). He is also a member of the Board of the Swiss Arbitration Association since 1994 and has served as Chairman of the Swiss Society of Jurists, the main professional association of Switzerland in the area of law. Geneviève Saumier Professor of Law, McGill University Professor Saumier teaches private international law, international dispute resolution, consumer law and civil liability. She has recently received a Social Sciences and Humanities Research Council Grant to research the theory and practice of international jurisdiction in the judicial and arbitral settings. She has served on the faculties of Penn State and Tulane Universities as well as of the Scuola Superiore Sant’Anna in Pisa, Italy, and as the Deputy Director of the Quebec Centre for Private and Comparative Law. She continues to publish in cross-border class actions and dispute resolution.

Hon. Bernard Fried N.Y. State Supreme Court, Commercial Division Justice Bernard J. Fried graduated from Alfred University (1962) and Brooklyn Law School (1965), where he served as Editor-in-Chief of the Brooklyn Law Review. Following three years in the Judge Advocate General Corps, US Army, he was a Law Clerk to Charles D. Breitel, (then) Associate Judge of the New York Court of Appeals (1969-70). From 1970-72, he was a Senior Fulbright Scholar in Seoul, Korea. Thereafter, he was an Assistant United States Attorney for the Eastern District of New York, becoming Chief Assistant United States Attorney in 1978. In 1980 he was appointed by Mayor Edward I. Koch as a Judge of the Criminal Court of the City of New York. Designated in 1984 as an Acting Justice of the Supreme Court, he first served in the Criminal Branch in Bronx County, and in 1989 was reassigned to New York County, Supreme Court, Criminal Branch. While in New York County, he was also assigned to civil cases. He has been assigned to the Commercial Division, New York County, since February 2004. In April 2010 Governor David A. Patterson nominated him to serve as an interim Justice of the Supreme Court and he was confirmed on May 4, 2010 by the New York State Senate. He was Certificated in January 2011. Matthew Kirtland Fulbright & Jaworski, LLP Matthew Kirtland is a partner in the Washington, D.C., office of Fulbright & Jaworski, having joined in 1997. He focuses his practice on dispute resolution with a particular focus on international and domestic arbitration, complex civil litigation and government contracts. He is head of the Washington office international arbitration group and co-head of the firm's government contracts group. He has represented corporate and individual clients, including officers and directors, from a diverse range of industries including energy, satellite television, pharmaceuticals, utilities, banking and finance, telecommunications, and health care. Mr. Kirtland has first and second-chair experience in international and domestic arbitration, federal and state court and has argued before the United States Courts of Appeal for the District of Columbia and the Sixth Circuit as well as state courts of appeal. In the field of international arbitration, he has handled UNCITRAL, AAA, ICDR, LCIA, ICSID, ICC and ad hoc proceedings. Mr. Kirtland also has extensive experience in white collar civil and criminal defense, having represented clients in investigations and civil, criminal and administrative proceedings involving the False Claims Act (including its qui tam provisions), securities fraud, health care fraud, defense contracting fraud, bank fraud and civil and criminal RICO.

Michael E. Burke Arnall Golden Gregory LLP, Atlanta Mr. Burke’s practice focuses on cross-border transactions, including joint ventures, strategic alliances, private equity investments, mergers and acquisitions, distribution and reseller networks, and technology licensing. He also advises clients on compliance with U.S. export controls regulations, U.S. economic sanctions programs, the Foreign Corrupt Practices Act and U.S. antiboycott regulations. Mr. Burke counsels clients on U.S. and international privacy, data protection and information security issues, and represents clients before the Federal Trade Commission in connection with information security investigations. He has extensive experience in China-related direct investments, acquisitions, private equity transactions and technology ventures. Mr. Burke has provided technical legal assistance to the Chinese government on the Provisions on Acquisitions of Chinese Enterprises by Foreign Investors; Securities Law; Company Law; and the Regulation on the Administration of Foreign-invested Venture Capital Enterprises. He has authored more than 32 publications focused on doing business in China, most recently the Corporate Counsel’s Guide to Doing Business in China, 3d ed. Mr. Burke is a past Co-chair of the ABA Section of International Law’s China Committee and currently chairs the Section itself.

THE UNIDROIT PRINCIPLES 2010: AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW

by

Michael Joachim Bonell Professor Emeritus, University of Rome I

Chairman of the Working Group on the UNIDROIT Principles

I. THE UNIDROIT PRINCIPLES: AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW

• Origin and preparation of the UNIDROIT Principles of International

Commercial Contracts

• The content of the UNIDROIT Principles: A mixture of both tradition and innovation. Examples of innovative provisions.

II. THE UNIDROIT PRINCIPLES 2010: THE NEW TOPICS • Restitution in case of failed contracts

• Illegality

• Conditions

• Plurality of obligors and of obliges

III. THE UNIDROIT PRINCIPLES AND THEIR USE IN PRACTICE • The UNIDROIT Principles as a model for national and international

legislators • National reform projects inspired by the UNIDROIT Principles

• The UNIDROIT Principles as the rules of law governing the contract

• Party autonomy and soft law instruments: new prospects

• Cases in which the UNIDROIT Principles were referred to as the

rules of law applicable to the substance of the dispute

2

2

• The UNIDROIT Principles as a means of interpreting and supplementing international uniform law instruments

• Cases in which the UNIDROIT Principles were referred to interpret

and supplement the U.N. Sales Convention (CISG)

• The UNIDROIT Principles as a means of interpreting and supplementing domestic law

• The “restatement function” of the UNIDROIT Principles – or the

UNIDROIT Principles as background law in applying domestic laws in an international context

1

THE UNIDROIT PRINCIPLES 2010:

AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW

by

Michael Joachim Bonell (*)

It is with great pleasure that I take the floor at today’s Symposium. This is not the first time

that I have the opportunity to introduce the UNIDROIT Principles in this country at an event such as

this. The first was as early as 1992 when the Principles were still under preparation, and some of the

members of the Working Group, which was meeting in Miami, were invited by the University of

Miami School of Law to present the project to the local legal community. Other similar events

followed, of which I would like to mention in particular, the 1994 Eason-Weinmann Colloquium

held at Tulane University School of Law and the UNIDROIT Symposium organised in 2005 by

Henry Gabriel at the Loyola University School of Law in New Orleans - shortly before the immense

tragedy that in the summer of the same year hit that in so many respects unique city.

Yet today’s event is a very special one: only a few months ago a new – third - edition of the

Principles was adopted and this is the first international symposium devoted to the UNIDROIT

Principles 2010 not only in this country but worldwide.

In my presentation I will, after a brief description of the UNIDROIT Principles (I), focus on

two major aspects: the new topics addressed in the new edition, in particular the rather controversial

section on illegality (II), and the most significant ways in which the Principles are used in practice,

with special attention to their dual role as the rules of law governing international contracts and as

background law for interpreting and supplementing the applicable domestic law (III).

I. THE UNIDROIT PRINCIPLES: AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW

The UNIDROIT Principles of International Commercial Contracts (hereinafter the UNIDROIT

Principles) – right from their first appearance in 1994 welcomed by one of the leading contract

lawyers of this country (J. Perillo) as “[…] a significant step towards the globalisation of legal

thinking” 1

(*) Professor Emeritus, University of Rome I; Chairman of the Working Group for the preparation of the of the UNIDROIT Principles 2010; Rapporteur on the Chapter on Illegality (as of April 2009). The views expressed in this article are those of the author and do not necessarily reflect the opinions of the other members of the Working Group.

– represent a private codification or “restatement” of the general part of international

1 J.M. PERILLO, UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and a Review, in 43 Fordham Law Review (1994), p. 281 et seq. (p. 318).

2

contract law. Prepared by a group of independent experts from all the major legal systems and geo-

political areas of the word – from the United States E. Allan Farnsworth for the first two editions

and Henry D. Gabriel, Neil Cohen and Alejandro Garro for the third – the UNIDROIT Principles,

unlike legislative instruments such as the UN Convention on Contracts for the International Sale of

Goods (CISG), are not intended to be ratified by States to become integral part of the respective

domestic laws. However they differ from other internationally widely used soft law instruments

such as the INCOTERMS or the Uniform Customs and Practices relating to Documentary Credits

(UCP) prepared by the International Chamber of Commerce as they have been produced under the

supervision of and finally adopted by an intergovernmental organisation such as the International

Institute for the Unification of Private Law (UNIDROIT). Moreover and more important, while most

international uniform law instruments, be they of legislative or non-legislative nature, are restricted

to particular types of transactions (sales; leasing; factoring; carriage of goods by sea, road or air,

etc.) or to specific topics (delivery terms; modes of payment; etc.), the UNIDROIT Principles have a

much broader scope. They deal with international commercial contracts in general, with respect to

which they – much like the U.S. Restatement on Contracts – provide a comprehensive set of rules

covering virtually all the most important topics of general contract law, such as formation,

interpretation, validity, performance, non-performance and remedies, assignment, set-off, plurality

of obligors and of obliges, as well as agency and limitation periods.

Yet the UNIDROIT Principles are similar to the U.S. Restatement on Contracts also with

respect to their formal presentation. They are composed of black letter rules (“Articles”) – precisely

211 divided into 11 chapters in the current edition – each of which is accompanied by comments

and, where appropriate, by factual illustrations intended to explain the reasons for the black letter

rule and the different ways in which it may operate in practice. Sometimes the comments – regarded

as an integral part of the UNIDROIT Principles – go even further and supplement the black letter

rules, as is the case whenever the latter are expressed in very broad language.2

The drafting style of the UNIDROIT Principles resembles that of civilian codes rather than that of

Anglo-American statutes. The language is concise and straightforward so as to facilitate

comprehension also by non-lawyers, and deliberately avoids terminology peculiar to any given legal

system thereby creating a legal lingua franca to be used and uniformily understood throughout the

world.

2 Cf. e.g. Article 2.1.15 (2) stating that “[…] a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party” while leaving it to the comments to specify that “[…] the aggrieved party may recover the expenses incurred in the negotiations and may also be compensated for the lost opportunity to conclude another contract with a third person (so-called reliance or negative interest), but may generally not recover the profit which would have resulted had the original contract been concluded (so-called expectation or positive interest). Only if the parties have expressly agreed on a duty to negotiate in good faith, will all the remedies for breach of contract be available to them, including the remedy of the right to performance”.

3

As to their content, the UNIDROIT Principles represent a mixture of both tradition and

innovation. In other words, while as a rule preference was given to solutions generally accepted at

international level (“common core” approach), whenever – as was more often than not the case – it

was necessary to choose between conflicting rules what was decisive was not just which rule was

adopted by the majority of countries, but rather which of the rules under consideration had the most

persuasive value and/or appeared to be particularly well suited for cross-border transactions (“better

rule” approach).

In this respect the UNIDROIT Principles undoubtedly differ from the U.S. Restatement on

Contracts and the reasons are rather obvious. The “common core” approach makes good sense in a

federal jurisdiction like the United States where the differences between the individual State laws are

relatively small. At international level where the contrasts between the various national legal systems

are much more significant, the “better rule” approach will often be inevitable, all the more so since the

UNIDROIT Principles deal specifically with international business transactions which by their very

nature are continuously evolving and as such may well require solutions not yet generally accepted at

domestic level. In view of the fact that the UNIDROIT Principles only in part reflect generally accepted

principles and rules while in the remaining part lay down rules which have still to be verified in

practice, one might even conclude that they both “re-state” and “pre-state” international contract law.

This is clearly not the place to enter into a in depth analysis of which provisions of the

UNIDROIT Principles are innovative and which are not. After all, as rightly pointed out by E. Allan

Farnsworth with respect to the U.S. Restatement on Contracts, “[s]ometimes innovation does not

take the form of a new substantive rule but rather of a new perspective on the problem, reflected in

the substitution of a new terminology or analysis for a traditional one [...]. Even where substantive

rules are concerned, it is no easy task to assess the extent of innovation [...] often a paucity of cases

or a confusion in the courts’ analyses makes it impossible starkly to contrast innovation with

tradition.” 3

On the whole it is fair to say – to quote Justice Finn of the Federal Court of Australia – “[…]

the Principles contain much that is recognisable in many legal systems of the world even when it

does not fully accord in its detail with the law of any particular country”.

4

3 Cf. E.A. FARNSWORTH, Ingredients in the Redaction of the Restatement (Second) of Contracts, in 81 Columbia Law Review (1981), p. 1 et seq. (pp. 5 – 6).

In other words there are

relatively few provisions of the UNIDROIT Principles which openly conflict with existing domestic

laws, while for the most part they are perfectly consistent with almost all of them and in a number

of cases represent a useful clarification or complement. Examples of the latter type are, among

4 P. FINN, The UNIDROIT Principles: An Australian Perspective, in Australian International Law Journal 2010, p.193 et seq. (p.194).

4

others, Article 2.1.1 on different manners of formation of contract, Articles 2.1.11 on modified

acceptance and 2.1.12 on writings in confirmation, Article 2.1.14 on contracts with terms

deliberately left open, Article 4.7 on linguistic discrepancies, Articles 5.1.4 and 5.1.5 on the

distinction between a duty to achieve a specific result and a duty of best efforts, Article 6.1.7 on

payment by cheque or other instrument, Article 6.1.8 on payment by funds transfer, Article 6.1.9 on

the currency of payment, and Articles 6.1.15 to 6.1.17 on public permission requirements and the

burden of filing the application and the legal consequences of the failure to obtain a decision and/or

of the rejection of the application.

As to the innovative provisions of the UNIDROIT Principles there are first of all those which,

while quite familiar to civil law systems, are unknown to common law systems and vice versa.

Examples of the former are Articles 1.7 and 2.1.15 on the duty to act in good faith in general and

(pre-contractual) liability for negotiating in bad faith, Article 2.1.22 on the so-called battle of forms,

Article 2.2.4 on undisclosed agency, Article 4.3 on the relevance, for the purpose of interpretation,

of the conduct of the parties prior and subsequent to the conclusion of the contract, Article 7.1.7 on

force majeure, Article 7.2.2 on the general right to require performance of non-montary obligations,

and Article 7.4.13 on the enforceability of penalty clauses. Examples of provisions new to civil law

systems are Article 2.2.3 on disclosed agency, Article 3.2.11 on avoidance for defects in consent by

mere notice and Article 7.3.2 on termination for non-performance by mere notice, Article 7.1.6 on

exemption clauses, and Article 7.2.2 lit.(c) excluding the remedy of specific performance where the

innocent party may reasonably obtain performance from another source. Needless to say that also in

this context the dichotomy between common law and civil law systems is not strict given the

considerable differences between e.g. U.S. and English contract law and within the civil law

systems those between Romanistic and German legal traditions.

Only a small number of provisions represent a novelty for both civil law and common law

systems and their rationale again lies above all in the special needs of international business

transactions. This is particularly true of Article 3.1.2 according to which the mere agreement of the

parties is sufficient for the valid conclusion or modification of the contract without any further

requirement such as “consideration” or “cause”; of Articles 6.2.1 to 6.2.3 on hardship, especially as

concerns the right of the disadvantaged party to request renegotiation of the contract; of Article

7.1.4 granting the non-performing party the right to cure non-performance even after termination of

the contract by the aggrieved party; and of Article 9.1.9 on the effectiveness of assignment of

monetary rights notwithstanding an agreement between the assignor and the obligor limiting or

prohibiting such assignment.

5

Interestingly enough, most of the innovative provisions of the UNIDROIT Principles have

generally received quite positive comments,5 and in some cases they have even prompted courts to

revisit their own domestic laws. Thus, for instance, courts in Australia and to a certain extent even

courts in England and New Zealand have recently on a number of occasions referred to the

UNIDROIT Principles as a source of inspiration in their attempt to affirm also at domestic level the

relevance of good faith in contract negotiation,6 interpretation7 and performance.8 On the other

hand French case law, traditionally hostile to the very idea of renegotiating and adaptating

commercial contracts in case of hardship, has recently taken a much more flexible approach at least

with respect to renegotiation.9

II. THE UNIDROIT PRINCIPLES 2010: THE NEW TOPICS

The UNIDROIT Principles 2010 – like the previous editions prepared by a group of experts from

all over the world including numerous observers representing international organisations such as

UNCITRAL and the Hague Conference on Private International Law, important institutions such as

the International Bar Association, the American Law Institute and the New York City Bar, research

groups such as the Study Group for a European Civil Code and the Groupe de Travail Contrats

Internationaux, and major arbitration centers such as the I.C.C. International Court of Arbitration and

the Swiss Arbitration Association – are not intended as a revision of the 1994 and 2004 editions. The

main purpose is to address additional topics of interest to the international business and legal

community, such as restitution in case of failed contracts, illegality, conditions, and plurality of

obligors and of obligees.

What follows is a brief analysis of the new sections with special emphasis on the section on

illegality which proved to be particularly controversial.

5 From a common law perspective, see e.g. J. GORDLEY, An American Perspective on the UNIDROIT Principles, Centro di studi e ricerche in diritto comparato e straniero: Saggi conferenze e seminari n. 22, Roma 1996, pp. 1-6 (with respect to the abandoning of the requirement of consideration); J.M. PERILLO, UNIDROIT Principles of International Commercial Contracts , cit., pp. 301-302 and R. GOODE, Commercial Law, 3rd ed., London 2004, p. 970 et seq. (with respect to the provisions on hardship). 6 See with respect to Australian law, e.g. Hughes Aircraft Systems International v. Airservices Australia in UNILEX at http://www.unilex.info/case.cfm?id=634; United Group Rail Services v Rail Corporation Of New South Wales in UNILEX at http://www.unilex.info/case.cfm?id=1517. 7 See with respect to New Zealand law, see e.g. Hideo Yoshimoto v Canterbury Golf International Limited in UNILEX at http://www.unilex.info/case.cfm?id=802; with respect to Australian law, see e.g. Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Limited in UNILEX at http://www.unilex.info/case.cfm?id=1519; with respect to English law ProForce Recruit Ltd v. The Rugby Group Ltd, [2006] EWCA Civ 69. 8 See with resepct to Australian law, e.g. Alcatel Australia Ltd. v. Scarcella & Ors in UNILEX at http://www.unilex.info/case.cfm?id=648. 9 See also for further references B. FAUVARQUE-COSSON, Le Changement de circonstances, in Revue des contrats 2004, p. 67 et seq.

http://www.unilex.info/case.cfm?id=634�



6

1. RESTITUTION IN CASE OF FAILED CONTRACTS

Both the 1994 and 2004 editions of the UNIDROIT Principles have addressed the topic of

restitution of performances parties have exchanged prior to the failure of their contract – also

known as “unwinding of failed contracts” – only with respect to avoidance for defects of consent

and termination for non-performance. More precisely Articles 3.17(2) and Article 7.3.6(1)

respectively stated that in both cases either party may claim restitution of whatever it had supplied

provided that such party concurrently makes restitution of whatever it had received under the

contract, or if restitution in kind is not possible or appropriate an allowance has to be made in

money whenever reasonable; moreover Article 7.3.6(2) added that, if performance of the contract

has extended over a period of time and the contract is divisible, restitution can only be claimed for

the period after termination has taken effect.

This approach was considered unsatisfactory for at least three reasons. First of all it left

unsettled a number of questions arising in connection with restitution, such as the allocation of risk

in cases where the impossibility to make restitution in kind is not attributable to the recipient of the

performance, whether the recipient is entitled to compensation for expenses incurred for the

preservation or maintenance of the object of the performance, and whether the recipient must make

restitution of any benefits it may have received from the performance. Moreover, the rules on

restitution in case of termination clearly took sales contracts as the paradigm case and degraded

contracts to be performed over a period of time to the exception whereas in practice the latter are

just as important as the former. Finally, other cases of failed contracts, such as contracts affected by

illegality or the case of fulfilment of a resolutive condition which were about to be addressed in the

new edition, would remain uncovered.

Once having decided to deal in the 2010 edition with unwinding of failed contracts of the

UNIDROIT Principles in a more comprehensive manner,10

10 As Rapporteur on the topic was appointed REINHARD ZIMMERMANN (Germany).

the first question to be addressed was

whether to have a separate chapter on the subject or whether to have rules on restitution in each of

the chapters dealing with the different cases of failed contracts. Eventually the latter approach was

preferred as being more user-friendly, but in order to avoid unnecessary repetition it was decided to

set out detailed rules on restitution only in the chapters on avoidance and termination and to make

in the chapters on illegality and conditions a mere reference to those rules. Moreover, with respect

to restitution in case of termination contracts to be performed at one time and contracts to be

performed over a period of time were put on an equal footing and dealt with in two separate articles.

7

As a result, Articles 3.17(2) and 7.3.6(1) of the 1994 and 2004 editions have become in the

new edition of the UNIDROIT Principles Articles 3.2.15 and 7.3.6, respectively, paragraphs 1 and 2

of which literally correspond to the former two provisions.11

The last two paragraphs are new,

stating that “[t]he recipient of the performance does not have to make an allowance in money if the

impossibility to make restitution in kind is attributable to the other party” (paragraph 3) and

“[c]ompensation may be claimed for expenses reasonably required to preserve or maintain the

performance received”, whereas the question concerning the benefits derived from the performance

is dealt with only in the comments, which point out that in commercial practice it is often difficult

to establish the value of the benefits a party – or as often is the case both parties – may receive from

the performance. Moreover, in the UNIDROIT Principles 2010 Article 7.3.6 deals only with contracts

to be performed at one time, while contracts to be performed over a period of time are dealt with in

a new Article 7.3.7 corresponding in substance to former Article 7.3.6(2). Finally, in the Section on

Illegality there is a special provision (Article 3.3.2(3)) referring, in case restitution is granted, to the

rules set out in Article 3.2.15; likewise in the Section on Conditions there is a special provision

(Article 5.3.5) on restitution in case of fulfilment of a resolutive condition referring to the rules set

out in Article 3.2.15 or in Articles 7.3.6 and 7.6.7, respectively, depending on whether the

resolutive condition operates retroactively or not.

2. CONDITIONS In commercial practice it is quite frequent that parties make their contract or individual

obligations arising from it dependant on the occurrence of a future uncertain event (“condition”).

Despite the numerous problems that may come up in such a case, the topic of conditions is usually

rather neglected in international uniform law instruments: thus while the CISG does not address it at

all, even more recent instruments such as the Principles of European Contract Law and the Draft

Common Frame of Reference contain only a few provisions on the subject. 12

Also the new Section on Conditions

13

11 For a comprehensive analysis of the new provisions see R. ZIMMERMANN, The Unwinding of Failed Contracts in the UNIDROIT Principles 2010, in Uniform Law Review 2011, p. XXXXX

– included in the UNIDROIT Principles 2010 as Section

3 of Chapter 5 – in its final version consists of five rather succinct articles dealing with a few basic

questions while a number of other questions were considered too controversial to be addressed in

12 See Articles 16:101 – 16:103 of the Principles of European Contract Law; Article III. – 1:106 of the Draft Common Frame of Reference.. 13 As Rapporteur on the topic was appointed BÉNÉDICTE FAUVARQUE-COSSON (France).

8

the black letter rules and were ultimately relegated to the comments so as at least to alert the parties

to their existence and the need to dispose of them in the contract. 14

The Section opens with a definition of the two types of condition considered, i.e. where a

contract or a contractual obligation is made conditional upon the occurrence of a future uncertain

event so that the contract or the contractual obligation only takes effect if the event occurs (so-

called suspensive condition) or comes to an end if the event occurs (so-called resolutive condition)

(Article 5.3.1). The comments first of all make it clear that the Section applies only to conditions

that originate in an agreement between the parties while conditions imposed by law (e.g. public

permission requirements) are not covered unless they are incorporated into the contract by the

parties (cf. Comment 1). They also draw attention to the fact that other somewhat similar types of

situation such as where the contract provides that one party’s performance is dependent upon the

performance by the other party or fixes a specific date at which the contract or individual

obligations arising from it are to take effect or come to an end are not to be confused with the

“conditions” dealt with in the Section: not the former because such provisions merely indicate the

order in which the performances of the parties are to be rendered ; not the latter because in such a

case the parties merely fix a time limit (cf. Comment 2). Moreover the comments briefly address the

question of the time by which the condition has to occur and that of a condition entirely dependent

on the will of the obligor: with respect to the first question they point out that if the contract does

not state a specific time by which the condition must occur, the time may be implied by interpreting

the intention of the parties (cf. Comment 2); with respect to the second question they likewise refer

to the circumstances of the case in order to determine whether the obligor intends to be bound or not

(cf. Comment 4). Finally special attention is given to “closing”, i.e. the case, quite frequent in

complex business transactions involving prolonged negotiations, where the parties provide in their

contract for the formal acknowledgement at a certain point in time (“closing date”) that on or before

that date all the stipulated conditions (“conditions precedent”) have been satisfied. As pointed out in

the comments, despite the terminology used by the parties not all the events referred to as

“conditions precedent” are “conditions” as defined by Article 5.3.1 but may for instance relate to

specific matters still to be agreed upon or real obligations that the parties must fulfil in the course of

negotiations, with the consequence that also their effects are different (cf. Comment 5).

Article 5.3.2 states that, contrary to a number of domestic laws under the UNIDROIT Principles

the fulfilment of a condition has prospective effect only, subject of course to an agreement to the

contrary between the parties.

14 For an analysis of the new provisions see B. FAUVARQUE-COSSON, The New Section on Conditions in the UNIDROIT Principles 2010, in Uniform Law Review 2011, p. XXXXX.

9

On their part, Article 5.3.3 on the duty of the party interested in the non-fulfilment of a

suspensive condition or the fulfilment of a resolutive condition not to prevent or to bring about the

fulfilment of the condition, respectively, and Article 5.3.4 on the party’s duty pending fulfilment of

a condition not to prejudice the other party’s rights in case of fulfilment of the condition are in

substance nothing more than specific applications of the general principles of good faith and fair

dealing and the duty of cooperation between the parties. However the comments rightly point out

that parties are well advised to set out in their contract more detailed provisions on these matters,

such as the kind of efforts a party has to make in order to bring about the fulfilment of a suspensive

condition or to impede the fulfilment of a resolutive condition (cf. Comment to Article 5.3.3 lit. (a)

- (d)), or the kind of measures the party who would benefit from the fulfilment of the condition

might take pending the fulfilment of the condition in order to preserve its rights (cf. Comment to

Article 5.3.4).

Finally, Article 5.3.5 deals with restitution in case of fulfilment of a resolutive condition by

referring to the rules on restitution in case of termination with appropriate adaptations (paragraph 1)

or to the rules on restitution in case of avoidance if the parties have agreed that the resolutive

condition is to operate retroactively (paragraph 2).

3. PLURALITY OF OBLIGORS AND OF OBLIGEES The subject of plurality of obligors and of obligees is not only highly technical but also of

great practical importance. Suffice it to mention the frequency with which – as far as plurality of

obligors is concerned – several persons borrow together from a single financial institution, several

contractors participate jointly in a construction project or important risks are covered by a group of

co-insurers, or – as far as plurality of obligees is concerned – several banks join in a syndicated loan

agreement to lend money to one client, multiple buyers and sellers enter into share acquisition

agreements or several partners are parties to consortium agreements in the construction sector or the

petroleum industry.

Chapter 11 on Plurality of Obligors and of Obligees15 consists of a total of seventeen articles

divided into two sections: Section 1 on Plurality of Obligors (Articles 11.1.1 -11.1.13) and Section

2 on Plurality of Obligees (Articles 11.2.1 -11.2.4).16

Article 11.1.1 defines the two main types of obligation which exist in practice when several

obligors are bound by the same obligation towards an obligee. Under the first – called “joint and

15 As Rapporteur on the topic was appointed MARCEL FONTAINE (Belgium). 16 For comprehensive analysis of the new provisions see M. FONTAINe, The New Chapter 11 of the UNIDROIT Principles 2010: Plurality of Obligors and of Obligees, in Uniform Law Review 2011, p. XXXXX.

10

several” obligations – each obligor is bound for the whole obligation which means that the obligee

may require performance for any one of the obligors (cf. Article 11.1.3) subject to the contributory

claims between the obligors at a later stage (cf. Article 11.1.10). Under the second – called

“separate” obligations – each obligor is bound only for its share thereby entitling the obligee to

claim only that much from each of the obligors. Article 11.1.2, reflecting current commercial

practice, establishes a presumption in favour of joint and several obligations which may however be

rebutted by an explicit contractual provision to the contrary or by other circumstances from which

one may infer that the co-obligors are only bound for their respective shares.

Articles 11.1.4 to 11.1.8 deal with the defences joint and several obligors may have against the

obligee. In particular, Article 11.1.4 states that a joint and several obligor may assert against the

obligee only the defences and rights of set-off that are personal to it or common to all the co-

obligors but not those that are personal to one or several of the other co-obligors, while Articles

11.1.5 to 11.1.8 deal with the effect on the other joint and several obligors whenever one obligor’s

obligation towards the obligee is extinguished or otherwise affected.

Section 1 ends with a few provisions concerning apportionment among joint and several

obligors and the related contributory claims (cf. Articles 11.1.9 to 11.1.13).

Section 2 on Plurality of Obligees opens with a definition of three types of plurality of claims

that may occur in practice: “separate” claims, i.e. when each obligee can only claim its share; “joint

and several” claims, i.e. when each obligee can claim the whole performance; and “joint” claims,

i.e. when all obligees have to claim performance together (cf. Article 11.2.1). In the course of the

preparatory work the question was extensively discussed as to whether there should be a

presumption in favour of one of these types of claim, but since empirical inquiries showed that in

practice the default rule varied considerably from one trade sector to another, it was eventually

decided to have no default rule at all and in the comments to urge parties to make their own

arrangements in each single case (cf. Comment 4 to Article 11.2.1). Such an approach might be

appropriate when the parties (and their lawyers) are sufficiently sophisticated while at least in

countries with less developed legal systems there is a risk that parties are taken by surprise by the

absence of any default rule and a presumption in favour of joint and several claims might have been

in the interests of both obligees and obligors: of the former because in most cases their expectation

is that their claims are joint and several and of the latter because they would normally expect to be

able to discharge their obligations vis-à-vis the co-obligees by making a single payment and not

having to make a separate payment to each co-obligee and eventually to be sued by all of them.

The remaining articles of Section 2 all deal with joint and several claims and basically mirror

the corresponding provisions in Section 1. Thus Article 11.2.2 states that “full performance of an

11

obligation in favour of one of the joint and several obligees discharges the obligor towards the other

obligees”, while Article 11.2.3, dealing with the availability of defences against joint and several

obligees (paragraph 1) and the effects on the other co-obligees whenever the claim of one obligee is

extinguished or otherwise affected (paragraph 2), lay down rules which in substance correspond to

those set out in Articles 11.1.4 to 11.1.8 with respect to joint and several obligations. Finally,

Article 11.2.4 dealing with the allocation between joint and several obligees and related

contributory claims, likewise follows the approach taken in Articles 11.1.9 and 11.1.10.

4. ILLEGALITY The topic of illegality was expressly excluded from the scope of the UNIDROIT Principles in

both the 1994 and the 2004 editions on account of “the inherent complexity of questions of […]

public policy and the extremely diverse manner in which they are treated in domestic law.”17

Indeed, with respect to this type of invalidity of contracts domestic laws vary considerably, at

least at first sight, not only in content but even in terminology and conceptual structure. While most

common law jurisdictions know the general categories of “illegality” and “illegal contracts” and

further distinguish between “statutory illegality”, i.e. contracts the formation of which is expressly

or impliedly prohibited by statute, and “common law illegality”, i.e. contracts which are illegal at

common law because they are contrary to public policy, in the United States one speaks in general

terms of “contracts unenforceable on grounds of public policy”, of which “illegal contracts”

represent just a particular type characterised by the fact that they involve the imposition of some

penalty on at least one of the parties. As concerns civil law jurisdictions, for instance German,

Austrian and Swiss law distinguish between “illegal” (“gesetzeswidrige” or “verbotswidrige”) and

“immoral” (“sittenwidrige”) contracts, i.e. contracts violating statutory prohibitions and contracts

contrary to good morals; by contrast, French and Italian law make the invalidity of the contracts

dependent on their being based on a “cause illicite” or “causa illecita”, i.e. a cause, respectively,

“prohibeé par la loi ou […] contraire aux bonnes moeurs ou à l’ordre public” or “contraria a

norme imperative, all’ordine pubblico o al buon costume”; a similar approach is also taken by the

new Civil Code of Québec, while the new Dutch, Portuguese and Brazilian civil codes have

abandoned any reference to cause with respect to illegal or immoral contracts and basically follow

the German approach.

18

Despite the extreme complexity of the subject – or perhaps precisely because of it – when

UNIDROIT conducted its inquiry to identify the new topics for inclusion in the 2010 edition of the

17 See Article 3.1 UNIROIT Principles (1994 and 2004 editions). 18 For further references see M.J. BONELL, The New Provisions on Illegality in the UNIDROIT Principles 2010, in Uniform Law Review 2011, p.xxxx

12

UNIDROIT Principles, illegality was one of the most strongly favoured, leading to the decision to

cover it in the new edition. Not surprisingly, in the course of the preparatory work the subject

proved to be particularly controversial19 but ultimately consensus was reached on the adoption of

two rather elaborate articles on “Contracts infringing mandatory rules” and on “Restitution” to be

placed in Chapter 3 on Validity as a new Section 3 entitled “Illegality”. 20

For a non-binding instrument such as the UNIDROIT Principles to deal with a complex and

politically sensitive topic such as illegality may be considered overambitious. Yet this conclusion is

not justified.

First of all, by restricting the scope of the Section on Illegality to contracts infringing

mandatory rules applicable in accordance with the relevant rules of private international law (cf.

Article 3.3.1(1) referring to Article 1.4), the UNIDROIT Principles take into account that according to

the traditional and still prevailing view it is primarily up to the applicable domestic law(s) to set the

limits to the validity of contracts, be they domestic or international, and that only in the context of

international arbitration arbitral tribunals may refer also to the so-called transnational public policy or

ordre public transnational (see Comment 4 to Article 1.4). At the same time, however, by adopting a

broad notion of “mandatory rules” the UNIDROIT Principles make it clear that restrictions on freedom

of contract may derive not only from statutory prohibitions but also from unwritten general principles

of public policy of the applicable domestic law(s), including those of international or supranational

origin (cf. Comment 2 to Article 1.4).

Secondly, also with respect to the effects of the infringement of a mandatory rule the UNIDROIT

Principles refer above all to the applicable domestic law(s) provided that the infringed rule expressly

prescribes those effects (cf. Article 3.3.1(1) and Comment 1 to Article 3.3.2). It is only where the

infringed rule is silent on the issue that the UNIDROIT Principles step in to provide their own solution,

thereby offering judges and arbitrators internationally uniform guidelines for determining the effects

of an infringement of the mandatory rule in question.

It is true that by stating that the parties may exercise such contractual remedies “as in the

circumstances are reasonable” (cf. Article 3.3.1(2)) and that also restitution may be granted where

“reasonable in the circumstances” (cf. Article 3.3.2(1)), the UNIDROIT Principles adopt a flexible

19 The main issue was whether in the context of illegality, depending on the seriousness of the unlawful behaviour, a distinction should be made between contracts contrary to “principles widely accepted as fundamental in legal systems throughout the world” and contracts infringing statutory prohibitions”. Initially the Working Group was in favour of such a two-tier approach, but at a later stage abandoned it in favour of a more restrictive approach on the ground that the very notion of “principles widely accepted as fundamental in legal systems throughout the world” was too vague and would inevitably give rise to divergent interpretations in the different parts of the world, thereby undermining one of the main objectives of the UNIDROIT Principles which was to promote legal certainty in international contract practice. 20 As Rapporteurs on the topic were appointed MICHAEL. FURMSTON (United Kingdom) (2006-2009) and the Author of this paper (2009-2010). - For a comprehensive analysis of the new Section on Illegality see M.J. BONELL, The New Provisions on Illegality in the UNIDROIT Principles 2010, cit.

13

approach that at least at first sight contrasts with the rigidity or “lack of remedial flexibility”21

However, at least with respect to contractual remedies in practice the results are not so different.

In fact, as under most domestic laws,

of most

domestic laws.

22 also under the UNIDROIT Principles whenever a contract

violates fundamental principles of public policy no contractual remedies will be granted to either

party and even in cases of infringement of statutory prohibitions the granting of such remedies is

rather exceptional.23

It is only with respect to restitution that the UNIDROIT Principles are really innovative. Indeed,

contrary to the traditional and still prevailing view at domestic level that, whenever as a consequence

of the infringement of a mandatory rule the parties are denied any remedies under the contract, they

should not even be entitled to recover the benefits conferred,

24 the UNIDROIT Principles, by making

the solution also in this respect dependent on what is reasonable in the circumstances, provide a

maximum of flexibility. In doing so the UNIDROIT Principles follow a modern trend that is emerging

at both domestic and international level25

The two examples given in the comments are particularly significant in this respect.

and seems particularly suited to the special situations that

may arise in the context of international commercial contracts, in particular in the case of works

contracts, or more in general long term contracts, involving large investments. 26

21 So E. McKendrick, Contract Law (2009), p.348.

They both

concern contracts for the construction of large industrial works entered into by a foreign company and

a local Government as a result of the payment of a bribe by the former to the latter. When the works

had already been completed or almost completed, a new Government comes to power which,

invoking the bribery paid to the previous Government, refuses to pay the outstanding contract price.

While the seriousness of the parties’ improper conduct necessarily leads to the conclusion that neither

party is entitled to any remedy under the contract, it seems reasonable to grant the foreign company an

allowance in money for the work done corresponding to the value the (almost) completed

construction has for the Government and in turn to grant the Government restitution of any payments

it or its predecessor has made exceeding this amount. The granting of restitutionary remedies in the

presence of corruption may at first sight come as somewhat of a surprise, but at closer examination it

appears under the circumstances justified for at least two reasons: first and above all, it would not be

22 For further references see M.J. BONELL, The New Provisions on Illegality, cit., p. XXXXX. 23 For confirmation see the Illustrations in Comment 6 to Article 3.3.1. 24 For further references see M.J. BONELL, The New Provisions on Illegality, cit., p. XXXXX . 25 See in particular Article 6:211(1) of the Dutch Civil Code, according to which restitution is excluded whenever granting it would in the circumstances be contrary to “reasonableness and equity”. But see also Article 7(1) of the New Zealand Illegal Contracts Act 1970 stating that the court may grant to a party to an illegal contract restitution “howsoever as [it] in its discretion thinks just”, and the recommendations contained in Consultation Paper 154 of 1999 of the English Law Commission, cit., Part VII, para. 7.2 et seq., in particular paras. 7.17-7.22. 26 Cf. Illustrations 1 and 2 in Comment 2 to Article 3.3.2.

