COPYRIGHT AND CITATION CONSIDERATIONS FOR THIS THESIS/ DISSERTATION

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1 COPYRIGHT AND CITATION CONSIDERATIONS FOR THIS THESIS/ DISSERTATION o Attribution You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. o NonCommercial You may not use the material for commercial purposes. o ShareAlike If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original. How to cite this thesis Surname, Initial(s). (2012) Title of the thesis or dissertation. PhD. (Chemistry)/ M.Sc. (Physics)/ M.A. (Philosophy)/M.Com. (Finance) etc. [Unpublished]: University of Johannesburg. Retrieved from: (Accessed: Date).

2 CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS by TIANA VAN DER MEER A dissertation submitted in partial fulfilment for the degree of MAGISTER LEGUM IN INTERNATIONAL COMMERCIAL LAW (M4018Q) In the Department of Mercantile Law in the Faculty of Law at the UNIVERSITY OF JOHANNESBURG

3 ABSTRACT The principle of party autonomy is a fundamental characteristic of private international law. The contracting parties freedom of choice regarding the law governing their contract is one which optimises the fundamental principle of party autonomy. It is generally accepted that a choice of a governing law by the parties should be respected by adjudicating bodies such as domestic courts and arbitral tribunals. It would often benefit contracting parties to choose a neutral legal system so that there will be a fair playing field in case a dispute arises between them. However, some domestic legal systems and regional, supranational and international commercial instruments limit the choice of law to that of a recognised domestic legal system. Accordingly, choosing the UNIDROIT Principles on International Commercial Contracts as governing law will, in most cases, not be a viable option for the parties concerned. Such a limitation on the choice of a governing law does not promote the fundamental principle of party autonomy, which is characteristic of private international law. Parties to an international commercial contract should be able to choose a non-state system of law to govern their contract. The UNIDROIT Principles of International Commercial Contracts provide a comprehensive, complete and easily obtainable system of law compiled by legal experts in the various fields which form part of international commercial law. It follows a via media system of law with regards to Civil Law and Common Law legal systems. This paper will discuss the principle of party autonomy, as well as the possibility of a choice of non-state law, in particular the UNIDROIT Principles of International Commercial Contracts, as the law governing an international commercial contract. The choice of law will be discussed with reference to the position taken in domestic courts as well as that in international arbitration. To review the impact and success of the UNIDROIT Principles in the realm of international commercial contracting, various international commercial instruments will be discussed. 2

4 CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS Tiana van der Meer TABLE OF CONTENTS 1 INTRODUCTION 2 GENERAL 2.1 The principle of party autonomy with regards to choice of law 3 THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 3.1 Establishment and purpose 3.2 Harmonising international substantive law 4 CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AS THE LAW GOVERNING THE CONTRACT: THE POSITION IN NATIONAL LEGAL SYSTEMS 4.1 The position in domestic courts and arbitral tribunals, respectively Express choice of law a) Domestic courts b) Arbitral tribunals Absence of an express choice of law Choice of law clauses 5 THE POTENTIAL INFLUENCE OF THE DRAFT HAGUE PRINCIPLES ON CHOICE OF LAW IN INTERNATIONAL CONTRACTS ON THE CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AS THE LAW GOVERNING THE CONTRACT 6 POTENTIAL FUTURE DEVELOPMENTS WITH REGARD TO THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AS A CHOICE OF LAW 7 CONCLUSION 8 BIBLIOGRAPHY 9 CASE INDEX 3

5 1. INTRODUCTION A contractual obligation cannot exist in vacuo; it must draw its existence from a legal system, whose norms specify that in the particular circumstances a contractual obligation exists. 1 Parties often encounter various issues when concluding an international commercial contract which would generally not arise when concluding a domestic contract. It can be an impossible task for any legal advisor to predict the outcome of a dispute which arose between parties to an international commercial contract. This is mainly due to different adjudicating bodies in different jurisdictions, which are bound by different legal systems instructing them to apply different rules of private international law to the contract from which the dispute arose. As a result, it will be most favourable if the contract itself stated the law applicable to it. Ultimately, the applicable law should be determined by the parties to the international commercial contract. Parties would be more willing to engage in international trade if their international commercial contract was reliable and predictable. 2 The legal principle of party autonomy is a fundamental characteristic of private international law. The parties to an international commercial contract have the freedom of choice, which optimises the principle of party autonomy. This choice should be respected by an adjudicating body in the event of a contractual dispute. Different domestic legal systems and international commercial instruments often refer to the choice of law as the proper law of the contract or the applicable law. 3 The term applicable law has been used in the Rome Convention on the Law Applicable to Contractual Obligations (1980), 4 as well as the Inter-American Convention on the Law Applicable to International Contracts (the Mexico City 1 Forsyth Private International Law: The Modern Roman-Dutch Law including the Jurisdiction of the High Courts (5 th ed) Whited The UNIDROIT Principles of International Commercial Contracts: An overview of their utility and the role they have played in reforming domestic contract law around the world 2012 Journal of International Comparative Law Maniruzzaman Choice of law in international contracts: Some fundamental conflict of laws issues 1999 Journal of International Arbitration Rome Convention on the Law Applicable to Contractual Obligations (80/934/EEC) (1980), Article 10. 4