14

fair to let the Government have the (almost) completed works which may be worth an enormous

amount of money for significantly less than the agreed price; second, Governments, far from being

dissuaded from accepting bribes when awarding important contracts, may even be encouraged to do

so if they know that by invoking at a later stage the bribery they are able to shift the entire loss

resulting from the illegal transaction to the foreign company.

III. THE UNIDROIT PRINCIPLES AND THEIR USE IN PRACTICE

Even though the UNIDROIT Principles may be applied in practice only by virtue of their

persuasive value, they may – and actually do – play a considerable role in a number of different

contexts. The most important ways in which the UNIDROIT Principles may be used in practice are

set forth in their Preamble. In the following, special attention shall be given to their functions as a

model for national and international legislators (1.), as the rules of law governing international

contracts (2.), as a means of interpreting and supplementing international uniform law instruments

(3.), and as a means of interpreting and supplementing domestic law (4.).

1. THE UNIDROIT PRINCIPLES AS A MODEL FOR NATIONAL AND INTERNATIONAL LEGISLATORS

In view of their intrinsic merits the UNIDROIT Principles may – and actually frequently do –

serve as a model to both national and international legislators.27

In some cases – as in the preparation of the new Civil Code of the Russian Federation – the

UNIDROIT Principles have been chosen as one of the sources of inspiration even before the publication

of their first edition in 1994. In the following years the UNIDROIT Principles were chosen as a model

for the new Civil Codes of Estonia and of Lithuania, both of which entered into force in 2001. Other

significant examples are the proposals for the reform of the rules on interpretation of legal acts

published in 1996 by the Scottish Law Commission and the proposal for the reform of the general

rules on commercial contracts in the Spanish Commercial Code published by the Comisión General

de Codifición in 2004. Also the German legislature, in preparing the reform of the law of obligations

They may be particularly useful to

countries lacking a sufficiently developed body of legal rules relating to contract law in general and

which intend to update their law, at least with respect to international business transactions, so as to

meet current international standards. Yet the impact of the UNIDROIT Principles on the law reform

process underway within different countries, far from being confined to specific geo-political regions,

extends in fact to all parts of the world including countries with highly developed legal systems.

27 For a comprehensive overview see R. MICHAELS, in S.VOGENAUER – J. KLEINHEISTERKAMP (eds), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009), p. 68 et seq.

15

of the German Civil Code (BGB) which entered into force in 2002, took into account, though

eventually only to a limited extent, the UNIDROIT Principles. Most recently, the French reform of the

law on limitation periods in private law relationships of 2008 was inspired by the provisions on

limitation periods in the UNIDROIT Principles.

Outside Europe mention may be made above all of the Chinese Contract Law of 1999, widely

inspired not only by the CISG but also by the UNIDROIT Principles and the projects for the

modernisation and harmonisation of contract law in Mongolia, Vietnam and Georgia. Also the

successive drafts for the revision of Article 2 of the Uniform Commercial Code of the United States

contained references to individual provisions of the UNIDROIT Principles. The Organization for the

Harmonisation of Business Law in Africa (OHADA) requested UNIDROIT to assist OHADA in the

preparation of a uniform contract law based on the UNIDROIT Principles, and in 2004 an Avant-projet

d’Acte uniforme sur le droit des contrats prepared by a member of the UNIDROIT Working Group,

was submitted to the competent organs of OHADA for consideration. Furthermore, the Japanese Civil

Code (Law of Obligations) Reform Commission which is currently working on a new contract law is

reported to using as one of its sources of inspiration the UNIDROIT Principles.

To be sure, the examples of the Lithuanian Civil Code or the new draft Spanish Commercial

Code let alone the draft OHADA Uniform Contract Law, large parts of which have literally been

taken from the UNIDROIT Principles, are rather exceptional. Normally the influence of the UNIDROIT

Principles has been neither exclusive nor necessarily predominant. Moreover, a particular solution

provided by the UNIDROIT Principles may well have been accepted as a model in one country while

decidedly rejected in another: a typical example are the provisions on hardship (cf. Articles 6.2.1 –

6.2.3) which have been incorporated with only minor modifications in the Civil Code of the Russian

Federation to cope with the dramatic changes in the socio-economic and legal setting that followed

the collapse of the Soviet regime, while after an intense debate they were rejected by the Chinese

legislature for fear that the courts would not apply them properly.

Yet the UNIDROIT Principles have been used as a model also in the preparation of international

legal instruments. Thus, both the ICC Force Majeure Clause 2003 and the ICC Hardship Clause 2003

have been inspired, at least in part, by Art. 7.1.7 and Arts 6.2.1, 6.2.2 and 6.2.3 of the UNIDROIT

Principles, respectively. Likewise, the ITC Contractual Joint Venture Model Agreements published in

2004 by the International Trade Centre UNCTAD/WTO openly state that Arts 18 and 19 dealing with

hardship and force majeure, respectively, have been inspired by the corresponding provisions of the

UNIDROIT Principles.

16

2. THE UNIDROIT PRINCIPLES AS THE RULES OF LAW GOVERNING THE CONTRACT

According to their Preamble, the UNIDROIT Principles “[…] shall be applied when the parties

have agreed that their contract shall be governed by them” (paragraph 2), and “[…] may be applied

when the parties have agreed that their contract be governed by general principles of law, the lex

mercatoria or the like” (paragraph 3) or “[…] when the parties have not chosen any law to govern

their contract” (paragraph 4) (emphasis added).

One may think of a variety of situations in which parties – be they powerful “global players”

or small or medium businesses – wish to avoid the application of any domestic law and prefer

instead to “de-nationalise” their contract by subjecting it to a genuinely neutral a-national or

transnational legal regime.28

What still remains to be seen is whether, and if so to what an extent, under the relevant rules of

private international law parties are permitted to choose a soft law instrument such as the UNIDROIT

Principles as the law governing their contract in lieu of a particular domestic law.

In the past for this purpose the parties had no other choice than

generically to refer to “generally accepted principles of international commercial law”, the “lex

mercatoria” or the like, leaving it to the adjudicating body to determine what in each given case

was the precise meaning of such rather vague formulas. This solution has met with considerable

criticism on account of its unpredictability if not arbitrariness. A valid alternative may now be the

recourse to an easily accessible and comprehensive instrument such as the UNIDROIT Principles.

And indeed, recent experience shows that in actual practice parties more and more often agree on

the UNIDROIT Principles as the law governing their contract; likewise an increasing number of

Model Contracts prepared by international agencies such as the International Chamber of

Commerce (ICC) or the International Trade Centre (ITC) UNCTAD/WTO in the field of

commercial agency, distributorship, joint ventures, etc. contain a reference to the UNIDROIT

Principles either as the exclusive lex contractus or in conjunction with other sources of law (e.g. a

particular domestic law; general principles of law prevailing in a given trade sector; usages).

Recently also the Standard Material Transfer Agreement for Plant Genetic Resources of Food and

Agriculture adopted by the U.N. Food and Agriculture Organization (F.A.O.) refers as the

applicable law to “General Principles of Law, including the UNIDROIT Principles of International

Commercial Contracts 2004 […]”.

29

In the context of international commercial arbitration the answer is nowadays generally in the

affirmative: Art. 28 (1) of the 1985 UNCITRAL Model Law on International Commercial Arbitration

expressly states that “[t]he arbitral tribunal shall decide the dispute in accordance with such rules of

28 See also for further references, M.J. Bonell, An International Restatement, cit., p. 174 et seq.. 29 See M.J. Bonell, An International Restatement, cit., p. 180 et seq.

17

law as are chosen by the parties as applicable to the substance of the dispute […]” (emphasis added),

and similar provisions may be found in the forty or so domestic arbitration laws enacted world wide

on the basis of the UNCITRAL Model Law.

By contrast, as far as court proceedings are concerned, the traditional and still prevailing view is

that the parties’ freedom of choice is limited to a particular domestic law, with the result that a

reference to the UNIDROIT Principles will be considered as a mere agreement to incorporate them into

the contract and as such can bind the parties only to the extent that they do not affect the mandatory

provisions of the lex contractus30

However, some recent significant developments suggest that such a view, clearly influenced by

a state-based concept of law, is being increasingly questioned.

Thus, the 1994 Inter-American Convention on the Law Applicable to International Contracts

refers in two places – precisely in Arts 9(2) and 10 – to legal sources of an a-national or supra-

national character for the purpose of the determination of the lex contractus, thereby justifying the

conclusion that under this Convention the UNIDROIT Principles may well be applied as the law

governing the contract at least if expressly chosen by the parties.31

Furthermore, a reference to the possibility for parties to agree on the applicability of the

UNIDROIT Principles can be found even in the Official Comments to the United States Uniform

Commercial Code. More precisely, Comment 2 to § 1-302, as revised in 2001, states that “[...] parties

may vary the effect of [the Uniform Commercial Code’s] provisions by stating that their relationship

will be governed by recognised bodies of rules or principles applicable to commercial transactions [...]

[such as e.g. ] the UNIDROIT Principles of International Commercial Contracts) […].” It is true that

such reference is made in the context of § 1-302 laying down the principle of freedom of contract and

not in the context of § 1-301 dealing with the parties’ right to choose the applicable law, with the

consequence that a parties’ agreement to have their contract governed by the UNIDROIT Principles will

be respected only to the extent that the Code grants parties the right to derogate from its provisions.

Yet, apart from the symbolic value of an explicit reference to the UNIDROIT Principles as an

alternative set of rules applicable to the kind of transactions falling within the scope of the Code, the

probability that, if parties actually choose the UNIDROIT Principles as the rules of law governing their

contract, individual provisions of the Principles will be struck out because of their incompatibility

30 See, also for further references, R. MICHAELS, in S.VOGENAUER – J. KLEINHEISTERKAMP (eds), Commentary on the UNIDROIT Principles, cit., p. 36 et seq. 31 Cf. F.K. JUENGER, The Inter-American Convention on the Law Applicable to International Contracts: Some Highlights and Comparisons, in 42 The American Journal of Comparative Law (1994), p. 601 et seq

18

with the Code is rather remote,32 all the more so since most of the mandatory provisions of the Code

are restricted to consumer transactions.33

Finally the “Hague Principles on Choice of Law in International Commercial Contracts”

currently under preparation at the Hague Conference on Private International Law,

34

Turning to actual practice, of the 266 decisions referring in one way or another to the

UNIDROIT Principles collected in the UNILEX database (

in Article 2, after

laying down the basic principle that “[a] contract is governed by the law chosen by the parties”,

specify that “[i]n these Principles a reference to law includes rules of law” thereby making it clear that

under the proposed Principles parties are free to choose also soft law instruments such as the

UNIDROIT Principles as the rules of law governing their contract.

http://www.unilex.info),35 55 arbitral

awards applied the UNIDROIT Principles as the rules of law governing the substance of the dispute,

while four court decisions confirmed arbitral awards applying them; moreover two other court

decisions admitted as an obiter dictum the parties’ right to choose the UNIDROIT Principles as the

rules of law governing their contract.36

In some cases the UNIDROIT Principles were expressly chosen by the parties either as the sole

legal basis for the decision by the arbitral tribunal or in conjunction with other sources of law, such

as the CISG or a particular domestic law.

37

32 One of the few examples of conflicting provisions is that of Art. 1.2 UNIDROIT Principles, according to which neither the conclusion of a contract nor a subsequent modification thereof or its termination by agreement is subject to any requirement as to form, and UCC § 2-201 confirming the statute of frauds. - For an article-by-article comparative analysis of the UNIDROIT Principles (and CISG) on the one hand and the relevant provisions of the UCC, see H.D. GABRIEL, Contracts for the Sale of Goods: A Comparison of Domestic and International Law, cit. (supra Chapter 4, n. 47).

Interestingly enough, more often than not the parties

had agreed on the application of the UNIDROIT Principles only after the commencement of the

arbitral proceedings, sometimes on the suggestion of the arbitral tribunal itself.

33 There are of course other provisions of the UNIDROIT Principles which may be disregarded by U.S. courts not because they go against specific provisions of the UCC, but because they contrast with firmly established principles of general contract law: this is the case in particular of Arts. 4.1 and 4.3 (contrasting with the “plain meaning rule” in contract interpretation) and of Art. 6.2.3 (contrasting with the reluctance of U.S. courts to reform contracts). 34 See the final draft adopted in June 2011 by a Working Group composed of independent experts from all over the world. 35 At 31 August 2011. 36 For these figures see E. FINAZZI-AGRÒ, The Impact of the UNIDROIT Principles in International Dispute Resolution: The Figures, in Uniform Law Review, 2011, p. XXX). For links to the relevant cases see UNILEX at http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13621&x=1. 37 See e.g. Arbitral Award of the Centro de Arbitraje de Mexico of 30 November 2006, in UNILEX at http://www.unilex.info/case.cfm?id=1149 (Contract between Mexican grower and U.S. distributor for production and distribution on an exclusive basis of specific quantities vegetables; contract contained arbitration clause referring to UNIDROIT Principles as the rules of law governing the contract); more recently, Arbitral Award of the Permanent Court of Arbitration of 2009, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1473&do=case (licensing agreement between European company and international governmental Organisation; parties’ express choice of UNIDROIT Principles as the law governing their contract); ICC Award of 2004, No. 11880, in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1427&do=case (international “guaranty” contract containing reference to the UNIDROIT Principles as the law governing the contract in conjunction with Italian law).


http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13621&x=1�


http://www.unilex.info/case.cfm?pid=2&id=1473&do=case�


19

In other cases the UNIDROIT Principles were applied where the parties had agreed that their

contract would be governed by and/or the arbitral tribunal would decide the merits of the dispute in

accordance with no further specified principles and rules of supra-national or transnational character,

such as the “general principles of the lex mercatoria”, “general principles of international contract

law”, “general principles of equity”, “laws and rules of natural justice”. The recourse by the arbitral

tribunal to the UNIDROIT Principles was justified on the ground that they constitute a particularly

authoritative and reliable expression of the principles and rules in question.38

Finally, there are also cases where the arbitral tribunal applied the UNIDROIT Principles as the

rules of law governing the substance of the dispute even in the absence of any choice-of-laws clause

in the contract or where the choice-of-laws clause was manifestly invalid because the parties had

made a reference to non-existing legal sources as the law governing their contract. In so doing, the

arbitral tribunal normally relied on the relevant statutory provisions or arbitration rules, according to

which – to quote the language used in Art. 17 of the ICC Rules of Arbitration – “[it] shall apply the

rules of law which [it] determines to be appropriate” (paragraph 1, second sentence) and “in all

cases [it] shall take account of […] the relevant trade usages” (paragraph 2).

39

3. THE UNIDROIT PRINCIPLES AS A MEANS OF INTERPRETING AND SUPPLEMENTING INTERNATIONAL UNIFORM LAW INSTRUMENTS

As indicated in their Preamble,40

Article 7 of the CISG states that “[i]n the interpretation of this Convention regard is to be had to

its international character and to the need to promote uniformity in its application [...]” (paragraph 1)

the UNIDROIT Principles may be used as a means of

interpreting and supplementing international uniform law instruments. Since the UNIDROIT Principles

have not been adopted in the form of an international treaty or incorporated as such in any domestic

law, it still remains to be seen how such use can be justified in the absence of any reference to them

by the parties.

38 Cf. e.g. ICC Award of 28 July 2000, in UNILEX at http://www.unilex.info/case.cfm?id=668 (Member Firm Interfirm Agreements between the 140 Arthur Andersen member firms operating in 75 different countries contained arbitration clause stating “the [sole] arbitrator shall decide in accordance with the terms of this Agreement [...] [i]n interpreting [it] the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in [its] Preamble [...] taking into account general principles of equity”; the Arbitral Tribunal, after finding that the Agreement failed to provide guidelines for a decision, declared that it would apply “general principles of law [...] commonly accepted by the legal systems of most countries” and to this effect have resort to the UNIDROIT Principles [...]”); Partial Award of ad hoc Arbitration of 25 September 2000 at http://www.fao.org/DOCREP/MEETING/004/Y6612E.HTM (contract for ordinary maintenance of premises between F.A.O. and an Italian company providing that contract be governed by “general principles of law to the exclusion of any single national system of law”; Arbitral Tribunal decided to apply the UNIDROIT Principles). 39 Cf. e.g. Arbitral Award of the Arbitration Institute of the Stockholm Chamber of Commerce of 2001, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=793&do=case; ICC Award of 2003, No. 11265, in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1416&do=case; ICC Award of 15 September 2008, No. 15089, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1440&do=case. 40 Paragraph 5.


http://www.fao.org/DOCREP/MEETING/004/Y6612E.HTM�




20

and that “[q]uestions concerning matters governed by this Convention which are not expressly settled

in it are to be settled in conformity with the general principles on which it is based [...]” (paragraph 2).

Similar formulae are to be found also in other recent international Conventions 41

In the past such autonomous principles and rules had to be found by the judges and arbitrators

themselves on an ad hoc basis. Now that there are the UNIDROIT Principles, the question arises as to

whether they may, and if so to what extent, be used for this purpose.

but even in the

absence of any specific language to this effect it is nowadays widely recognised that international

uniform law instruments should be interpreted and supplemented according to autonomous and

internationally uniform principles and that recourse to domestic law should only be a last resort.

Opinions among legal scholars are divided. On the one hand there are those who categorically

deny such a possibility not only on account of the private and non-binding nature of the UNIDROIT

Principles, but also, at least with respect to instruments adopted prior to the publication of the

UNIDROIT Principles, on the basis of the rather formalistic argument that, coming later, the latter could

in no case be of relevance to the former. 42 On the other hand there are those who definitely assert the

possibility of using the UNIDROIT Principles as a means of interpreting and supplementing

international uniform law instruments on the ground that they represent “general principles of

international commercial contracts” and as such without further qualification meet the requirements of

Article 7 of the CISG. 43

The correct solution appears to lie between these two extreme positions. In other words, there

can be little doubt that in general the UNIDROIT Principles may well be used to interpret or supplement

international law instruments even if they were adopted prior to the UNIDROIT Principles, as is the

case with the CISG. The only conditions which need to be satisfied are that the issue at stake falls

within the scope of the respective Convention and that the relevant provisions of the UNIDROIT

Principles can be considered an expression of – to use the language of Art. 7(2) CISG – the “general

principles on which [the Convention] is based”.

44

Turning to actual practice, it is worth noting that despite scholarly doubts and reservations as to

the possibility of using the UNIDROIT Principles to interpret or supplement the CISG, both judges and

41 See e.g. Art. 7 of the 2001 U.N. Convention on the Assignment of Receivables in International Trade; Art. 5 of the 2001 Cape Town Convention on international Interests in Mobile Equipment; Art. 2 of the 2008 U. N. Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea. 42 In this sense, e.g., R. HERBER, “Lex mercatoria” und “Principles” – Gefährliche Irrlichter im internationalen Kaufrecht, in Internationales Handelsrecht 2003, p. 1 et seq. (pp. 7 and 9). 43 So e.g. A.M. GARRO, The Gap-Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay between the Principles and CISG, in 69 Tulane Law Review (1995), p. 1149 et seq., at p. 1152 et seq. 44 See M.J. Bonell, An International Restatement, cit., p. 233.

21

arbitrators do not seem too troubled by theoretical justifications when resorting to the UNIDROIT

Principles for this purpose.45

Significantly only in a few cases has recourse to the UNIDROIT Principles been justified on the

ground that the individual provisions invoked as gap-fillers could be considered an expression of a

general principle underlying both the UNIDROIT Principles and the CISG. Thus, in two arbitral awards

Article 7.4.9(2) of the UNIDROIT Principles, according to which the applicable rate of interest is the

average bank short-term lending rate to prime borrowers prevailing at the place for payment for the

currency of payment, has been referred to in order to fill the gap in Aricle 78 CISG on the ground that

it could be considered an expression of the general principle of full compensation underlying both the

UNIDROIT Principles and the CISG.

46 Likewise, a French court has once been justified recourse to

Article 6.1.6 of the UNIDROIT Principles to determine under CISG the place of performance of the

seller’s obligation to return the price unduly paid by the buyer on the ground that this provision

expressed in general terms the principle underlying also Article 57(1) CISG, i.e. that monetary

obligations have to be performed at the obligee’s place of business.47

On other occasions Article 7.4.9(2) of the UNIDROIT Principles on the applicable rate of interest

was applied with no further justification at all

48), or because it itself was considered “one of the

general principles according to Article 7(2) CISG”49 Still other decisions equate, with no further

explanation, the UNIDROIT Principles in their entirety with the general principles underlying the CISG

and so justify the application of individual provisions of the UNIDROIT Principles to interpret or

supplement the CISG 50

Yet there are decisions which go even further and apply the UNIDROIT Principles not merely as

general principles underlying the CISG but because they amount to “trade usages [...] in international

trade widely known” and are therefore applicable according to Article 9(2) CISG

51

45 The total number of decisions referring to the UNIDROIT Principles to interpret international uniform law instruments collected in UNILEX is 35 (24 arbitral awards and 11 court decisions) of which 30 concern the CISG (cf. E. FINAZZI-AGRÒ, The Impact of the UNIDROIT Principles in International Dispute Resolution: The Figures, cit., p. XXX).

or because they –

46 Cf. Awards of the Vienna International Court of Arbitration of 15 June 1994, SCH-4318 and SCH-4366, in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=635&do=case and http://www.unilex.info/case.cfm?pid=2&id=636&do=case. 47 Cf. Cour d’Appel de Grenoble, 23 October 1996, in UNILEX at http://www.unilex.info/ case.cfm?pid=2&id=638&do=case. 48 Cf. e.g. ICC Award of December 1996, No. 8769, in ICC International Court of Arbitration Bulletin, 10/2 (1999), p. 82; ICC Award of 2004, No. 13152, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1419&do=case 49 Cf. ICC Award of 1995, No. 8128, in Journal de droit international 1996, p. 1024. 50 Cf. e.g. ICC Award of December 1997, No. 8817, in ICC International Court of Arbitration Bulletin, 10/2 (1999), p. 75; ICC Award of 2004, No. 12460, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1411&do=case. 51 Cf. e.g. Award of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation of 5 June 1997, No. 229/1996, abstract in UNILEX at http://www.unilex.info/ case.cfm?pid=2&id=669&do=case; more recently, Award of the International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation of 19 December 2008, No. 14/2008, abstract in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1476&do=case.



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22

as emphatically stated – may be considered “a restatement of the commercial contract law of the

world [which] refines and expands the principles contained in the United Nations Convention”.52

The most recent example of this latter approach is a decision of the Belgian Supreme Court

rendered in 2009.

53

The case concerned a number of contracts for the sale of steel tubes entered into

between a Dutch and a French company and governed by the CISG. A dispute arose when after the

conclusion of the contracts the seller gave notice to the buyer that it was forced to recalculate the

agreed price because of an unforeseeable 70% increase in the price of steel. The Belgian Supreme

Court, after noting that the CISG does not expressly address hardship, held that in accordance with

Article 7 of the CISG the gap was to be filled having regard to the “general principles governing the

law of international commerce”, and with no further explanation affirmed that such principles are to

be found, among others, in the UNIDROIT Principles and without citing Article 6.2.3 on the effects of

hardship concluded that in the case at hand the seller was entitled to request renegotiation of the price

of the contract.

4. THE UNIDROIT PRINCIPLES AS A BACKGROUND LAW FOR INTERPRETING AND SUPPLEMENTING DOMESTIC LAW According to paragraph 6 of the Preamble of the UNIDROIT Principles, “[t]ey may be used to

interpret or supplement domestic law.”

Indeed, the UNIDROIT Principles may play – and actually increasingly do play – a role in the

interpretation of the domestic law governing the contract chosen by the parties or applicable by virtue

of the relevant conflict-of-laws-rules of the forum. This is the case in particular when the domestic

law in question is that of a country in transition from a planned economy to a market economy or

anyhow lacks expertise in regulating modern business transactions. Yet also highly developed legal

systems do not always provide a clear cut solution to specific issues arising out of commercial

contracts especially if international in nature, either because opinions are sharply divided or because

the issue at stake has so far not been addressed at all. In both cases, the UNIDROIT Principles may be

used as a yardstick to ensure an interpretation and supplementation of the respective domestic law

consistent with internationally accepted standards and/or the special needs of cross-border trade

relationships.

What still remains to be seen is, first, whether the use of the UNIDROIT Principles as a means to

interpret and supplement a particular domestic law is restricted to international disputes or should be

admitted also in a purely domestic context; second, whether the UNIDROIT Principles may even be

52 So Court of Appeal of New Zealand of 27 November 2000 (per Thomas J), Hideo Yoshimoto v Canterbury Golf International Limited, in 1 New Zealand Law Report (2001), p. 523. 53 See Cour de cassation of 19 June 2009, in UNILEX at http://www.unilex.info/case.cfm?pid=2&id=1456&do=case.


23

invoked to justify a solution which, though conforming to current international standards, contradicts

an express statutory provision (or the prevailing case law) of the domestic law in question.

While the answer to the first question is definitely in the affirmative, at least as far as

transactions between businesses are concerned, the second question is more difficult. On the one

hand, there can be no doubt that in general, if the applicable domestic law provides a clear cut

solution to the issue at stake, it should not be permitted to departure from it in favour of a different

solution provided by the UNIDROIT Principles, unless there is an explicit request to this effect by the

parties. On the other hand, exceptionally a different approach may be justified in those cases where

the strict application of a particular provision of the relevant domestic law would – to quote the

language used in Article 6:2(2) of the Dutch Civil Code – “[...] be unacceptable according to criteria

of reasonableness and equity”. Reference may be made, for instance, to a domestic law whose

statutory rate of interest for payments in arrears is considerably higher than that of other countries.

The rate in question may or may not be justified with respect to payments in the local currency, but is

likely to appear exorbitant where payments are to be made in a foreign currency which is negotiated

on the international financial markets at a much lower rate: in such a case it may be appropriate to

interpret the law fixing the rate in question narrowly so as to restrict its application to payments in the

local currency and to replace it by Article 7.4.9(2) of the UNIDROIT Principles whenever payment is to

made in a foreign currency. 54

Turning to actual practice, in more than half of the reported decisions – which again include

also court decisions – the UNIDROIT Principles were used as a means of interpreting and

supplementing the applicable domestic law.

55

54 For a notice of two unpublished arbitral awards in this sense see M.J.BONELL, An International Restatement of Contract Law, 3rd ed., Transnational Publications, Inc., Ardsley, New York (2005), fn. 195 at p. 244).

Most of the cases in question concerned international

disputes, but there are also decisions referring to the UNIDROIT Principles which related to disputes of a

purely domestic character. More important, the domestic laws governing the individual contracts in

the cases in question were far from being only those of less developed countries or countries in

transition to a market economy. Indeed, they included inter alia the laws of Australia, England,

Finland, France, Greece, Italy, the Netherlands, New Zealand, Switzerland and the State of New

York, thus confirming that even highly sophisticated legal systems do not always provide clear and/or

satisfactory solutions to the special needs of current international commercial transactions, while the

UNIDROIT Principles may actually offer such a solution. To be sure, more often than not the reference to

the UNIDROIT Principles had no direct impact on the decision of the merits of the dispute at hand, and

individual provisions of the UNIDROIT Principles were cited essentially to demonstrate that the solution

55 According to the above-mentioned study (E. FINAZZI-AGRÒ, The Impact of the UNIDROIT Principles in International Dispute Resolution: The Figures, cit, p. XXX) the number of decisions falling in this category is 76, 27 of which are arbitral awards and 49 are court decisions rendered in 14 countries.

24

adopted under the applicable domestic law was in conformity with current internationally accepted

standards and rules.56 Yet in a number of cases the courts and arbitral tribunals resorted to the UNIDROIT

Principles in support of the adoption of one of several possible solutions under the applicable domestic

law, or in order to fill a veritable gap in the latter. 57

In view of these figures – all the more impressive considering that the use of the UNIDROIT

Principles as a means of interpreting and supplementing domestic laws was expressly indicated in the

Preamble only in the 2004 edition – it has been argued that the so-called “restatement function” of the

UNIDROIT Principles is even more important than their role as rules of law governing international

commercial contracts. Indeed just like the U.S. Restatements of the law the UNIDROIT Principles are

by their very nature best suited to serve as background law in applying domestic laws in an

international context and as such may eventually become a sort of ius commune or the general part of

transnational contract law.

58

IV. CONCLUSIONS

In endorsing the 2004 edition of the UNIDROIT Principles, UNCITRAL congratulated UNIDROIT

“on having made a further contribution to the facilitation of international trade by preparing general

rules for international commercial contracts” and commended “the use of the UNIDROIT Principles

2004, as appropriate for their intended purposes”.

Over the years the UNIDROIT Principles have been favourably received both by academics and

by practitioners and are increasingly being used all over the world in a number of ways.

In particular, the UNIDROIT Principles have inspired numerous legislatures in both developed

and less developed countries in their law reform projects.

Moreover they are chosen by parties to international commercial contracts as the rules of law

governing their contract and applied by arbitral tribunals as the rules of law applicable to the

substance of the dispute even in the absence of a request to this effect by the parties.

Finally they are increasingly referred to by both arbitral tribunals and domestic courts as

background law to interpret and supplement the applicable domestic law including international

uniform law instruments incorporated therein.

56 For an overview of the most important decisions falling in this category see E. FINAZZI-AGRÒ, The Impact of the UNIDROIT Principles in International Dispute Resolution: An Empirical Analysis, in Uniform Commercial Code Law Journal, 2011, p. XXX). 57 For an overview of the most important decisions falling in this category see E. FINAZZI-AGRÒ, The Impact of the UNIDROIT Principles in International Dispute Resolution: An Empirical Analysis, cit., p. XXX). 58 R. MICHAELS, Umdenken für die UNIDROIT-Prinzipien. Vom Rechtswahlstatus zum Allgemeinen Teil des transnationale Vertragsrechts, in Rabels Zeitschrift vol 73 (2009), p. 866 et seq.

25

It may be expected that the new 2010 edition of the UNIDROIT Principles, containing additional

provisions on restitution in case of failed contracts, illegality, conditions, and plurality of obligors and

of obligees, will be given even greater attention by the international legal and business communities.

1

THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL LAW

An American Perspective on the Principles and Their Use

Henry Deeb Gabriel

Professor of Law Elon University School of Law

______________________________________________________________

CONTENTS

I. The Principles of International Commercial Law: What they Are and Where They

Come From

II. The American Experience

III. How and Why American Courts Might Use the Principles

IV. How and Why American Parties Might Use the Principles

V. The UNIDROIT Principles as an Inspiration for Future American Law

VI. Comparison of the Major Rules of the Principles with American Commercial Contract Law

a. Structural Differences and Major Concepts b. Formation c. Fundamental Non-Performance d. Contract Modification e. Damages f. Assignment of Rights g. Illegality h. Conditions i. Limitation Periods

VII. CONCLUSION

______________________________________________________________

2

I. The Principles of International Commercial Law: What they Are and Where They Come From

The UNIDROIT Principles of International Commercial Law 1 are the product of the

International Institute for the Unification of Private Law (UNIDROIT). UNIDROIT was set up

in 1926 as an auxiliary organ of the League of Nations. Following the demise of the League, the

organization was reestablished in 1940 on the basis of a multilateral agreement. UNIDROIT is

an independent intergovernmental organization. Its purpose is to examine ways of coordinating

the private law of States and to prepare gradually for the adoption by States of uniform rules of

private law. UNIDROIT’s member States are drawn from the five continents and represent a

variety of different legal, economic, and political systems.2

1 International Institute for the Unification of Private Law (UNIDROIT), Principles of International Commercial Contracts (1994), available in 34 I.L.M. 1067(1995) [hereinafter the “ Principles”].

2 UNIDROIT has 61 member States: Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Holy See, Hungary, India, Iran, Iraq, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Nicaragua, Nigeria, Norway, Pakistan, Paraguay, Poland, Portugal, Republic of Korea, Romania, Russian Federation, San Marino, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Tunisia, Turkey, United Kingdom, United States of America, Uruguay, Venezuela, and Yugoslavia (Federal Republic of).

3

The UNDROIT Governing Council approved the project to draft the contract’s Principles

in 1971, but a working group was not set up until 1980. The first set of the Principles was

approved in 1994. These are composed of a Preamble and 119 articles divided into seven

chapters: “General Provisions” (Chapter 1); “Formation” (Chapter 2); “Validity” (Chapter 3);

“Interpretation” (Chapter 4); “Content” (Chapter 5); “Performance” (Chapter 6); and “Non-

Performance” (Chapter 7). Chapter 6 has two sections dealing with “Performance in General”

and “Hardship,” respectively, while Chapter 7 has four sections: one concerning “Non-

Performance in General,” one on the “Right to Performance,” one on “Termination,” and one on

“Damages.”

The second set of Principles was promulgated in 2004.3 The 2004 Principles do not

replace the 1994 Principles but supplement them with new additional chapters on “Set off”

(Chapter 8); “Assignment of Rights, Transfer of Obligations, Assignment of Contracts” (Chapter

9); and “Limitation Periods” (Chapter 10); as well as a new section 2 to Chapter 2 on the

“Authority of Agents”.4

3 In addition to the English and French versions of the 2004 Principles, promulgated by UNIDROIT, the Principles have also been translated into Arabic, Chinese, Farsi, German, Italian, Korean, Portuguese, Romanian, Russian, and Spanish and Vietnamese. The 2010 Principles are available in English and French.

For further general discussion on the Principles, see Michael Joachim Bonell, CASELAW AND BIBLIOGRAPHY ON THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS (2d. ed. 2005); Michael Joachim Bonell, Soft Law and Party Autonomy, the Case of the UNIDROIT Principles, 51 LOY. L. REV. 229 (2005); Michael Joachim Bonell, From UNIDROIT Principles 1994 to UNIDROIT Principles 2004: A Further Step Towards a Global Contract Law, 37 U.C.C. L.J. 1 (2004); Symposium, The UNIDROIT Principles of International Commercial Law: Why? What? How?, 69 TULANE L. REV. 1121 (1995).

For a comparison of the Principles with the European Principles of Contract Law, see Michael Joachim Bonell, The UNIDROIT Principles of International Commercial Law and the Principles of European Contract Law: Similar Rules for the Same Purpose?, 2 UNIFORM L. REV. 229 (1996); Ole Lando, A Vision of the Future World Contract Law: Impact of European and UNIDROIT Contract Principles, 37 U.C.C. L.J. 2 (2004). 4 The only substantive change made from the original 1994 text is an amendment to article 2.8(2) on the effect of holidays occurring during or at the expiration of the period of time fixed by an offeror for acceptance. This section is now a new Article 1.12.

4

A third set of Principles was completed in 2010. The 2010 edition adds new sections on

illegality, conditions, restitution in failed contracts, and plurality of obligors and obliges, and

amends some of the sections in the general provisions, the grounds for avoidance, and

termination. In addition, some reordering of the Principles have been made.

The Principles are intended to enunciate rules that are common to most legal systems.5

To the extent that the rules do not reflect these principles, they are designed to accommodate the

special requirements of international trade.6

Important from an American legal perspective, unlike an international treaty or

convention, or a domestic statute, which are sources of international and domestic positive law,

the UNIDROIT Principles do not apply by legislative mandate. Instead, they were drafted as a

non-legislative standard of uniformity for international commercial contracts. In this respect,

they are similar to the Restatements of Law promulgated by the American Law Institute in the

United States.

The “black-letter rules” are accompanied by

extensive and detailed comments, including illustrations, which form an integral part of the

Principles.

7 As such, the Principles do not have the force of law8 and, therefore, must be

incorporated into a contract or used by a judge or arbitrator.9

5 BONELL, INTERNATIONAL RESTATEMENT, supra note 33, at 46. The primary influences were codifications that had recently been drafted or amended. These include domestic legislation, such as American Uniform Commercial Code and Restatement 2d of Contracts, the Algerian Civil Code, the Dutch Civil Code, the Civil Code of Quebec, and the law of obligations of the German Civil Code. The CISG also was a major influence. Id. at 48–49.

6 Id. 46–47 and 50–52. 7 In fact, the American Restatement of Law was the model for the UNIDROIT Principles. See MICHAEL JOACHIM BONELL, AN INTERNATIONAL RESTATEMENT OF CONTRACT LAW, 19 (2d ed. 1997); BONELL, INTERNATIONAL RESTATEMENT, supra note 33, at 9–25.

For a discussion on how the Convention is specifically not as a restatement of the law, see Michael P. Van Alstine, Consensus, Disssensus, and Contractual Obligation Through the Prism of Uniform International Sales Law, 37 VA. J. INT’L L. 1 (1996). 8 Because the Principles do not have the force of law, it may be asked for what purpose the Principles are meant to serve. There is not a single goal, but in fact a multitude of considerations that support the Principles. For a discussion of the goals of the Principles, see BONELL, INTERNATIONAL RESTATEMENT, supra note 33, at 9–25. For

5

The Principles have also to be placed within the broad family of non-binding legal rules

that are often referred to as “soft law.”10 Various soft law instruments are well known and

widely used by American parties in international commercial transactions. These include model

laws,11 codifications of customs and usages, 12 and the promulgation of international trade

terms. 13

What these have in common is that they fill in a specific transactional need. As will be

discussed below, the question is whether the Principles likewise fill a specific need for American

parties to international commercial transactions.