6 Convention), 5 whereas the term the proper law of the contract appears in Common Law systems, such as the law of the United Kingdom, Australia, Canada, 6 and India. These terms imply that the law chosen by the parties governs every aspect of the contract, including its validity; the parties obligations in terms of the contract; 7 the effect of the contact; and the consequences of non-compliance with the terms stated in the contract. 8 It can thus be said that the proper law or the applicable law deals with all the legal aspects associated with a contract. Brown has summed up the English common law position as follows: A contract is the creature of its proper law, and it is a reference by the parties to a system of law which is to give life to the contact. 9 It is clear that the applicability of the chosen law should solely be dependent on the intention of the parties involved. The use of the term applicable law by certain conventions might refer to an applicable system which is less than a legal system, 10 and could encompass legal principles and rules which do not form part of any domestic legal system. This position mirrors the recent developments of international law. 11 However, there is still lingering scepticism amongst practitioners with regards to the applicability of such a legal system. 12 There exists a certain level of cost which may arise in the event of an uncertainty, therefore contract drafters and adjudicators may prefer to remain within the realm of the known when deciding the law applicable to a contract and any dispute which may arise from it. 13 The possibility the choice of the UNIDROIT Principles of International Commercial Contracts, 14 as a non-state legal system, to govern an international commercial contract will be examined below. This will be done with reference to 5 Inter-American Convention on the Law Applicable to International Contracts (Mexico City Convention) (1994). 6 Referring to all the Common Law provinces of Canada (that is: excluding Quebec which is based on a Civil Law legal system) 7 Amin Rasheed Shipping Corporation v Kuwait Insurance Co. [1984] AC 50 55, as referred to in Maniruzzaman (n 3) above. 8 n 7 above. 9 Brown Choice of law provisions in concessions and related contracts 1976 Modern Law Review 625, Maniruzzaman (n 3) See the Draft Hague Principles on the Choice of Law in International Contracts (2014) available at 12 Saumier Designating the UNIDROIT Principles in international dispute resolution 2012 Uniform Law Review Saumier (n 12) 533:...lawyers often jump on the opportunity to exclude any law which is not their own. 14 The International Institute for the Unification of Private Law (UNIDROIT) Principles of International Commercial Contracts (2010). 5

7 some of the most influential international commercial instruments and their current status regarding this possibility. For ease of reference this paper will refer to the applicable law as the law governing the contract, with the exception of the terms used in specific provisions. 2. GENERAL The Institute of International Law has stressed the importance of private international law to the development of trade and relations between private persons or entities in the international sphere in its Session of Basel in The principle of party autonomy is one of the fundamental principles of private international law with regard to international commercial law, and as such, the principle has been enshrined in various regional, supranational and international instruments. 16 Furthermore, notably with regard to arbitration, the choice by the relevant parties of rules of law other than those of a particular State is reserved The principle of party autonomy with regards to choice of law The principle of party autonomy can generally be described as the contracting parties right to exercise their intention to be bound to their contractual undertaking, 18 and exercising a choice of law can be seen as optimising the autonomy principle in the context of private international law. It has been established that the principle of party autonomy has in recent times become a legitimate expectation of parties to an international commercial contract and accordingly, in most cases, contracting parties may choose practically any rules of law they like and not just by national laws. 19 In essence, the principle allows contracting parties to 15 See Institut de droit international, Session of Basel (1991), The Autonomy of the Parties in International Contracts Between Private Persons or Entities, Preamble. English translation available at 16 See Session of Basel, Preamble (n 15) and Article See Session of Basel, Preamble (n 15). 18 Gama and Saumier Non-state law in the (proposed) Hague Principles on Choice of Law in International Contracts in Fernandez Arroyo and Obando Peralta (eds) El Derecho Internacional Privado En Los Procesos De Intergracion Regional (2011) Available at SSRN: 19 Lalive The UNIDROIT Principles as lex contractus, with or without an explicit or tacit choice of law: an arbitrator s perspective in UNIDROIT Principles of International Commercial Contracts: Reflections on Their Use in International Arbitration; A Special Supplement of the ICC International Court of Arbitration Bulletin (2002) 79. 6

8 choose the law which will determine the existence and validity of, and their rights and obligations arising from, the contract, the law governing that choice itself, any limits on the right to choose, the nature of the law or laws which may be chosen, and the impact of so-called mandatory laws on that choice. 20 It is possible for the parties to an international commercial contract to have a real interest in choosing the law applicable to their contract, as well as any dispute which may arise between the parties after its conclusion. It would be in the interest of the socio-economically weaker party to propose, if not insist on, a choice of law clause expressly stating that neutral law should govern any dispute which may arise between the parties in future, so as to place both contracting parties in a similar position before an adjudicating body. This would mean that neither party will be disadvantaged due to favouritism, knowledge of the law or cost. 21 However, in reality, the stronger party, in a socio-economical sense, is in a position to force their choice onto the weaker party and often does. 22 A choice of, for instance, the habitual residence or domicile of one of the contracting parties may be neutral to some extent but there is also a possibility of the domestic law being biased. Furthermore, a choice of a domestic legal system might not be as advanced with regards to international commercial contracts. Many contracting parties might consider choosing a law or rules of law which are highly developed in respect of certain aspects of the contract, or their choice might be one of a modern codification of international commercial law, 23 such as the UNIDROIT Principles of international Commercial Contracts. 24 Although the principle is recognised in the field of international commercial law, it is subject to some limitations placed on it by the private international law rules of the forum adjudicating a dispute between the parties, as well as mandatory rules 20 Nygh Autonomy in International Contracts (1999) Whited (n 2) See Chevron Corporation v Donzinger and Others, 768 F. Supp. 2d 581 (S.D.N.Y 2011) pg 292. A choice of, for instance, the habitual residence or domicile of one of the contracting parties may be neutral to some extent but there is also a possibility of the domestic law being biased. 22 Furthermore, a choice of a domestic legal system might not be as advanced with regards to international commercial contracts Gama and Saumier (n 18) See UNIDROIT (n 14); see also Nygh (n 20): Party autonomy in the context of international commercial law provides the contracting parties with an opportunity to not only choose the law applicable to their contract, but also the forum which will adjudicate any disputes arising from the international commercial contract. The contracting parties choice of law and choice of forum are closely related issues. The choice of forum often dictates the parties choice of law 7

9 them. 28 The principle of autonomy, with regards to choice of law, must be approached and international public policy. 25 The principle of party autonomy may be expanded by allowing contracting parties to choose a non-state legal system as the law applicable to the various aspects of the contract. Parties should be allowed to choose the law applicable to their international commercial contract due to their right to freedom of contract, 26 legal certainty and economic efficiency. 27 Due to the fact that party autonomy is considered to be a legitimate expectation of parties concluding an international commercial contract, their choice of applicable law, with regards to the substance of the relevant contract, should be reasonably respected by the adjudicating body settling a dispute between from either a domestic or international point of view. Arbitral tribunals are more advanced regarding the principle of autonomy with regards to choice of law in international commercial disputes, whereas stumbling blocks are regularly encountered in domestic courts. 29 Where the parties choice is that of a domestic legal system, the applicable law will only be effective in as far as the rules of that legal system are recognised by the domestic court adjudicating the dispute. 30 Thus, the applicable law will be subject to the private international law rules of a domestic legal system and, as a result, the private international law of the forum will determine the limit and scope of the contracting parties choice of applicable law. 31 As a result, the extent of the parties autonomy is determined and regulated by the law of a state. One must thus conclude that the principle of party autonomy, as a legitimate expectation of the parties, is restricted in most circumstances involving domestic courts because they only recognise binding laws. 25 Nygh (n 20). 26 See the Constitution of the Republic of South Africa (1996), Article 18 which affords citizens the right to freedom of association. 27 Nygh (n 20) Nygh (n 20). 29 Most domestic legal systems will not recognise a choice of non-state law as the law applicable to the contract. 30 Domestic courts may decide not to apply the contracting parties choice of law based on the domestic legal system s mandatory rules or its public policy. 31 The law of the forum determines whether or not the contracting parties will have the right to choose an applicable law. 8

10 However, the question as to the validity of the choice of the UPICC as the law governing the contract still exists. 32 This lingering question is mainly due to the fact that the UPICC is a non-binding instrument and as such it only has persuasive authority. 33 Many authors believe that the UPICC should be applied as the rules of law governing a contract or dispute if the relevant parties so chose. 34 Accordingly, it would benefit the parties, and the development of the principle, most if the parties intention is respected by the forum adjudicating a dispute. 35 It also discourages parties from engaging in forum shopping THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS The International Institute for the Unification of Private Law ( UNIDROIT ) is an independent, inter-governmental organisation pioneering the movement towards a harmonised international private law, 37 and it is situated in Rome. 38 The UNIDROIT Principles on International Commercial Contracts ( the UPICC ) is one of the organisation s most recognised and most influential Soft Law instruments. 39 It comprises of a total of 119 articles in seven chapters, together with a Preamble and commentary on the articles. 40 The UPICC have been prepared by a group of leading experts, in various fields of international law, representing the different and most predominant legal 32 See Lalive (n 19) above, See G Corderro-Moss International Commercial Contracts (2014) See Lalive (n 19) above, 79; Juenger (n 136) Nygh (n 20) 3, with regards to the law applicable to a dispute in national courts: To leave that determination to a national court invites uncertainty since national choice of law rules dealing with the absence of choice tend to differ and even if they involve similar non-rule statements... they are open to judicial chauvinistic manipulation. 36 Forum shopping usually occurs when more than one court has jurisdiction to hear a dispute. This may lead the plaintiff in the matter to select a court which will most likely decide in his favour. Some parties deliberately structure their contract in such a way as to benefit in the event of a dispute. 37 For general information on the organisation see 38 For the history of UNIDROIT see 39 Bonell The UNIDROIT Principles of International Commercial Contracts and the Principles of European Contract Law. Similar rules for the same purpose? 1996 Uniform Law Review ; Whited (n 2) 168; see also Report of the United Nations Commission on International Trade Law, fortieth session, A/62/17 Part 1 (2007) par in the Yearbook of the United Nations Commission on International Trade Law (2007) 52. Available at 40 See UNIDROIT (n 14). 9