II. The American Experience

the view that since the Principles have no legislative impact, they should be treated as primarily a grand academic enterprise, see C. Kessedjian, Un exercice de renovation des source du droit des contrats du commerce international: Les Principes proposes par l’UNIDROIT, 1995 REVUE CRITIQUE DE DROIT INTERNATIONAL PRIVE 641. 9 “This means, in essence, that the UNIDROIT Principles will be applied only if incorporated into a contract, or if the Principles find enough favor with an arbitrator or a judge looking for a rule to fill a gap encountered in the regulation of a given international commercial contract.” Symposium, supra note 9. See also Klaus Peter Berger, International Arbitral Practice and the UNIDROIT Principles of International Commercial Contracts, 46 AM. J. COMP. L. 129 (1998) (reviewing the circumstances under which international arbitral tribunals have applied the UNIDROIT Principles); Klaus Peter Berger, The Lex Mercatoria Doctrine and the UNIDROIT Principles of International Commercial Contracts, 28 LAW & POL’Y INT’L BUS. 943 (1997) (discussing the doctrinal and practical issues related to the lex mercatoria doctrine as it applies to the UNIDROIT Principles); Ole Lando, Assessing the Role of the UNIDROIT Principles in the Harmonization of Arbitration Law, 3 TUL. J. INT’L & COMP. L. 129 (1995) (discussing the concept of lex mercatoria as it applies to the UNIDROIT Principles); Alejandro M. Garro, The Contribution of the UNIDROIT Principles to the Advancement of International Commercial Arbitration, 3 TUL. J. INT’L & COMP. L. 93 (1995) (providing an overview of the circumstances under which the UNIDROIT principles are and should be applied in an arbitration setting).

10 Defined by one commentator, “‘soft law’ is understood as referring in general to instruments of normative nature with no legally binding force and which are applied only through voluntary acceptance.” BONELL M., “Soft Law and Party Autonomy: The Case of the UNIDROIT Principles”, 51 Loyola Law Review 229 (2005). Soft law is generally established legal rules that are not positive and therefore not judicially binding. 11 See e.g., UNCITRAL Model Law on International Commercial Arbitration (1985). 12 For example, the International Chamber of Commerce (ICC) has promulgated the Uniform Customs and Practice for Documentary Credits which set out the rules and principles that govern letters of credit. The ICC, which was founded in 1919 in Paris, is a federation of business organizations and business people. It is a non-governmental body, and it is neither supervised nor subsidized by governments. 13 See e.g., International Chamber of Commerce, Incoterms 2000.

6

After eighteen years since their original promulgation, there are only two14 reported

American cases that address the Principles.15

In The Ministry of Defense and Support for the Armed Forces of the Islamic Republic of

Iran v. Cubic Defense Systems, Inc.,

The court in neither case addressed any

substantive aspect of the Principles.

16

In a second American case, the court was asked to compel arbitration under the New

York Convention.

the court was asked to affirm and enforce an arbitral

award under the New York Convention. The court in this case addressed the narrow issue of

whether the use of the Principles as a source of international commercial law by an ICC arbitral

tribunal exceeded the scope of the tribunal’s terms of reference. Noting that the one of the

questions presented to the tribunal was whether international law applied to the dispute, the court

found the tribunal’ reference to the Principles was clearly within the tribunal’s terms of

reference. As the provisions of the Principles themselves were not in issue in the case, the court

neither used nor analyzed any specific provision of the Principles nor in any way noted how the

Principles operate within the framework of American domestic law.

17

14 A third case is mistakenly listed in the UNILEX database: Koda v. Carnival Corp., 2007 U.S. Dist. LEXIS 97109 (order to compel arbitration); 2007 U.S. Dist. LEXIS 100084 (order denying motion for rehearing). In this case, the court does not reference the Principles. The plaintiff cites the Principles in its pleadings, and this citation is picked up by the UNILEX database as being part of the court opinion.

In this case, the arbitration was challenged on the grounds that the

arbitration agreement was both unconscionable under domestic American law as well as a

violation of the doctrine of fairness under the Principles because the party had no real bargaining

power for the terms of the contract. Noting that the court was bound by the precedent that lack

15 I do not want to suggest that this is an abnormally low number of cases for a country. There are only 94 reported cases worldwide, http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13619&x=1, and only two countries, Spain and Australia have more than 10 reported cases. There are no reported German cases in the UNILEX database that apply the Principles. 16 United States District Court for the Southern District of California, 29 Federal Supplement 1168 (1998). 17 Krstic v. Princess Cruise Lines, 706 Federal Supplement 1271 (United States District Court for the Southern District of Florida, 2010).


7

of bargaining power was not a defense to an arbitration agreement,18

There is one American administrative determination by the Overseas Private Investment

Corporation, which dealt with a dispute between an American and Argentinian parties, that

recognized the Principles for the purpose of determining contract formation.

the court determined that

neither domestic law nor the Principles were a basis for overriding the existing law. The court in

this case neither discussed the difference between the standard of fairness under the Principles

and the concomitant rule under American domestic law nor did the court state what would

suffice under the requirement of fairness under the Principles to invalidate an arbitration clause

or any other contract provision.

19

As for arbitrations, the extent to which American parties have chosen or consented to the

Principles as controlling law, or the extent to which tribunals have applied the Principles in

transactions with American parties cannot be ascertained because the majority of the awards are

unreported. There are, however, no reported American arbitrations that use the Principles.

The

administrative tribunal made the unremarkable finding that the Principles provide for contract

formation both by an offer as well as by conduct. It is not clear whether the parties provided for

the application of the Principles in their agreement or whether the tribunal raised it on its own.

III. How and Why American Courts Might Use the Principles

It is difficult to determine how often the Principles are used because in the majority of

cases where the parties have chosen to use the Principles, no dispute arises. Actual usage is,

therefore, unknown. Moreover, in the agreements in which they are used the Principles sit in the

18 The court cited Bautista v. Star Cruises, 396 Federal Reporter 3d 12 89 (United States Court of Appeals for the 11th Circuit, 2005). 19 http://www.unilex.info/case.cfm?id=1125.

http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&FindType=Y&SerialNum=2005995766�

8

background without being interpreted. In addition, even when there is a dispute between parties

that may implicate the Principles, the majority of cases in which they have been used, either by

party choice or by the decision of a court or arbitral tribunal, will not be reported. Given these

constraints of information, it is still possible to examine the reported cases in which the parties

have used the Principles. There are actually quite few- only 255 reported court cases and arbitral

awards since the Principles were first promulgated.20

Yet, in appropriate circumstances,

This would suggest that parties are not

widely adopting the Principles and courts and arbitral tribunals are not widely using them as

controlling.

21

The American Restatements of Law, which as mentioned above, are soft law instruments similar

to the Principles,

the Principles can be a source of guidance to courts.

22 have been widely used by American courts as a basis for forging new legal

rules as well as interpreting existing ones.23

Moreover, the Principles may be the basis for gap fillers when the otherwise applicable

international or domestic law does not address a specific question. For example, as the

UNIDROIT Principles of International Commercial Law have a broader scope than the U.N.

For international commercial contracts, the

Principles can fill this need.

20 This figure was taken from the UNILEX database, which is maintained by UNIDROIT and tracks all reported cases. http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13618&x=1 (last viewed on July 22, 2011. 21 Presumably the use of the Principles would be limited to commercial, and probably international, disputes.

22 For a discussion of the similarities between the Principles and the American Restatements, see, Michael Joachim Bonell, "The UNIDROIT Principles of International Contracts and CISG: Alternative or Complementary Instrument?," Uniform Law Review 1996, 26-39.

23 See Adams, “The American Law Institute: Justice Cardozo’s Ministry of Justice?” 32 S. Ill. Univ/. L. J. 173 (2007).


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9

Convention on Contracts for the International Sale of Goods, 24 the Principles have been used to

resolve questions not addressed by the CISG.25

As for questions that might otherwise be resolved by American domestic law, although

the scope of the Principles does not cover any area where there is not domestic law that could

govern, given that the Principles only govern international contracts, a court may well decide the

proper rule, if the domestic law otherwise deviated from the Principles, should be the Principles

because of the expectations of parties in international transactions. Whether this type of

guidance is useful has been questioned because, with the convenience of having existing rules in

place, according to some, tribunals have a tendency to follow soft law principles blindly

without any analysis of why the rules are appropriate or better suited than competing rules.

26

There is much to commend the Principles to American courts. To the extent that a court

is not otherwise constrained by conflict of laws rules, other mandatory rules, or public policy

restraints, the Principles have specific characteristics that suggest their use in appropriate cases.

First, the Principles are designed for international contracts, and they reflect the expectations of

international commerce more than most domestic laws.

However, because the Principles are only likely to be chosen by a tribunal after a decision has

been made that the Principles embody the more appropriate rule, this concern should be minimal.

27

24 The major areas of scope in the Principles that are not covered by the CISG are limitation periods, assignment of rights and delegation of duties, third party rights, and set-off.

In addition, to the extent that a

25 See eg., Hideo Yoshimoto v Canterbury Golf International Limited, Court of Appeal of New Zealand, (2000) NZCA 350; SCEA GAEC Des Beauches Bernard Bruno v. Société Teso Ten Elsen GmbH & COKG, Cour d'appel de Grenoble (1996). 26 See eg, MAGGS G., “Ipse Dixit: The Restatement (Second) of Contracts and the Modern Development of Contract Law”, 66 George Washington Law Review 508 (1998); SYMEONIDES S., “The Judicial Acceptance of the Second Conflicts Restatement: A Mixed Blessing”, 56 Maryland Law Review 1248 (1997). 27 The American Uniform Commercial Code, for example, is primarily based on American domestic case law, and it reflects a particular American, if not common law legal perspective.

10

transaction may be governed by other international law, such as the CISG, the broad scope of the

Principles may be a useful supplement to the otherwise applicable law.

As to the specific type of cases which the Principles might be used by a court (or arbitral

tribunal), there is a fairly limited scope. The Preamble to the Principles suggests six specific

uses: 1. They shall be applied when the parties have agreed that their contract be governed by

them.

2. They may be applied when the parties have agreed that their contract be governed by

general principles of law, the lex mercatoria or the like.

3. They may be applied when the parties have not chosen any law to govern their contract.

4. They may be used to interpret or supplement international uniform law

instruments.

5. They may be used to interpret or supplement domestic law.

6. They may serve as a model for national and international legislators.

Before looking at any of these particular uses, it is important to remember that the

Principles were drafted with the goal of providing guidance for international commercial

contracts. Embedded in this is the notion, that presumably would be recognized by American

courts, is that parties to both domestic and non-commercial contracts have different expectations

than those that arise in international commercial contracts. Thus, to the extent that an agreement

is either a domestic or consumer contract, the Principles would probably not be the best model,

as both domestic as well as consumer contracts would normally entail expectations and assumed

risks different from international commercial contract.28

28 Explaining why the Principles might be used as guidance for the interpretation of domestic law, the comments that accompany the Preamble to the Principles state “[e]specially where the dispute relates to an international commercial contract, it may be advisable to resort to the Principles as a source of inspiration.”

Moreover, it is unlikely that any

11

American court would have any basis for looking outside domestic American law in these

circumstances.

As for the utility of the Principles as a basis for the governance of international

commercial contracts, it is important to distinguish between those contracts in which the parties

have chosen the Principles to govern the agreement and those contracts in which a court or

arbitral tribunal independently decides to apply the Principles. In those cases in which the court

or tribunal is independently choosing to use the Principles, it is also important to distinguish

between the use of the substantive rules of the Principles as controlling and the use of the

Principles to interpret other law.

If the parties expressly choose the application of the Principles, the role of the courts

should be straightforward. Subject to any restriction the jurisdiction’s law may have on choice

of law,29 the court should simply apply the Principles.30

It should be noted that the question of choice of law under American law may be more

restrictive than under other systems. For example, under the Uniform Commercial Code, the

parties choice of law is limited to those agreements where the chosen law bears a reasonable

relation to the chosen jurisdiction. A proposed revision to the Uniform Commercial Code would

As we have seen, at least in the reported

cases, the American courts have not had the opportunity to apply the Principles by party choice.

UNIDROIT Principles of International Commercial Contracts, Preamble, comment 6. This comment suggests the limited scope but important possible application of the principles: those cases in which a domestic law is the governing law, but the contract itself is an international contract. The cited cases and arbitral decisions on this point have been limited to the circumstances where the Principles have been cited either to interpret how the domestic law should apply in an international case or to supplement the findings in the case by the customs and usages of international practice derived from the Principles. 29 UNIDROIT Principles of International Commercial Contracts, Preamble, comment 4. 30 This is, of course subject to any mandatory rules that the governing jurisdiction may have that would overrule or supplement the Principles. his point is recognized in the Principles: “Nothing in these Principles shall 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.” UNIDROIT Principles of International Commercial Contracts, 1.4.

12

have limited this choice of law restriction to domestic cases, thereby allowing parties a more

unrestricted limitation on choice of law. This revision, however, has only been adopted by the

United States Virgin Islands.

In the case of specific party choice to use the Principles, though, in a properly drafted

agreement the choice of law restrictions should not prevent the application of the Principles if the

agreement specifies that the Principles are not binding as a choice of law, but instead, are binding

as the explicit terms of the agreement itself. This is simply the application of the Principles as

freedom of contract and not as choice of law.

As a basis for interpreting other governing law, the Principles might be used either to

interpret how the governing international law might be interpreted31 or the Principles might be

used to supplement the findings in the case by a custom and usage of international practice as

derived from the Principles.32

The Preamble to the Principles suggests that the Principles may be applied in cases where

there is not an express choice of law by the parties. This appears to be more aspirational than

realistic. No court, much less an American court, has done so.

As noted, no American case has used the Principles for this

purpose, but as the Principles become more widely known, this is a use of the Principles that

could develop in American law.

33

31 This use appears to be more theoretical than practical: there are only two reported cites of the Principles being used for this purpose. This would be expected, particularly when the CISG is the governing law, as there is already hundreds of cases interpreting every provision of the CISG as well as hundreds of article and books exploring every nook and cranny of the CISG. The need for yet another interpretive view is not present.

Given the hurdles a court

would normally follow to find the Principles as the governing law, this is understandable. Under

conflict of law rules (rules of private international law), a court would normally look to the

32 There is no reported court decision having done this, however, there are fifteen arbitration decisions that have used the Principles as a basis to determine international customs and trade usage. 33 There are three reported arbitration cases in which the tribunal, acting as amiable compositeur, chose the Principles as the governing law.

13

governing law of one the jurisdiction of one of the parties or to an applicable international

convention or treaty. The Principles, having not been adopted as the positive law of any

jurisdiction, would not be applicable under these rules. The comments to the Preamble mention

the inherent flexibility of arbitral rules to provide an arbitral tribunal the power to choose the

applicable law.34

On the other hand, in the rare case where the parties expressly provide for the application

of “general principles of international law” or some equivalent, a court might determine that the

Principles should apply. At this time, no reported court case, American or otherwise, has done

so. Several arbitration cases have.

This flexibility is not generally recognized by courts.

35

IV. How and Why American Parties Might Use the Principles

There is nothing to suggest any extensive use of the Principles by American contracting

parties. There are two strong possibilities for this, but no empirical evidence to support or either

or both reasons. First, parties may just be unaware of the Principles. Second, parties may have

some familiarity with the Principles but have not determined that the Principles create any

substantial benefits over what would otherwise be the applicable law. It is this second reason

that goes to the core issue of whether the Principles are likely to have any substantial future

among American parties.

Within the limits provided by choice of law rules and party autonomy, parties may

choose to adopt specific rules embodied in nonbinding instruments such as the Principles.36

34 UNIDROIT Principles of International Commercial Contracts, Preamble, comment 4(c).

35 This is noted in the UNILEX database prepared by UNIDROIT: http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=13621&x=1 36 Some instruments, such as the Uniform Customs and Practice for Documentary Credits or the INCOTERMS, are so commonly used and accepted that they often govern by default absent a contrary party agreement. Most soft law instruments, however, become a part of the parties’ agreement by express or implicit adoption.

14

Parties may choose to do so because they believe the rules reflect their business relationship

better than domestic or other international law or they seek a neutral principle that does not give

one party an advantage. Between parties of unequal bargaining power, it is not uncommon for

the stronger party to insist on the choice of its own domestic law. However, there are times when

a party, although having sufficient bargaining power to impose its own domestic law, in practice

prefers not to because of its own law’s lack of predictability or for another reason, and instead

opts for other governing law such as the UNIDROIT Principles of International Commercial

Contracts.37

In fact, to a large extent, the question is not what the best law is, but what the

governing law is. For if the parties know what the operative law is, they know what rules

they need to draft around. Given the general allowance of freedom of contract, this is

generally allowed except to the extent that the provisions violate otherwise mandatory law.

As mandatory provisions are the major limitation on the use of the Principles,

This is unusual, though, and not common among American parties.

38

parties

have virtually equal freedom to draft their agreements as they wish whether or not they

use the Principles as the underlying law.

37 For instance, as pointed out by the President of the International Court of Arbitration of the Russian Federation,

[a] reason which may militate in favour of the wide use of the Unidroit Principles [in Russia] is the fact that Russian lawyers and business people do not seem to be as reluctant as their foreign counterparts to contemplate references to the Principles in place of the application of their domestic law on the ground that the former would not confer on them the advantages which parties to foreign trade contracts usually expect from the application of their own domestic law, namely the well-known and detailed regulation of business transactions to which they are accustomed.”

(A. KOMAROV, “The UNIDROIT Principles of International Commercial Contracts: A Russian View”, 1996 Uniform L. Rev. 247, 250). 38 UNIDROIT Principles of International Commercial Contracts, Article 1.4

15

Despite these limitations, there may be some advantages to using the Principles that

American parties should consider. First, the Principles were drafted specifically to provide rules

that broadly accommodate both the Civil and Common law traditions. To the extent that the

parties are uncomfortable with an agreement that is governed by either of these legal traditions,

the Principles provide some neutrality.

Moreover, although there has not been any American cases interpreting the Principles,

there are cases from other jurisdictions that have, and these cases, in addition to the extensive

comments that accompany the Principles, provide clear interpretive guidance. This should, to

some extent, alleviate the concern parties will have as to how the Principles will be understood.

V. The UNIDROIT Principles as an Inspiration for Future American Law

In the recent attempts to revise the American Uniform Commercial Code, the drafting

committee was mandated to look at international legal rules, particularly the CISG for possible

guidance. The revisions, completed in 2003, and recently withdrawn without enactment, did not

in fact draw upon any section of the CISG for guidance. 39 Likewise, the Principles, which

could have been a source of inspiration, did not have any influence whatsoever with the

revisions. As it is unlikely that commercial law in the United States, at least at a national level,40

39 Thus, after twelve years of work revising the American Uniform Commercial Code, the fruits of attempting to harmonize the Uniform Commercial Code with the CISG were reduced to the following prefatory comment:

has little probability of being revised in the near future, there is little possibility that the

When the parties enter into an agreement for the international sale of goods, because the United States is a party to the Convention, the applicable law may be the United Nations Convention on Contracts for the International Sale of Goods (CISG). Since many of the provisions of the CISG appear quite similar to provisions in Article 2, early in the process of drafting the amendments the drafting committee considered making references in the Official Comments to similar provisions in the CISG. However, upon reflection, the drafting committee concluded that these references should not be included because their inclusion might suggest a greater similarity between the Article 2 and the CISG than in fact exists.

40 Commercial law in the United States is for the most part state and not federal law. But because of the Uniform Commercial Code, much of the commercial laws are drafted for adoption by the several states with the idea that there will be national uniformity. See also footnote 46, infra.

16

Principles will have any influence on the statutory commercial law in the United States any time

soon.

Given the experience with the revisions of the Uniform Commercial Code, though, it is

unlikely that the Principles would have any influence on domestic American law even if were

being revised today. Ideally a revision of commercial law would look at other legal systems and

sets of rules, such as the Principles, for solutions to existing problems as well as for

improvements over existing law. In the revision process in the United States we found structural

challenges that impeded this.

First, there was the question of the mandate. The primary goal was to resolve existing

problems, and to the extent practical, harmonize the domestic commercial law with international

law. But because the Principles are not binding positive law, the efforts to harmonize, and all the

complications that it entailed, the drafters did not focus on soft law such as the Principles,

because the soft law did not create a conflict between two sets of binding positive law, and

therefore there was nothing seen in the Principles to harmonize with the domestic law.

Moreover, when the drafters confronted the actual and perceived problems of the existing

law, the focus tended to be inward looking; the focus was on correcting perceived existing

deficiencies as opposed to looking outward toward other sources of law such as the Principles.

It is also the case that many who were tasked with the revisions brought to the process expertise

in the laws being revised, but most had no particular expertise with other laws such as the

Principles.

A second problem the drafters confronted in the revision of American commercial law

with consideration of international norms, such as the Principles, was the accommodation of

17

different legal traditions.41 The updating of commercial law should, ideally, take into account

the globalization of trade and economies, and this should entail looking at a variety of other

commercial legal regimes. However, to the extent that this crosses different legal traditions,

revision efforts that attempt to bridge these legal traditions is quite difficult. To the extent that

the Principles embody Civil law concepts, this will create difficulty in their use as a source for

American law in the future.42

It is yet to be seen what influence the Principles may have for other domestic legislation

in the future. It may well be that they are used as a model because they are well drafted and

balanced,

43 or this may occur simply because they are a convenient and ready source of law and

therefore eliminate the difficulty of drafting new language.44

VI. Comparison of the Major Rules of the Principles with American Commercial Contract Law

They have not nor are likely to

have much influence on the development of American law.

41 Primarily, this arises in the context of trying to adjust rules that accommodate both the Common Law and the Civil Law traditions. 42 For a general discussion of the incompatibility issues in an attempt to reconcile the American domestic law and the CISG, see Henry D. Gabriel “The Inapplicability of the United Nations Convention on the International Sale of Goods as a Model for the revision of Article Two of the Uniform Commercial Code” 72 Tul L. Rev. 1995 (1998).

Although there have been many successful efforts to harmonize international commercial law, this success has largely been due to the fact that its principles have only to be compatible with international commercial practice, not with domestic laws based on civil law or common law traditions. An obvious exception is the United Nationals Convention on Contracts for the International Sale of Goods (CISG). The CISG successfully straddles both the common law and the Civil Law, and avoids grappling with the major distinctions between the two. See Gabriel, CONTRACTS FOR THE SALE OF GOODS: A COMPARISON OF U.S. AND INTERNATIONAL LAW, p.14, Oxford Univ. Press (2009). 43 This would appear to be the case with the recent promulgation by the Organization for the Harmonization of Business Law in Africa of a new Uniform Law on Contracts, which is based on the UNIDROIT Principles of International Commercial Contracts.

44 Describing the influence of the American Uniform Commercial Code and the Restatement Second of Contracts on the drafting of the UNIDROIT Principles of International Contracts, the late Professor Allan Farnsworth noted: unlike any other common lawyer, “ I came with texts in statutory form: the Uniform Commercial Code and the Restatement (Second) of Contracts. No decision of a common law tribunal--not even the House of Lords--was as persuasive as a bit of blackletter text.” Farnsworth “The American Provenance of the UNIDROIT Principles”, 72 Tulane Law Review 1985, 1990 (1998).

18

As American contracting parties choose to adopt the Principles in their agreements in the

future, they will discover, for the most part, that the Principles are consistent with American law

and will cause little conflict. Moreover, except to the extent that the Principles derogate from

mandatory domestic law,45

American commercial contract law is a blend of statutory and case law. Moreover,

because commercial law is for the most part state, and not federal law, there are fifty separate

state (and several district and territory) laws that govern commercial transactions.

the Principles will govern over otherwise applicable domestic law

that would apply if the parties had not chosen the Principles. There are, however, some areas

where the Principles vary from American commercial contract law, and in this section, I

highlight the main issues.

46 Thus, to

speak of an American law of commercial contracts is somewhat misleading. However, as most

of American commercial law47

a. Structural Differences and Major Concepts

is based on general common law principles, and the various

jurisdictions have long looked to the law of their sister American jurisdiction in the development

of contract law, it can be accurately said that there are general principles of American

commercial contracts. These general contract rules can be compared to the Principles.

45 See PICC art. 1.4. 46 With the Uniform Commercial Code articles on contracts for the sale of goods enacted in all states except Louisiana, at least for these limited types of contracts (contracts for the sale of goods) it is possible to discuss American commercial contracts. 47 With the exception of Louisiana, which is a Civil Law jurisdiction.

19

American commercial contract law operates within a context of established principles of

the Common law of contracts. Conversely, the Principles are not based on any particular set of

underlying established domestic legal principles. Instead, they were drafted to be independent of,

rather than to work in conjunction with, any particular domestic law or legal tradition.48

The Principles also lack two traditional staples of the common law: the statute of frauds

and the parol evidence rule.

Thus,

any comparative discussion must recognize the lack of a common legal tradition. This is not just

an academic concern of comparative legal scholars, but also a concern of practicing lawyers

who would have to navigate in unfamiliar territory if the Principles were used.

49 The absence of a statute of frauds (certain contracts need to be in

writing to be enforceable) is only a theoretical difference- most international contracts will have

a writing or electronic equivalent, and moreover the writing requirement might enforceable

anyway under the Principles as a mandatory rule.50

The lack of a parol evidence rule may also be more of a theoretical distinction. This goes to

the general question of contract interpretation. The Principles set out a general standard of

interpretation of statements and other conduct that is derived from Article 8 of the Convention:

(1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention.

48 See Franco Ferrari, Universal and Regional Sales Law: Can They Coexist?, 8 UNIF. L. REV. 2003-1/2, 177 (2003);

Gonzalo Parra-Aranguren, Conflict of Law Aspects of the UNIDROIT Principles of International Commercial Contracts, 69 TUL. L. REV. 1239 (1995); Alejandro M. Garro, Reconciliation of Legal Traditions in the U.N. Convention on Contracts for the International Sale of Goods, 23 INT’L LAW. 443, 480–83 (1989). 49 It, of course should be noted that the United Nations Convention on International Sale of Goods also excludes these, and the Convention also excludes the statute of frauds and the parol evidence rule. The Convention is the law of the United States, as the United States has ratified it, but in these areas, as with some other areas of the Convention, provide rules that are not otherwise in conformity with American law. 50 PICC art. 1.4 .Presupposing the possibility of a mandatory writing requirement in the appropriate enforcing jurisdiction, the Principles define“writing” in PICC Article 1.10.

It has been noted that “[a]rticle 1.10, which, in defining ‘writing’ . . . takes into account the fact that messages and other forms of information are increasingly exchanged in a paper-free fashion by electronic means.”

20

(2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.51

The Principles also have a general rule of interpretation of party intent that is a modified rule

of objective interpretation:

(1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.52

This rule is similar to the Common law American approach—the meaning that reasonable

persons would have given the language controls unless both parties intended a different

meaning.53

In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including

Moreover, similar to the Common law, but without the hierarchical ordering, the

Principles set out a categorization of the types of evidence that might be used to show intent:

(a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages.54

Without delving into the complexities of the Common law parol evidence rule, the Principles do,

unlike the Convention, provide guidance on the effect of a merger clause:

51 PICC art. 4.2. 52 PICC art. 4.1. 53 See RESTATEMENT (SECOND) OF CONTRACTS § 201(1):

Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. 54 PICC art. 4.3.

21

A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.55

This is similar to the Common law parol evidence rule, which provides that an integrated

agreement can be explained by evidence outside the record, because it cannot be contradicted or

supplemented by terms outside the agreement, as it is more limited in scope since this rule only

applies where there is a merger clause. It should also be noted that unlike this rule, there is no

clear position in American law on whether a merger clause is conclusive, as it is in the

Principles, or merely presumptive.

The law of warranty for contracts for the sale of goods is another example where there is

a major divergence between American law and the Principles. The Principles, and the American

Uniform Commercial Code both assume that the seller must tender goods that conform to the

contract. Under the Uniform Commercial Code, this is resolved under a theory of warranty.56

The American law of warranty is an outgrowth of a long history of Common law responsibility

that has its roots in both contract and tort.57 Thus, the Code rules are very much grounded in this

history. In contrast, the Principles does not have a general theory of warranty. Instead, under the

Principles, the obligation to deliver goods that conform to the contract description are derived

from the general obligation to perform at a reasonable quality58

55 PICC art. 2.17.

and the duty to achieve a

56 The seller may make an express warranty, an implied warranty of merchantability, or an implied warranty of fitness for particular purpose or all three in a particular transaction. These warranties are terms of the contract to which the goods must conform. See U.C.C. Rev. §2-313 and 2-315. 57 For the classic and standard article tracing the rise of American warranty law through the morass of tort and contract, see William L. Prosser, The Implied Warranty of Merchantable Quality, 27 MINN. L. REV. 117 (1943). 58 PICC Article 5.6.

22

specific result.59 Unlike the American law of warranty, the Principles do not specify any specific

terms, such as “warranty” to define these obligations. Although the difference is primarily one of

terminology, the difference can be significant. Under the Uniform Commercial Code, one is

often looking to the language of warranty as well as the well-established rules based on the

warranty language.60

This point is emphasized in the modification and disclaimer provision for warranties.

Because the term “warranty” is not used, the Principles have no provision for the “exclusion or

modification” of warranties. The Principles deal with disputes over quality by providing a

flexible standard that requires where the quality is neither fixed by nor determinable from the

contract, a party is bound to render performance of a quality that is reasonable and not less than

average in the circumstances.

In contrast, because the Principles do not work in terms of warranty, there

are no familiar terms to help grasp the similarities.

61 The Uniform Commercial Code, on the other hand, offers quite a

bit of protection to the buyer against attempts by the seller to exclude or limit express and

implied warranties by agreement. Thus, for example, if an attempt to negate or limit cannot be

construed as reasonably consistent with an express warranty, the disclaimer is “inoperative.”62

Similarly, a disclaimer of an implied warranty of merchantability must meet certain requirements

of form and disclosure.63 Thus, the effort to limit or exclude “must mention merchantability” and

if the disclaimer is in writing, “must be conspicuous.”64

59 PICC Article 5.4(1).

60 The American courts have had this problem with the CISG, and there has been a tendency for the courts to analyze CISG cases in terms of warranty law. See e.g., Schmitz-Werke Gmbh & Co. v. Rockland Industries, Inc., 37 Fed. Appx. 687 (4th Cir. 2002). 61 PICC art. 5.6. 62 U.C.C. Rev. §2-316(1). 63 U.C.C. Rev. §2-316(2). 64 Ibid.

23

Although it has been proclaimed as “the Magna Carta of international commercial law”,

65 the concept of good faith and fair dealing has no fixed meaning in the law. This is another

legal concept that could not be said to be the same in American commercial law and the

Principles. The Principles expressly state a standard of good faith for the conduct of the parties:

“Each party must act in accordance with good faith and fair dealing in international trade.”66

This obligation67exists throughout the whole of the contract, including negotiations.68 This

application of the concept is similar to that taken by many Civilian systems, but not necessarily

that taken by some Common law jurisdictions.69

65 K.P. BERGER, THE CREEPING CODIFICATION OF THE LEX MERCATORIA, at 165 (Kluwer Law International 1999).

Thus, in no sense can it be assumed to be a

universal application of the concept of good faith.

66 PICC art. 1.7(1). 67 This obligation is nonwaivable, PICC art. 1.7(2). 68 Comment 1 to PICC art. 1.7. 69 See, e.g., Roy Goode, THE CONCEPT OF “GOOD FAITH” IN ENGLISH LAW (Centro di Studi e Ricerche di Diretto Comparatato e Straniero 1992).

24

It has been suggested “Good faith” under the Principles is an objective, not a subjective

standard.70 This is consistent with many Civil Law jurisdictions,71 but not necessarily the

standard in some Common law jurisdictions. The concept of “good faith” in the Principles

includes both “abuse of rights” as well as “inconsistent behavior.”72

The meaning of “good faith” in the Uniform Commercial Code, in contrast to the

Principles, is bifurcated. Most articles of the Code have adopted a definition of good faith that

applies both an objective and subjective standard to all parties.

73 Article 5: Letters of Credit does

not adopt the objective component of the definition. This is a deliberate decision based on

customary practices with regard to letters of credit.74

b. Formation

The rules of contract formation under the Principles, for the most part, are consistent the

American law. The Principles do not define the necessary terms of exchange between the

parties, and therefore the issue of Common law consideration or Civil Law cause is avoided. As

for the rules of offer and acceptance, the Principles differ from the American common law on the

question of when an acceptance becomes effective. Under the Principles, an acceptance is

70 One rationale for this is that because “good faith” is coupled with the term “fair dealing,” which is understood to be an objective standard, “good faith” should likewise be interpreted as an objective standard, BONELL, INTERNATIONAL RESTATEMENT, supra note 33, at 131. However, it is just as reasonable to assume that because both terms are present, “good faith” should be interpreted subjectively to complement the objective standard of “fair dealing,” 71 See, e.g., A.S. Hartkamp, Judicial Discretion Under the New Civil Code of the Netherlands, 40 AM. J. COMP. L. 551, 554–555 (1992). 72 BONELL, INTERNATIONAL RESTATEMENT, supra note 33, at 133–134. These are both Civil Law concepts. Inconsistent behavior most clearly resembles the doctrine of equitable estoppel in the Common Law. 73 See e.g., §1-201(20) of revised Article 1; §3-103(6) of revised Article 3, imported into Article 4 by §4-104(c); §4A-105(a)(6); §7-102(a)(6) of revised Article 7; §8-102(a)(10) of amended Article 8; and §9-102(a)(43) of revised Article 9. 74 See §5-102(a)(7).

25

effective upon receipt of the acceptance by the offeror; 75under the Common law, it is effective

upon dispatch.76

c. Fundamental Non-Performance

The Principles provide that a party may suspend its own performance and terminate the

contract upon the other party’s “ fundamental non-performance”77 As with any broad concept,

the term “fundamental non-performance” is not subject to a precise definition, and there in no

attempt in the Principles to do so.78

The Common law does not have a concept directly equivalent to fundamental

nonperformance. However, developing from the doctrine of conditions in contracts, the Common

law

79 has developed a similar concept of “material breach.” The Restatement defines a material

breach as “a condition of each party’s remaining duties to render performances to be exchanged

under an exchange of promise that there be no uncured material failure by the other party to

render such performance due at an earlier time.”80 Therefore, to the extent that there is a material

breach, as with a fundamental non-performance under the Principles, the non-breaching party has

not only a right to damages, but also the right to quit performance of that party’s own

obligations. Moreover, the factors for determining a material breach are similar to the factors one

would consider for a fundamental nonperformance.81

75 PICC Article 2.3(1).

76 Restatement (Second) of Contracts § 63. 77 PICC Article 7.3.(1). 78 General guidance on the types of factors to consider is provided in PICC Article 7.3.(1). 79 At least the American branch. At least one Canadian court has concurred that the Common Law standard is the same as the Convention for fundamental breach. See Diversitel Communications Inc. v. Glacier Bay Inc., 42 C.P.C. (5th) 196 (2003). 80 RESTATEMENT (SECOND) OF CONTRACTS §237. 81 RESTATEMENT (SECOND) OF CONTRACTS §241.

26

Yet, the cautious lawyer would be circumspect in equating the two concepts, for one can

never be sure a court or arbitral tribunal will also equate “fundamental non-performance” and

“material breach”. This fear can be easily alleviated by providing clear express guidance for the

grounds for termination. Doing so would override the standards for termination and insure there

was no basis for different standards.

d. Contract Modification

The traditional Common law rule for contract modification requires new consideration to

modify the agreement. The Principles, conversely, actively eschew the necessity of new

“consideration” or “cause” and provide simply that “[a] contract is concluded, modified or

terminated by the mere agreement of the parties, without any further requirements.”82 Thus, the

Principles simply do not address the question of whether consideration or cause (in other words,

whether additional value) is necessary for a modification of the agreement. Deviating from the

traditional common law rule, this is the approach taken by the American Uniform Commercial

Code for contracts for the sale of goods.83

e. Damages

82 PICC art. 3.2. 83 Uniform Commercial Code §2-209.

27

Consistent with American Common law, the Principles provide for a general right of damages for

the aggrieved party.84 Also consistent, in appropriate cases, under the Principles this would include

personal injury losses.85 In addition, consistent with the American Common law, under the Principles the

damages must be foreseeable, and the Principles adopt both an objective as well as a subjective standard

of foreseeability.86

Across the board, the right to and the measurement of damages is consistent between

the Principles and American commercial contract law.

f. Assignment of Rights

The Principles, consistent with the American commercial law, assume contractual rights are

freely assignable.87 This rule, in American law, of course is a general rule subject to many statutory

exceptions. An agreement otherwise governed by the Principles would also be subject to these statutory

exceptions, as the exceptions would be mandatory rules that would govern over the default provisions of

the Principles,88

Unlike the traditional common law approach to assignment of rights, the Principle specifically

allow the transfer of future rights. Many older American cases did not allow for this on the theoretical

basis that one cannot assign a right that does not exist. Most courts would allow the assignment of future

rights today as an “equitable assignment’,

thus effectively creating the same standard for both American commercial law and he

Principles. Also consistent with American commercial law, the Principles recognize non-assignability

clauses thereby allowing the parties the freedom to restrict the assignments of contractual rights.

89

and therefore would come to a result consistent with the

Principles.

84 PICC art.7.4.2. 85 PICC art. 7.4.2(2). 86 PICC art. 7.4.4. 87 88 89

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g. Illegality

A restriction on the enforcement of illegal contracts could serve as a powerful tool to encourage

positive behavior between contracting parties. After several years of discussion on this issue, however,

the drafting committee for the Principles was unable to come up with a standard that was effectively

consistent among the various legal systems. Thus, although adding a section on illegal contracts, the

Principles in fact do not create any substantive rule for illegal contracts. Instead, the Principles simply

provide that a provision that otherwise infringes a mandatory rule under Article 1.4, the provision is

unenforceable.90 Because the contractual provision would be subject to the otherwise applicable

mandatory rule under Article 1.4, the articles on illegality91

h. Conditions

add nothing. By deferring to mandatory rules

in the domestic law, the article on illegality in the Principles are by definition fully in accord with

American commercial law.

Under the American law of contracts, a condition requires the existence of a contract.

The duties of the respective parties may be conditional such that the duties do not come into

effect92 or are suspended93

Conditions governed by the Principles include both those that

unless something occurs or doe not occur. In either case, there is an

existing contract that creates the condition and the parties’ contingent duties under it. The

Principles provide a similar framework, but also provide for the possibility that the existence of

the contract itself is subject to a condition:

determine whether a contract exists and those that determine obligations within a contract. Accordingly, application of the Principles may in some circumstances impose duties even in the absence of a

90 PICC art. 3.3.1. 91 92 Condition precedent. The Principles adopt the Civil Law terminology, and refer to this as a suspensive condition. PICC art. 5.3.1

93Condition subsequent. The Principles adopt the Civil Law terminology, and refer to this as a resolutive condition. PICC art. 5.3.1.

29

contract.94

This concept is foreign to American law, and how it would be enforced in an American court is

not clear. Certainly a court could not enforce the condition under contract law given the non-

existence of the contract. To the extent that it would be fair to enforce the condition, one can

assume courts either finding an contract subject to a condition as indicating the parties’ true

intent, or finding some extra contractual basis for enforcement such as promissory estoppel.

i. Limitation Periods

The Principles provide a limitation period of three years from the time the party know or

should have known of the basis for the action subject to maximum period of ten years.95

All legal systems recognize the influence of passage of time on rights. There are two basic systems. Under one system, the passage of time extinguishes rights and actions. Under the other system, the passage of time operates only as a defense against an action in court. Under the Principles a lapse of time does not extinguish rights, but operates only as a defense.

How the

limitation period in the Principles operates within the framework of American law requires an

appreciation of the effect of a limitation period in American law. The Principles note that:

96

Under American law, a limitation periods are created by statute, and whether they are considered

jurisdictional and therefore extinguish the rights, or are in the nature of a defense and therefore

have to be affirmatively raised or are therefore waived, varies from state to state and statute to

statute. Given this complexity, it is not possible to determine with any sense of accuracy how

the limitations period in the Principles would work with American law. However, some general

observations can be made.

94 PICC art. 5.3.1. comment 1. 95 PICC art. 10.2 96 PICC art.101. comment 1.

30

First, to the extent that the domestic limitations period is jurisdictional, it is likely to be

treated as a mandatory rule under Article 1.4, and therefore if the domestic limitation period is

less than the one provided by the Principles, the shorter domestic period will govern as the court

would not have jurisdiction to hear the case after this time. If the limitation period under the

Principles is shorter, that shorter period should also govern as a matter of party choice. In other

words, while a court would have jurisdiction to hear the claim, the parties would have

contractually limited it, and this limitation should be binding.

It the domestic limitation period is not jurisdictional, but simply a defense to

enforcement, if the limitation period in the Principles is the shorter period, then the parties

should be held to have agreed by party choice to the shorter period. If the domestic limitation

period is the shorter period, then it would apply if the party in whose favor the period would run

raises it as a defense.

VII. CONCLUSION

Although originally promulgated in 1994, the UNIDROIT Principles have had virtually

no influence on American law. This might be due to a lack of familiarity with the Principles

among American contracting parties and American lawyers.

It may also be due to a lack of recognition as to the usefulness of Principles as a choice of

law. As explained above, the primary question most transactional lawyers asked is which law

applies so that they know what to contract around. Given that, there is a natural resistance to

adopt a new and unfamiliar set of legal rules irrespective of how balanced and well written they

may be.

American lawyers have slowly become familiar with the United Nations Convention on

Contracts for the International Sale of Goods, but this is due primarily because the Convention is

31

binding law, and therefore it governs many agreements. Even here, for many years, parties

routinely opted out of the Convention primarily for fear of having to master a new and unknown

body of law. Whether parties will embrace the Principles, another new and unknown body of

law, without the impetus of it being binding, is yet to be seen.

UNIDROIT

International Institute for the Unification of Private Law

UNIDROIT PRINCIPLES

OF INTERNATIONAL COMMERCIAL CONTRACTS

2010

x

WORKING GROUP FOR THE PREPARATION OF

THE UNIDROIT PRINCIPLES 2010 MEMBERS Berhooz AKHLAGHI — Partner, International Law Office Dr. Berhooz

Akhlaghi & Associates, Tehran Guido ALPA — Professor of Law, University of Rome I “La Sapienza” Michael Joachim BONELL — Professor of Law (emeritus), University

of Rome I “La Sapienza”; Consultant, UNIDROIT; Rapporteur on Chapter 3, Section 3 (2009-2010) and on the Revised Comments to Article 1.4; Chairman of the Working Group

Paul-André CREPEAU — Professor of Law (emeritus), McGill Univer-sity, Montreal

Samuel K. DATE-BAH — Justice, Supreme Court of Ghana Bénédicte FAUVARQUE-COSSON — Professor of Law, Université

Panthéon-Assas Paris II; Rapporteur on Chapter 5, Section 3

Paul FINN — Judge, Federal Court of Australia Marcel FONTAINE — Professor of Law (emeritus), Centre de droit des

Obligations, Université Catholique de Louvain, Louvain-la-Neuve; Rapporteur on Chapter 11; Chairman of the Editorial Committee for the French language version

Michael P. FURMSTON — Dean of Law and Professor of Law, Singapore Management University; Rapporteur on Chapter 3, Section 3 (2006-2008)

Henry D. GABRIEL — Professor of Law, Elon University Law School, Greensboro, N.C.; Member of the UNIDROIT Governing Council; Chairman of the Editorial Committee

Lauro GAMA Jr. — Professor of Law, Pontifical Catholic University of Rio de Janeiro (PUC-Rio); Partner, Binenbojm, Gama & Carvalho Britto Advogados, Rio de Janeiro (2008-2010)

Sir Roy GOODE — Professor of Law (emeritus), University of Oxford; Honorary Member of the UNIDROIT Governing Council

UNIDROIT Principles

xi

Arthur S. HARTKAMP — Professor of European Private Law, Radboud University Nijmegen; Member of the UNIDROIT Governing Council

Alexander S. KOMAROV — Professor of Law, Head of Private Law Department, Russian Academy of Foreign Trade, Moscow; Honorary Member of the UNIDROIT Governing Council

Ole LANDO — Professor of Law (emeritus), Copenhagen Business School

Takashi UCHIDA — Professor of Law, Faculty of Law, University of Tokyo; Senior Advisor on Legislative Reform, Civil Affairs Bureau, Ministry of Justice, Tokyo

João Baptista VILLELA — Professor of Law, Universidade Federal de Minas Gerais, Belo Horizonte (2006-2007)

Pierre WIDMER — Professor of Law (emeritus), Former Director of the Swiss Institute of Comparative Law, Lausanne; Honorary Member of the UNIDROIT Governing Council

ZHANG Yuqing — Professor of Law, Zhang Yuqing Law Firm, Beijing; Honorary Member of the UNIDROIT Governing Council

Reinhard ZIMMERMANN — Professor of Law, Director at the Max-Planck-Institut für ausländisches und internationales Privat-recht, Hamburg; Rapporteur on Articles 3.2.14, 3.2.15, 7.3.6 and 7.3.7

OBSERVERS Ibrahim Hassan AL MULLA — General Manager, Emirates International

Law Center, Dubai; Observer for the Emirates International Law Center

Eckart BRÖDERMANN — Partner, Brödermann & Jahn, Hamburg; Observer for the Space Law Committee, International Bar Association

Alejandro CARBALLO — Lawyer, Cuatrecasas Law Firm, Madrid; Observer for the American Society of International Law, Private International Law Group

Christine CHAPPUIS — Professor of Law, Faculty of Law, University of Geneva; Observer for the Groupe de Travail Contrats Internationaux

UNIDROIT Principles

xii

Chang-ho CHUNG — Judge, Gwang-ju District Court of Korea; Observer for the Government of the Republic of Korea

Neil B. COHEN — Jeffrey D. Forchelli Professor of Law, Brooklyn Law School, New York; Observer for the American Law Institute

François DESSEMONTET — Professor of Law, University of Lausanne; Observer for the Swiss Arbitration Association

Lauro GAMA Jr. — Professor of Law, Pontifical Catholic University of Rio de Janeiro (PUC-Rio); Partner, Binenbojm, Gama & Carvalho Britto Advogados, Rio de Janeiro; Observer for the Brazilian Branch of the International Law Association (2007)

Alejandro GARRO — Professor of Law, Columbia Law School, New York; Observer for the New York City Bar

Attila HARMATHY — Professor of Law (emeritus), Faculty of Law Eötvös Loránd University, Budapest; Member of the UNIDROIT Governing Council; Observer for the Arbitration Court of the Hungarian Chamber of Commerce and Industry

Emmanuel JOLIVET — General Counsel, ICC International Court of Arbitration; Observer for the ICC International Court of Arbitration

Timothy LEMAY — Principal Legal Officer and Head of the Legislative Branch, International Trade Law Division, United Nations Commission on International Trade Law (UNCITRAL); Observer for UNCITRAL (2010)

Pilar PERALES VISCASILLAS — Professor of Law, Universidad de La Rioja, Logroño; Observer for the National Law Center for Inter-American Free Trade

Marta PERTEGÁS — Secretary, Hague Conference on Private Inter-national Law; Observer for the Hague Conference on Private International Law

Hilmar RAESCHKE-KESSLER — Honorary Professor of Law, Rechts-anwalt beim Bundesgerichtshof, Karlsruhe; Observer for the German Arbitration Institution

Giorgio SCHIAVONI — Vice President of the Milan Chamber of National and International Arbitration; Observer for the Milan Chamber of National and International Arbitration

Jeremy SHARPE — Attorney-Adviser (International), U.S. Department of State, Washington; Observer for the Institute for

UNIDROIT Principles

xiii

Transnational Arbitration of the Center for American and International Law

Matthew SILLET — Deputy Registrar, London Court of International Arbitration; Observer for the London Court of International Arbitration

Renaud SORIEUL — Director, International Trade Law Division, United Nations Office of Legal Affairs and Secretary of the United Nations Commission on International Trade Law (UNCITRAL); Observer for UNCITRAL (2006-2009)

Christian von BAR — Professor of Law, Director Institut f. Europäische Rechtswissenschaft, University of Osnabruck; Observer for the Study Group for a European Civil Code

WANG Wenjing — Director, Arbitration Research Institute, China International Economic and Trade Arbitration Commission; Observer for the China International Economic and Trade Arbitration Commission

Secretaries to the Working Group were Paula HOWARTH and Lena

PETERS of the UNIDROIT Secretariat

xxxix

CONTENTS Foreword to the 2010 edition v Introduction to the 2010 edition vii

The UNIDROIT Governing Council (2009-2013) ix Members of the Working Group (2010) x

Foreword to the 2004 edition xv Introduction to the 2004 edition xvi

The UNIDROIT Governing Council (1999-2004) xviii Members of the Working Group (2004) xix

Foreword to the 1994 edition xxi Introduction to the 1994 edition xxii

The UNIDROIT Governing Council (1994-1998) xxv Members of the Working Group (1994) xxvi

Table of correspondence of the articles of the 1994, 2004 and 2010 editions of the UNIDROIT Principles xxxi

PREAMBLE (Purpose of the Principles) 1

CHAPTER 1: GENERAL PROVISIONS Article 1.1 (Freedom of contract) 8 Article 1.2 (No form required) 9 Article 1.3 (Binding character of contract) 10 Article 1.4 (Mandatory rules) 12 Article 1.5 (Exclusion or modification by the parties) 14 Article 1.6 (Interpretation and supplementation of the Principles) 16 Article 1.7 (Good faith and fair dealing) 18 Article 1.8 (Inconsistent behaviour) 22 Article 1.9 (Usages and practices) 25 Article 1.10 (Notice) 28 Article 1.11 (Definitions) 30 Article 1.12 (Computation of time set by parties) 32

CHAPTER 2: FORMATION AND AUTHORITY OF AGENTS

Section 1: Formation

Article 2.1.1 (Manner of formation) 35 Article 2.1.2 (Definition of offer) 36 Article 2.1.3 (Withdrawal of offer) 38 Article 2.1.4 (Revocation of offer) 39 Article 2.1.5 (Rejection of offer) 42

UNIDROIT Principles

xl

Article 2.1.6 (Mode of acceptance) 43 Article 2.1.7 (Time of acceptance) 46 Article 2.1.8 (Acceptance within a fixed period of time) 47 Article 2.1.9 (Late acceptance. Delay in transmission) 48 Article 2.1.10 (Withdrawal of acceptance) 50 Article 2.1.11 (Modified acceptance) 50 Article 2.1.12 (Writings in confirmation) 52 Article 2.1.13 (Conclusion of contract dependent on agreement on specific matters or in a particular form) 54 Article 2.1.14 (Contract with terms deliberately left open) 56 Article 2.1.15 (Negotiations in bad faith) 59 Article 2.1.16 (Duty of confidentiality) 62 Article 2.1.17 (Merger clauses) 64 Article 2.1.18 (Modification in a particular form) 64 Article 2.1.19 (Contracting under standard terms) 66 Article 2.1.20 (Surprising terms) 68 Article 2.1.21 (Conflict between standard terms and non-standard terms) 70 Article 2.1.22 (Battle of forms) 71

Section 2: Authority of agents

Article 2.2.1 (Scope of the Section) 74 Article 2.2.2 (Establishment and scope of the authority of the agent) 77 Article 2.2.3 (Agency disclosed) 78 Article 2.2.4 (Agency undisclosed) 81 Article 2.2.5 (Agent acting without or exceeding its authority) 82 Article 2.2.6 (Liability of agent acting without or exceeding

its authority) 84 Article 2.2.7 (Conflict of interests) 86 Article 2.2.8 (Sub-agency) 88 Article 2.2.9 (Ratification) 90 Article 2.2.10 (Termination of authority) 92

CHAPTER 3: VALIDITY

Section 1: General Provisions

Article 3.1.1 (Matters not covered) 94 Article 3.1.2 (Validity of mere agreement) 94 Article 3.1.3 (Initial impossibility) 96 Article 3.1.4 (Mandatory character of the provisions) 98

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Section 2: Grounds for avoidance

Article 3.2.1 (Definition of mistake) 99 Article 3.2.2 (Relevant mistake) 100 Article 3.2.3 (Error in expression or transmission) 103 Article 3.2.4 (Remedies for non-performance) 104 Article 3.2.5 (Fraud) 105 Article 3.2.6 (Threat) 106 Article 3.2.7 (Gross disparity) 108 Article 3.2.8 (Third persons) 110 Article 3.2.9 (Confirmation) 112 Article 3.2.10 (Loss of right to avoid) 112 Article 3.2.11 (Notice of avoidance) 114 Article 3.2.12 (Time limits) 115 Article 3.2.13 (Partial avoidance) 115 Article 3.2.14 (Retroactive effect of avoidance) 116 Article 3.2.15 (Restitution) 117 Article 3.2.16 (Damages) 121 Article 3.2.17 (Unilateral declarations) 122

Section 3: Illegality

Article 3.3.1 (Contracts infringing mandatory rules) 124 Article 3.3.2 (Restitution) 134

CHAPTER 4: INTERPRETATION

Article 4.1 (Intention of the parties) 137 Article 4.2 (Interpretation of statements and other conduct) 138 Article 4.3 (Relevant circumstances) 140 Article 4.4 (Reference to contract or statement as a whole) 142 Article 4.5 (All terms to be given effect) 143 Article 4.6 (Contra proferentem rule) 144 Article 4.7 (Linguistic discrepancies) 145 Article 4.8 (Supplying an omitted term) 146

CHAPTER 5: CONTENT, THIRD PARTY RIGHTS AND CONDITIONS

Section 1: Content

Article 5.1.1 (Express and implied obligations) 148 Article 5.1.2 (Implied obligations) 148 Article 5.1.3 (Co-operation between the parties) 149 Article 5.1.4 (Duty to achieve a specific result. Duty of best efforts) 150 Article 5.1.5 (Determination of kind of duty involved) 152 Article 5.1.6 (Determination of quality of performance) 154

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Article 5.1.7 (Price determination) 156 Article 5.1.8 (Contract for an indefinite period) 159 Article 5.1.9 (Release by agreement) 160

Section 2: Third party rights

Article 5.2.1 (Contracts in favour of third parties) 161 Article 5.2.2 (Third party identifiable) 163 Article 5.2.3 (Exclusion and limitation clauses) 164 Article 5.2.4 (Defences) 165 Article 5.2.5 (Revocation) 166 Article 5.2.6 (Renunciation) 167

Section 3: Conditions

Article 5.3.1 (Types of condition) 168 Article 5.3.2 (Effect of conditions) 173 Article 5.3.3 (Interference with conditions) 174 Article 5.3.4 (Duty to preserve rights) 176 Article 5.3.5 (Restitution in case of fulfilment of a resolutive condition) 177

CHAPTER 6: PERFORMANCE

Section 1: Performance in General

Article 6.1.1 (Time of performance) 179 Article 6.1.2 (Performance at one time or in instalments) 180 Article 6.1.3 (Partial performance) 181 Article 6.1.4 (Order of performance) 183 Article 6.1.5 (Earlier performance) 185 Article 6.1.6 (Place of performance) 188 Article 6.1.7 (Payment by cheque or other instrument) 190 Article 6.1.8 (Payment by funds transfer) 191 Article 6.1.9 (Currency of payment) 193 Article 6.1.10 (Currency not expressed) 196 Article 6.1.11 (Costs of performance) 197 Article 6.1.12 (Imputation of payments) 198 Article 6.1.13 (Imputation of non-monetary obligations) 199 Article 6.1.14 (Application for public permission) 200 Article 6.1.15 (Procedure in applying for permission) 204 Article 6.1.16 (Permission neither granted nor refused) 207 Article 6.1.17 (Permission refused) 209

Section 2: Hardship

Article 6.2.1 (Contract to be observed) 212 Article 6.2.2 (Definition of hardship) 213 Article 6.2.3 (Effects of hardship) 218

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CHAPTER 7: NON-PERFORMANCE

Section 1: Non-performance in general

Article 7.1.1 (Non-performance defined) 223 Article 7.1.2 (Interference by the other party) 224 Article 7.1.3 (Withholding performance) 225 Article 7.1.4 (Cure by non-performing party) 226 Article 7.1.5 (Additional period for performance) 230 Article 7.1.6 (Exemption clauses) 233 Article 7.1.7 (Force majeure) 236

Section 2: Right to performance

Article 7.2.1 (Performance of monetary obligation) 239 Article 7.2.2 (Performance of non-monetary obligation) 239 Article 7.2.3 (Repair and replacement of defective performance) 243 Article 7.2.4 (Judicial penalty) 245 Article 7.2.5 (Change of remedy) 247

Section 3: Termination

Article 7.3.1 (Right to terminate the contract) 249 Article 7.3.2 (Notice of termination) 252 Article 7.3.3 (Anticipatory non-performance) 254 Article 7.3.4 (Adequate assurance of due performance) 255 Article 7.3.5 (Effects of termination in general) 256 Article 7.3.6 (Restitution with respect to contracts to be performed at one time) 257 Article 7.3.7 (Restitution with respect to contracts to be performed over a period of time) 263

Section 4: Damages

Article 7.4.1 (Right to damages) 265 Article 7.4.2 (Full compensation) 266 Article 7.4.3 (Certainty of harm) 269 Article 7.4.4 (Foreseeability of harm) 271 Article 7.4.5 (Proof of harm in case of replacement transaction) 272 Article 7.4.6 (Proof of harm by current price) 274 Article 7.4.7 (Harm due in part to aggrieved party) 275 Article 7.4.8 (Mitigation of harm) 277 Article 7.4.9 (Interest for failure to pay money) 279 Article 7.4.10 (Interest on damages) 281 Article 7.4.11 (Manner of monetary redress) 282 Article 7.4.12 (Currency in which to assess damages) 283 Article 7.4.13 (Agreed payment for non-performance) 284

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CHAPTER 8: SET-OFF

Article 8.1 (Conditions of set-off) 287 Article 8.2 (Foreign currency set-off) 293 Article 8.3 (Set-off by notice) 294 Article 8.4 (Content of notice) 294 Article 8.5 (Effect of set-off) 296

CHAPTER 9: ASSIGNMENT OF RIGHTS, TRANSFER OF OBLIGATIONS, ASSIGNMENT OF CONTRACTS

Section 1: Assignment of rights Article 9.1.1 (Definitions) 298 Article 9.1.2 (Exclusions) 299 Article 9.1.3 (Assignability of non-monetary rights) 301 Article 9.1.4 (Partial assignment) 302 Article 9.1.5 (Future rights) 303 Article 9.1.6 (Rights assigned without individual specification) 304 Article 9.1.7 (Agreement between assignor and assignee sufficient) 305 Article 9.1.8 (Obligor’s additional costs) 307 Article 9.1.9 (Non-assignment clauses) 308 Article 9.1.10 (Notice to the obligor) 311 Article 9.1.11 (Successive assignments) 313 Article 9.1.12 (Adequate proof of assignment) 314 Article 9.1.13 (Defences and rights of set-off) 315 Article 9.1.14 (Rights related to the right assigned) 316 Article 9.1.15 (Undertakings of the assignor) 318

Section 2: Transfer of obligations Article 9.2.1 (Modes of transfer) 322 Article 9.2.2 (Exclusion) 324 Article 9.2.3 (Requirement of obligee’s consent to transfer) 324 Article 9.2.4 (Advance consent of obligee) 326 Article 9.2.5 (Discharge of original obligor) 327 Article 9.2.6 (Third party performance) 330 Article 9.2.7 (Defences and rights of set-off) 331 Article 9.2.8 (Rights related to the obligation transferred) 332

Section 3: Assignment of contracts Article 9.3.1 (Definitions) 335 Article 9.3.2 (Exclusion) 335 Article 9.3.3 (Requirement of consent of the other party) 336 Article 9.3.4 (Advance consent of the other party) 337 Article 9.3.5 (Discharge of the assignor) 338 Article 9.3.6 (Defences and rights of set-off) 341 Article 9.3.7 (Rights transferred with the contract) 342

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CHAPTER 10: LIMITATION PERIODS

Article 10.1 (Scope of the Chapter) 344 Article 10.2 (Limitation periods) 346 Article 10.3 (Modification of limitation periods by the parties) 351 Article 10.4 (New limitation period by acknowledgement) 353 Article 10.5 (Suspension by judicial proceedings) 356 Article 10.6 (Suspension by arbitral proceedings) 358 Article 10.7 (Alternative dispute resolution) 360 Article 10.8 (Suspension in case of force majeure, death or incapacity) 361 Article 10.9 (Effects of expiration of limitation period) 363 Article 10.10 (Right of set-off) 364 Article 10.11 (Restitution) 365

CHAPTER 11: PLURALITY OF OBLIGORS AND OF OBLIGEES

Section 1: Plurality of obligors

Article 11.1.1 (Definitions) 367 Article 11.1.2 (Presumption of joint and several obligations) 369 Article 11.1.3 (Obligee’s rights against joint and several obligors) 371 Article 11.1.4 (Availability of defences and rights of set-off) 372 Article 11.1.5 (Effect of performance or set-off) 373 Article 11.1.6 (Effect of release or settlement) 375 Article 11.1.7 (Effect of expiration or suspension of limitation period) 377 Article 11.1.8 (Effect of judgment) 379 Article 11.1.9 (Apportionment among joint and several obligors) 381 Article 11.1.10 (Extent of contributory claim) 382 Article 11.1.11 (Rights of the obligee) 384 Article 11.1.12 (Defences in contributory claims) 385 Article 11.1.13 (Inability to recover) 387

Section 2: Plurality of obligees

Article 11.2.1 (Definitions) 389 Article 11.2.2 (Effects of joint and several claims) 393 Article 11.2.3 (Availability of defences against joint and several obligees) 395 Article 11.2.4 (Allocation between joint and several obligees) 399

Annex: Text of the Articles of the Principles of International Commercial Contracts 401

Index 437

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PREAMBLE (Purpose of the Principles)

These Principles set forth general rules for international commercial contracts.

They shall be applied when the parties have agreed that their contract be governed by them.(*)

They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like.

They may be applied when the parties have not chosen any law to govern their contract.

They may be used to interpret or supple-ment international uniform law instruments.

They may be used to interpret or supple-ment domestic law.

They may serve as a model for national and international legislators.

COMMENT

The Principles set forth general rules which are basically conceived for “international commercial contracts”.

1. “International” contracts

The international character of a contract may be defined in a great variety of ways. The solutions adopted in both national and international legislation range from a reference to the place of business or habitual residence of the parties in different countries to the adoption of more general criteria such as the contract having “significant connections with

(*) Parties wishing to provide that their agreement be governed by the Principles might use the following words, adding any desired exceptions or modifications:

“This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles …]”.

Parties wishing to provide in addition for the application of the law of a particular jurisdiction might use the following words:

“This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles…], supplemented when necessary by the law of [jurisdiction X]”.

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more than one State”, “involving a choice between the laws of different States”, or “affecting the interests of international trade”.

The Principles do not expressly lay down any of these criteria. The assumption, however, is that the concept of “international” contracts should be given the broadest possible interpretation, so as ultimately to exclude only those situations where no international element at all is involved, i.e. where all the relevant elements of the contract in question are connected with one country only.

2. “Commercial” contracts

The restriction to “commercial” contracts is in no way intended to take over the distinction traditionally made in some legal systems between “civil” and “commercial” parties and/or transactions, i.e. to make the application of the Principles dependent on whether the parties have the formal status of “merchants” (commerçants, Kaufleute) and/or the transaction is commercial in nature. The idea is rather that of excluding from the scope of the Principles so-called “consumer transactions” which are within the various legal systems being increasingly subjected to special rules, mostly of a mandatory character, aimed at protecting the consumer, i.e. a party who enters into the contract otherwise than in the course of its trade or profession.

The criteria adopted at both national and international level also vary with respect to the distinction between consumer and non-consumer contracts. The Principles do not provide any express definition, but the assumption is that the concept of “commercial” contracts should be understood in the broadest possible sense, so as to include not only trade transactions for the supply or exchange of goods or services, but also other types of economic transactions, such as investment and/or concession agreements, contracts for professional services, etc.

3. The Principles and domestic contracts between private persons

Notwithstanding the fact that the Principles are conceived for international commercial contracts, there is nothing to prevent private persons from agreeing to apply the Principles to a purely domestic contract. Any such agreement would however be subject to the mandatory rules of the domestic law governing the contract.

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4. The Principles as rules of law governing the contract

a. Express choice by the parties As the Principles represent a system of principles and rules of

contract law which are common to existing national legal systems or best adapted to the special requirements of international commercial transactions, there might be good reasons for the parties to choose them expressly as the rules of law governing their contract. In so doing the parties may refer to the Principles exclusively or in conjunction with a particular domestic law which should apply to issues not covered by the Principles (see the Model Clause in the footnote to the second paragraph of the Preamble).

Parties who wish to choose the Principles as the rules of law governing their contract are well advised to combine such a choice of law clause with an arbitration agreement.

The reason for this is that the freedom of choice of the parties in designating the law governing their contract is traditionally limited to national laws. Therefore, a reference by the parties to the Principles will normally be considered to be a mere agreement to incorporate them in the contract, while the law governing the contract will still have to be determined on the basis of the private international law rules of the forum. As a result, the Principles will bind the parties only to the extent that they do not affect the rules of the applicable law from which the parties may not derogate (see Comment 3 on Article 1.4).

The situation is different if the parties agree to submit disputes arising from their contract to arbitration. Arbitrators are not necessarily bound by a particular domestic law. This is self-evident if they are authorised by the parties to act as amiable compositeurs or ex aequo et bono. But even in the absence of such an authorisation parties are generally permitted to choose “rules of law” other than national laws on which the arbitrators are to base their decisions (see in particular Article 28(1) of the 1985 UNCITRAL Model Law on International Commercial Arbitration; see also Article 42(1) of the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention)).

In line with this approach, the parties would be free to choose the Principles as the “rules of law” according to which the arbitrators would decide the dispute, with the result that the Principles would apply to the exclusion of any particular national law, subject only to the application of those rules of domestic law which are mandatory

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irrespective of which law governs the contract (see Comment 4 on Article 1.4).

In disputes falling under the ICSID Convention, the Principles might even be applicable to the exclusion of any domestic rule of law.

b. The Principles applied as a manifestation of “general principles of law”, the “lex mercatoria” or the like referred to in the contract

Parties to international commercial contracts who cannot agree on the choice of a particular domestic law as the law applicable to their contract sometimes provide that it shall be governed by the “general principles of law”, by the “usages and customs of international trade”, by the lex mercatoria, etc.

Hitherto, such reference by the parties to not better identified principles and rules of a supranational or transnational character has been criticised, among other grounds, because of the extreme vagueness of such concepts. In order to avoid, or at least to reduce considerably, the uncertainty accompanying the use of such rather vague concepts, it might be advisable, in order to determine their content, to have recourse to a systematic and well-defined set of rules such as the Principles.

c. The Principles applied in the absence of any choice of law by the parties

The Principles may however be applied even if the contract is silent as to the applicable law. If the parties have not chosen the law governing their contract, it has to be determined on the basis of the relevant rules of private international law. In the context of international commercial arbitration such rules are very flexible, permitting arbitral tribunals to apply “the rules of law which they determine to be appropriate” (see e.g. Article 17(1) of the 1998 Rules of Arbitration of the International Chamber of Commerce; Article 24(1) of the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce). Normally arbitral tribunals will apply a particular domestic law as the proper law of the contract, yet exceptionally they may resort to a-national or supra-national rules such as the Principles. This may occur when it can be inferred from the circumstances that the parties intended to exclude the application of any domestic law (e.g. where one of the parties is a State or a government agency and both parties have made it clear that neither would accept the application of the other’s domestic law or that of a third country), or when the contract presents connecting factors with

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many countries none of which is predominant enough to justify the application of one domestic law to the exclusion of all the others.

5. The Principles as a means of interpreting and supplementing international uniform law instruments

International uniform law instruments may give rise to questions concerning the precise meaning of their individual provisions and may present gaps.

Traditionally international uniform law has been interpreted on the basis of, and supplemented by, principles and criteria of domestic law, be it the law of the forum or that which would, according to the relevant rules of private international law, be applicable in the absence of an international uniform law.

Recently, both courts and arbitral tribunals have increasingly abandoned such a “conflictual” approach, seeking instead to interpret and supplement international uniform law by reference to autonomous and internationally uniform principles and criteria. This approach, expressly sanctioned in recent conventions (see, e.g., Art. 7 of the 1980 UN Convention on Contracts for the International Sale of Goods (CISG)), is based on the assumption that international uniform law, even after its incorporation into the various national legal systems, only formally becomes an integrated part of the latter, whereas from a substantive point of view it does not lose its original character of a special body of law autonomously developed at international level and intended to be applied in a uniform manner throughout the world.

Until now, such autonomous principles and criteria for the interpretation and supplementing of international uniform law instruments have had to be found in each single case by the judges and arbitrators themselves on the basis of a comparative survey of the solutions adopted in the different national legal systems. The Principles could considerably facilitate their task in this respect.

6. The Principles as a means of interpreting and supplementing domestic law

The Principles may also be used to interpret and supplement domestic law. In applying a particular domestic law, courts and arbitral tribunals may be faced with doubts as to the proper solution to be adopted under that law, either because different alternatives are available or because there seem to be no specific solutions at all. Especially where the dispute relates to an international commercial contract, it may be advisable to resort to the Principles as a source of

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inspiration. By so doing the domestic law in question would be interpreted and supplemented in accordance with internationally accepted standards and/or the special needs of cross-border trade relationships.

7. The Principles as a model for national and international legislators

In view of their intrinsic merits the Principles may in addition serve as a model to national and international law-makers for the drafting of legislation in the field of general contract law or with respect to special types of transaction. At a national level, the Principles may be particularly useful to those countries which lack a developed body of legal rules relating to contracts and which intend to update their law, at least with respect to foreign economic relationships, to current international standards. Not too different is the situation of those countries with a well-defined legal system, but which after the recent dramatic changes in their socio-political structure have an urgent need to rewrite their laws, in particular those relating to economic and business activities.

At an international level the Principles could become an important term of reference for the drafting of conventions and model laws.

So far the terminology used to express the same concept differs considerably from one instrument to another, with the obvious risk of misunderstandings and misinterpretations. Such inconsistencies could be avoided if the terminology of the Principles were to be adopted as an international uniform glossary.

8. Other possible uses of the Principles

The list set out in the Preamble of the different ways in which the Principles may be used is not exhaustive.

Thus, the Principles may also serve as a guide for drafting contracts. In particular the Principles facilitate the identification of the issues to be addressed in the contract and provide a neutral legal terminology equally understandable by all the parties involved. Such a use of the Principles is enhanced by the fact that they are available in a large number of languages.

The Principles may also be used as a substitute for the domestic law otherwise applicable. This is the case whenever it proves impossible or extremely difficult to establish the relevant rule of that particular domestic law with respect to a specific issue, i.e. it would entail disproportionate efforts and/or costs. The reasons for this

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generally lie in the special character of the legal sources of the domestic law in question and/or the cost of accessing them.

Furthermore, the Principles may be used as course material in universities and law schools, thereby promoting the teaching of contract law on a truly comparative basis.

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SECTION 3: ILLEGALITY

ARTICLE 3.3.1 (Contracts infringing mandatory rules)

(1) Where a contract infringes a man-datory rule, whether of national, international or supranational origin, applicable under Article 1.4 of these Principles, the effects of that infrin-gement upon the contract are the effects, if any, expressly prescribed by that mandatory rule.

(2) Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as in the circumstances are reasonable.

(3) In determining what is reasonable regard is to be had in particular to:

(a) the purpose of the rule which has been infringed;

(b) the category of persons for whose protection the rule exists;

(c) any sanction that may be imposed under the rule infringed;

(d) the seriousness of the infringement; (e) whether one or both parties knew or

ought to have known of the infringement; (f) whether the performance of the

contract necessitates the infringement; and (g) the parties’ reasonable expectations.

COMMENT

1. Scope of the Section

Despite its paramount importance (see Article 1.1), under the Principles freedom of contract is not without limit. Not only must parties conclude the contract without error and without constraints, also the contract must not violate the applicable mandatory rules. While defects of consent are dealt with in Section 2 of this Chapter, this

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Section is concerned with a contract that infringes mandatory rules, whether by its terms, performance, purpose or otherwise. More precisely, this Section deals with the effects of that infringement on the contract by laying down the criteria to be followed in determining whether, despite the infringement, parties may still be granted remedies, and if so, whether there will be remedies under the contract (Article 3.3.1) or restitution (Article 3.3.2).

2. Only mandatory rules applicable under Article 1.4 relevant

For the purpose of this Section, only mandatory rules, whether of national, international or supranational origin, that are applicable under Article 1.4 are relevant (see Comments 1 and 2 on Article 1.4). In other words, this Section is concerned only with a contract infringing mandatory rules, be they specific statutory provisions or unwritten general principles of public policy, which are applicable in accordance with the relevant rules of private international law. Which mandatory rules will be applicable in a given case basically depends on whether the dispute is pending before a domestic court or an arbitral tribunal, and on whether the parties’ reference to the Principles is considered to be only an agreement to incorporate them in the contract or whether the Principles are applied as the law governing the contract (see Comments 3, 4 and 5 on Article 1.4). Note that the Illustrations below do not address these questions and are based on the assumption that the mandatory rules referred to apply in the cases illustrated.

3. Ways in which a contract may infringe mandatory rules

A contract may infringe mandatory rules first of all by its very terms. As shown by the following Illustrations concerning corruption and collusive bidding, mandatory rules may be specific statutory provisions or unwritten general principles of public policy.

I l l u s t r a t i o n s 1. Contractor A of country X enters into an agreement with agent B (“the Commission Agreement”) under which B, for a fee of USD 1,000,000, would pay USD 10,000,000 to C, a high-ranking procurement advisor of D, the Minister of Economics and Development of country Y, in order to induce D to award A the contract for the construction of a new power plant in country Y (“the Contract”). In both countries X and Y bribery of public officials is prohibited by statute. The Commission Agreement infringes the statutory prohibitions in question by its terms. As to the Contract for the construction of the power plant, see Illustration 7.

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2. Contractor A of country X enters into an agreement with agent B (“the Commission Agreement”) to pay EUR 100,000 to C, a high ranking officer of company D of country Y, in order to induce D to award A the contract for the installation of a sophisticated IT system. Neither in country X nor in country Y is bribery in the private sector prohibited by statute but in both countries it is considered contrary to public policy. The Commission Agreement violates these principles of public policy by its terms. 3. Bidders A and B of countries X and Y respectively enter into an agreement (“the Collusive Bidding Agreement”) according to which in a series of public tendering proceedings for the procurement of construction contracts in country Z, they would collude so that A would get some of the contracts and B the others. A statutory regulation of country Z prohibits collusive bidding in public tendering proceedings. The Collusive Bidding Agreement infringes the statutory prohibition by its terms. 4. Bidders A and B of countries X and Y respectively enter into an agreement (“the Collusive Bidding Agreement”) according to which in a series of public tendering proceedings for the procurement of construction contracts in country Z, they would collude so that A would get some of the contracts and B the others. In country Z there is no statutory regulation prohibiting collusive bidding in public tendering proceedings but collusive bidding is considered contrary to public policy. The Collusive Bidding Agreement violates this principle of public policy by its terms.

A contract may also by its performance infringe mandatory rules.

I l l u s t r a t i o n s 5. A, a large-scale retailer in country X, enters into an agreement with B, a manufacturer in country Y, for the manu-facture of toys according to its specifications (“the Manufacture Agreement”). A knew or ought to have known that the toys ordered would be manufactured by child labourers. In both country X and country Y child labour is considered contrary to public policy. The Manufacture Agreement violates these principles of public policy by its performance. 6. Importer A from country X enters into an agreement with exporter B from country Y for the supply of equipment. After the conclusion of the contract, the United Nations imposes an embargo on the importation of such type of equipment into country X. B nevertheless delivers the equipment in violation of


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the embargo. The agreement between A and B violates the embargo by its performance.

Moreover, a contract may also infringe mandatory rules in other ways, for example by the way in which it is formed or by its purpose.

I l l u s t r a t i o n s 7. The facts are the same as in Illustration 1, except that B pays C the USD 10,000,000 bribe and D awards the Contract to A. The Contract violates the statutes prohibiting corruption by the way in which it is formed. 8. A, a manufacturer of plastic explosives situated in country X, enters into an agreement with B, a trading company situated in country Y, for the supply of quantities of semtex, a material useful for peaceful purposes as well as for the manufacture of bombs (“the Supply Agreement”). A knew or ought to have known that B would ultimately forward the goods to a terrorist organisation. The Supply Agreement violates the fundamental principle of public policy prohibiting the support of terrorist activities by its purpose.