11 systems in the world. 41 Thus, it has established a diverse collection of knowledge of the main components of contract law. Furthermore, the experts contributed to the UPICC while sitting in a personal capacity and did not represent any governments; this fact added to its independence. 42 It can, consequently, be said that the UPICC are truly specialised with regards to international substantive law which surpasses the quality of traditional national legal orders. 43 The UPICC are considered to be a codification of the general principles of international commercial law. 44 Moreover, they do not merely codify these principles; they also determine the most effective solutions to issues which arise in international commercial contracts. 45 Thus, they are considered to be both a prescription and a description. 46 They are viewed as a Soft Law instrument because, although they have become very persuasive, they do not have formal legitimacy such as the CISG, for example. 47 Member States of the CISG are directly bound by its provisions whenever the relevant contract falls within its scope, with the exclusion of any reservation made in terms of the Convention, and the exclusion of its application by the parties. 48 Thus, Member States must treat the relevant provisions of such a binding instrument as part of their domestic law. The provisions are binding because it is in the form of a Convention which affords it formal legitimacy. 49 The fact that the UPICC is a Soft Law instrument, has emphasised the reasonability and economic soundness of the principles. 50 Furthermore, the UPICC has been formally endorsed by the United Nations Commission for International Trade Law (UNCITRAL), 51 which will contribute to the UPICC s increased application. 41 See UNIDROIT (n 14); see also Bonell (n 66) Veneziano The Soft Law approach to the unification of international commercial contract law: Future perspectives in light of UNIDROIT s experience 2013 Villanova Law Review See Vischer The relevance of the UNIDROIT Principles for judges and arbitrators in disputes arising out of international contracts 1998 European Journal of Law Reform : see also ICC International Court of Arbitration Award no 7110 available at 44 UPICC, Preamble (n 14). 45 Whited (n 2) 169; Basedow Uniform law Conventions and the UNIDROIT Principles of International Commercial Contracts 2000 Uniform Law Review Vogenauer and Kleinheisterkamp Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC) (2009) 25 par Vogenauer and Kleinheisterkamp (n 46) 27 par See generally United Nations Convention for the International Sale of Goods (Vienna Sales Convention) (1980), available at 49 See (n 47). 50 Veneziano (n 42) 524; Dennis (n 69) below, See Bonell The CISG and the UNIDROIT Principles of International Commercial Contracts: two complementary instruments 2008 International Law Review of Wuhan University ; see also Report of the United Nations Commission on International Trade Law (n 39) par

12 Due to the UPICC s global recognition as a Soft Law instrument, 52 and the changing needs of the international community, it is reviewed often and improved on by UNIDROIT in order to become more comprehensive and expansive. 53 Since the first draft of the UPICC in 1994, there have been two further editions, in 2004 and 2010 respectively, covering aspects not previously dealt with. 54 It must also be noted that the UPICC does not deal with all the aspects of international commercial contracts and must thus be supplemented in certain instances. 55 However, having said that, where an issue is indeed dealt with in the UPICC, the parties are allowed to deviate from it whenever they would like to do so Establishment and purpose UNIDROIT was established with the purpose of examining ways of harmonising and coordinating the private law of States and of groups of States, and to prepare gradually for the adoption by the various States of Uniform rules of private law by preparing drafts of laws and conventions with the object of establishing uniform internal law. 57 The UPICC was designed to be an elaboration of an international restatement of the general principles of contract law. 58 This elaboration was [m]odelled after the Restatements of the Law in the United States of America, 59 and was done for the purpose of promoting the harmonisation of international commercial contracts law See Bonell (n 51) Whited (n 2) Additional provisions deal with aspects such as agency, assignment of rights, obligations, set-off and limitation periods (UPICC 2004); restitution, illegality, plurality of obligors and obliges, conditions and termination of long-term contracts for just cause (UPICC 2010). 55 See Vogenauer and Kleinheisterkamp (n 46) 4 par UNIDROIT (n 14) Article Peters UNIDROIT 2012 Rüdiger Wolfrum (ed) Max Planck Encyclopedia of Public International Law Available at 58 Vogenauer and Kleinheisterkamp (n 46) 1 par Vogenauer and Kleinheisterkamp (n 46) 26 par Vogenauer and Kleinheisterkamp (n 46) 7 par