4. Effects of infringement expressly prescribed by the mandatory rule infringed

Sometimes the mandatory rule itself expressly states which contractual or restitutionary remedies, if any, are available to the parties in case of its infringement. Thus, for instance, Article 101(2) of the Treaty on the European Union (former Article 85(2) of the Treaty of Rome) expressly states that anti-competitive agreements between enterprises which may affect trade between member States of the European Union prohibited under Article 101(1) “shall be automatically void”. Similarly the UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects provides that “[a] Contracting State may request […] the return of a cultural object illegally exported from the territory of the requesting State” (Article 5) and that “[t]he possessor of a cultural object who acquired the object […] illegally exported shall be entitled […] to payment by the requesting State of fair and reasonable compensation, provided that [it] neither knew nor ought reasonably to have known at the time of acquisition that the object had been illegally exported” (Article 6).


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5. Effects of infringement to be determined according to what is reasonable in the circumstances If the mandatory rule does not expressly provide for the effects of

its infringement upon the contract, paragraph (2) provides that the parties may exercise “such remedies under the contract as in the circumstances are reasonable”. The formula used is sufficiently broad to permit a maximum of flexibility. Thus, notwithstanding the infringement of the mandatory rule, one or both of the parties may, depending on the circumstances of the case, be granted the ordinary remedies available under a valid contract (including the right to performance), or other remedies such as the right to treat the contract as being of no effect, the adaptation of the contract or its termination on terms to be fixed. The latter kind of remedies may be particularly appropriate where as a consequence of the infringement only part of the contract becomes ineffective. As to the granting of restitution of the performances rendered under a contract infringing a mandatory rule, see Article 3.3.2.

6. Criteria for determining what is reasonable in the circumstances Given the great variety of mandatory rules which may be relevant

under this Article, ranging from regulations of a merely technical nature to prohibitions for the purpose of preventing grave social harm, paragraph (3) provides a list of criteria to determine the contractual remedies available in the circumstances, if any. The list is not exhaustive. In many cases more than one of the criteria will be relevant and the decision will involve a weighing of these criteria.

a. Purpose of the rule infringed

Among the most important factors to be taken into consideration is the purpose of the mandatory rule and whether the attaining of its purpose would or would not be affected by granting at least one of the parties a remedy under the contract.

I l l u s t r a t i o n s 9. The facts are the same as in Illustration 1, except that even though B paid C A’s bribe, D does not award the Contract to A. Since the purpose of the relevant statutory prohibition of bribery would be frustrated by granting A and B any remedy under the Commission Agreement, B may not request the payment of the USD 1,000,000 fee from A, nor may A recover from B the USD 10,000,000 B has paid to C.


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10. A, an aircraft manufacturer in country X, knowing that C, the Ministry of Defence of country Y, intends to purchase a number of military aircraft, enters into an agreement with B, a consultancy firm located in country Y, by which B is to negotiate the possible purchase by C of the aircraft manufactured by A (“the Agency Agreement”). A statutory regulation of country Y prohibits the employment of intermediaries in the negotiation and conclusion of contracts with governmental agencies. Since the purpose of the statutory prohibition of the employment of intermediaries is to fight corruption, neither A nor B should be granted any remedy under the Agency Agreement. 11. The facts are the same as in Illustration 6. Since the purpose of the embargo is to impose a sanction on country X following X’s violation of international law, the attaining of that purpose requires that all contracts concluded or performed in violation of the embargo have no effect and that parties be denied any remedy under such contracts.

b. Category of persons to be protected by the rule infringed

Another important factor to be taken into consideration is whether the mandatory rule that is infringed is aimed at protecting the interests of the public in general or those of a specific category of persons. Licensing requirements are often of the latter type, i.e. are imposed by law on those carrying out certain activities for the protection of their customers or clients. If a contract is entered into by an unlicensed party it might be reasonable to grant its customer or client at least some remedies under the contract such as damages.

I l l u s t r a t i o n 12. Company A in country X enters into an agreement with engineer B in country Y for the preparation of plans for the restructuring of A’s factory (“the Engineering Contract”). A statutory regulation of country X requires that only licensed engineers carry out this activity. B, who does not have the necessary license, delivers plans that are in part based on erroneous calculations causing a delay in the restructuring work. Requested by A to pay damages for the loss caused by the delay, B refuses to pay on the ground that the Engineering Contract was invalid as B lacked the required license. Since the purpose of the license requirement is the protection of the clients, A may be granted the right to damages.


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c. Any sanction that may be imposed under the rule infringed

Statutory regulations prohibiting certain activities or imposing limitations to certain activities often provide criminal or administrative sanctions. As noted in Comment 4, when such a regulation expressly states the effect of violation on contractual rights or remedies, that statement controls. When the regulation is silent as to that effect, however, the existence and nature of the criminal or administrative sanctions can provide important insight into the purpose of the rule that has been violated, the category of persons for whose protection the rule exists, and the seriousness of the violation. Accordingly, the existence and nature of these sanctions should be taken into consideration in determining the effect of such a violation on contractual rights and remedies.

I l l u s t r a t i o n 13. A, an exporter in country X, enters into a contract of carriage with B, a ship-owner in country Y, to carry goods by sea from country X to country Y (“the Contract”). A statutory regulation in country X imposes limits on the loads that ships may carry. The statutory regulation provides for a fine in the case of its violation but it says nothing about the effects a violation would have on the individual contracts of carriage. B overloads the ship and A, claiming the invalidity of the Contract, refuses to pay the freight notwithstanding the fact that the goods had arrived safely. Since the purpose of the statutory regulation is to prevent, in the interests of the safety of the ship and its crew, overloading and not to prohibit contracts, and this purpose is sufficiently achieved by the fining of B, B may be granted the right to be paid the agreed freight for the carriage of the goods.

d. Seriousness of infringement

Another factor to be taken into consideration is the seriousness of the infringement. Thus, remedies under the contract may be granted where the mandatory rule is of a purely technical nature and its infringement has no impact on the other party.

I l l u s t r a t i o n s 14. Cattle farmer A in country X sells cattle to cattle farmer B in country Y. A statutory regulation in country Y requires incoming cattle to be properly tagged and that the information contained on the tags also be set out in accompanying documents. The cattle delivered is properly tagged but the accompanying documents are


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incomplete. A may nevertheless be granted the right to payment of the price. 15. A, an exporter in country X, enters into a contract with B, a carrier from country Y, for the carriage of dangerous goods from country X to country Y (“the Contract”). Country X has a statutory regulation requiring goods of the kind in question to be carried on a vehicle with particular safety requirements. The statutory regulation provides a criminal sanction in case of violation but says nothing about the effects a violation would have on the individual contracts of carriage. B carries the goods on a vehicle that does not meet the prescribed safety requirements. A, claiming the invalidity of the Contract, refuses to pay the freight notwithstanding the fact that the goods arrived safely. Since the purpose of the statutory regulations is the prevention of injury to third persons or damage to the environment, B, irrespective of the imposition of the criminal sanction, should not be granted the right to be paid the agreed freight.

e. Whether one or both parties knew or ought to have known of the infringement

Granting remedies under the contract may also depend on whether one or even both of the parties knew or ought to have known of the mandatory rule or of its infringement.

I l l u s t r a t i o n s 16. The facts are the same as in Illustration 1, except that B has paid the bribe to C and D, who neither knew nor ought to have known of the bribe to C, awarded the Contract to A. If D subsequently becomes aware of the payment of the bribe, D may choose whether or not to treat the Contract as effective. If D chooses to treat the Contract as effective, A will be obliged to perform and D will have to pay the price, subject to an appropriate adjustment taking into consideration the payment of the bribe. If, on the other hand, D chooses to treat the Contract as being of no effect, neither of the parties has a remedy under the Contract. This is without prejudice to any restitutionary remedy that may exist. 17. Contractor A of country X enters into negotiations with D, the Minister of Economics and Development of country Y, with a view to conclude an agreement on a large infrastructure project (“the Contract”). D requests the payment of a “commission” of 7.5% of the contract price in order to conclude the Contract. A pays the requested “commission” and the Contract is concluded. When A has already performed half of its obligations under the


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Contract, a new Government comes to power in country Y and the new Minister of Economics and Development, invoking the payment of the “commission”, cancels the project and refuses to pay for the work already performed. A is not entitled to any remedy under the Contract. This is without prejudice to any restitutionary remedy that may exist.

f. Whether the performance of the contract necessitates the infringement

Another factor to be taken into consideration is whether the performance of the contract necessitates the infringement. Thus, if by its very terms the contract provides for, or even only implicitly involves, the violation of a statutory regulation it might be reasonable not to grant the parties any remedy under the contract.

I l l u s t r a t i o n 18. Company A of country X enters into a contract with company B of country Y for the construction of a chemical fertilizer production plant in country Y (“the Contract”). The Contract does not provide for the installation of the safety devices required by the environmental protection laws of country Y and the parties deliberately agree on a price insufficient to cover the costs of the installation of the devices in question. Neither A nor B should be granted any remedy under the contract.

g. The parties’ reasonable expectations

If one of the parties on account of different legal or commercial culture could not have reasonably been aware of the infringement or, as is more often the case, one of the parties creates a legitimate expectation as to the enforceability of the contract or its individual terms and later invokes a statutory prohibition of its own law in order to nullify that expectation, it might be reasonable to grant the other party the remedies available under the contract or its individual terms.

I l l u s t r a t i o n 19. Company A of country X enters into an agreement with B, the Minister of Economics and Development of country Y, concerning an investment project in country Y (“the Agreement”). The Agreement contains a clause providing that all disputes arising out of the Agreement should be decided by arbitration to be held in country Z in accordance with the UNCITRAL Arbitration Rules. If a dispute subsequently arises and A commences arbitration proceedings, B, with a view to


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avoiding arbitration, cannot invoke a mandatory rule of country Y according to which the domestic courts of country Y have exclusive jurisdiction which may not be contractually excluded by an arbitration agreement for disputes relating to contracts of the type of the Agreement.

h. Other criteria

In addition to the criteria expressly listed in paragraph (3) of this Article, there are others which may be taken into consideration to determine the remedies available in the circumstances, if any. One criterion is the extent to which the contract infringes the mandatory rule. If the contract infringes the mandatory rule only in part, it may be reasonable to adapt the contract and grant the parties remedies under it.

I l l u s t r a t i o n 20. The facts are the same as in Illustration 5, except that only one specific type of toy ordered by A is manufactured by child labourers in their homes, while all the other types are manufactured by workers lawfully employed by B in its factory. Under the circumstances it may be reasonable to adapt the Manufacture Agreement accordingly and grant the parties the ordinary remedies under the adapted Manufacture Agreement.

Another factor is the timely withdrawal from the improper transaction. Thus, if a party to a contract infringing a mandatory rule repents of its action before the unlawful purpose of the contract has been achieved, that party may be granted the right to recover what it has performed.

I l l u s t r a t i o n 21. The facts are the same as in Illustration 1, except that A, after having paid B the agreed fee of USD 1,000,000, but before B pays C the USD 10,000,000 bribe, decides no longer to pursue the illegal purpose and withdraws from the Contract. A may be granted the right to recover the fee from B.


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ARTICLE 3.3.2 (Restitution)

(1) Where there has been performance under a contract infringing a mandatory rule under Article 3.3.1, restitution may be granted where this would be reasonable in the circum-stances.

(2) In determining what is reasonable, regard is to be had, with the appropriate adaptations, to the criteria referred to in Article 3.3.1(3).

(3) If restitution is granted, the rules set out in Article 3.2.15 apply with appropriate adaptations.

COMMENT

1. Restitution under contracts infringing mandatory rules to be granted where reasonable under the circumstances

Even where as a consequence of the infringement of a mandatory rule the parties are denied any remedies under the contract, it remains to be seen whether they may at least claim restitution of what they have rendered in performing the contract. According to Article 3.3.1(1), the answer first of all depends on the mandatory rule itself which may or may not expressly address the issue (see also Comment 4 on Article 3.3.1).

If the mandatory rule is silent on the issue, this Article, in line with the modern trend, adopts a flexible approach and provides that where there has been performance under a contract infringing a mandatory rule, restitution may be granted if this would be reasonable in the circumstances (paragraph 1). In other words, contrary to the traditional view that, at least where both parties were aware or ought to have been aware of the infringement of the mandatory rule, they should be left where they stand, i.e. should not even be entitled to recover the benefits conferred, under the Principles restitution may or may not be granted depending on whether it is more appropriate to allow the recipient to keep what it has received or to allow the performer to reclaim it.


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2. Criteria for determining whether granting of restitution reasonable

The same criteria laid down in paragraph (3) of Article 3.3.1 to determine if any contractual remedies are available in the circumstances, if any, apply to determine whether granting restitution under paragraph (1) of this Article is reasonable. However, since the contractual and restitutionary remedies are different, the same criteria may lead to different results under the same facts.

I l l u s t r a t i o n s 1. The facts are the same as in Illustration 1 in the Comments on Article 3.3.1, except that A, having been awarded the Contract, had almost completed the construction of the power plant when in country Y a new Government comes to power which claims that the Contract is invalid because of corruption and refuses to pay the outstanding 50% of the price. Under the circumstances it would not be fair to let D have the almost completed power plant for half the agreed price. A may be granted an allowance in money for the work done corresponding to the value that the almost completed power plant has for D and D may be granted restitution of any payment it has made exceeding this amount. 2. Contractor A of country X enters into negotiations with D, the Minister of Economics and Development of country Y, with a view of concluding an agreement on a large infrastructure project (“the Contract”). D requests the payment of a “commission” of 7.5% of the contract price in order to conclude the Contract. A pays the requested “commission” and the Contract is concluded. After A has fulfilled all of its obligations under the Contract, a new Government comes to power in country Y and the new Minister of Economics and Development, invoking the payment of the “commission”, refuses to pay the remaining contract price. A may be granted an allowance in money for the work done corresponding to the value of the infrastructure project. 3. The facts are the same as in Illustration 15 in the Comments on Article 3.3.1, except that B, given that the goods had arrived safely at destination, claims the recovery of at least the value of its service. Under the circumstances, i.e. in view of the seriousness of the violation and the necessity of preventing by all means the carriage of dangerous goods by vehicles lacking the required safety requirements, B may not even be granted the right to recover the value of its service.


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3. Rules governing restitution if granted

If restitution is granted under this Article it is governed by the rules set out in Article 3.2.15 on restitution in the context of avoidance. These rules however need some adaptations, in the sense that in paragraph (1) of Article 3.2.15 the reference to avoidance is to be understood as a reference to the case where the contract becomes ineffective as a result of the infringement of a mandatory rule, and the reference to avoidance of part of the contract as a reference to the case where only part of the contract becomes ineffective as a result of the infringement of a mandatory rule. For further explanation of the rules on restitution referred to in this Article, see the Comments on Article 3.2.15.

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UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 2010

PREAMBLE (Purpose of the Principles)

These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed

by them.(*) They may be applied when the parties have agreed that their contract be governed by

general principles of law, the lex mercatoria or the like. They may be applied when the parties have not chosen any law to govern their

contract. They may be used to interpret or supplement international uniform law instruments. They may be used to interpret or supplement domestic law. They may serve as a model for national and international legislators.

CHAPTER 1 — GENERAL PROVISIONS

ARTICLE 1.1 (Freedom of contract)

The parties are free to enter into a contract and to determine its content.

ARTICLE 1.2 (No form required)

Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form. It may be proved by any means, including witnesses.

ARTICLE 1.3 (Binding character of contract)

A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles.

ARTICLE 1.4 (Mandatory rules)

Nothing in these Principles shall 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.

(*) Parties wishing to provide that their agreement be governed by the Principles might use the following words, adding any

desired exceptions or modifications: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles …]”. Parties wishing to provide in addition for the application of the law of a particular jurisdiction might use the following words: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles…], supplemented when necessary by the law of [jurisdiction X]”.

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ARTICLE 1.5 (Exclusion or modification by the parties)

The 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.

ARTICLE 1.6 (Interpretation and supplementation of the Principles)

(1) In the interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application.

(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.

ARTICLE 1.7 (Good faith and fair dealing)

(1) Each party must act in accordance with good faith and fair dealing in international trade.

(2) The parties may not exclude or limit this duty.

ARTICLE 1.8 (Inconsistent behaviour)

A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment.

ARTICLE 1.9 (Usages and practices)

(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

(2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable.

ARTICLE 1.10 (Notice)

(1) Where notice is required it may be given by any means appropriate to the circumstances.

(2) A notice is effective when it reaches the person to whom it is given. (3) For the purpose of paragraph (2) a notice “reaches” a person when given to

that person orally or delivered at that person’s place of business or mailing address. (4) For the purpose of this Article “notice” includes a declaration, demand,

request or any other communication of intention.

ARTICLE 1.11 (Definitions)

In these Principles – “court” includes an arbitral tribunal; – where a party has more than one place of business the relevant “place of

business” is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract;

– “obligor” refers to the party who is to perform an obligation and “obligee” refers to the party who is entitled to performance of that obligation.

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– “writing” means any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form.

ARTICLE 1.12 (Computation of time set by parties)

(1) Official holidays or non-business days occurring during a period set by parties for an act to be performed are included in calculating the period.

(2) However, if the last day of the period is an official holiday or a non-business day at the place of business of the party to perform the act, the period is extended until the first business day which follows, unless the circumstances indicate otherwise.

(3) The relevant time zone is that of the place of business of the party setting the time, unless the circumstances indicate otherwise.

CHAPTER 2 — FORMATION AND AUTHORITY OF AGENTS

SECTION 1: FORMATION

ARTICLE 2.1.1 (Manner of formation)

A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement.

ARTICLE 2.1.2 (Definition of offer)

A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance.

ARTICLE 2.1.3 (Withdrawal of offer)

(1) An offer becomes effective when it reaches the offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches

the offeree before or at the same time as the offer.

ARTICLE 2.1.4 (Revocation of offer)

(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before it has dispatched an acceptance.

(2) However, an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that

it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and

the offeree has acted in reliance on the offer.

ARTICLE 2.1.5 (Rejection of offer)

An offer is terminated when a rejection reaches the offeror.

ARTICLE 2.1.6 (Mode of acceptance)

(1) A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

(2) An acceptance of an offer becomes effective when the indication of assent reaches the offeror.

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(3) However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, the acceptance is effective when the act is performed.

ARTICLE 2.1.7 (Time of acceptance)

An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise.

ARTICLE 2.1.8 (Acceptance within a fixed period of time)

A period of acceptance fixed by the offeror begins to run from the time that the offer is dispatched. A time indicated in the offer is deemed to be the time of dispatch unless the circumstances indicate otherwise.

ARTICLE 2.1.9 (Late acceptance. Delay in transmission)

(1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect.

(2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed.

ARTICLE 2.1.10 (Withdrawal of acceptance)

An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective.

ARTICLE 2.1.11 (Modified acceptance)

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-of-fer.

(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

ARTICLE 2.1.12 (Writings in confirmation)

If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy.

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ARTICLE 2.1.13 (Conclusion of contract dependent on agreement on specific matters

or in a particular form) Where in the course of negotiations one of the parties insists that the contract is not

concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form.

ARTICLE 2.1.14 (Contract with terms deliberately left open)

(1) If the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person does not prevent a contract from coming into existence.

(2) The existence of the contract is not affected by the fact that subsequently (a) the parties reach no agreement on the term; or (b) the third person does not determine the term,

provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.

ARTICLE 2.1.15 (Negotiations in bad faith)

(1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is

liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations

when intending not to reach an agreement with the other party.

ARTICLE 2.1.16 (Duty of confidentiality)

Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.

ARTICLE 2.1.17 (Merger clauses)

A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing.

ARTICLE 2.1.18 (Modification in a particular form)

A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct.

ARTICLE 2.1.19 (Contracting under standard terms)

(1) Where one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.1.20 - 2.1.22.

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(2) Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party.

ARTICLE 2.1.20 (Surprising terms)

(1) No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.

(2) In determining whether a term is of such a character regard shall be had to its content, language and presentation.

ARTICLE 2.1.21 (Conflict between standard terms and non-standard terms)

In case of conflict between a standard term and a term which is not a standard term the latter prevails.

ARTICLE 2.1.22 (Battle of forms)

Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

SECTION 2: AUTHORITY OF AGENTS

ARTICLE 2.2.1 (Scope of the Section)

(1) This Section governs the authority of a person (“the agent”) to affect the legal relations of another person (“the principal”) by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal.

(2) It governs only the relations between the principal or the agent on the one hand, and the third party on the other.

(3) It does not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority.

ARTICLE 2.2.2 (Establishment and scope of the authority of the agent)

(1) The principal’s grant of authority to an agent may be express or implied. (2) The agent has authority to perform all acts necessary in the circumstances to

achieve the purposes for which the authority was granted.

ARTICLE 2.2.3 (Agency disclosed)

(1) Where an agent acts within the scope of its authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly affect the legal relations between the principal and the third party and no legal relation is created between the agent and the third party.

(2) However, the acts of the agent shall affect only the relations between the agent and the third party, where the agent with the consent of the principal undertakes to become the party to the contract.

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ARTICLE 2.2.4 (Agency undisclosed)

(1) Where an agent acts within the scope of its authority and the third party neither knew nor ought to have known that the agent was acting as an agent, the acts of the agent shall affect only the relations between the agent and the third party.

(2) However, where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent.

ARTICLE 2.2.5 (Agent acting without or exceeding its authority)

(1) Where an agent acts without authority or exceeds its authority, its acts do not affect the legal relations between the principal and the third party.

(2) However, where the principal causes the third party reasonably to believe that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the lack of authority of the agent.

ARTICLE 2.2.6 (Liability of agent acting without or exceeding its authority)

(1) An agent that acts without authority or exceeds its authority is, failing ratification by the principal, liable for damages that will place the third party in the same position as if the agent had acted with authority and not exceeded its authority.

(2) However, the agent is not liable if the third party knew or ought to have known that the agent had no authority or was exceeding its authority.

ARTICLE 2.2.7 (Conflict of interests)

(1) If a contract concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to Articles 3.2.9 and 3.2.11 to 3.2.15.

(2) However, the principal may not avoid the contract (a) if the principal had consented to, or knew or ought to have known of, the

agent’s involvement in the conflict of interests; or (b) if the agent had disclosed the conflict of interests to the principal and the latter

had not objected within a reasonable time.

ARTICLE 2.2.8 (Sub-agency)

An agent has implied authority to appoint a sub-agent to perform acts which it is not reasonable to expect the agent to perform itself. The rules of this Section apply to the sub-agency.

ARTICLE 2.2.9 (Ratification)

(1) An act by an agent that acts without authority or exceeds its authority may be ratified by the principal. On ratification the act produces the same effects as if it had initially been carried out with authority.

(2) The third party may by notice to the principal specify a reasonable period of time for ratification. If the principal does not ratify within that period of time it can no longer do so.

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(3) If, at the time of the agent’s act, the third party neither knew nor ought to have known of the lack of authority, it may, at any time before ratification, by notice to the principal indicate its refusal to become bound by a ratification.

ARTICLE 2.2.10 (Termination of authority)

(1) Termination of authority is not effective in relation to the third party unless the third party knew or ought to have known of it.

(2) Notwithstanding the termination of its authority, an agent remains authorised to perform the acts that are necessary to prevent harm to the principal’s interests.

CHAPTER 3 — VALIDITY

SECTION 1: GENERAL PROVISIONS

ARTICLE 3.1.1 (Matters not covered)

This Chapter does not deal with lack of capacity.

ARTICLE 3.1.2 (Validity of mere agreement)

A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.

ARTICLE 3.1.3 (Initial impossibility)

(1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.

(2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract.

ARTICLE 3.1.4 (Mandatory character of the provisions)

The provisions on fraud, threat, gross disparity and illegality contained in this Chapter are mandatory.

SECTION 2: GROUNDS FOR AVOIDANCE

ARTICLE 3.2.1 (Definition of mistake)

Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded.

ARTICLE 3.2.2 (Relevant mistake)

(1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and

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(a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or

(b) the other party had not at the time of avoidance reasonably acted in reliance on the contract.

(2) However, a party may not avoid the contract if (a) it was grossly negligent in committing the mistake; or (b) the mistake relates to a matter in regard to which the risk of mistake was as-

sumed or, having regard to the circumstances, should be borne by the mistaken party.

ARTICLE 3.2.3 (Error in expression or transmission)

An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated.

ARTICLE 3.2.4 (Remedies for non-performance)

A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance.

ARTICLE 3.2.5 (Fraud)

A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.

ARTICLE 3.2.6 (Threat)

A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract.

ARTICLE 3.2.7 (Gross disparity)

(1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

(a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and

(b) the nature and purpose of the contract. (2) Upon the request of the party entitled to avoidance, a court may adapt the

contract or term in order to make it accord with reasonable commercial standards of fair dealing.

(3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. Article 3.2.10(2) applies accordingly.

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ARTICLE 3.2.8 (Third persons)

(1) Where fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself.

(2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract.

ARTICLE 3.2.9 (Confirmation)

If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded.

ARTICLE 3.2.10 (Loss of right to avoid)

(1) If a party is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has reasonably acted in reliance on a notice of avoidance.

(2) After such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective.

ARTICLE 3.2.11 (Notice of avoidance)

The right of a party to avoid the contract is exercised by notice to the other party.

ARTICLE 3.2.12 (Time limits)

(1) Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely.

(2) Where an individual term of the contract may be avoided by a party under Article 3.2.7, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party.

ARTICLE 3.2.13 (Partial avoidance)

Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract.

ARTICLE 3.2.14 (Retroactive effect of avoidance)

Avoidance takes effect retroactively.

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(1) On avoidance either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that the party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided.

(2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.

(3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.

(4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received.

ARTICLE 3.2.16 (Damages)

Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract.

ARTICLE 3.2.17 (Unilateral declarations)

The provisions of this Chapter apply with appropriate adaptations to any commu-nication of intention addressed by one party to the other.

SECTION 3: ILLEGALITY

ARTICLE 3.3.1 (Contracts infringing mandatory rules)

(1) Where a contract infringes a mandatory rule, whether of national, international or supranational origin, applicable under Article 1.4 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule.

(2) Where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as in the circumstances are reasonable.

(3) In determining what is reasonable regard is to be had in particular to: (a) the purpose of the rule which has been infringed; (b) the category of persons for whose protection the rule exists; (c) any sanction that may be imposed under the rule infringed; (d) the seriousness of the infringement; (e) whether one or both parties knew or ought to have known of the infringement; (f) whether the performance of the contract necessitates the infringement; and (g) the parties’ reasonable expectations.


(1) Where there has been performance under a contract infringing a mandatory rule under Article 3.3.1, restitution may be granted where this would be reasonable in the circumstances.

(2) In determining what is reasonable, regard is to be had, with the appropriate adaptations, to the criteria referred to in Article 3.3.1(3).

(3) If restitution is granted, the rules set out in Article 3.2.15 apply with appropriate adaptations.

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CHAPTER 4 — INTERPRETATION

ARTICLE 4.1 (Intention of the parties)

(1) A contract shall be interpreted according to the common intention of the parties.

(2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

ARTICLE 4.2 (Interpretation of statements and other conduct)

(1) The statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention.

(2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.

ARTICLE 4.3 (Relevant circumstances)

In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including

(a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages.

ARTICLE 4.4 (Reference to contract or statement as a whole)

Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.

ARTICLE 4.5 (All terms to be given effect)

Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.

ARTICLE 4.6 (Contra proferentem rule)

If contract terms supplied by one party are unclear, an interpretation against that party is preferred.

ARTICLE 4.7 (Linguistic discrepancies)

Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.

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ARTICLE 4.8 (Supplying an omitted term)

(1) Where the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied.

(2) In determining what is an appropriate term regard shall be had, among other factors, to

(a) the intention of the parties; (b) the nature and purpose of the contract; (c) good faith and fair dealing; (d) reasonableness.

CHAPTER 5 — CONTENT AND THIRD PARTY RIGHTS

SECTION 1: CONTENT

ARTICLE 5.1.1 (Express and implied obligations)

The contractual obligations of the parties may be express or implied.

ARTICLE 5.1.2 (Implied obligations)

Implied obligations stem from (a) the nature and purpose of the contract; (b) practices established between the parties and usages; (c) good faith and fair dealing; (d) reasonableness.

ARTICLE 5.1.3 (Co-operation between the parties)

Each party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations.

ARTICLE 5.1.4 (Duty to achieve a specific result.

Duty of best efforts) (1) To the extent that an obligation of a party involves a duty to achieve a specific

result, that party is bound to achieve that result. (2) To the extent that an obligation of a party involves a duty of best efforts in the

performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.

ARTICLE 5.1.5 (Determination of kind of duty involved)

In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of an activity or a duty to achieve a specific result, regard shall be had, among other factors, to

(a) the way in which the obligation is expressed in the contract; (b) the contractual price and other terms of the contract; (c) the degree of risk normally involved in achieving the expected result; (d) the ability of the other party to influence the performance of the obligation.

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ARTICLE 5.1.6 (Determination of quality of performance)

Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances.

ARTICLE 5.1.7 (Price determination)

(1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price.

(2) Where the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary.

(3) Where the price is to be fixed by a third person, and that person cannot or will not do so, the price shall be a reasonable price.

(4) Where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute.

ARTICLE 5.1.8 (Contract for an indefinite period)

A contract for an indefinite period may be ended by either party by giving notice a reasonable time in advance.

ARTICLE 5.1.9 (Release by agreement)

(1) An obligee may release its right by agreement with the obligor. (2) An offer to release a right gratuitously shall be deemed accepted if the obligor

does not reject the offer without delay after having become aware of it.

SECTION 2: THIRD PARTY RIGHTS

ARTICLE 5.2.1 (Contracts in favour of third parties)

(1) The parties (the “promisor” and the “promisee”) may confer by express or implied agreement a right on a third party (the “beneficiary”).

(2) The existence and content of the beneficiary’s right against the promisor are determined by the agreement of the parties and are subject to any conditions or other limitations under the agreement.

ARTICLE 5.2.2 (Third party identifiable)

The beneficiary must be identifiable with adequate certainty by the contract but need not be in existence at the time the contract is made.

ARTICLE 5.2.3 (Exclusion and limitation clauses)

The conferment of rights in the beneficiary includes the right to invoke a clause in the contract which excludes or limits the liability of the beneficiary.

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ARTICLE 5.2.4 (Defences)

The promisor may assert against the beneficiary all defences which the promisor could assert against the promisee.

ARTICLE 5.2.5 (Revocation)

The parties may modify or revoke the rights conferred by the contract on the beneficiary until the beneficiary has accepted them or reasonably acted in reliance on them.

ARTICLE 5.2.6 (Renunciation)

The beneficiary may renounce a right conferred on it.

SECTION 3: CONDITIONS

ARTICLE 5.3.1 (Types of condition)

A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition).

ARTICLE 5.3.2 (Effect of conditions)

Unless the parties otherwise agree : (a) the relevant contract or contractual obligation takes effect upon fulfilment of a

suspensive condition; (b) the relevant contract or contractual obligation comes to an end upon fulfilment

of a resolutive condition.

ARTICLE 5.3.3 (Interference with conditions)

(1) If fulfilment of a condition is prevented by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the non-fulfilment of the condition.

(2) If fulfilment of a condition is brought about by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the fulfilment of the condition.

ARTICLE 5.3.4 (Duty to preserve rights)

Pending fulfilment of a condition, a party may not, contrary to the duty to act in accordance with good faith and fair dealing, act so as to prejudice the other party’s rights in case of fulfilment of the condition.

ARTICLE 5.3.5 (Restitution in case of fulfilment of a resolutive condition)

(1) On fulfilment of a resolutive condition, the rules on restitution set out in Articles 7.3.6 and 7.3.7 apply with appropriate adaptations.

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(2) If the parties have agreed that the resolutive condition is to operate retroactively, the rules on restitution set out in Article 3.2.15 apply with appropriate adaptations.

CHAPTER 6 — PERFORMANCE

SECTION 1: PERFORMANCE IN GENERAL

ARTICLE 6.1.1 (Time of performance)

A party must perform its obligations: (a) if a time is fixed by or determinable from the contract, at that time; (b) if a period of time is fixed by or determinable from the contract, at any time

within that period unless circumstances indicate that the other party is to choose a time; (c) in any other case, within a reasonable time after the conclusion of the contract.

ARTICLE 6.1.2 (Performance at one time or in instalments)

In cases under Article 6.1.1(b) or (c), a party must perform its obligations at one time if that performance can be rendered at one time and the circumstances do not indicate otherwise.

ARTICLE 6.1.3 (Partial performance)

(1) The obligee may reject an offer to perform in part at the time performance is due, whether or not such offer is coupled with an assurance as to the balance of the performance, unless the obligee has no legitimate interest in so doing.

(2) Additional expenses caused to the obligee by partial performance are to be borne by the obligor without prejudice to any other remedy.

ARTICLE 6.1.4 (Order of performance)

(1) To the extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise.

(2) To the extent that the performance of only one party requires a period of time, that party is bound to render its performance first, unless the circumstances indicate otherwise.

ARTICLE 6.1.5 (Earlier performance)

(1) The obligee may reject an earlier performance unless it has no legitimate interest in so doing.

(2) Acceptance by a party of an earlier performance does not affect the time for the performance of its own obligations if that time has been fixed irrespective of the performance of the other party’s obligations.

(3) Additional expenses caused to the obligee by earlier performance are to be borne by the obligor, without prejudice to any other remedy.

ARTICLE 6.1.6 (Place of performance)

(1) If the place of performance is neither fixed by, nor determinable from, the contract, a party is to perform:

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(a) a monetary obligation, at the obligee’s place of business; (b) any other obligation, at its own place of business. (2) A party must bear any increase in the expenses incidental to performance

which is caused by a change in its place of business subsequent to the conclusion of the contract.

ARTICLE 6.1.7 (Payment by cheque or other instrument)

(1) Payment may be made in any form used in the ordinary course of business at the place for payment.

(2) However, an obligee who accepts, either by virtue of paragraph (1) or voluntarily, a cheque, any other order to pay or a promise to pay, is presumed to do so only on condition that it will be honoured.

ARTICLE 6.1.8 (Payment by funds transfer)

(1) Unless the obligee has indicated a particular account, payment may be made by a transfer to any of the financial institutions in which the obligee has made it known that it has an account.

(2) In case of payment by a transfer the obligation of the obligor is discharged when the transfer to the obligee’s financial institution becomes effective.

ARTICLE 6.1.9 (Currency of payment)

(1) If a monetary obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless

(a) that currency is not freely convertible; or (b) the parties have agreed that payment should be made only in the currency in

which the monetary obligation is expressed. (2) If it is impossible for the obligor to make payment in the currency in which the

monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).

(3) 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.

(4) However, if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.

ARTICLE 6.1.10 (Currency not expressed)

Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made.

ARTICLE 6.1.11 (Costs of performance)

Each party shall bear the costs of performance of its obligations.

ARTICLE 6.1.12 (Imputation of payments)

(1) An obligor owing several monetary obligations to the same obligee may specify at the time of payment the debt to which it intends the payment to be applied.

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However, the payment discharges first any expenses, then interest due and finally the principal.

(2) If the obligor makes no such specification, the obligee may, within a reasonable time after payment, declare to the obligor the obligation to which it imputes the payment, provided that the obligation is due and undisputed.

(3) In the absence of imputation under paragraphs (1) or (2), payment is imputed to that obligation which satisfies one of the following criteria in the order indicated:

(a) an obligation which is due or which is the first to fall due; (b) the obligation for which the obligee has least security; (c) the obligation which is the most burdensome for the obligor; (d) the obligation which has arisen first.

If none of the preceding criteria applies, payment is imputed to all the obligations proportionally.

ARTICLE 6.1.13 (Imputation of non-monetary obligations)

Article 6.1.12 applies with appropriate adaptations to the imputation of performance of non-monetary obligations.

ARTICLE 6.1.14 (Application for public permission)

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.

ARTICLE 6.1.15 (Procedure in applying for permission)

(1) The party required to take the measures necessary to obtain the permission shall do so without undue delay and shall bear any expenses incurred.

(2) That party shall whenever appropriate give the other party notice of the grant or refusal of such permission without undue delay.

ARTICLE 6.1.16 (Permission neither granted nor refused)

(1) If, notwithstanding the fact that the party responsible has taken all measures required, permission is neither granted nor refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract.

(2) Where the permission affects some terms only, paragraph (1) does not apply if, having regard to the circumstances, it is reasonable to uphold the remaining contract even if the permission is refused.

ARTICLE 6.1.17 (Permission refused)

(1) The refusal of a permission affecting the validity of the contract renders the contract void. If the refusal affects the validity of some terms only, only such terms are void if, having regard to the circumstances, it is reasonable to uphold the remaining contract.

(2) Where the refusal of a permission renders the performance of the contract impossible in whole or in part, the rules on non-performance apply.

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SECTION 2: HARDSHIP

ARTICLE 6.2.1 (Contract to be observed)

Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.

ARTICLE 6.2.2 (Definition of hardship)

There is hardship where the occurrence of events fundamentally alters the equilib-rium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and

(a) the events occur or become known to the disadvantaged party after the conclu-sion of the contract;

(b) the events could not reasonably have been taken into account by the disadvan-taged party at the time of the conclusion of the contract;

(c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.

ARTICLE 6.2.3 (Effects of hardship)

(1) In case of hardship the disadvantaged party is entitled to request renegotia-tions. The request shall be made without undue delay and shall indicate the grounds on which it is based.

(2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.

(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.

(4) If the court finds hardship it may, if reasonable, (a) terminate the contract at a date and on terms to be fixed, or (b) adapt the contract with a view to restoring its equilibrium.

CHAPTER 7 — NON-PERFORMANCE

SECTION 1: NON-PERFORMANCE IN GENERAL

ARTICLE 7.1.1 (Non-performance defined)

Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance.

ARTICLE 7.1.2 (Interference by the other party)

A party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party’s act or omission or by another event for which the first party bears the risk.

ARTICLE 7.1.3 (Withholding performance)

(1) Where the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance.

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(2) Where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed.

ARTICLE 7.1.4 (Cure by non-performing party)

(1) The non-performing party may, at its own expense, cure any non-performance, provided that

(a) without undue delay, it gives notice indicating the proposed manner and timing of the cure;

(b) cure is appropriate in the circumstances; (c) the aggrieved party has no legitimate interest in refusing cure; and (d) cure is effected promptly. (2) The right to cure is not precluded by notice of termination. (3) Upon effective notice of cure, rights of the aggrieved party that are

inconsistent with the non-performing party’s performance are suspended until the time for cure has expired.

(4) The aggrieved party may withhold performance pending cure. (5) Notwithstanding cure, the aggrieved party retains the right to claim damages

for delay as well as for any harm caused or not prevented by the cure.

ARTICLE 7.1.5 (Additional period for performance)

(1) In a case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance.

(2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the ag-grieved party may resort to any of the remedies that may be available under this Chapter.

(3) Where in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate.

(4) Paragraph (3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.

ARTICLE 7.1.6 (Exemption clauses)

A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract.

ARTICLE 7.1.7 (Force majeure)

(1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

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(2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.

(3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt.

(4) Nothing in this Article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

SECTION 2: RIGHT TO PERFORMANCE

ARTICLE 7.2.1 (Performance of monetary obligation)

Where a party who is obliged to pay money does not do so, the other party may re-quire payment.

ARTICLE 7.2.2 (Performance of non-monetary obligation)

Where a party who owes an obligation other than one to pay money does not per-form, the other party may require performance, unless

(a) performance is impossible in law or in fact; (b) performance or, where relevant, enforcement is unreasonably burdensome or

expensive; (c) the party entitled to performance may reasonably obtain performance from an-

other source; (d) performance is of an exclusively personal character; or (e) the party entitled to performance does not require performance within a

reasonable time after it has, or ought to have, become aware of the non-performance.

ARTICLE 7.2.3 (Repair and replacement of defective performance)

The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly.

ARTICLE 7.2.4 (Judicial penalty)

(1) Where the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order.

(2) The penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages.

ARTICLE 7.2.5 (Change of remedy)

(1) An aggrieved party who has required performance of a non-monetary obliga-tion and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy.

(2) Where the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy.

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SECTION 3: TERMINATION

ARTICLE 7.3.1 (Right to terminate the contract)

(1) A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.

(2) In determining whether a failure to perform an obligation amounts to a funda-mental non-performance regard shall be had, in particular, to whether

(a) the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;

(b) strict compliance with the obligation which has not been performed is of essence under the contract;

(c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot

rely on the other party’s future performance; (e) the non-performing party will suffer disproportionate loss as a result of the

preparation or performance if the contract is terminated. (3) In the case of delay the aggrieved party may also terminate the contract if the

other party fails to perform before the time allowed it under Article 7.1.5 has expired.

ARTICLE 7.3.2 (Notice of termination)

(1) The right of a party to terminate the contract is exercised by notice to the other party.

(2) If performance has been offered late or otherwise does not conform to the contract the aggrieved party will lose its right to terminate the contract unless it gives notice to the other party within a reasonable time after it has or ought to have become aware of the offer or of the non-conforming performance.

ARTICLE 7.3.3 (Anticipatory non-performance)

Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract.

ARTICLE 7.3.4 (Adequate assurance of due performance)

A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract.

ARTICLE 7.3.5 (Effects of termination in general)

(1) Termination of the contract releases both parties from their obligation to effect and to receive future performance.

(2) Termination does not preclude a claim for damages for non-performance. (3) Termination does not affect any provision in the contract for the settlement of

disputes or any other term of the contract which is to operate even after termination.

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ARTICLE 7.3.6 (Restitution with respect to contracts to be performed at one time)

(1) On termination of a contract to be performed at one time either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract.

(2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.

(3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.

(4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received.

ARTICLE 7.3.7 (Restitution with respect to contracts to be performed over a period of time)

(1) On termination of a contract to be performed over a period of time restitution can only be claimed for the period after termination has taken effect, provided the contract is divisible.

(2) As far as restitution has to be made, the provisions of Article 7.3.6 apply.

SECTION 4: DAMAGES

ARTICLE 7.4.1 (Right to damages)

Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the non-performance is excused under these Principles.

ARTICLE 7.4.2 (Full compensation)

(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.

(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

ARTICLE 7.4.3 (Certainty of harm)

(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty.

(2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence.

(3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

ARTICLE 7.4.4 (Foreseeability of harm)

The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.

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ARTICLE 7.4.5 (Proof of harm in case of replacement transaction)

Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm.

ARTICLE 7.4.6 (Proof of harm by current price)

(1) Where the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm.

(2) Current price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference.

ARTICLE 7.4.7 (Harm due in part to aggrieved party)

Where the harm is due in part to an act or omission of the aggrieved party or to an-other event for which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties.

ARTICLE 7.4.8 (Mitigation of harm)

(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps.

(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

ARTICLE 7.4.9 (Interest for failure to pay money)

(1) If a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused.

(2) The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.

(3) The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.

ARTICLE 7.4.10 (Interest on damages)

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance.

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ARTICLE 7.4.11 (Manner of monetary redress)

(1) Damages are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.

(2) Damages to be paid in instalments may be indexed.

ARTICLE 7.4.12 (Currency in which to assess damages)

Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate.

ARTICLE 7.4.13 (Agreed payment for non-performance)

(1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

(2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

CHAPTER 8 — SET-OFF

ARTICLE 8.1 (Conditions of set-off)

(1) Where two parties owe each other money or other performances of the same kind, either of them (“the first party”) may set off its obligation against that of its obligee (“the other party”) if at the time of set-off,

(a) the first party is entitled to perform its obligation; (b) the other party’s obligation is ascertained as to its existence and amount and

performance is due. (2) If the obligations of both parties arise from the same contract, the first party

may also set off its obligation against an obligation of the other party which is not ascertained as to its existence or to its amount.

ARTICLE 8.2 (Foreign currency set-off)

Where the obligations are to pay money in different currencies, the right of set-off may be exercised, provided that both currencies are freely convertible and the parties have not agreed that the first party shall pay only in a specified currency.

ARTICLE 8.3 (Set-off by notice)

The right of set-off is exercised by notice to the other party.

ARTICLE 8.4 (Content of notice)

(1) The notice must specify the obligations to which it relates. (2) If the notice does not specify the obligation against which set-off is exercised,

the other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. If no such declaration is made, the set-off will relate to all the obligations proportionally.

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ARTICLE 8.5 (Effect of set-off)

(1) Set-off discharges the obligations. (2) If obligations differ in amount, set-off discharges the obligations up to the

amount of the lesser obligation. (3) Set-off takes effect as from the time of notice.

CHAPTER 9 — ASSIGNMENT OF RIGHTS, TRANSFER OF OBLIGATIONS, ASSIGNMENT OF CONTRACTS

SECTION 1: ASSIGNMENT OF RIGHTS

ARTICLE 9.1.1 (Definitions)

“Assignment of a right” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”), including transfer by way of security, of the assignor’s right to payment of a monetary sum or other performance from a third person (“the obligor”).

ARTICLE 9.1.2 (Exclusions)

This Section does not apply to transfers made under the special rules governing the transfers:

(a) of instruments such as negotiable instruments, documents of title or financial instruments, or

(b) of rights in the course of transferring a business.

ARTICLE 9.1.3 (Assignability of non-monetary rights)

A right to non-monetary performance may be assigned only if the assignment does not render the obligation significantly more burdensome.

ARTICLE 9.1.4 (Partial assignment)

(1) A right to the payment of a monetary sum may be assigned partially. (2) A right to other performance may be assigned partially only if it is divisible,

and the assignment does not render the obligation significantly more burdensome.

ARTICLE 9.1.5 (Future rights)

A future right is deemed to be transferred at the time of the agreement, provided the right, when it comes into existence, can be identified as the right to which the assignment relates.

ARTICLE 9.1.6 (Rights assigned without individual specification)

A number of rights may be assigned without individual specification, provided such rights can be identified as rights to which the assignment relates at the time of the assignment or when they come into existence.

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ARTICLE 9.1.7 (Agreement between assignor and assignee sufficient)

(1) A right is assigned by mere agreement between the assignor and the assignee, without notice to the obligor.

(2) The consent of the obligor is not required unless the obligation in the circum-stances is of an essentially personal character.

ARTICLE 9.1.8 (Obligor’s additional costs)

The obligor has a right to be compensated by the assignor or the assignee for any additional costs caused by the assignment.

ARTICLE 9.1.9 (Non-assignment clauses)

(1) The assignment of a right to the payment of a monetary sum is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to the obligor for breach of contract.

(2) The assignment of a right to other performance is ineffective if it is contrary to an agreement between the assignor and the obligor limiting or prohibiting the assignment. Nevertheless, the assignment is effective if the assignee, at the time of the assignment, neither knew nor ought to have known of the agreement. The assignor may then be liable to the obligor for breach of contract.

ARTICLE 9.1.10 (Notice to the obligor)

(1) Until the obligor receives a notice of the assignment from either the assignor or the assignee, it is discharged by paying the assignor.

(2) After the obligor receives such a notice, it is discharged only by paying the assignee.

ARTICLE 9.1.11 (Successive assignments)

If the same right has been assigned by the same assignor to two or more successive assignees, the obligor is discharged by paying according to the order in which the notices were received.

ARTICLE 9.1.12 (Adequate proof of assignment)

(1) If notice of the assignment is given by the assignee, the obligor may request the assignee to provide within a reasonable time adequate proof that the assignment has been made.

(2) Until adequate proof is provided, the obligor may withhold payment. (3) Unless adequate proof is provided, notice is not effective. (4) Adequate proof includes, but is not limited to, any writing emanating from the

assignor and indicating that the assignment has taken place.

ARTICLE 9.1.13 (Defences and rights of set-off)

(1) The obligor may assert against the assignee all defences that the obligor could assert against the assignor.

(2) The obligor may exercise against the assignee any right of set-off available to the obligor against the assignor up to the time notice of assignment was received.

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ARTICLE 9.1.14 (Rights related to the right assigned)

The assignment of a right transfers to the assignee: (a) all the assignor’s rights to payment or other performance under the contract in

respect of the right assigned, and (b) all rights securing performance of the right assigned.

ARTICLE 9.1.15 (Undertakings of the assignor)

The assignor undertakes towards the assignee, except as otherwise disclosed to the assignee, that:

(a) the assigned right exists at the time of the assignment, unless the right is a future right;

(b) the assignor is entitled to assign the right; (c) the right has not been previously assigned to another assignee, and it is free

from any right or claim from a third party; (d) the obligor does not have any defences; (e) neither the obligor nor the assignor has given notice of set-off concerning the

assigned right and will not give any such notice; (f) the assignor will reimburse the assignee for any payment received from the

obligor before notice of the assignment was given.

SECTION 2: TRANSFER OF OBLIGATIONS

ARTICLE 9.2.1 (Modes of transfer)

An obligation to pay money or render other performance may be transferred from one person (the “original obligor”) to another person (the “new obligor”) either

(a) by an agreement between the original obligor and the new obligor subject to Article 9.2.3, or

(b) by an agreement between the obligee and the new obligor, by which the new obligor assumes the obligation.

ARTICLE 9.2.2 (Exclusion)

This Section does not apply to transfers of obligations made under the special rules governing transfers of obligations in the course of transferring a business.

ARTICLE 9.2.3 (Requirement of obligee’s consent to transfer)

The transfer of an obligation by an agreement between the original obligor and the new obligor requires the consent of the obligee.

ARTICLE 9.2.4 (Advance consent of obligee)

(1) The obligee may give its consent in advance. (2) If the obligee has given its consent in advance, the transfer of the obligation

becomes effective when a notice of the transfer is given to the obligee or when the obligee acknowledges it.

ARTICLE 9.2.5 (Discharge of original obligor)

(1) The obligee may discharge the original obligor.

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(2) The obligee may also retain the original obligor as an obligor in case the new obligor does not perform properly.

(3) Otherwise the original obligor and the new obligor are jointly and severally liable.

ARTICLE 9.2.6 (Third party performance)

(1) Without the obligee’s consent, the obligor may contract with another person that this person will perform the obligation in place of the obligor, unless the obligation in the circumstances has an essentially personal character.

(2) The obligee retains its claim against the obligor.


(1) The new obligor may assert against the obligee all defences which the original obligor could assert against the obligee.

(2) The new obligor may not exercise against the obligee any right of set-off available to the original obligor against the obligee.

ARTICLE 9.2.8 (Rights related to the obligation transferred)

(1) The obligee may assert against the new obligor all its rights to payment or other performance under the contract in respect of the obligation transferred.

(2) If the original obligor is discharged under Article 9.2.5(1), a security granted by any person other than the new obligor for the performance of the obligation is discharged, unless that other person agrees that it should continue to be available to the obligee.

(3) Discharge of the original obligor also extends to any security of the original obligor given to the obligee for the performance of the obligation, unless the security is over an asset which is transferred as part of a transaction between the original obligor and the new obligor.

SECTION 3: ASSIGNMENT OF CONTRACTS


“Assignment of a contract” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”) of the assignor’s rights and obligations arising out of a contract with another person (the “other party”).

ARTICLE 9.3.2 (Exclusion)

This Section does not apply to the assignment of contracts made under the special rules governing transfers of contracts in the course of transferring a business.

ARTICLE 9.3.3 (Requirement of consent of the other party)

The assignment of a contract requires the consent of the other party.

ARTICLE 9.3.4 (Advance consent of the other party)

(1) The other party may give its consent in advance.

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(2) If the other party has given its consent in advance, the assignment of the contract becomes effective when a notice of the assignment is given to the other party or when the other party acknowledges it.

ARTICLE 9.3.5 (Discharge of the assignor)

(1) The other party may discharge the assignor. (2) The other party may also retain the assignor as an obligor in case the assignee

does not perform properly. (3) Otherwise the assignor and the assignee are jointly and severally liable.


(1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.13 applies accordingly.

(2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.7 applies accordingly.

ARTICLE 9.3.7 (Rights transferred with the contract)

(1) To the extent that the assignment of a contract involves an assignment of rights, Article 9.1.14 applies accordingly.

(2) To the extent that the assignment of a contract involves a transfer of obligations, Article 9.2.8 applies accordingly.

CHAPTER 10 — LIMITATION PERIODS

ARTICLE 10.1 (Scope of the Chapter)

(1) The exercise of rights governed by the Principles is barred by the expiration of a period of time, referred to as “limitation period”, according to the rules of this Chapter.

(2) This Chapter does not govern the time within which one party is required under the Principles, as a condition for the acquisition or exercise of its right, to give notice to the other party or to perform any act other than the institution of legal proceedings.

ARTICLE 10.2 (Limitation periods)

(1) The general limitation period is three years beginning on the day after the day the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised.

(2) In any event, the maximum limitation period is ten years beginning on the day after the day the right can be exercised.

ARTICLE 10.3 (Modification of limitation periods by the parties)

(1) The parties may modify the limitation periods. (2) However they may not (a) shorten the general limitation period to less than one year; (b) shorten the maximum limitation period to less than four years; (c) extend the maximum limitation period to more than fifteen years.

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ARTICLE 10.4 (New limitation period by acknowledgement)

(1) Where the obligor before the expiration of the general limitation period acknowledges the right of the obligee, a new general limitation period begins on the day after the day of the acknowledgement.

(2) The maximum limitation period does not begin to run again, but may be exceeded by the beginning of a new general limitation period under Article 10.2(1).

ARTICLE 10.5 (Suspension by judicial proceedings)

(1) The running of the limitation period is suspended (a) when the obligee performs any act, by commencing judicial proceedings or in

judicial proceedings already instituted, that is recognised by the law of the court as asserting the obligee’s right against the obligor;

(b) in the case of the obligor’s insolvency when the obligee has asserted its rights in the insolvency proceedings; or

(c) in the case of proceedings for dissolution of the entity which is the obligor when the obligee has asserted its rights in the dissolution proceedings.

(2) Suspension lasts until a final decision has been issued or until the proceedings have been otherwise terminated.

ARTICLE 10.6 (Suspension by arbitral proceedings)

(1) The running of the limitation period is suspended when the obligee performs any act, by commencing arbitral proceedings or in arbitral proceedings already instituted, that is recognised by the law of the arbitral tribunal as asserting the obligee’s right against the obligor. In the absence of regulations for arbitral proceedings or provisions determining the exact date of the commencement of arbitral proceedings, the proceedings are deemed to commence on the date on which a request that the right in dispute should be adjudicated reaches the obligor.

(2) Suspension lasts until a binding decision has been issued or until the proceedings have been otherwise terminated.

ARTICLE 10.7 (Alternative dispute resolution)

The provisions of Articles 10.5 and 10.6 apply with appropriate modifications to other proceedings whereby the parties request a third person to assist them in their attempt to reach an amicable settlement of their dispute.

ARTICLE 10.8 (Suspension in case of force majeure, death or incapacity)

(1) Where the obligee has been prevented by an impediment that is beyond its control and that it could neither avoid nor overcome, from causing a limitation period to cease to run under the preceding Articles, the general limitation period is suspended so as not to expire before one year after the relevant impediment has ceased to exist.

(2) Where the impediment consists of the incapacity or death of the obligee or obligor, suspension ceases when a representative for the incapacitated or deceased party or its estate has been appointed or a successor has inherited the respective party’s position. The additional one-year period under paragraph (1) applies accordingly.

ARTICLE 10.9 (Effects of expiration of limitation period)

(1) The expiration of the limitation period does not extinguish the right.

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(2) For the expiration of the limitation period to have effect, the obligor must assert it as a defence.

(3) A right may still be relied on as a defence even though the expiration of the limitation period for that right has been asserted.

ARTICLE 10.10 (Right of set-off)

The obligee may exercise the right of set-off until the obligor has asserted the expiration of the limitation period.

ARTICLE 10.11 (Restitution)

Where there has been performance in order to discharge an obligation, there is no right of restitution merely because the limitation period has expired.

CHAPTER 11 — PLURALITY OF OBLIGORS AND OF OBLIGEES

SECTION 1: PLURALITY OF OBLIGORS


When several obligors are bound by the same obligation towards an obligee: (a) the obligations are joint and several when each obligor is bound for the whole

obligation; (b) the obligations are separate when each obligor is bound only for its share.

ARTICLE 11.1.2 (Presumption of joint and several obligations)

When several obligors are bound by the same obligation towards an obligee, they are presumed to be jointly and severally bound, unless the circumstances indicate otherwise.

ARTICLE 11.1.3 (Obligee’s rights against joint and several obligors)

When obligors are jointly and severally bound, the obligee may require performance from any one of them, until full performance has been received.

ARTICLE 11.1.4 (Availability of defences and rights of set-off)

A joint and several obligor against whom a claim is made by the obligee may assert all the defences and rights of set-off that are personal to it or that are common to all the co-obligors, but may not assert defences or rights of set-off that are personal to one or several of the other co-obligors.

ARTICLE 11.1.5 (Effect of performance or set-off)

Performance or set-off by a joint and several obligor or set-off by the obligee against one joint and several obligor discharges the other obligors in relation to the obligee to the extent of the performance or set-off.

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ARTICLE 11.1.6 (Effect of release or settlement)

(1) Release of one joint and several obligor, or settlement with one joint and several obligor, discharges all the other obligors for the share of the released or settling obligor, unless the circumstances indicate otherwise.

(2) When the other obligors are discharged for the share of the released obligor, they no longer have a contributory claim against the released obligor under Article 11.1.10.

ARTICLE 11.1.7 (Effect of expiration or suspension of limitation period)

(1) Expiration of the limitation period of the obligee’s rights against one joint and several obligor does not affect:

(a) the obligations to the obligee of the other joint and several obligors; or (b) the rights of recourse between the joint and several obligors under Article

11.1.10. (2) If the obligee initiates proceedings under Articles 10.5, 10.6 or 10.7 against

one joint and several obligor, the running of the limitation period is also suspended against the other joint and several obligors.

ARTICLE 11.1.8 (Effect of judgment)

(1) A decision by a court as to the liability to the obligee of one joint and several obligor does not affect:

(a) the obligations to the obligee of the other joint and several obligors; or (b) the rights of recourse between the joint and several obligors under Article

11.1.10. (2) However, the other joint and several obligors may rely on such a decision,

except if it was based on grounds personal to the obligor concerned. In such a case, the rights of recourse between the joint and several obligors under Article 11.1.10 are affected accordingly.

ARTICLE 11.1.9 (Apportionment among joint and several obligors)

As among themselves, joint and several obligors are bound in equal shares, unless the circumstances indicate otherwise.

ARTICLE 11.1.10 (Extent of contributory claim)

A joint and several obligor who has performed more than its share may claim the excess from any of the other obligors to the extent of each obligor’s unperformed share.

ARTICLE 11.1.11 (Rights of the obligee)

(1) A joint and several obligor to whom Article 11.1.10 applies may also exercise the rights of the obligee, including all rights securing their performance, to recover the excess from all or any of the other obligors to the extent of each obligor’s unperformed share.

(2) An obligee who has not received full performance retains its rights against the co-obligors to the extent of the unperformed part, with precedence over co-obligors exercising contributory claims.

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ARTICLE 11.1.12 (Defences in contributory claims)

A joint and several obligor against whom a claim is made by the co-obligor who has performed the obligation :

(a) may raise any common defences and rights of set-off that were available to be asserted by the co-obligor against the obligee ;

(b) may assert defences which are personal to itself ; (c) may not assert defences and rights of set-off which are personal to one or

several of the other co-obligors.

ARTICLE 11.1.13 (Inability to recover)

If a joint and several obligor who has performed more than that obligor’s share is unable, despite all reasonable efforts, to recover contribution from another joint and several obligor, the share of the others, including the one who has performed, is increased proportionally.

SECTION 2: PLURALITY OF OBLIGEES


When several obligees can claim performance of the same obligation from an obligor:

(a) the claims are separate when each obligee can only claim its share; (b) the claims are joint and several when each obligee can claim the whole

performance; (c) the claims are joint when all obligees have to claim performance together.

ARTICLE 11.2.2 (Effects of joint and several claims )

Full performance of an obligation in favour of one of the joint and several obligees discharges the obligor towards the other obligees.

ARTICLE 11.2.3 (Availability of defences against joint and several obligees)

(1) The obligor may assert against any of the joint and several obligees all the defences and rights of set-off that are personal to its relationship to that obligee or that it can assert against all the co-obligees, but may not assert defences and rights of set-off that are personal to its relationship to one or several of the other co-obligees.

(2) The provisions of Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8 apply, with appropriate adaptations, to joint and several claims.

ARTICLE 11.2.4 (Allocation between joint and several obligees)

(1) As among themselves, joint and several obligees are entitled to equal shares, unless the circumstances indicate otherwise.

(2) An obligee who has received more than its share must transfer the excess to the other obligees to the extent of their respective shares.

For an extensive collection of case

law and international bibliography

on the UNIDROIT Principles, see

the UNILEX database at

http://www.unilex.info

SYMPOSIUM ON THE 2010 UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS:

TOWARDS A “GLOBAL” CONTRACT LAW

GEORGETOWN UNIVERSITY, 28 OCTOBER 2011

FROM SCHOLAR’S DREAM TO LAWYER’S TOOL?

UNIFORM COMMERCIAL LAW AND INTERNATIONAL LEGAL PRACTICE –

BRIEF REMARKS ON THE WORK OF UNIDROIT

“And yet, it moves.” (attributed to Galileo).

JOSÉ ANGELO ESTRELLA FARIA∗

INTRODUCTION

Few business lawyers in the United States could nowadays think of intersate legal practice without the Uniform Commercial Code. Regrettably, even fewer can think of international legal practice without the complexities and cost involved in ascertaining the applicable law and assessing its implications for their clients. The world is a patchwork of sovereign states with diverse legal tradition and often conflicting business regulation, and is likely to remain that way for a long while.

A century ago, few would have disagreed in substance with Lord Justice Kennedy’s enthusiastic statement at the 1909 Annual Meeting of the Liverpool Board of Legal Studies that “[t]he certainty of enormous gain to civilised mankind from the unification of law needs no exposition.”1

The creation of international organisations especially for the purpose of unifying rules of private law and private international

∗ Secretary-General, International Institute for the Unification of Private Law (“UNIDROIT”). 1 “Conceive the security and the peace of mind of the shipowner, the banker, or the merchant”

continued His Lordship, “who knows that in regard to his transactions in a foreign country the law of contract, of movable property, and of civil wrongs is practically identical with that of his own country.” Lord Justice Kennedy, The Unification of Law, 10 J. SOC’Y COMP. LEGIS., 212, 214 (1909).

UNIFORM COMMERCIAL LAW AND INTERNATIONAL LEGAL PRACTICE 2

law was warmly acclaimed by an academic world in which the impact of the monumental work of the 19th century codifications in continental Europe was still fresh. The Hague Conference on Private International Law (“the Hague Conference”)2 or the International Institute for the Unification of Private Law (UNIDROIT)3 are prime examples of such approval. International “unification” of law seemed to be the next obvious step towards an illuminated state of legal order, coherence and clarity. In particular among continental lawyers, this vision was often motivated by the nostalgic attachment to the “paradise lost”4 of Roman Law. Work in those early years of institutionalised legal harmonisation was dominated by academics, and developed “in an unconstrained truly academic discourse among experts.”5

Europe was historically the driver of the legal unification movement. This is not surprising when one considers the remarkable diversity of cultures and legal traditions of the continent. Despite their universal vocation and aspirations, the activities of the Hague Conference or UNIDROIT were confined to Europe for a long time.

6 That situation changed dramatically after World War II, when new organisations were established, including the United Nations Commission on International Trade Law (UNCITRAL),7

The combined production of those and other intergovernmental organisations, but also of non-governmental organisations, such as

in 1966, and several specialized UN bodies and other global or regional organisations. As more countries outside of Europe joined the Hague Conference and UNIDROIT, the number of ratifications or accessions to pre-existing treaties and conventions greatly increased, while new instruments were developed and gained worldwide acceptance.

2 The Hague Conference, which currently has sixty-nine Member States, had been active since 1893

and received a statute in 1955. It has worked in a wide range of issues, including abolition of legalisation requirements, service of process, taking of evidence abroad, access to justice, international child abduction, intercountry adoption, conflicts of laws relating to the form of testamentary dispositions, maintenance obligations, and recognition of divorce. See More About HCCH, http://www.hcch.net/index_en.php?act=text.display&tid=4 (last visited Mar. 12, 2010).

3 UNIDROIT which currently has sixty-three member States, was established under the auspices of the League of Nations in 1926 and re-established in 1940 following the demise of the League. UNIDROIT has worked on various areas, such as agency and sales law, security interest in mobile equipments, international leasing and factoring contracts, international wills, stolen or illegally exported cultural objects, and principles of international commercial contracts. See UNIDROIT An Overview, http://www.UNIDROIT.org/dynasite.cfm?dsmid=84219 (last visited Mar. 12, 2010).

4 Marc Ancel, From the Unification of Law to its Harmonisation, 51 TUL. L. REV. 108, 108–17 (1976). , at 108. 5 Herbert Kronke, Methodical Freedom and Organisational Constraints in the Development of

Transnational Law, 51 LOY. L. REV. 287, 288 (2005). 6 Jürgen Basedow, Worldwide Harmonisation of Private Law and Regional Economic Integration -

General Report, 8 UNIF. L. REV. 31, 32 (2003). 7 UNCITRAL is a subsidiary body of the U.N. General with the general mandate to further the

progressive harmonisation and unification of the law of international trade. There are sixty full members of UNCITRAL elected for six-year terms, but its proceedings are open to all 192 member States of the United Nations. UNCITRAL has worked on many areas of commercial law, including sales law, international payments, assignment of receivables, arbitration and conciliation, international carriage of goods, electronic commerce, insolvency, and public procurement. For more about UNCITRAL, see http://www.uncitral.org/uncitral/en/about_us.html (follow “Origin, Mandate, and Composition,” “Methods of Work,” and “FAQ” hyperlinks, last visited Mar. 12, 2010).


the International Chamber of Commerce (ICC), include various highly successful international instruments such as the Brussels Convention for the Unification of Certain Rules of Law Relating to Bills of Lading (the “Hague Rules”);8 the Warsaw Convention on the Unification of Certain Rules Relating to International Transportation by Air (the “Warsaw Convention”);9 the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards;10 the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters;11 the United Nations Convention on the International Sale of Goods (CISG);12 the Convention on International Interests in Mobile Equipment;13 the Hague Convention on the Taking Evidence Abroad in Civil or Commercial Matters;14 and the International Chamber of Commerce’s International Rules for the Interpretation of Trade Terms (Incoterms);15 and Uniform Customs and Practice for Documentary Credits (UCP).16

I. CRITICISM OF THE UNIFICATION PROCESS

The intensification of international unification efforts in the post-war world and the ever growing number of initiatives led more prominent representatives of the unification movement to see wide-reaching legal unification as inevitable, and its achievement as a simple question of finding the appropriate means.17 Yet, dissenting voices started to question “the assumption that uniform law is good in itself and that the process of unification is one to be encouraged.”18

8 International Convention for the Unification of Certain Rules Relating to Bills of Lading for

Carriage of Goods by Sea, Aug. 25, 1924, 51 Stat. 233, 120 L.T.N.S. 155.

9 Convention for the Unification of Certain Rules Relating to International Transportation by Air, Oct. 12, 1929, 49 Stat. 3000, 137 L.N.T.S. 11.

10 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3.

11 Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, 658 U.N.T.S. 163.

12 United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980, Fed. Reg. 6264, 1489 U.N.T.S 3 (known as the “CISG”).

13 Convention on International Interests in Mobile Equipment, Nov. 16, 2001, U.N.T.S. 2307 (available at http://www.UNIDROIT.org/english/conventions/mobile-equipment/main.htm).

14 Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, Oct. 26, 1968, 23 U.S.T. 2555, 847 U.N.T.S. 231.

15 International Chamber of Commerce, Incoterms 1990, I.C.C. Publ. No. 460. 16 International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits

1993, I.C.C. Publ. No. 500. 17 René David, the famous French comparative lawyer, for instance, was positive: “From our point of

view, the illusion is not the international unification of the law. On the contrary, it is the refusal to contemplate unification and the desire to preserve law as strictly an instrument of state power and thus as divided among states . . . Let jurists continue in their routine opposition to international unification of law; nevertheless, that unification will occur without and despite them, just as the ius gentium developed in Rome without the pontiffs, and as equity developed in England without the common-law lawyers. Today the problem is not whether international unification of law will be achieved; it is how it can be achieved.” Methods of Unification, 16 AM. J. COMP. L. 13, 14 (1968).

18 R. H. Graveson, The International Unification of Law, 16 AM. J. COMP. L. 4, 5–6 (1968).


A. Questioning the need for legal harmonisation

The ideal of “unification” of law began to be seen as a simplistic, top-to-bottom approach to rule-making, and gave way gradually to the notion of “legal harmonisation,” thought by many to reflect more accurately both the flexibility now universally understood as necessary, but also the holistic approach to a task that was not to be accomplished with the mere enactment of uniform rules.19

In what may appear as a paradox, emerging criticism of international harmonisation efforts did not mean fewer harmonisation projects. On the contrary, the deepening of the European integration process and the growing economic ties across the globe led to a steady expansion of the number of international harmonisation initiatives. By the mid-1980s, some even began to fear that the multiplicity of international projects might have reached a saturation point.

20

Initially, criticism was directed at the primary vehicle for the international unification of domestic private law: the multilateral treaty. The treaty-making process was increasingly criticized as being cumbersome and time-consuming, and the resulting product difficult to amend in instances requiring accommodation of economic changes or evolution of practice or technology.

21 Even where amendments were practicable, there was a risk that amending protocols might not be ratified by all the original signatory States. This unease sometimes resulted in a complex patchwork of Contracting Parties. The rigidity of the treaty-making process, and the little flexibility—if any—left for adaptations to the domestic reality, it was said, was discouraging States from adhering to international conventions.22

More recently, criticism has also been directed against the international negotiation process itself.

23

19 Ancel, supra, note

The search for consensus between different legal traditions may entail mitigating or

4, 108–17 (1976). 20 “In fact, one should worry at the prospect that the countless current projects of legal unification

and harmonisation could come to fruition as complete texts and that the stream of such texts might flow down to the already overburdened mills of national legislative organs. Above all, one must ask whether the ever more intricate patchwork of uniform law might not at the end overwhelm the capacity of practice to process new norms.” Heinz Kötz, “Rechtsvereinheitlichung – Nutzen, Kosten, Methoden, Ziele,” 50 RABELS ZEITSCHRIFT FUR AUSLANDISCHES UND INTERNATIONALES PRIVATRECHT 2, 5 (1986).

21 “As time changes and the law does not, codifications become the enemy of substantive reform. In today’s world, any code that does not build a process for prompt and sustained reconsideration into its structure becomes part of the problem, not part of the solution.” Arthur Rosett, Unification, Harmonisation, Restatement, Codification and Reform in International Commercial Law, 40 AM. J. COMP. L. 683, 683–88 (1992).

22 “At the international level, it is harder to persuade States to accede to a convention if the ‘price’ is so high at the outset. And, if this initial hurdle is overcome and a reasonable number of States do accede, amendment of that original convention then requires agreement from a much larger group of States if uniformity is to be maintained.” Alan D. Rose, The Challenges for Uniform Law in the Twenty-First Century, 1 UNIF. L. REV. 9, 13 (1996).

23 See Rosett, supra note 21, at 688.


abandoning the preferred rule in a given legal system, especially when it is unlikely that it will obtain support of other legal systems. It is not surprising that uniform law is not attractive to domestic readers persuaded of the superiority of national law.24

In particular common lawyers, with their ingrained fear of unexpected judicial construction, are suspicious of the abstract formulations which uniform law negotiators often resort to avoid entering in details about which consensus would be difficult to find. Much the same way as continental lawyers dislike the pre-eminence of common law legal thinking, particularly in the areas of banking and financing

The emergence of the law and economics movement inevitably added a new dimension to the debate between advocates and opponents of legal harmonisation. Arguments no longer focus primarily on the suitability of a particular topic or methodology, but would now question the economic need for legal harmonisation.

In particular, some argue that the benefit of lower transaction costs and lower legal risk expected to result from legal harmonisation has to be balanced against the transition costs incurred by parties to adapt to the operation of the harmonized rule.25

Some even see in the harmonisation process a direct source of higher transaction costs, because it would typically lead to the adoption of “sub-optimal,” vaguely drafted rules for the purpose of achieving political compromise.

26 The comparative law foundation of the harmonisation process, too, has been questioned as incapable of differentiating between types of rules or providing “any guidance as to the normative value of the rules so produced,” and leading to the formulation of “text-based solutions and compromises” that are “inconsistent with the overriding commercial objective of achieving materially greater levels of certainty and predictability.”27

We know, for instance that there have been relatively few reported decisions on the CISG by U.S. courts or involving U.S. parties, in the twenty years during which international sales involving parties located in the United States have potentially been subject to the Convention.

28

24 “These conventions are inevitably and confessedly drafted as multi-cultural compromises between

different schemes of law. Consequently they will normally have less merit than most of the individual legal systems from which they have been derived.” J.S. Hobhouse, International Conventions and Commercial Law: the Pursuit of Uniformity, 106 L. Q. REV. 530, 533 (1990).

The most likely explanation is that U.S. legal counsel

25 Michale P. Van Alstine, Treaty Law and Legal Transition Costs, 77 CHI.-KENT L. REV. 1303, 1303–1324 (2001).

26 Steven Walt, Novelty and the Risks of Uniform Sales Law, 39 VA. J. INT’L L. 671, 694–696 (1999). 27 Jeffrey Wool, Rethinking the Notion of Uniformity in the Drafting of International Commercial

Law: Proposal for a Policy-based Unification Model for Drafting International Commercial Law, 52 UNIF. L. REV. 47, 48–49 (1997).

28 For a discussion of the statistics on reported U.S. CISG cases, see Mathias REIMAN, “The CISG in the United States: Why It Has Been Neglected and Why Europeans Should Care” (paper from “The Convention on the International Sale of Goods – The 25th Anniversary: Its Impact in the Past – Its Role in the Future; German Society of Comparative Law – Private Law Division Conference 2005: 22-24 September 2005, Würzburg), Rabels Zeitschrift für ausländisches und internationales Privatrecht, vol. 71 (2007), 115 et seq. (117-120).


routinely have advised their clients to opt out of the CISG and choose U.S. domestic sales law as the law governing their international sales transactions. Although there seems to be some indication that “the wisdom of proffering this advice mechanically is now being questioned by U.S. lawyers”, this trend has not yet been reversed.29 While there are several reasons for the practice of excluding the CISG (which incidentally is also observed in other Contracting States to the Convention), an informed decision as to the advantages or disadvantages of the Convention, as compared to the substantive law chosen instead, is rarely the decisive factor. It is “sometimes ignorance, sometimes fear, sometimes a reluctance to change existing patterns – and be it for lack of time and resources to concentrate on something new” that in most situations leads to the exclusion of the CISG.30

Some suggest therefore that it would be better to simply allow companies to “elect in and out of national commercial law systems” so that “States thus could compete for legal business on the basis of the attractiveness of their rules and dispute resolution procedures, rather than coerce their subjects to follow any one system of commercial law.”

31

That choice of law clauses may not be enforceable in a given foreign jurisdiction is a risk that is often overlooked and that “regulatory competition” is not an option when parties are not free to choose the governing law of their dealings, particularly in areas so eminently territorial as property law.

B. Re-affirming legal harmonisation in the 21st century Criticism of legal harmonisation sometimes neglects to consider the possible impact of international standards in improving the domestic framework for business, in particular in less sophisticated jurisdictions.