13 The purpose of the UPICC is specifically dealt with in the Preamble. The Preamble sets out seven purposes which the UPICC aspires to achieve with its implementation and reads as follows: 61 These Principles set forth the 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 domestic law. They may serve as a model for national and international legislators. The overriding purpose of the UPICC is to set forth general rules for international commercial contracts. 62 This rings true with the aforementioned restatement of international commercial contract law and would thus form a system of rules of law. 63 The UPICC itself determines when it will be applicable to an international commercial contract. 64 However, their application may be limited due to their status as a non-binding instrument. 65 Some of the provisions in the UPICC are black letter rules which are modern and innovative, unlike the content of many domestic legal systems. 66 The UPICC are tailored to fit general as well as specific issues found in international commerce UNIDROIT, Preamble (n 14) above. 62 See UNIDROIT, Preamble (n 14) par See UNIDROIT, Preamble (n 14); see also RULES OF LAW (n ) below. 64 See UNIDROIT, Preamble (n 14). 65 The UPICC has persuasive authority and is not considered to be law in the traditional sense. 66 See Bonell Symposium paper: the UNIDROIT Principles of International Commercial Contracts: achievements in practice and prospects for the future 2010 Australian International Law Journal ; see also Vogenauer and Kleinheisterkamp (n 46) 15 par 35; the UPICC also provides users with commentary on the black letter rules so as to make all provisions clear and concise. 67 Vogenauer and Kleinheisterkamp (n 46) 15 par

14 3.2 Harmonising international substantive law Generally speaking, it may be stated that harmonisation is the process of joining and unifying laws from diversified legal systems. 68 UNIDROIT has engaged in important work designed to enhance...the harmonisation of international trade law. 69 One of UNIDROIT s projects, with the aim of harmonising international substantive law, is the UPICC. 70 The UPICC encourages the harmonisation of the law of international commercial contracts, having been designed as an international restatement of the general principles of contract law. 71 They offer an alternative approach to the problems that many contracting parties, adjudicating forums and legal advisors have encountered in the past. 72 The need for the harmonisation of international commercial law is in keeping with the desire to create certainty, efficiency and to encourage trade. In addition, Vogenauer and Kleinheisterkamp specifically name three reasons why harmonisation should be encouraged: 1. divergences between different legal systems often lead to increased transaction costs for the parties involved; divergences can lead to businesses experiencing a distortion of competition ; 74 and 3. international commercial contracts often contain provisions which are inadequate[ly] dealt with by domestic legal systems Rabello and Lerner The Unidroit Principles of International Commercial Contracts and Israeli Contract Law 2003 Uniform Law Review Dennis The guiding role of the CISG and the UNIDROIT Principles in harmonising international contract law in Contributions to the study of international trade law and alternative dispute resolution in the South Pacific, 2014 Comparative Law Journal of the Pacific and 52: Most significantly, the UNIDROIT Governing Council has requested that the Secretariat continue providing the highest priority to the promotion of UNIDROIT instruments, including the UNIDROIT Contract Principles. 70 See UNIDROIT (n 14) above. 71 Vogenauer and Kleinheisterkamp (n 46) 1 par One example of such a problem is the interpretation of the United Nations Convention on the International Sale of Goods (CISG) (1980) with regards to the relevant remedies in case of breach of contract. 73 Vogenauer and Kleinheisterkamp (n 46) 1 par 3: these divergences may lead to an increased difficulty in determining the law applicable to the contract. In most cases, it will lead to at least one of the parties being placed in a negative position. 74 Vogenauer and Kleinheisterkamp (n 46) 2 par 4: the overall growth of companies will be negatively affected, reducing the volume and frequency of international trade even further due to diminishing capital resources. 75 Vogenauer and Kleinheisterkamp (n 46) 2 par 5: specific rules are required to be able to deal with specific problems. 13

15 The harmonisation of international substantive law can only be obtained through a process of integration. 76 Such a process can take many forms and the establishment of the UPICC as a non-binding or Soft Law instrument, is only one of the methods that can be employed. Other methods include the drafting of treaties and model laws, and the publication of standard contractual terms. 77 UNIDROIT was established to promote the harmonisation of international contract law and in so doing develop world trade. However, some authors believe that complete harmonisation will never be possible due to the vast differences in within contract law CHOICE OF THE UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS AS THE LAW GOVERNING A CONTRACT 4.1 Introduction The UPICC recognises freedom of contract and party autonomy. Article 1.1 of the UPICC states that parties are free to enter into a contract and to determine its content. 79 This is not only a fundamental principle underlying the UPICC, 80 but also one which underlies contract law in general. The Official Commentary to the UPICC states that parties should be free to agree on the terms of individual transactions and that this right is the cornerstone of an open, market-orientated and competitive international economic order. 81 This principle is confirmed in Article 1.5 which allows the parties to exclude the application of the UPICC, thus providing them with the widest possible autonomy. 82 However, party autonomy in the UPICC is by no means unrestricted. 83 Parties who choose the UPICC to govern their contract, or 76 Whited (n 2) Faria Legal harmonisation through model laws: the experience of the United Nations Commission on International Trade Law (UNCITRAL) paper delivered at the Association of Law Reform Agencies in Eastern and Southern Africa Conference of 2005, South Africa, Session 5, 1 8. Available at 78 Calus A Modernisation and Harmonisation of Contract Law: Focus on Selected Issues 2003 Uniform Law Review UNIDROIT (n 14). 80 Bonell An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts (2005) Official Commentary on the UNIDROIT Principles of International Commercial Contracts (2010) Comment Bonell (n 80) Bonell (n 80)

16 who merely incorporate them into their contract, will be limited by the applicable mandatory rules domestic or international. 84 The UPICC is a balanced system of rules which covers aspects such as the parties obligations in terms of the contract, the effect of the contact, and the consequences of non-compliance with the terms of the contract, as well as interpretation, and the various remedies at breach of contact. 85 More importantly, the structure of the UPICC is of such a nature that it can be used universally without having to take account of the legal, economic or political traditions of the forum in which they are to be applied. This is evident in the fact that the UPICC are available in almost all of the major international languages and are also available freely in electronic format to enable contracting parties to have unrestricted access to them. 86 The Preamble of the UPICC provides that they will apply to a contract when the parties have agreed that their contract be governed by them. 87 It also states that the UPICC will apply if the parties agreed that the general principles of law, the lex mercatoria or the like will govern their contract. 88 Some authors are of the opinion that the UPICC can be referred to as the lex mercatoria. 89 Once the UPICC have been chosen as the law governing the contract, and so-called gaps appear due to their application, the UPICC themselves should be able to provide a solution. 90 An alternative would be for the parties to refer to a particular domestic legal system to supplement the UPICC in dealing with matters not covered by them thus acting as a gap-filler. 91 The UPICC, although non-binding, have become an important source of law to international contracting parties. Parties to international commercial contracts should be in favour of selecting rules of law which act as an impartial set of substantive rules, to govern their contract because of the fact that the choice of one 84 UNIDROIT (n 14) Article See UNIDROIT (n 14) above. 86 For the various translated versions see 87 UNIDROIT (n 14) Preamble. 88 UNIDROIT (n 14). 89 Zeller The UNIDROIT Principles of Contract Law: Is there room for their inclusion into domestic contract? 2006 Journal of Law and Commerce ; the UPICC itself states in its Preamble that it may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like. 90 UNIDROIT (n 14) Article n 70 above. 15

17 of the contracting parties domestic legal system may lead to certain disadvantages for the other party. 92 The UPICC are considered to be a useful system of rules of law. They may be regarded as a practical solution to contracting parties who are in search of neutrality. 93 The UPICC acts as a neutral law governing the contract and any dispute which may arise between the parties. It allows the parties an alternative to choosing one of their own domestic legal systems, as well as the uncertain legal system of a third state. The fact that the UPICC are easily accessible to the parties and adjudicators, make them even more appealing as a possible choice of law. 94 In considering the abovementioned, the parties may choose the UPICC by utilising one of the Model Clauses provided by UNIDROIT. 95 Where the parties have chosen the UPICC as the law applicable to their contract, its application will depend on the private international rules of the forum adjudicating the matter. 96 The provision in the Preamble which states that the UPICC can be chosen as the law governing the contract is a controversial one. 97 The controversy is predominantly based on the fact that the UPICC is not considered to be hard law and, traditionally, parties and adjudicators can only be bound by such law. If the parties are unable to choose the UPICC directly as the applicable law, it will still be possible to incorporate them into the contract, by reference, if incorporation is allowed by the true applicable law. 98 This method is considered to be an indirect application of the UPICC and finds its grip in the principle of freedom of contract. 99 In this way, some provisions of the UPICC still become binding on the parties involved, within the limits placed on it by the applicable law. 100 Where parties have chosen the UPICC as the applicable law, they did so purposefully so as to effect its application. The same effect is expected when they 92 See par 3 above. 93 Zeller (n 89) See n 86 above. 95 See par below, note Vogenauer and Kleinheisterkamp (n 46) 37 par See UNIDROIT (n 14) Preamble par 2; Vogenauer and Kleinheisterkamp (n 35) 28 par Vogenauer and Kleinheisterkamp (n 46) 37 par 33; both English and South African law requires that the reference be made expressly in order for the UPICC to be incorporated into the contract. 99 Vogenauer and Kleinheisterkamp (n 46) 37 par Vogenauer and Kleinheisterkamp (n 46) 37 par