New institutional economics pays increasing attention to the impact of the legal and regulatory framework on economic activity. Modern economic theory associates economic development with the quality of social institutions.32

29 “Changing the Opt-out Tradition in the United States”, paper presented by Harry M. FLECHTNER at the

UNCITRAL Congress “Modern Law for Global Commerce (Vienna, 9-12 July 2007), available at <

Outdated laws and inadequate mechanisms

http://www.uncitral.org/uncitral/en/about/congresspapers.html>, 10 March 2009. 30 “The practice of excluding the CISG: time for change? Comment on the limited use of the CISG in private

practice (and on why this will increasingly change)”, paper presented by Eckart BRÖDERMANN at the UNCITRAL Congress “Modern Law for Global Commerce (Vienna, 9-12 July 2007), available at <http://www.uncitral.org/uncitral/en/about/congresspapers.html>, 10 March 2009.

31 Paul B. Stephan, The Futility of Unification and Harmonisation in International Commercial Law, 39 VA. J. INT’L L. 743, 789, 795 (1999). For an economic justification of this argument, see See also Anthony Ogus, “Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law.” International and Comparative Law Quarterly, vol 48 (1999), pp. 405-418.

32 “Successful development policy entails an understanding of the dynamics of economic change if the policies pursued are to have the desired consequences. And a dynamic model of economic change entails as an integral part of that model analysis of the polity since it is the polity that specifies and enforces the formal rules.” (Douglass C. NORTH, “The New Institutional Economics and Development”,

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for the enforcement of legal rights are now recognised as generating economic inefficiency and hindering sustainable economic development.

All market activities involve “transaction costs”.33 Legal inefficiency may take the form of rules that allocate rights inefficiently, thus leading to higher transaction costs owing to the need to rearrange the initial allocation of rights. However, once the costs of carrying out market transactions are taken into account, it becomes clear that “such a rearrangement of rights will only be undertaken when the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about.” 34

A particular arrangement of rights may bring about a greater value of production than any other. But “unless this is the arrangement of rights established by the legal system, the costs of reaching the same result by altering and combining rights through the market may be so great that this optimal arrangement of rights, and the greater value of production which it would bring, may never be achieved.”

35

Laws that are outdated and that are not based on harmonised or trans-parent standards therefore may add another obstacle to economic growth and sustainable development. They increase commercial risks and transaction costs. They may also hamper the activities of commercial entities and restrict their participation in international trade. In such a legal environment, small and medium-sized enterprises with limited experience and access to legal advice often encounter particular difficulty in penetrating new markets, establishing new trade relations and resolving disputes in a predictable and efficient manner. In addition, investment can be severely affected or may not take place at all.

In these conditions, the initial delimitation of legal rights by the governing legal system does have an effect on the efficiency with which the economic system operates.

International efforts to improve the legal framework for business in developing countries and transition economies work in two comple-mentary directions: they help developing countries to promote domestic trade and industry, while giving legal certainty for and enhancing returns on the investments made by foreign companies. This effect of legal harmonisation means that the harmonisation process, contrary to what some of its detractors maintain, is not a “race to the bottom” leading inevitably to a sub-optimal lowest common denominator. Indeed, legal harmonisation often entails a

Washington University in St Louis, <http://econpapers.repec.org/ paper/ wpawuwpeh/9309002.htm>, 10 September 2007).

33 They encompass elements such as the cost to “discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on” (R.H. COASE, “The Problem of Social Cost”, Journal of Law and Economics, vol. 3 (1960), 1 et seq. (15)).

34 Ibid., 15. 35 Ibid.


choice for the most efficient solution and provides a framework for its “transplantation” across jurisdictions.

I am well aware of the controversy surrounding both the notion and the desirability of “legal transplantation”36 the effectiveness of which is criticised on grounds of cultural identity and social context, and which is seen by some as a crude tool of a blunt and ultimately ineffective “legal imperialism”.37 However, it has been also been said that denying categorically the possibility of legal transplants “betrays an exaggeration of cultural diversity as it contradicts the teachings of history”. 38 Indeed, it is well known fact that legal systems have always communicated and have often influenced one another, through “importation” or “inspiration”.39

The last world in this debate may not have been spoken, and I personally tend to agree with those who advocate a more nuanced approach in assessing the feasibility of legal transplants.

40

From my own experience in the formulation of uniform rules, however, I have observed that the process of developing harmonised legal rules is often a learning process through which policymakers compare the adequacy of their own rules against solutions found in other legal systems and asses the possible need for law reform. Incorporating efficient standards developed through negotiations at which they participate is often a more acceptable option than simply “transplanting” foreign law to the domestic context.

41

36 The theory of legal transplant was developed by the Scottish-American legal scholar W.A.J. 'Alan'.

Watson in his seminal work Legal Transplants: An Approach to Comparative Law (Edinburgh: Scottish Academic Press, 1974).

37 The same year as Watson published his theories, Otto Kahn-Freund warned that “any attempt to use a pattern of law outside the environment of its origin continues to entail the risk of rejection” (Otto Kahn-Freund, “On Use and Misuse of Comparative Law” (1974), 37 Modern Law Review 1-27. The most severe criticism to Watson’s theory was formulated by Pierre Legrand, who characterises Watson's views as providing “a most impoverished explanation of interactions across legal systems – the result of a particularly crude apprehension of what law is and of what a rule is” (Pierre Legrand, “The Impossibility of Legal Transplants”, Maastricht Journal of European and Comparative Law, Vol. 4, Issue 2 (1997), pp. 111-124, at 113).

38 George Mousourakis, “Transplanting Legal Models across Culturally Diverse Societies: A Comparative Law Perspective”, Osaka University Law Review No. 57 (February 2010) 87-106; see also Jean-Louis Halpérin "The Concept of Law: A Western Transplant?," Theoretical Inquiries in Law: Vol. 10 : No. 2 (2009), Article 2. (Available at: http://www.bepress.com/til/default/vol10/iss2/art2, last visited 20 October 2011).

39 “[…] legal transplants are inevitable. Since the later Roman empire they have been a major, if not always the main, factor in legal change in the western world. England is no exception. Nor is the United States. Nor is Québec, even with its differences from the other Provinces.” A. Watson, “Legal Transplants and European Private Law”, Electronic Journal of Comparative Law, vol 4.4 (December 2000), < http://www.ejcl.org/ejcl/44/44-2.html>, last visited 20 October 2011.

40 Much like the middle-ground approach advocated by Nursel Atar, who, after reviewing the Turkish experience (an example of successful transplant often cited by the “legal transferists”) highlights both the success and the failures of transplantation depending on the relevant fields of the law and concludes on the need “to reject a grand transplant theory of either the transferist or the culturalist and to return to localized, contextual and detailed studies where all theories can be used side-by-side to understand each individual transplant case.” (Nursel Atar, “The Impossibility of a Grand Transplant Theory”, Ankara Law Review, Vol.4 No.2 (Winter 2007), pp.177-197.

41 It has been found that “[t]he way in which the law was initially transplanted is a more important determinant of legality than the supply of a particular legal family”, with the consequence that “substantial investments should be made in legal information and training prior to adoption of a

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In any event, countries’ choices when considering participating in a legal harmonisation process or implementing uniform standards nowadays benefit from a growing research on empirical demonstration of the practical utility of legal harmonisation, and the conditions under which it contributes to reducing transaction costs.42

Doubts about the harmonisation process are not new, and not every criticism is justified or reasonable. However, the debate in the last two decades has produced a fertile theoretical and practical ground for assessing the need of and scope for international legal harmonisation, the value it adds in a particular context, and the possible advantage of a uniform rule, as opposed to a purely domestic solution.

43

II. THE RESPONSE OF UNIDROIT TO THE CHALLENGES OF LEGAL HARMONISATION

UNIDROIT is not concerned that the criticism of the legal unification process may deprive it of its “business cause”. As a matter of fact, UNIDROIT is in the happy position to affirm that we have taken them seriously and that our tight budget has always forced us to look carefully at the feasibility and practical usefulness of all our projects before engaging Governments in the lengthy and costly process of negotiating uniform law.

A. Making method fit the project (and not the other way round)

UNIDROIT is very well aware of the fact that a project for harmonization of law, to use the words of one of the sceptics about the harmonisation process, is composed of four related features: “(i) the diverse elements to be harmonized; (ii) the rationale for or problem to be resolved by harmonization, i.e., whether and how diversity is problematic; (iii) the ultimate goal of harmonization; and (iv) the method by which this goal is to be achieved. […]. The justification for such a project, therefore, must be based on a critical analysis of all its component.”44

law, so that domestic agents can enhance their familiarity with the imported law and make an informed decision about how to adapt the law to local conditions”(Daniel Berkowitz, Katharina Pistor, Jean-Francois Richard, Economic Development, Legality, and the Transplant Effect (September 2001) <http://www.pitt.edu/~dmberk/Bpreerfinal.pdf> , last visited 20 October 2011, also published at European Economic Review, Volume 47, Issue 1 (February 2003), pp. 165-195).

42 See John Linarelli, The Economic of Uniform Laws and Uniform Lawmaking, 48 WAYNE L. REV. 1387, 1401 (2002).

43 David Leebron, Claims for Harmonisation: A Theoretical Framework, 27 CANADIAN BUS. L.J. 63 (1996).

44Martin Boodman, “The Myth of Harmonization of Laws”, The American Journal of Comparative Law, (1991), 708-709.


Like other international organisations involved in legal harmonisation UNIDROIT considers critically the limitations of the instruments it produces and the possible shortcomings of its own working methods. The result has been, for example, greater flexibility in choosing instruments and in conceiving ways in which “hard” and “soft” law may best supplement one another.45

There is now a clear tendency to reserve the multilateral treaty form (“conventions”) for special cases that require uniformity and to make greater use of instruments capable of being more easily adapted to a domestic context, such as model laws or guidelines.

46 Even within the ambit of the European Union (EU), where the high level of uniformity offered by regulations or directives issued by the Union is supplemented by the availability of judicial mechanisms to interpret and enforce uniform law (thus overcoming one of the main shortcomings of traditional international harmonisation), there is growing interest for alternative solutions, such as optional instruments available for parties to choose as the applicable law would to avoid the divergent mandatory provisions of different member states.47

There is also greater flexibility in the approach taken to formulation of rules and to the value attached to the uniformity norm, as well as to the extent of freedom given to contracting States to adapt the scope of international conventions and shape their application.

48

The international harmonisation process has therefore become more complex, with a growing number of different instruments being used

49 or different levels of coherence being sought.50

There is also growing awareness of the challenges of overcoming the barriers posed by deeply ingrained legal concepts and categories and of the need for shifting attention from conceptual categories to

45 Instruments such as the UNIDROIT Principles on International Commercial Contracts are a prime

example of the growing importance of soft law. 46 José Angelo Estrella Faria, Future Directions of Legal Harmonisation and Law Reform: Stormy

Seas or Prosperous Voyage?, 14 UNIF. L. REV. 5, 11 (2009). 47 Jürgen Basedow, Transjurisdictional Codification, 83 TUL. L. REV. 973, 995 (2009). 48 “Where the diversity of the factual situations and the law prior to the unification effort are such as

to suggest that the only (and more likely) alternative to full-scale unification is no unification at all, but where unification in core areas appears nonetheless desirable and achievable at the price of leaving certain other policy-sensitive areas untouched, a Convention may well respond to those differing policies by providing some flexibility through a system of declarations.” Herbert Kronke, Transnational Commercial Law: General Doctrines, Thirty Years On, in FESTSCHRIFT FÜR JAN KROPHOLLER 39, 43 (2008).

49 The inventory of instruments used by various international organisations now includes, in addition to multilateral treaties, or “conventions,” any of the following: “model laws,” “regulations,” “directives,” “recommendations,” “guides,” “guidelines,” “policy advice,” “model clauses,” “model provisions,” “principles.” See ROY GOODE, HERBERT KRONKE, EWAN MCKENDRICK & JEFFREY WOOL, TRANSNATIONAL COMMERCIAL LAW—INTERNATIONAL INSTRUMENTS AND COMMENTARY 191–214 (Oxford University Press 2007), for a discussion of instruments, methods and forums for legal harmonisation.

50 The word “unification,” is an inventory of instruments used by various international organisations and now includes, in addition to multilateral treaties, or “conventions,” any of the following: “model laws,” “regulations,” “directives,” “recommendations,” “guides,” “guidelines,” “policy advice,” “model clauses,” “model provisions,” “principles.” See id.


their practical operation in the relevant legal systems.51

There is a clear logical relation between “functional approach,” as used here, and the “functional method,” as known in the theory of comparative law.

While normative and conceptual uniformity were nearly inseparable attributes of early harmonisation efforts, recent instruments are often drafted as sets of provisions aimed at ensuring that a certain uniform policy objective is achieved through a minimum catalogue of functions that may be performed by existing legal categories available under domestic laws without attempting to reduce them to a common single concept. This has become known as the “functional approach” to legal harmonisation.

52

However, the two terms do not mean exactly the same thing. In the context of the formulation of uniform law, “functional approach” refers to the task of identifying a certain number of functions that a legal concept must achieve in order for it to develop a certain number of effects under a uniform law instrument or to benefit from a certain status or legal protection provided for by that instrument. While the choice of legal concepts to be encompassed by the same rule will inevitably entail a comparison of the functions performed by those concepts under the domestic systems covered by, or used as a paradigm in, the relevant harmonisation process, neither the identity of functions nor a thorough comparability of concepts are necessary preconditions for the use of a “functional approach” in legal harmonisation.

B. Practical examples of the flexible approach of UNIDROIT

The contribution of the Unidroit to the harmonisation of private law, in its 85 years of activities, is considerable and I could not make full justice to it in these remarks. I limit myself to point out it that Unidroit developed more than 70 projects in the most diverse areas of private law: from international sales of goods and connected transactions (credit, transport, tort liability), to procedural law, from cultural property, to secured transactions or capital markets. These projects have taken the form of international conventions, guides, model laws or principles. Some of these

51 “Practice requires conceptual categories. But these categories are different in various countries

and lawyers in these countries do nothing to free themselves from these differences. The contrasts we have before us exist in taxonomy qualifications, languages, descriptions, explanation and concepts. They do not exist however in the operating rules.” Rodolfo Sacco, Diversity and Uniformity in the Law, 49 AM. J. COMP. L. 171, 188 (2010).

52 The “functional method” of comparative law, which was originally advocated by Ernst Rabel, is still today largely seen as the most meaningful method of comparative law. Some go as far as calling it “comparative law’s principal gift to 20th century legal science.” MARY ANN GLENDON, MICHAEL WALLACE GORDON & CHRISTOPHER OSAKWE, COMPARATIVE LEGAL TRADITIONS, 1, 11 (2d ed. 1994). There is however extensive debate among comparative lawyers as to the place and value of the functional method, as compared to other methods advocated for comparative law, as well as its logical and theoretical foundations. See Ralf Michaels, The Functional Method of Comparative Law, in THE OXFORD HANDBOOK OF COMPARATIVE LAW 339 (Mathias Reimann & Reinhard Zimmermann eds. 2006).


instruments were later adopted as international conventions by other organisations; others were concluded by UNIDROIT itself.

I should like to mention here only three projects which, in my view, are prime examples of three characteristics that have recently distinguished our work: pragmatism in the choice of the topic; creativity in developing solutions for particular business needs; and adaptability of the methods of work to the nature of the project.

1. UNIDROIT Principles on International Commercial Contracts

The speakers in today’s symposium include some of the world’s best scholars in the area of international commercial law, and I would have little to add to their analysis of the UNIDROIT Principles. I would only like to stress a few points.

The idea to formulate “principles” on international commercial contracts resulted from two orders of consideration: one positive; the other one, negative.

The positive consideration was the real demand for greater harmony in the vast domain of the contracts law, the disparity of which was felt to represent a considerable obstacle to the good functioning of international trade.

The negative consideration was the recognition that the extreme difficulty and delay in the arduous process of unification of the law applicable to a rather straight-forward contract - the sale of goods, finally harmonized in 1980 through the United Nations Convention on Contracts for the International Sale of Goods after nearly 60 years of efforts since the first studies made by UNIDROIT in the 1920s - made of the idea of a global unification of contracts law a dream too far.

The choice eventually made by UNIDROIT in favour of a soft law instrument, as we have heard today, proved to be wise under all accounts. In its current form, the Principles can be useful in different contexts and for diverse purposes: as non-binding rules capable of incorporation by reference into a contract; as an expression of common legal principles (an international “restatement” of general principles of contract law which domestic or arbitral courts to base their decisions); as a set of norms to which the parties may submit voluntarily; as subsidy for the interpretation or international conventions; or as model to inspire the national legislator in the reform of domestic contract law.

For the most part, the UNIDROIT Principles reflect concepts found in many, if not all legal systems. However, as they are intended to provide a system of rules especially conceived for the needs of international commercial transactions, the Principles sometime chose the solution which is deemed to suit best an international


negotiation context, even if not necessarily universally adopted. Here the interests of international trade take precedence over restating the common ground.

This choice, where warranted, is consistent with the economic function of contract law, which is to facilitate exchanges by allocating rights and obligations in a manner that reduces or does not increase transaction costs. At least in theory, contract law also serves to inform companies about the contingencies capable of frustrating an exchange, which in turn helps them plan their transactions prudently.53 Lack of legal certainty – in itself a form of inefficiency – may occur whenever the laws are a “source of conflicts themselves” or fail to set “the right incentives to behave carefully.” 54 Inefficient rules contribute to higher transaction costs by encouraging litigation. Indeed, when both parties to a transaction have an interest in future, similar cases and the current legal rule is inefficient, the party held liable “has an incentive to force litigation.” 55

The objective of the UNIDROIT Principles, therefore, is to establish a body of balanced rules, conceived to be used all around the world, independently of the legal traditions and economic system of the countries where they will be applied.

We have also heard today of the main examples of this “best choice” approach, and I shall not repeat them here.

Such objective is reflected both in their presentation as well as in their underlying policy. The UNIDROIT Principles deliberately avoid the use of terminology particular to any legal systems The international character of the UNIDROIT Principles is also underscored by the fact that the commentaries that follow each provision systematically refrain from making reference to national laws to explain the origin and the reasoning of each adopted solution.

As regards the content, the UNIDROIT Principles are flexible enough to take care of the constant changes of circumstances, resulting from technological and economic development that affects foreign commerce. Whether or not one shares the belief in the existence of a “lex mercatoria” independent of domestic legal systems, this trend is clearly indicative of a growing acceptance of common standards suitable for commercial contracts.

I would like to conclude my remarks on the UNIDROIT Principles with one last thought: anecdotal evidence suggests a trend among international organisations (other than the EU, which has its own legal system), to refer to the principles as the governing rules of their contracts – and in some cases – even project agreements. This is not a surprising choice, since international organisations fear that submission to any domestic legal order might imply a waiver of

53 Richard POSNER, Economic Analysis of Law, 2nd ed., Boston, Little-brown (1977), 69. 54 Lode VEREECK / Manuela MÜHL, “An Economic Theory of Court Delay”, European Journal of Law and

Economics, vol. 10, No. 3 (2000), 243 et seq. (263). 55 Vincy FON / Francesco PARISI / Ben DEPOORTER, “Litigation, Judicial Path-Dependence, and Legal

Change”, European Journal of Law and economics, vol. 20 (2005), 44 et seq.


their quasi-sovereign privileges and immunities, which they protect with great zeal.

It would be interesting to see to what extent this trend may in the future extend to commercial contracts between private companies and sovereign or quasi-sovereign entities.

2. Convention on International Interests on Mobile Equipment (“Cape Town Convention”)

Effective laws on secured transactions are a cornerstone of a functioning market economy. Banks and other financial institutions would provide virtually no financing if they could not count on acceptable and legally enforceable collateral.

The law of secured transactions has been under constant evolution to meet the requirements of modern finance. The standards set by Article 9 of the Uniform Commercial Code (UCC) are well known: (1) non-possessory security interests; (2) clear priority rules and security perfection, publicity and ranking through filing; (3) exercise of creditor’s remedies upon default by the debtor, including the ability to take possession of and sell the collateral, independently from leave of court; and (4) security interests enforceable despite the debtor’s insolvency.

Yet, many countries are far from applying the same standards. The widely recognised applicability of the law of the place where the property is situated may considerably weaken the position of a secured lender of a mobile asset, or of international lenders in cross-border financing transactions. They would greatly benefit from a modern uniform legal standard.

The Cape Town Convention was to radically change the international legal landscape in this area. The Cape Town Convention aims at facilitating financing high value mobile equipment, offering greater security to the creditors and allowing, thus, the reduction of the cost of the applied taxes of risk.

The Convention and the Aircraft Protocol were adopted at a Diplomatic Conference held under the joint auspices of the International Civil Aviation Organisation (ICAO) and UNIDROIT at Cape Town from 29 October to 16 November 2001. The Conference concluded a drafting and negotiation process that had started at UNIDROIT in 1992 and which, in many respects was prime example of our organisation’s flexibility.

Following a proposal by Mr. T.B. Smith QC, Canadian member of the UNIDROIT Governing Council, in 1988 UNIDROIT commissioned a study on International Regulation of Security Interests in Mobile Equipment by Professor Ronald C.C. Cuming of the University of Saskatchewan, on the basis of which the Governing Council of UNIDROIT set up a Restricted Exploratory Working Group comprised


of renowned academics to ascertain the need for and feasibility of uniform rules governing security interests in cross-border transactions. The Group’s Report led to the establishment of a Study Group, a sub-committee of which was entrusted with the task of preparing a first draft. 56

In a clear example of its pragmatic approach to its working methods, already at that stage, UNIDROIT decided to engage the aviation industry in the drafting process. An expert consultant to the Study Group organised and coordinated the Aviation Working Group (AWG), a group of major aerospace manufacturers and financial institutions acting under the co-chairmanship of The Boeing Company and Airbus, which provided industry input throughout the process. AWG subsequently joined forces with the International Air Transport Association (IATA), representing 265 airlines.

The asset categories covered by the Convention include airframes, aircraft engines, helicopters, railway rolling stock, and space assets. These assets share two main characteristics that make them particularly suited for the legal regime established by the Convention: firstly, they require very high levels of capital investment, and secondly, they are intended to be put into such use so as to make them likely to move through multiple jurisdictions in the ordinary course of business, or, in the case of space assets, to be placed entirely the reach of outside any State jurisdiction. Other categories of assets may be added by special protocols.

The central concept of the Convention is that of an “international interest in mobile equipment” which is defined as “an interest, constituted under Article 7, in a uniquely identifiable object of a category of such objects listed in paragraph 3 and designated in the Protocol: (a) granted by the chargor under a security agreement; (b) vested in a person who is the conditional seller under a title reservation agreement; or (c) vested in a person who is the lessor under a leasing agreement.” 57

Rather than attempting to impose a uniform catalogue of security interests, the Convention gives international recognition to any form of security granted under a “security agreement”

58

The only requirements are those of article 7, namely: that the agreement creating or providing for the interest must be in writing; that it must relate to an object of which the chargor, conditional seller or lessor has power to dispose; that it should enables the

in accordance with the applicable law.

56 Roy Goode, OFFICIAL COMMENTARY CONVENTION ON INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT AND

PROTOCOL THERETO ON MATTERS SPECIFIC TO AIRCRAFT EQUIPMENT, Revised Ed. (Rome: UNIDROIT, 2008), pp. 5-6..

57 Cape Town Convention, Article 2 (1). 58 Defined as “an agreement by which a chargor grants or agrees to grant to a chargee an interest

(including an ownership interest) in or over an object to secure the performance of any existing or future obligation of the chargor or a third person.” (Cape Town Convention, article 1 (ii)).


object to be identified in conformity with the Protocol; and that, in the case of a security agreement, it should enable the secured obligations to be determined, but without the need to state a sum or maximum sum secured. The holder is entitled, upon default by the debtor to exercise the remedies provided for in the Convention, which include taking possession or control of the object, selling or granting a lease of any such object, collect or receive any income or profits arising from the management or use of any such object,59 as well as any compatible remedies permitted by the applicable law, including any remedies agreed upon by the parties of such an interest. The Convention further provides for vesting of object in satisfaction, either by agreement of the parties or court order.60

The Aircraft Protocol, which was adopted together with the Convention, deals with the application of the Convention in respect to matters specific to aircraft equipment. Of particular importance is the possibility given to the contracting States

61

This represents another innovation of Cape Town. The Convention and the Protocol combine uniform rules with a choice of policy-type options that contracting States are free to make on a number of points that permit them to enhance on the benefits expected to be derived from the Convention.

, upon the occurrence of an insolvency-related event, to give possession of the aircraft to the creditor no later than the earlier of: (a) the end of the waiting period; and (b) the date on which the creditor would be entitled to possession of the aircraft object if this Article did not apply. As in a few other sensitive issues, the Convention offers States different options from which to choose.

62

The Cape Town Convention is a remarkably innovative private law convention. Its flexible structure, consisting of an umbrella treaty to be completed by specific protocols allows to take into account the particular requirements of specific equipment types and industry branches, which are then brought into the umbrella of the Cape Town Convention, without the need for amending its original text. Moreover, the Cape Town Convention was the first instrument of harmonisation of private law – apart from the intellectual and industrial property instruments developed by the World Intellectual Property Organisation (WIPO) – to be accompanied by an operational infrastructure to assure its practical functioning: the International Registry for Aircraft Objects. Based in Dublin (Ireland) and managed by a private company selected through

59 Cape Town Convention, Article 8. 60 Cape Town Convention, Article 9, (1) and (2), respectively. 61 Aircraft Protocol, Article XI. 62 The main consideration for Contracting States in choosing whether or not to implement the

options would be whether “the policy benefits of significantly furthering the objectives of the convention within its territory outweigh the policy values embedded in the provisions of its national law which such [optional] convention provisions would displace.” Wool, supra note 27, at 51.


international public bidding, the registry works under the supervision of the International Civil Aviation Organisation (ICAO). The registry operates exclusively by electronic means, applying the highest standards of data protection and speed of communications. It already counts nearly 300,000 fillings since the entry into force of the Convention, in 2006.

The combined effect of these provisions in terms of risk reduction to lenders in secured aircraft financing transactions is significant. Indeed, it has been estimated that the reduction in the aircraft repossession delay from ten to two months 63 may reduce the loss-given-default of a typical aircraft loan by between twenty five and thirty percent. The risk reduction results in commensurate reduction in risk spreads (margins) on aircraft financings. The expected upfront risk fee reduction, expressed as percentage of the loan principal may range from o.26% for a triple A credit ratings all the way up to 6.96% for CCC/C-rated debtors. 64

Therefore, “in a 12 year aircraft loan with the initial 85% loan-to-value airlines rated B would see the upfront risk fee reduction of about 3.25% of the loan principal if the expected repossession delay is reduced from ten months to two months.” The airline would have to be upgraded two notches to BB- to enjoy a larger reduction in the upfront risk fee.

65

On that basis, assuming the average airline credit rating of B8 and using the Airline Monitor’s forecast of total aircraft orders in 2009-2030 of US$4,728 billion and the financing need of US$4,018 billion (85% of total orders), “the total savings directly resulting from the risk reduction due to reducing the worldwide repossession delay from ten to two months are on the order of US$161 billion over this period.”

66

These results are confirmed by other recent empirical studies, which have found that, by creating “effective devices in the Convention that encourage a country that ratifies it to commit to and fulfil commercial contracts”, the Convention “benefits airlines in the contracting states” and “successfully helps the contracting states,

63 Ten months is the estimated worldwide average delay according on the basis of data on contract

enforcement data delays in 180 jurisdictions worldwide compiled by the to our adjustment of the World Bank, and adjusted to the aircraft financing context (Vadim Linetsky, Economic Benefits of the Cape Town Treaty (2009) <http://www.awg.aero/assets/docs/economicbenefitsofCapeTown.pdf>, p.9, last visited 19 October 2011).

64 Id., at 19. 65 Id. 66 OECD, Sector understanding on export credits for civil aircraft. TAD/PG(2011)3, 1 February

2011, which forms an integral part of the Arrangement on Officially Supported Export Credits <http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TAD/PG(2011)3&docLanguage=En> (last visited 20 October 2011).


particularly developing countries, to facilitate their credibility in the international capital market”.67

The protection afforded to the creditor under the convention is so significant that the export credit agencies that participate in the Sector Understanding on Export Credits for Civil Aircraft negotiated under the auspices of the Organisation for Economic Cooperation and Development (OECD) offer substantial discount of the risk premium for credit extended to airlines located in countries that have ratified the Cape Town Convention with the declarations specified in the Sector Understanding.

68

Taken together, these features result in a system that offers tangible advantages to all parties potentially involved in an equipment financing transaction. The manufacturer or secured creditor benefits of the higher protection afforded to their interests and the easiness in their enforcement, being able, thus, to offer more favourable credit facilities to the buyers of the equipment (airlines, railways). The latter, in turn, benefitting from the reduction in their operational costs, can offer their services (cargo or passenger transport) at more competitive rates, to the advantage of the final users (importers, exporters, passengers). The balance of benefits distinguishes clearly the Cape Town Convention system from other international instruments, criticized – more or less justly – for improperly favouring certain economic agents to the detriment of others. Indeed, the only theoretically disadvantaged party under the Cape Town Convention system would be the unsecured creditor in the event of bankruptcy, for example, of an airline whose main assets were aircraft subject to international interests covered by the Convention and which the secured creditor were able to repossess by virtue of the Convention. But even in such a case, it would be fair to ponder that, with or without the Convention, as a practical matter, unsecured creditors are seldom paid in bankruptcy proceedings.

The Convention currently has 49 States parties, and the Aircraft Protocol 42.69

The second protocol, on matters specific to railway rolling stock was adopted in Luxemburg, on 23 of February of 2007. A third protocol, dedicated to matters specific to space objects – primarily, but not exclusively, satellites – has been recently approved by the Governing Council of UNIDROIT for submission to a Diplomatic Conference, which will have place in Berlin, of 27 of February the 9 of March of 2012, for final negotiation and adoption.

67 Yoshinobu Zasu and Ikumi Sato, “Providing credibility around the world: effective devices of

the Cape Town Convention”, European Journal of Law and Economics, published Online 19 June 2011, 1-25.

68 Id. 69 The status of the convention is available at <http://www.unidroit.org/english/implement/i-

main.htm>.


3. The UNIDROIT Convention on Substantive Rules for Intermediated Securities

I come now to my last example of UNIDROIT’s creative and flexible approach: the UNIDROIT Convention on Substantive Rules for Intermediated Securities, which was adopted at the closing of a diplomatic Conference held in Geneva from 5 to 9 October 2009. The “Geneva Convention”, as it became known, was the culmination of an extensive negotiation process started in 2002, and represents a major breakthrough in global harmonisation in what is probably one of the most complex and economically significant areas of commercial law.

Indeed, the total volume of financial assets under custody with the 10 largest custodians in the world amounts in 2011 to US$ 99.93 trillion.70 According to the Bank for International Settlements, as of April 2010, average daily turnover in global foreign exchange markets alone is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007,71 which means that this sector of the market alone generates every 20 days a trade volume equivalent to the world Gross Domestic Product (GDP), estimated by the World Bank in 2010 at 63.04 trillion.72

Yet, this extremely sophisticated and dynamic industry has in many countries to operate under arcane rules conceived in times past for the negotiability of debt instruments and other securities issued in paper form and kept in a bank’s vault. Securities laws in many countries have entirely lost pace with the reality of financial markets. Moreover, the dematerialisation of securities and the intermediation patterns that currently dominate the market rendered many of the legal theories that explained ownership and negotiability of securities now clearly obsolete or inadequate.

I need not say more about the magnitude of the interests at stake. Also, one can hardly imagine a more global industry, with gigantic sums of money moving between markets and custodians several times around the world every day.

Indeed, over the past fifty years, the practice of holding and disposition of investment securities has changed considerably. Departing from the traditional concept of custody or deposit of physical certificates, a system of holding through intermediaries has been developed for reasons of efficiency, operational certainty, speed and safety. In this system, the greater part of securities is immobilised with a central securities depository. The investor holds securities through a chain of intermediaries that are ultimately

70 <http://www.globalcustody.net>. 71 BIS, Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 -

Final results (December 2010), <http://www.bis.org/publ/rpfxf10t.htm>, last visited 20 October 2011.

72World Bank, World Development Indicators database 1 July 2011, <http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf>, last visited 20 October 2011.


connected to the central securities depository. The transfer of securities and the creation of security and other limited interests therein are in practice commonly effected by way of book entries to the securities accounts concerned. The securities themselves are no longer physically moved.

At national level, some countries have in recent years revised the legal framework applicable to the holding of securities in order to reflect the new market reality.73 However, in many countries, the legal framework which underlies this modern system of holding through intermediaries still relies on traditional legal concepts first developed for the traditional method of holding and disposition relating to tangible assets held in physical custody. Thus, for example, in some jurisdictions, such as Germany, Spain and The Netherlands, securities holders are characterised as co-owners of a pool of fungible property, whereas in France they are creditors of the intermediaries, but enjoy special protection in case of the intermediary’s insolvency. English law treats security holder of beneficiary owners and their intermediaries trustees of the property co-owned. Both Brazil and Italy continue to apply the notion of deposit to the holding of securities by intermediaries, while the United States created an entirely new category of rights (“security entitlement”), which combines a pool of property and personal rights held by the investors.74 Considerable legal uncertainty is caused by the fact that securities are increasingly held and transferred across borders, but the determination of the applicable law may be far from certain. 75

Legal risk, in times of ‘stress’, can even trigger systemic risks, that is, the risk that the inability of one institution to meet its obligations when due will cause other institutions to be unable to meet their obligations when due. Lehman Brothers was a sad example.

Also, domestic legal frameworks, as we have seen, are not necessarily compatible with each other.

Several international initiatives address this problem, such as the Recommendations for securities settlement systems issued in 2001 by the International Organisation of Securities Commissions (IOSCO), together with the Bank for International Settlements (BIS),76

73 For an overview of various law reform initiatives in this area see the various reports in the special

issue of the Unifrom Law Review “Enhancing Legal Certainty over Investment Securities Held with an Intermediary – The Preliminary Draft UNIDROIT Convention, Related International Initiatives and National Perspectives” (NS vol. X, 2005 1/2, pp. 189-367).

the G30 Plan of Action concerning global clearing and

74 For an overview, see Matthias Haentjens, HARMONISATION OF SECURITIES LAW – CUSTODY AND TRANSFER OF SECURITIES IN EUROPEAN PRIVATE LAW (Alphen aan den Rijn, Kluwer, 2007), at 30-36).

75 See Herbert Kronke, “Capital Markets and Conflict of Laws”, Recueil des Cours de l’Académie de Droit International, No. 286 (2000), The Hague, Martinus Nijhoff, 2001, pp. 249-385; see further Hague Conference on Private International Law, Report on the Law Applicable to Dispositions of Securities Held Through Indirect Holding Systems, prepared by Christophe Bernasconi, First secretary at the Permanent Bureau (Prel. Doc. No 1, of November 2000; <http://hcch.e-vision.nl/index_en.php?act=conventions.publications&dtid=35&cid=72>).

76 IOSCO/BIS, Recommendations for Securities Settlement Systems, November 2001 (<www.bis.org/publ/cpss46.pdf>).


settlement (2003),77 the Report on cross-border collateral arrangements of the BIS Committee on Payment and Settlement Systems (2006), 78 as well as, on a regional, European level, reports by the Giovannini Group.79

Those reports and guidelines identify the need for a reliable, smoothly functioning legal framework adapted to the modern system of holding securities through intermediaries, especially in a cross-border context. Such a legal framework is indeed crucial to all participants in the modern capital markets, including, first of all, investors, but also public and private issuers of securities, the securities industry, systems for the clearing and settlement of securities transactions and parties to collateral arrangements involving book entry securities.

The use of securities as collateral in many instances underpins arrangements for high-value cash transfers. Moreover, it is common in central bank monetary policy transactions, and is therefore crucial to the liquidity of the modern financial system as a whole.

The issue of harmonising the private international law rules regarding securities held with an intermediary is addressed by modernised conflict-of-laws rules in some countries and, at the international level, in the Hague Convention on the Law applicable to Certain Rights in respect of Securities held with an Intermediary (hereinafter: ‘Hague Securities Convention’), which was adopted in December 2002 under the auspices of the Hague Conference on Private International Law.80

The Geneva Convention is intended to fill this gap and to improve the legal framework for securities holding, transfer and collateralisation, in order to enhance the internal stability of national financial markets and their cross-border compatibility and, as such, to promote capital formation.

However, by its nature, neither the former nor the latter address issues of substantive law.

81

Work started in September 2002, in the form of meetings and consultations with practitioners and scholars in 20 countries, and moved in 2004 to the intergovernmental negotiation phase, which was concluded at two sessions of a diplomatic Conference held in Geneva from 1 to 12 September 2008, and again on 5 to 9 October

77 The Group of Thirty, Global Clearing and Settlement – A Plan of Action, 2003

(<http://www.group30.org>). 78 CPSS, Report on cross-border collateral arrangements (<http://www.bis.org/publ/cpss71.htm>). 79 The Giovannini Group, Second Report on EU Clearing and Settlement, Brussels, April 2003; in

this second report the group addresses the question of what actions should be undertaken to eliminate barriers to the integration of the European financial market identified in its first report: The Giovannini Group, Cross-Border Clearing and Settlement Arrangements in the European Union, Brussels, November 2001. Both reports are available at <http://europa.eu.int/comm/economy_finance/giovannini_en.htm.>.

80 Convention on the Law Applicable to Certain Rights in respect of Securities Held with an Intermediary, adopted under the auspices of The Hague Convention on Private International Law, The Hague, on 13 December 2002 (< www.hcch.net>).

81 For an overview of the Convention, its drafting and basic concepts, see Luc Thévenoz, “Intermediated Securities, Legal Risk, and the International Harmonization of Commercial Law”, 13 Stan. J.L. Bus. & Fin. 384.


2009. The Official Commentary on the Convention will be published soon.

Throughout the negotiation of the Convention, a number of overarching policy goals served as points of reference.

A first policy goal was the internal soundness of systems. UNIDROIT identified key features of a sound structure for the holding and transfer of securities through intermediaries from the point of view of both investor protection and efficiency. Indirect holders of securities should, for example, be confident that their interests are enforceable and are subject to simple, clear rules and procedures in respect of holding, transfer and realisation. Furthermore, the interests of investor should not be exposed to risks such as the insolvency of any intermediary or interference by unrelated third parties.