18 are merely incorporated into the contract, although, their application may be diminished due to their judicial interpretation. 101 There is, however, a slight difference with regards to the mandatory rules which are applicable to each of the abovementioned situations. If the UPICC were chosen as the applicable law to the contract, they will only be subject to the international or overriding mandatory rules which are applicable in terms of the forum s private international law, whereas a mere incorporation of the UPICC will result in the limited application of the UPICC due to the application of the mandatory rules of the objectively determined proper law. 102 The fact that the UPICC determines autonomously when it is applicable cannot automatically result in their application. 103 This traditional approach is followed mainly by domestic courts; it entails that the particular domestic court s private international law will determine whether or not the UPICC can be chosen as the applicable law. Arbitral tribunals have started to move away from such a restrictive approach. 104 Due to their non-binding or Soft Law nature, the UPICC are not a rigid and limitative legal source but rather one which is flexible and accommodating to the needs of the parties involved. 105 The continued release of new editions of the UPICC indicates that they are responding to the needs of a globalised market The position in domestic courts and arbitral tribunals, respectively Reference to the UPICC is increasing across the sphere of both domestic and arbitral awards. 107 In order for the UPICC to find application, a distinction must be drawn between domestic courts and arbitral tribunals. Although the UPICC itself does not distinguish between domestic courts and arbitral tribunals, it gains its authority differently, depending on the adjudicating forum. Furthermore, the UPICC are able to find application both in case of its express choice, and in case of the absence of such an express choice. 101 Vogenauer and Kleinheisterkamp (n 46) 38 par Vogenauer and Kleinheisterkamp (n 46) 39 par Vogenauer and Kleinheisterkamp (n 46) 36 par See Vogenauer and Kleinheisterkamp (n 46) 28 par See Zeller (n 89) Zeller (n 89) Bonell (n 66) above,

19 4.2.1 Express choice of law The impact of an express choice of the UPICC will vary depending on the adjudicating body seized by the parties. 108 The UPICC themselves provide for their use as the law governing an international commercial contract. 109 They were intended to serve as a governing law and be the object of the exercise of party autonomy. 110 However, they can only govern a contract if they were incorporated into such a contract by the parties involved, and only if the parties clearly intended for the Principles to govern. Parties are able to choose the UPICC exclusively, 111 or in conjunction with a particular domestic law which would act as a so-called gap-filler in the event that an issue is not dealt with in the UPICC. 112 The effect of the parties agreement on the application of the UPICC varies considerably depending on whether such agreement is invoked before a domestic court or an arbitral tribunal. 113 a) Domestic courts Domestic courts tend to be reserved with reference to the application of the UPICC as the law governing the contract, and would rather consider any reference to the UPICC as a mere agreement of incorporation. 114 Thus, a domestic court will determine the law applicable to the relevant dispute according to the lex fori s private international law rules and will only apply the provisions of the UPICC as far as they do not interfere with those of the applicable law as determined by the domestic court, including its mandatory provisions. 115 The recognition and subsequent application of a Soft Law instrument, such as the UPICC, has been rejected in many jurisdictions in favour of the application of 108 See Bonell (n 66) above, UNIDROIT (n 14) Preamble par 2, 3 and Saumier (n 12) Official Commentary (n 62) Comment 4.a See Official Commentary (n 62) Comment 4.a Bonell Towards a legislative codification of the UNIDROIT Principles? 2007 Uniform Law Review Bonell The UNIDROIT Principles of International Commercial Contracts and the harmonisation of international sales law 2002 Revue Juridique Themis Bonell (n 114) above,

20 legal systems indicated by the private international law rules of the forum. Currently, there is no domestic system of private international law which accommodates the choice of non-state law as the law governing an international commercial contract. 116 Although there have been discussions about the possibility of applying non-state law in Mexico and Venezuela due to their ratification of the Inter-American Convention, 117 there has been no definitive answer, merely conflicting opinions. Domestic courts are bound by their own rules of private international law which form part of their domestic legal system. 118 As a result, these private international rules restrict the parties choice of applicable law to that of domestic legal systems, and so exclude the application of any non-state system of rules, such as the UPICC. 119 Furthermore, where the contracting parties choose a domestic legal system as the law applicable to their contract, they are bound by the mandatory laws of that legal system. Thus, determining the applicability of the UPICC lies with the domestic authorities. If the UPICC are recognised by a state, as a viable choice of law by the parties, such a choice will be respected. 120 The current position with regard to a choice of the UPICC, by the contracting parties, as the rules of law applicable to the contract, will only be regarded as an agreement to incorporate them into the contract and not as a choice of law governing the contract. This will lead to the parties not being able to deviate from the rules of private international law of a domestic legal system by concluding an agreement to that effect. Thus, a choice of the UPICC would only bind the parties in as far as they do not interfere with the mandatory rules and public policy of the forum. 121 The traditional position in domestic courts has not changed due to the adoption of certain regional, supranational and international instruments. 116 See in general Agró (n 159) above. There have however, been developments in Paraguay with regards to the Draft Hague Principles on Choice of Law in International Contracts (2014). See par below. 117 Bonell (n 179) 201; Juenger (n 136) 392; Mexico City Convention (n 5). 118 Bonell (n 80) See par for a discussion on the Mexico City Convention and the possibility of a choice of non-state law. 120 There have been increased references by domestic courts to the UPICC, indicating the influence that the instrument is gaining. 121 Bonell (n 80) 241; see also the 20 December 2005 decision of the Bundesgericht of Switzerland where the court found that an incorporation of rules of law will only be allowed to the extent that such rules are not contrary to the mandatory provisions of the otherwise applicable law, available at 19

21 The Hague Sales Convention allows the contractual parties to choose the law which will govern their contract, and they can do so either expressly or tacitly. 122 However, it specifically states that the contract of sale shall be governed by the domestic legal system of the country designated by the contracting parties. 123 Four member countries to this Convention are also Member States to the Rome I Regulation. 124 However, where both instruments are applicable to the same situation, the Hague Sales Convention will enjoy priority. 125 The Rome Convention and the Rome I Regulation place a restriction on the parties freedom of choice by limiting it to a choice of State law. 126 Neels and Fredericks were of the opinion that the Convention should be amended to allow the contracting parties to choose an international instrument as the law applicable to the contract. 127 The European Commission considered making a choice of the general principles of law available to contracting parties as the law applicable to their contract during the drafting of Rome I. 128 Accordingly, a proposed Article 3(2) provided that the principles and rules of the substantive law of contract recognized internationally or in the Community may be chosen as the applicable law. 129 Sadly, this provision was not included in the final version of the Regulation. Moreover, Recital 13 of Rome I merely states that general principles, such as the UPICC, can be incorporated into the contract; 130 thus excluding the possibility of such principles 122 Convention sur la loi applicable aux ventes à caractère international d objets mobiliers corporels (The Hague Sales Convention) (1955), Article 2: Such designation must be contained in an express clause, or unambiguously result from the provisions of the contract. 123 n 122 above, Article The Countries which are members to both the Hague Sales Convention and the Rome I Regulation are: Finland, France, Italy and Sweden. 125 The Rome I Regulation (n 126) contains a provision in Article 25(1) to this effect. It states that [t]his Regulation shall not prejudice the application of international conventions to which one or more Member States are parties at the time when this Regulation is adopted and which lay down conflict-of-law rules relating to contractual obligations. Furthermore, a lex specialis instrument, such as the Hague Sales Convention, will always have preference over one which is lex generalis, see M Koskenniemi Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, International Law Commission Fifty Eighth Session, Report of the Study Group of the International Law Commission, 34. Available at See Rome Convention (n 4) above, Article 3(1) and Regulation (EC) on the Law Applicable to Contractual Obligations (Rome I Regulation) (2008), Article 3(1). 127 Neels and Fredericks Revision of the Rome Convention on the Law Applicable to Contractual Obligations (1980): Perspectives from international commercial and financial law 2006 Journal of South African Law Vogenauer and Kleinheisterkamp (n 46) 44 par Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I), COM (2005) 650 final (15 December 2005) See Rome I (n 126 ) above, Recital

22 being applied as the law governing the contract. 131 However, where a Member State to Rome I recognised the choice of a non-state law, such a choice will remain valid as a choice of the applicable law within the Member State s jurisdiction. 132 There seems to have been some progress made by the Inter-American Convention on the Law Applicable to International Contracts ( the Mexico City Convention ). 133 Currently, it will only be binding between Mexico and Venezuela, who have ratified the convention. 134 Under the Mexico City Convention, the contract will be governed by the law chosen by the parties, either expressly or tacitly. 135 Furthermore, reference is made, in both Article 9(2) and Article 10, to the general principles of international commercial law which some authors consider to be an indication of the possibility of a choice of non-state law, such as the UPICC, 136 whereas others have argued that a choice of the UPICC is more likely to be excluded because of the traditional interpretation of law. 137 According to Bonell and Juenger, 138 the language used in Article 9(2) was purposefully chosen so as to include the UPICC. Some authors have praised the Mexico City Convention for adopting such an innovative approach regarding the use of the UPICC. 139 The approach of a domestic court differs significantly from that of an arbitral tribunal which will almost always automatically honour the parties choice of applicable law See Ferrari and Leible Rome I Regulation: The Law Applicable to Contractual Obligations in Europe (2009) 11; Michaels Non-State law in the Hague Principles on Choice of Law in International Contracts in Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz (Purnhagen & Rott eds., 2014). Available at: V Lazić The impact of Uniform Law on national law: limits and possibilities commercial arbitration in the Netherlands 2009 Electronic Journal of Comparative Law n 5 above. 134 Five countries became signatories to the Convention, namely Bolivia, Brazil, Mexico, Uruguay and Venezuela. However, only Mexico and Venezuela ratified the Convention; see for further information. The Convention is not currently in force as it requires a third party to ratify it. 135 n 5 above, Article 7(1). 136 See Nygh (n 20) 62; Bonell (n 113) 201; Juenger The Inter-American Convention on the Law Applicable to International Contracts: Some highlights and comparisons 1994 American Journal of Comparative Law See Vogenauer and Kleinheisterkamp (n 46) 48 par Bonell (n 66) 184; Juenger (n 136) Juenger (n 136) See par (b) below. 21