Another crucial element already identified at the early stages of the project was the compatibility of systems, that is, the need to ensure the ability of a different legal systems to connect successfully where securities are held or transferred across national borders. In a cross-border context, complex legal questions may arise in relation to the applicable law, but also as a result of inconsistent national approaches in respect of substantive property law issues, supervision, company law or taxation. The harmonisation of at least some core issues was considered to be of essential in a cross-border context, in order to enhance predictability, legal certainty and liquidity.

Since both the internal soundness of systems and the compatibility of national legal frameworks were aimed at, it comes as no surprise that the Convention does not distinguish between domestic and cross-border transactions.

A key element in the Convention is the recognition of the central position of book entry accounts in modern indirect holding and transfer systems. Parties dealing in securities held with an intermediary need to be sure that a credit of securities to their securities account represents a good and effective interest. The importance of secure book entry interests is particularly evident in the common situation where linked transfers of interests take place through different intermediaries and settlement systems, operating under different laws. Any doubt as to the effectiveness of an interest represented by a book entry credit, or about the effectiveness and finality of a transfer made through book entry debits and credits,

Thus, the Convention provides that the credit of securities to a securities account confers on the account holder the right to receive and exercise any rights attached to the securities, including dividends, other distributions and voting rights and the right to dispose of the securities or, grant an interest on them, by giving instructions to the relevant intermediary.82

82 Geneva Convention, Article 9(1).

Securities are acquired


by credits to securities accounts, and disposed by debits to securities account, and no further step may be required by Contracting States to make the acquisition or disposition effective. 83

The rights and interests of account holders and their secured creditors are effective against the insolvency administrator and creditors in any insolvency proceeding.

84 Priorities among competing interests is established by a first-in-time rule.85 Priorities between the rightful owner and an innocent acquirer in case of wrongful booking or fraud are solved in favour of the latter, unless it knew or ought to know, at the relevant time, that another person had an interest in securities or intermediated securities and that the credit to the securities account of the acquirer, violated the rights of that other person. 86

Thus, the Convention does not define the nature of the rights of the holders o securities accounts as either “property” or “ownership”, but clearly gives them the necessary protection, particularly important in the event of insolvency of the intermediary making those rights “effective against third parties” effective against third parties.87 To preserve the integrity of the holding system, intermediaries must, for each description of securities, hold or have available securities and intermediated securities of an aggregate number or amount equal to the aggregate number or amount of securities of that description credited to either to the accounts it maintains for its clients and for itself.88 Should however, the aggregate number or amount of securities be less than the aggregate number or amount of securities of that description credited to the securities accounts of the account holders the shortfall is borne by the account holders to whom the relevant securities have been allocated, in proportion to the respective number or amount of securities of that description credited to their securities accounts. 89

The Convention is based on a neutral and functional approach accommodating different legal concepts by the use of language as neutral as possible and the formulation of rules by reference to their results. This choice was explained as follows: “In each jurisdiction, the law governing securities holding and transfer is embedded in national legislation and integrated within several different legal areas: commercial law, corporate law, tax law, insolvency law, etc., as well as through measures carried out by the regulatory authorities. Generally, provisions in an international instrument can be either intrusive with respect to domestic legislation, or seek solutions that are compatible with the law of all contracting

83 Geneva Convention, Article 11(1) and (2). 84 Geneva Convention, Article 14(1). 85 Geneva Convention, Article 19(3). 86 Geneva Convention, Article 18(1). 87 Geneva Convention, Article 9(2). 88 Geneva Convention, Article 24(1). 89 Geneva Convention, Article 26(2).


countries, or at least with their legal tradition. [. . .] The […] Convention settles on an intermediate approach: it is not designed along the lines of domestic laws (and therefore 'intrusive'), but aims at avoiding too much intrusion by formulating rules only by reference to facts. The means by which the required result is to be achieved in a concrete legal system is not decisive and remains within the national legislator's discretion, provided it is compatible with the other rules of the […] Convention.”90

Generally, the Convention took a ‘minimalist’ approach ,limiting itself to offering harmonised rules only where clearly required for the purpose of reducing legal or systemic risk or promoting market efficiency. In line with this approach, ‘non- Convention law’ (that is, the law in force in a Contracting State other than the provisions of the Convention) plays an important, complementary role throughout the Convention.

In addition, compatibility with other relevant instruments was an important objective, such as the EU Directives on Settlement Finality91 and Financial Collateral92, the Hague Securities Convention. Moreover, work was co-ordinated with the work on the UNCITRAL Legislative Guide on Secured Transactions, which at this stage does not cover securities at all.93

The Convention was opened for signature on 9 October 2009. Its principles have already been largely incorporated in the European Commission’s initial proposals for a Securities Law Directive in Europe.

94

Even before its entry into force, the Convention already sets the standard for modern securities law worldwide.

Conclusion

International legal harmonisation is complex and faces many challenges.

It would be naive to claim that harmonisation per se is necessary or desirable. But I believe that, despite the criticisms that the harmonisation process attracts – sometimes justifiably – there is ample evidence to demonstrate the importance and the usefulness

90 Explanatory Notes to the Preliminary Draft Convention, UNIDROIT Study LXVIII Doc. 19 (Dec.

2004), 19 <http://www.UNIDROIT.org/english/conventions/2009intermediatedsecurities/study78-archive-e.htm>, last visited on 20 October 2011.

91 Directive 98/26/EC of 19 May 1998 on settlement finality in payment and securities settlement systems (Official Journal of the European Communities, L 166/45, 11. 6. 98).

92 Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (“Collateral Directive) ((Official Journal of the European Communities, L 168/43, 27.6.2002).

93UNCITRAL Legislative Guide on Secured Transactions, 2007 (<http://www.uncitral.org/uncitral/en/uncitral_texts/payments/Guide_securedtrans.html>).

94The Commission’s consultation papers are available at <http://ec.europa.eu/internal_market/financial-markets/securities-law/index_en.htm>).


of uniform norms to facilitate international transactions, thus promoting trade, investment and growth.

The above considerations highlight the complexities and the methodological challenges of law reform. UNIDROIT is well equipped to face those challenges through a combination of a number of tools and strategic choices developed over the years: careful selection of the appropriate instrument to suit the needs of the end users; a flexible approach to working methods, its openness to industry participation and the increasing use of a functional approach to help advance legal harmonisation also in areas of the law where the practical commercial need for uniformity collides with the overwhelming force of traditional legal thinking.

© Geneviève Saumier 2011 do not cite without permission

1

Designating the UNIDROIT Principles in International Dispute Resolution

GENEVIÈVE SAUMIER∗*

Abstract:

The success of the new edition of the UNIDROIT Principles rests largely on its potential traction in practice. This paper will explore the extent to which the dissemination and use of the UNIDROIT Principles is related to choice of law rules in contract and the opportunity for parties to designate non-state law in international contracts beyond the traditional realm of international arbitration. Extending party autonomy to include non-state law designations that are operative within the judicial sphere is arguably the most likely path to full emancipation of the UNIDROIT Principles. By endorsing this approach, the proposed Hague Principles on Choice of Law in International Contracts are a positive signal for the future of the UNIDROIT Principles.

Introduction Recent empirical research on references to non-state law in international contracts and

international commercial arbitration suggests a lingering scepticism amongst practitioners.

Ever conscious of the cost of legal uncertainty, contract drafters and adjudicators may

prefer to remain within the realm of the known (or as Donald Rumsfeld famously said, the

“known unknowns”) when it comes to the law governing international contracts. Even

where a significant body of interpretation and application exists, such as with the Vienna

Convention on Contracts for the International Sale of Goods (“CISG”) for example, lawyers

(particularly North American ones) will often jump on the opportunity to exclude any law

that is not their own.1

∗ Of the Faculty of Law, McGill University, Montreal; member of the research group “Private Justice and the Rule of Law” (

And this despite the fact that the CISG has the imprimatur of an

http://www.mcgill.ca/pjrl/). Participation in the Symposium was made possible by Quebec government funding for academic research (FQRSC). With thanks to Lauro Gama for helpful insight into the UPICC and generous comments on an earlier version of this paper. 1Indeed, while both the US and Canada are signatories of the UNCITRAL Convention on Contracts for the International Sale of Goods (CISG), it is remarkable how little case law there is on that uniform law considering the volume of trade between the two countries. The main reason, of course, is that lawyers in both countries routinely avail themselves of the CISG’s own invitation to exclude its application (art. 6), contrary to the experience in Europe. See Harry M. Flechtner, Changing the Opt-Out Tradition in the United States, (2007) (available at ssrn.com/abstract=1571281) and Geneviève Saumier, International Sales: Is Canada Missing the Boat? 7:1 CANADIAN INTERNATIONAL LAWYER 1, (2007) (available at ssrn.com/abstract=1636376).

http://www.mcgill.ca/pjrl/�

http://ssrn.com/abstract=1571281�


2

international treaty officially sanctioned by States, including the United States of America,

through the ratification process, thus placing it squarely within the category of law,

regardless of how one may conceive of the boundaries of that category.2 For a “soft law”

instrument such as the 2010 UNIDROIT Principles of International Commercial Contracts

(“UPICC”)3

This paper will examine whether the fate of the UPICC is in fact closely linked

to choice of law rules for international contracts. If these rules systematically exclude

reference to the UPICC – as they do, at least in the judicial context – then any potential

modification to choice of law rules could well provide the impetus needed for the successful

deployment of the UPICC.

– the “unknown unknowns”, perhaps - it may looks like a lost cause, at least

from this side of the Atlantic.

This paper will be divided in three parts. In the first part I will sketch a

summary picture of existing approaches to choice of law rules in international commercial

contracts to support the statement that these generally exclude the option of referring to

the UPICC, unless the parties have also opted for arbitration of any eventual disputes. The

second part will examine a new proposed instrument, the draft Hague Principles on Choice

2 The literature on what is commonly, but not without controversy, called “non-state law” is endless. It reaches across disciplines and challenges the cognitive abilities of all but the most erudite renaissance scholar, at ease in legal theory, international relations, public international law, political science, history and hermeneutics (including autopoeisis) to name a few. The purpose of this short paper is too humble to embark on a defense of the term “non-state law”, used essentially in a descriptive manner to refer to a body of rules that does not have, as a primary source, a state organ, be it a legislator or court, depending on the legal system. Without denying that one must adhere to some theory of law to fully support a definition and defense of the category “non-state law”, this will not be attempted here. For two different views, compare the contributions of two leading writers in the US to a Symposium on Non-State Governance held at the University of Utah in February 2009: Paul S. Berman, Towards a Jurisprudence of Hybridity, 1 UTAH L. REV. 11 (2010) (“thinking of non-state norms through the prism of conflict of laws doctrines…might be preferable to the more mechanistic ways in which clashes between state and non-state norms are often judged”) and Ralf MICHAELS, The Mirage of Non-State Governance, 1 UTAH L. REV. 31, (2010) (“A governance concept that transcends the distinction between state and non-state laws, by contrast, should enable us truly to imagine governance not only outside the state, but outside even the dichotomy of state/non-state, outside the state framework altogether”). For those who might prefer hearing rather than reading the texts, videos of the Symposium presentations are available online at: http://www.ulaw.tv/search/?s=governance. 3 Others in this symposium will provide the history of and general detail on the UPICC and I refer readers to those papers. For a discussion of the « soft law » nature of the UPICC, see also Lauro Gama Jr., Perspectives for the UNIDROIT Principles in Brazil, UNIF. L. REV. (forthcoming 2011).

https://exchange.mcgill.ca/owa/redir.aspx?C=0f5a7c4105fd42f6843735a24a7a3caa&URL=http%3a%2f%2fwww.ulaw.tv%2fsearch%2f%3fs%3dgovernance�


3

of Law in International Contracts, which has jettisoned this two-speed approach to

designating non-state law depending on the forum for dispute resolution. Finally, the third

part will discuss how such an instrument would open the door to the designation of the

UPICC in all international contracts, regardless of the anticipated mode of dispute

resolution.

I. Current approaches to party autonomy and non-state law Across legal systems, there are three main approaches to party autonomy in choice of law

for contracts, that is, regarding the opportunity for parties to the contract to select the law

that governs their contractual relation:4

The first approach is characteristic of the private international law of Brazil (and

some but not all other Latin American countries)

(i) party autonomy is not (expressly) authorized,

(ii) party autonomy is recognized but is constrained by the requirement of an objective link

to the chosen law, (iii) party autonomy is recognized without any requirement of an

objective link to the designated law. Examples of all three can be found in the Americas.

5 in so far as the express choice of law rule

on the books retains the traditional lex loci contractus, or place of contracting rule, or the

lex loci executionis, or place of performance rule, leaving no obvious room for party

autonomy beyond the selection of that particular place.6

4 Although I focus here on cases where the parties have sought to subject their contract to a particular law, the three approaches to choice of law discussed here also cover the situation where the parties have not turned their attention to this issue. In other words, most choice of law systems consider both alternatives: where the parties have designated the applicable law and where they have not.

This approach is historically most

prevalent but is no longer representative of the mainstream position reflected in national or

regional instruments.

5 See Lauro Gama Jr., Perspectives for the UNIDROIT Principles in Brazil, UNIF. L. REV. (forthcoming 2011), footnote 17; in particular Mexico and Venezuela have adopted the OAS’ Mexico Convention of 1994 on the Law Applicable to International Contracts that fully endorses party autonomy. 6 See Lauro Gama Jr., Perspectives for the UNIDROIT Principles in Brazil, UNIF. L. REV. (forthcoming 2011), text accompanying note 106 (“article 9 of the Introductory Law to the Brazilian Civil Code (now called Lei de Introdução às Normas do Direito Brasileiro) has expressly adopted the lex loci contractus principle.”).


4

The second approach is the prevailing position7 in US conflict of laws, in so far

as it is expressed in the Restatement (2nd) on Conflict of Laws and the U.C.C. Indeed, while

the Restatement endorses party autonomy, it makes it subject to a geographical or a

reasonableness criterion.8 The latter may be interpreted generously in a manner that

maximizes autonomy,9 but it remains a fetter to full party freedom in relation to the choice

of governing law. Even where the U.C.C. applies (thereby displacing the Restatement), the

same result obtains. Indeed, U.C.C. § 1-301, in force in all of the States,10

[W]hen a transaction bears a reasonable relationship to [the forum] state and also to another state or nation the parties may agree that the law of either this state or of such other state or nation shall govern their rights and duties.

provides the

following limit to party autonomy in international contracts:

In an attempt to move away from such limitations on party autonomy, a modification to

the U.C.C. had been adopted in 2001. Its intent was described as follows:

In the context of business-to-business transactions, revised Article 1 [1-301] generally provides the parties with greater autonomy to designate a jurisdiction whose law will govern than does current Article 1 [then §1-105], but also provides some safeguards against abuse that do not appear in current Article 1. Following emerging international norms, greater autonomy is provided in subsections (b) and (c) by deleting the requirement that the transaction bear a "reasonable relation" to the jurisdiction designated in this non-consumer context.11

This change proved to be so controversial that it was eventually reversed in 2008, returning

the official U.C.C. version to the original choice of law rule and thus retaining the

requirement of a “reasonable relation” to the law designated by the parties.12

7 For the latest review of the state of the law, see Symeon C. Symeonides, Choice of Law in the American Courts in 2010: Twenty-Fourth Annual Survey, 58 AJCL (2011).

8 RESTATEMENT (SECOND), CONFLICT OF LAWS § 187 (1971). 9 See for example 1-800-Got Junk? LLC v. Superior Court, 116 Cal.Rptr.3d 923 (Cal.App. 2 Dist. 2010), reh’g denied (Nov. 05, 2010), review filed (Dec. 01, 2010) discussed in Symeonides, Choice of Law in the American Courts in 2010, supra note 7 at text accompanying note 333. 10 Except Louisiana. 11 See NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, MEETING IN ITS ONE-HUNDRED-AND-TENTH YEAR, WHITE SULPHUR SPRINGS, WEST VIRGINIA, AUGUST 10-17, 2001, REVISION OF UNIFORM COMMERCIAL CODE, ARTICLE 1 - GENERAL PROVISIONS, Section D.1. (my emphasis). 12 The Official Comment provides the following explanation on the notion of “reasonable relation”: “Ordinarily the law chosen must be that of a jurisdiction where a significant enough portion of the making or performance of the contract is to occur or occurs.”


5

The third approach, granting the broadest significance and effect to party

autonomy, is expressly provided in legislation in, for example, Quebec,13 Mexico and

Venezuela;14 moreover, it is also the common law rule in all other Canadian provinces.15 It

is equally the regime in place throughout Europe under the uniform choice of law rule for

the European Union, found in the so-called Rome I Regulation.16 It is also the position

under the new Chinese private international law for contracts.17

These three approaches do share a common limitation, however, regardless of

their divergent views of party autonomy. Under all three approaches to choice of law in

contract, the only law eventually applicable, whether designated by the parties or not, will

be the law of a State.

18

This state of affairs is not universal within arbitration law although it has

gathered increased currency in the last two decades. As early as 1985, the UNCITRAL Model

Law on International Arbitration modified the reference to a governing “law”, replacing it

Like all general rules, however, this one suffers from an exception,

and a particularly important one in the field of international transactions. The exception is

reserved to the arbitral setting, where it is now generally accepted that non-state law can

govern the parties’ contract and provide the substantive rules for the resolution of disputes

between the parties.

13 Article 3111 of the Civil Code of Quebec provides that “a juridical act…is governed by the law … designated in the act” without any further limitations on that choice for international contracts. 14 Mexico and Venezuela have adopted the 1994 OAS Inter-American Convention On The Law Applicable To International Contracts that provides, in Article 7: “The contract shall be governed by the law chosen by the parties” with no further limitation on the object of the choice. For an early comment on the Convention see Frederich K. Juenger, The Inter-American Convention on the Law Applicable to International Contracts: Some Highlights and Comparisons, 42 AJCL 381, (1994). 15 The seminal case being the Privy Council case of 1939 that established the generous party autonomy rule for choice of law in contracts in English law that was adopted in the Canadian common law provinces: Vita Foods v. Unus Shipping, [1939] A.C. 277. 16 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations, OJEU L 177/6 of 4 July 2008. 17 Y. Xiao & W. Long, Contractual Party Autonomy In Chinese Private International Law, 11 YEARBOOK OF PRIVATE

INTERNATIONAL LAW, 193, 197, (2009) (“although the chosen law most often has some connection with the transaction, there is general consensus that Chinese law allows the choice of a law which has no connection with the contract.”). 18 Or more precisely of a jurisdiction with competence over contract law – such as individual states of the U.S. and individual provinces of Canada, for example.


6

with “rules of law”. This slight linguistic change signalled a more significant shift, as

explained in the Official Commentary:

…by referring to the choice of “rules of law” instead of “law”, the Model Law broadens the range of options available to the parties as regards the designation of the law applicable to the substance of the dispute. For example, parties may agree on rules of law that have been elaborated by an international forum but have not yet been incorporated into any national legal system. Parties could also choose directly an instrument such as the United Nations Convention on Contracts for the International Sale of Goods as the body of substantive law governing the arbitration, without having to refer to the national law of any State party to that Convention.

The admission of a reference to non-state law in this critical UNCITRAL instrument was

followed elsewhere, recently in the UNCITRAL Arbitration Rules (2010)19 but also earlier in

the Arbitration Rules of the International Chamber of Commerce (1998 version)20, the

Commercial Arbitration and Mediation Center for the Americas (CAMCA) Arbitration Rules

(1996)21 and several national statutes on international arbitration.22 It is worth noting that

even in those countries that have not explicitly endorsed party autonomy in their private

international law, such as Brazil, this has not hampered the move to allow the designation

of non-state law in the context of international arbitration.23

Of course the ability to designate non-state law in the arbitral setting says

nothing about the actual practice regarding choice of law in international commercial

contracts. As noted at the outset of this paper, empirical research thus far suggests that the

formal designation of non-state law remains exceptional, at least as an expression of party

19 Article 35: “The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute.”’ 20 Article 17: “The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute.” This is now Article 21 in the new 2012 edition of the rules. 21 Article 30: The tribunal shall apply the laws or rules of law designated by the parties as applicable to the dispute. 22 Such as Brazil (1996 Law on arbitration - Article 2 § 1. The parties may freely choose the rules of law applicable in the arbitration…), Japan (2003 Arbitration Law - Article 36 “The arbitral tribunal shall decide the dispute in accordance with such rules of law as are agreed by the parties as applicable to the substance of the dispute.”), Costa Rica (Ley sobre arbitraje comercial internacional (2011) - “El tribunal arbitral decidirá el litigio de conformidad con las normas de derecho elegidas por las partes como aplicables al fondo del litigio.”), Mexico (Commercial Code: Article 1445 - 1. “The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable.”) and France (2011 amendments to the Nouveau Code de procédure civile - Article 1511 “Le tribunal arbitral tranche le litige conformément aux règles de droit que les parties ont choisies…”). 23 See Lauro Gama Jr., Perspectives for the UNIDROIT Principles in Brazil, UNIF. L. REV. (forthcoming 2011).


7

autonomy.24 In other words, choice-of-law clauses in international contracts do not

commonly refer to non-state law to govern their contractual relationship.25 While this is only

one way what that the UPICC could be used to define contractual obligations and resolve

disputes, it remains the most closely linked to the principle of party autonomy in private

international law. The fact the UPICC appear to be used to frame negotiations or to

supplement interpretation26

The UPICC were intended to serve as a governing law and be the object of the

exercise of party autonomy and this is made explicit in the preamble that states, inter alia,

that the UPICC “shall be applied when the parties have agreed that their contract be

governed by them.” That such compulsory language (“shall be applied”) is potentially

effective only in the arbitral setting reflects the current state of choice of law rules as they

apply in the judicial context. This may well be insufficient for the full emancipation of the

UPICC given the limited exposure that arbitral decisions receive in mainstream legal

practice. As a result, expanding the operative effect of the designation of non-state law

beyond the arbitral setting and into the judicial sphere may well be the best way to increase

the visibility and penetration of the UNIDROIT Principles. One possible avenue for this to

occur is the proposed Hague Principles on Choice of Law in International Contracts.

is certainly a testament to their usefulness in practice, however

these uses are independent of choice-of-law considerations in general and of party

autonomy in particular.

II. The (proposed) Hague Principles on Choice of Law in International Contracts

24 For the most recent empirical research see P.L. Fitzgerald, The International Contracting Practices Survey Project: An Empirical Study of the Value and Utility of the United Nations Convention on the International Sale of Goods (CISG) and the UNIDROIT Principles of International Commercial Contracts to Practitioners, Jurists, and Legal Academics in the United States, 27 J.L. & COM. 1, (2008) and F. Dasser. Mouse or Monster? Some Facts and Figures on the lex mercatoria, GLOBALISIERUNG UND ENTSTAATLICHUNG DES RECHTS 129 (Reinhart Zimmermann ed., 2008); see also the 2010 LLM dissertation by Sarah Lake entitled “The impact of the UNIDROIT Principles for international commercial contracts: British and International Responses”, unpublished, discussed in Lauro Gama Jr., Perspectives for the UNIDROIT Principles in Brazil, UNIF. L. REV. note 98 (forthcoming 2011). 25 But see Michael Joachim Bonell, Towards a Legislative Codification of the UNIDROIT Principles?, UNIF. L. REV. 233, 241 (2007), with references to standard form contracts that refer to the UPICC directly. 26 Id.


8

The Hague Conference on Private International Law defines itself as a “global inter-

governmental organization” that “develops and services multilateral legal instruments, which

respond to global needs.”27 Following the adoption of the Choice of Court Convention in

2005, the Conference’s General Council turned to the question of choice of law in

international contracts. After three feasibility studies were conducted by the Conference’s

Permanent Bureau between 2006 and 2009,28

The Council invited the Permanent Bureau to continue its work on promoting party autonomy in the field of international commercial contracts. In particular, the Permanent Bureau was invited to form a Working Group consisting of experts in the fields of private international law, international commercial law and international arbitration law and to facilitate the development of a draft non-binding instrument within this Working Group.

including the usual questionnaires sent to

member states and other interested bodies, the decision was taken in 2009 to go forward

with the project. The mandate was defined as follows:

29

The Working Group held three formal meetings and several teleconferences during the

2010-11 period, which eventually gave rise to draft Principles of Choice of Law for

International Contracts that will be submitted to the scrutiny of the General Council in the

near future.30

The two main issues canvassed in the previous section were on the agenda of the

Working Group. First, whether the principles should specifically refer to the designation of

non-state law. Second, and assuming an affirmative answer to the first question, whether

the designation should extend to both arbitral and judicial settings. From the outset, it was

apparent that three options were available to the Working Group: (i) to reserve the

designation of non-state law to the arbitral setting; (ii) to allow the designation of non-state

27 www.hcch.net. 28 All references to documents from the Hague Conference are available online at www.hcch.net under “Work in Progress” then “International Contracts”. 29 Report of the Council on General Affairs and Policy of the Conference of 31 March to 2 April 2009 (Prel. Doc. No 1), December 2009. 30 The author is a member of the Working Group and participated in all of its sessions and discussions.

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9

law regardless of the method of dispute resolution and, (iii) to make no statement about

non-state law.31

As discussed previously, the first option would continue the status quo, at least as it

is expressed in most modern arbitration rules, whether from state law or from arbitration

institutions. Still, given that not all current instruments include a specific reference to the

validity of the parties’ designation of “rules of law” as opposed to “[state] law”, such a

statement in the Hague Principles would not be a mere restatement of an existing universal

rule. Given that the Hague Principles are intended to provide a model for legislators, even

this option could be considered to further support party autonomy.

32

Skipping ahead to the third option (saying nothing), it should be observed that this

could be an ambiguous position to take. Indeed, silence could be interpreted as the

maintenance of current interpretations of references to “law” in a choice of law rule and

therefore transform the principles into a mere restatement. While this could make sense in

relation to judicial tribunals (given the universal refusal to recognise the designation of non-

state law in that forum), the lack of uniformity as it applies to arbitral tribunals could cause

confusion. On the other hand, silence would not necessarily foreclose variations from the

status quo, on the understanding that the term “law” is itself susceptible to interpretation.

Nevertheless, silence would be an odd choice given the mandate of the General Council to

“promote party autonomy”.

In the end, the Working Group favoured the second option.33

31 These issues were addressed in two reports (unpublished) submitted by a sub-group set up after the first meeting of the Working Group and mandated to study the questions. The author was a member of the sub-group. The discussion in this part of the paper draws on those reports.

As between options 1

and 2, reserving the designation of non-state law to the arbitral setting or allowing such

designation regardless of the method of dispute resolution, the latter is arguably the more

defensible option given the fact that in most legal systems arbitration now carries the same

32 The draft Principles include a preamble that sets out its objectives – the latest version is not yet available online but an earlier version is (see www.hcch.net). 33 Report on the Second Meeting of the Working Group on Choice of Law in International Contracts (15-17 November 2010), p. 3 (available online at www.hcch.net).



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legitimacy and effectiveness as the judicial dispute resolution system. It is also entirely

consistent with the Hague Conference’s recent convention on forum selection clauses, which

creates a model for choice of court agreement largely parallel to the one that exists for

arbitration clauses.34 In other words, with the 2005 Hague Convention on Choice of Court

Agreements,35 courts are required to respect such agreements in deciding on their

jurisdiction and must recognize judgments rendered by courts exercising jurisdiction

according to such an agreement.36

Allowing the designation of non-state law in state courts does not necessarily involve

admitting the possibility of a “contrat sans loi/droit”, understood as a contract independent

of all law, and governed solely by its own provisions.

By excluding the designation of non-state law in the

Hague Principles, the Hague Conference would risk reducing the role of the Choice of Court

Convention. Moreover, party autonomy is supported by providing parties will real options

with respect to dispute resolution and applicable law. By extending the designation of non-

state law to the judicial sphere, these two elements of international commercial disputes are

decoupled and party autonomy is maximized.

37 Instead, by including such a

possibility in the Hague Principles, the selection of a non-state law would proceed from a

choice of law rule. In other words, the designated non-state law would not have binding

effect per se but would become binding on the parties as a result of their intention to be

bound by the designated non-state law, their intention being in turn sanctioned by a choice-

of-law rule that is provided either directly by State law or indirectly by arbitral procedures

recognized as binding by State law and courts.38

34 More precisely the United Nations Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

35 Convention of 30 June 2005 on Choice of Court Agreements, not yet in force but signed by the U.S., E.U. and Mexico (available online at www.hcch.net). 36 For a detailed analysis of the Convention see Paul Beaumont, Hague Choice of Court Agreements Convention 2005: Background, Negotiations, Analysis and Current Status, 5 JOURNAL OF PRIVATE INTERNATIONAL LAW 125, (2009). 37 See Léna Gannagé, Le contrat sans loi en droit international privé, 11.3 ELECTRONIC JOURNAL OF COMPARATIVE LAW

12, (2007), available at : <www.ejcl.org>. 38 See DAVID OSER, THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS: A GOVERNING LAW? 74 (2008).

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11

Any concern that such an extension would allow parties to abuse their position or

would unduly dilute the state’s authority is addressed through traditional private

international law methods, including forum public policy and mandatory rules.39 In addition,

the draft Hague Principles are addressed to B2B contracts, thereby excluding from their

scope those contracts, such as consumer or employment contracts, where party autonomy

is typically limited as regards choice of law.40 As a result, the decision taken by the Working

Group to extend party autonomy to include the designation of non-state law even in the

judicial context is narrowed to the sphere of contract choice of law where it is most likely to

attract consensus.41 This makes it more likely to withstand scrutiny, unlike a similar initiative

taken during the drafting of the Rome I Regulation that was eventually eliminated from the

final draft of that instrument.42

The potential necessity of defining “rules of law” is also an inevitable issue when

drafting a choice of law rule that endorses such a designation by the parties. Those

arbitration rules that expressly allow the designation of “rules of law” by the parties do not

typically define what these are, at least not in the instruments themselves. Like the

UNCITRAL Model Law, any definitional attempts are left for commentary. Even in such

cases, however, the term “rules of law” is left rather open-ended, reflecting the plurality of

their possible sources and the dynamism of their development. Following this precedent, the

Working Group did not put forward a definition of “rules of law” in the draft Hague

39 The draft Hague Principles include provisions on both of these. 40 Report of the Working Group Meeting (21-22 January 2010), p. 2 (available online at http://www.hcch.net/upload/wop/contracts_rpt_e.pdf). This is also consistent with the 2005 Choice of Court Convention, that expressly excludes consumer and employment contracts from its scope of application. 41 For example, Symeonides, who expresses great skepticism on such an extension, is more receptive if it is limited to the B2B context: Symeon C. Symeonides, Party Autonomy and Private-Law Making in Private International Law:The Lex Mercatoria that Isn’t, in LIBER AMICORUM KONSTANTINOS D. KERAMEUS (2006). 42 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations, OJEU L 177/6 of 4 July 2008; on the proposal to include a reference to non-state law, see Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I), COM(2005) 650 final, Brussels, 15.12.2005. For a discussion of the proposal, see Katharina Boele-Woelki, Where Do We Stand on the Rome I Regulation?, in THE FUTURE OF EUROPEAN CONTRACT

LAW 19, section 3.4 (K. Boele-Woelki & F. Grosheide eds, 2007).

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12

Principles themselves, preferring instead to address the issue using examples and sample

wording,43

Of course, an open-ended reference to non-state law in the draft Hague Principles

carries with it the challenge of identifying the content of the designated law, particularly

where the reference is not to an existing instrument or codification but rather to unwritten

principles such as lex mercatoria. Such lack of precision or non-comprehensiveness is often

cited as an argument against the wisdom of allowing such a choice to be made by the

parties. The principle of party autonomy itself contains the answer to this challenge. If party

autonomy is taken seriously and is valued (as the Working Group’s mandate supposes),

there is no strong justification for limiting the parties’ options on the basis of either of those

two potential shortcomings. So long as the parties are responsible for identifying and

establishing the nature and content of the relevant rules of the designated non-state law

that are invoked in support of their claims, the difficulty of that task should not provide a

valid objection to the parties’ selection. To hold otherwise smacks of paternalism, which is

the antithesis of party autonomy. In any event, this challenge is largely absent when it

comes to the UPICC, whose designation in international contracts would certainly be

facilitated by the widespread adoption of the Hague Principles.

in a future commentary.

III. Designating the UPICC

Regardless of one’s ideological position on non-state law, whether with respect to its

existence or to the merit of the nomenclature, there is no doubt that the UPICC are a breed

apart. Unlike the unwieldy lex mercatoria whose content remains elusive, or private codes

of conduct that are decried as self-interested, the UPICC have attracted praise because of

their mode of elaboration and also due to the intrinsic value of substantive rules that they 43 This is the approach taken by UNIDROIT in a footnote in the Preamble to the UPICC and by the International Chamber of Commerce in several of its model contracts. On the latter see FABIO BORTOLOTTI, DRAFTING AND

NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS chapter 2.8 (2009).


13

propose.44

Although the UPICC cover an intentionally circumscribed subject matter, the breadth

and depth of that coverage are capable of resolving complex disputes between contracting

parties in the international sphere. Moreover, the accessible body of decisions examining,

interpreting or applying the UPICC provisions, along with the commentary, both official and

doctrinal,

It is thus not surprising that one of the first examples given in the legal literature

of those “rules of law” that parties could designate to govern their contracts in the exercise

of their autonomy, the UPICC figure prominently.

45 offer a wealth of sources to those who would be charged with giving effect to

their designation by the parties. Finally, the fact that the UPICC have been the subject of

ongoing review, giving rise to the latest edition celebrated in this Symposium,46

The UPICC drafters have anticipated being designated by parties to international

contracts, as stated in the Preamble:

is indicative

of the responsiveness and the dynamic character of the drafting process at UNIDROIT.

These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed by them.(*)

The footnote (signalled by the “*”) even suggests language for such a choice of law clause:

Parties wishing to provide that their agreement be governed by the Principles might use the following words, adding any desired exceptions or modifications: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles ...]”.

44 For a careful review of the substantive and procedural characteristics of the UPICC that may allow it to qualify as a “governing law”, see DAVID OSER, THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS: A

GOVERNING LAW? 92-103 (2008). 45 See www.unilex.info, which reports cases from courts and arbitral tribunals that refer to the UPICC and provide a fairly extensive bibliography on the instrument. 46 Although called the 2010 UPICC, they were officially adopted by UNIDROIT in May 2011, as reported in the Summary of Conclusions of the Governing Council at its 90th Session (accessible online at http://www.unidroit.org/english/documents/2011/cd90-conclusions-e.pdf). According to the UNIDROIT’s own announcement, “The UNIDROIT Principles 2010 contain new provisions on restitution in case of failed contracts, illegality, conditions, and plurality of obligors and obligees, while with respect to the text of the 2004 edition the only significant changes made relate to the Comments to Article 1.4.” Others in the symposium will discuss the 2010 UPICC and I refer the reader to those articles for further details.


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14

Recognizing the limited scope of the UPICC in terms of subject matter, wording for a

subsidiary applicable law, useful for gap filling for example, is also provided:

Parties wishing to provide in addition for the application of the law of a particular jurisdiction might use the following words: “This contract shall be governed by the UNIDROIT Principles (2010) [except as to Articles...], supplemented when necessary by the law of [jurisdiction X]”.

On this basis, it is apparent that no modifications to the UPICC are needed to allow for their

designation in a choice of law clause whether it is to be applied by arbitrators or by state

courts. In that sense, the UPICC provide an immediate and realistic example of the

application of the choice of law rule proposed in the Hague Principles on Choice of Law in

International Contracts. While the extension of the designation of “rules of law” from the

arbitral to the judicial setting is an innovation of the Hague Principles, it is not a mere

theoretical innovation given the concrete (and anticipated)47

availability of the UPICC as the

object of such a designation.

Conclusion

The elaboration of rules to govern international commercial transactions has never been the

exclusive prerogative of the state. Still, whether these rules develop organically through the

practice of those involved in the business – such as trade usages or standard-from contracts

– or through a formal mechanism such as the UPICC elaborated by UNIDROIT, many jurists

will continue to reject their characterization as “law”. The same narrow interpretation of

“law” by courts applying choice of law rules has meant that only state laws have been

recognized as the object of party autonomy in international contracts. But in the last 25

years, international arbitration has moved away from this traditional view, endorsing instead

47 As repeatedly called for by Michael Joachim Bonell, Towards a Legislative Codification of the UNIDROIT Principles?, UNIF. L. REV. 233, (2007), and more recently The UNIDROIT Principles of International Commercial Contracts: Achievements in Practice and Prospects for the Future, 17 AUSTRALIAN ILJ 177, (2010).


15

a broader target for the parties’ choice of a governing set of “rules of law”, widely

understood to encompass what might also be referred to as non-state law.

The two-speed model for international commercial dispute resolution has little to

commend itself. By refusing to look beyond formal state sources, state legislators and

courts are cutting themselves off from international commercial adjudication. It is somewhat

paradoxical that this position is often defended on the basis of a concern over the excessive

or illegitimate privatization of law.

The proposed Hague Principles on Choice of Law in International Contracts invite a

change in position. By endorsing the designation of “rules of law” with effect before judicial

and arbitral tribunals, the Hague Principles seek to bridge the gap that currently exists

between these two dispute resolution fora. There is no doubt that the existence of the

UNIDROIT Principles of International Commercial Contracts takes this proposal beyond a

mere theoretical possibility, making it instead an operative principle. In that sense, the

Hague Principles and the UPICC, in combination, may be worth more than the sum of their

parts.

UNIDROIT PRINCIPLES 2010

A new edition of the UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS

The UNIDROIT Principles of International Commercial Contracts, first published in 1994 and in a second edition in 2004, are taken by legislators worldwide as a model for contract law reform and increasingly used in international contracting and arbitration practice, as well as by the courts to interpret and supplement the applicable domestic law .

The new edition of the Principles (“UNIDROIT Principles 2010”), prepared by a group of experts from all over the world including representatives of numerous international organisations and arbitration centres, was formally adopted by the Governing Council of UNIDROIT in Spring 2011. In addition to some minor modifications and updating of the Comments and Illustrations, the UNIDROIT Principles 2010 contain new provisions dealing with:

• Restitution in case of failed contracts • Illegality • Conditions • Plurality of obligors and of obligees

ORDER FORM

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