Unidroit, International Commercial Law, International Private Law, International Contracts

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1 Title: The Unidroit Principles as the Law of the Contract in France and the US Information about author: Johanna Hoekstra is a PhD candidate in international commercial law at the University of Essex Abstract The Unidroit Principles of International Commercial Contracts are designed as a neutral contract instrument to facilitate international business. The introduction of the Unidroit Principles has also given new life to the debate on whether or not non-state norms can be used as a choice of law in international contracts. This debate centres partly on the recognition of non-state norms as a source of law for international contracts. In legislative practice this debate is less important than the more practical and wider one which centres on the actual possibilities for the parties to choose non-state laws as the law of the contract. This paper explores the possibilities to use the Unidroit Principles as the law of the contract in France and the USA. Comparing different legislations can offer a contribution to this debate and in the end add to harmonisation and ultimately to increased security in international business. The USA is a common law legislation but with a mostly codified commercial law whereas France is not only a civil law legislation but also an EU member. Both are also important industrial trade nations. In first instance this paper looks at the actual application of the Unidroit Principles by national courts and in second instance the paper will explore the position of the Unidroit Principles as a source of a law. In a globalised pluralistic world the choice of non-state norms as the law of the contract only becomes more important as increasing international commercial transactions lead to more demand for clarity and judicial security. Keywords: Unidroit, International Commercial Law, International Private Law, International Contracts 1

2 The Unidroit Principles as the Law of the Contract in France and the US Introduction The methods of harmonisation of international commercial law include more traditional instruments such as international conventions but also more non-traditional such as initiatives by private organisations. The Unidroit Principles of International Commercial Contracts (from now on: Unidroit Principles or Principles) are such an initiative. They were published in 1994 and are currently in their third incarnation which dates from This paper will discuss the value of the Unidroit Principles as a choice of law for international commercial contracts and their acceptance as a source of law. This debate can in first place contribute to a better understanding of the harmonisation of international commercial law. Secondly it helps to understand the nature of a legal instrument which has been initiated by a private organisation and has no obligatory force. Thirdly it can help with further harmonisation initiatives. The first part consists of a more general introduction to the Principles. The second part focuses on the applicability of the Unidroit Principles in litigation and their value as a source of law; especially in the context of the lex mercatoria. This paper will look at two jurisdictions: France and the US so as to have an example of both a civil law and a common law jurisdiction and will focus on litigation and not on other methods of dispute resolution. The Unidroit Principles of International Commercial Contracts are designed as a neutral instrument to facilitate international business transactions and consist of specific rules as well as general principles and statements. The work went beyond simply codifying the existing principles and laws in international trade law that are common to the majority of states but instead there was an active selection and innovation process. In the words of Professor Bonell the Unidroit Principles are intended to enunciate rules which are common to most of the 2

3 existing legal systems and at the same time to select the solutions which seem best adapted to the special requirements of international trade. 1 The Preamble to the Principles suggests the following uses: 1. They shall be applied if chosen by the parties 2. They could be applied as a manifestation 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 for 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. 7. Other possibilities could include the use of the principles as a guide for drafting contracts or as a substitute for domestic law. 2 In the first two instances and possibly in the last instance the parties make an active choice for the Principles. In the second, third, fourth, fifth and possibly the last instance the choice is made by the adjudicator. Therefore a distinction can be made between the choice for the Principles by the parties and the use of the Principles by the mediator, arbitrator and judge without the parties having chosen the Unidroit Principles. The Unidroit Principles do not fit any of the established categories of sources of law even under a notion of law that goes beyond that accepted by strict positivists and which includes judge made law and trade law usage as genuine sources of law. 3 Yet this in itself does not mean that they are not law either. David Oser states that the established canon of sources of law is the least pertinent for asserting the law character of a set of rules in the international context. 1 MJ Bonell, The Unidroit Principles of International Commercial Contracts: Why? What? How?, (The Tulane Law Review, Vol 69, No 5, April, 1995, p1129) 2 The Unidroit Principles can be accessed online via the site of Unidroit. The following link is for the English language version: 3 D Oser, The Unidroit Principles of International Commercial Contracts: a governing law, (Martinus Nijhoff, 2008)p120 3

4 4 Camilla Baasch Andersen writes that in the current transnational law context it would not be beneficial to set up criteria to determine what law is or what law is not. 5 One of the ways that the acceptance of the Principles as a source of law can be assessed is by looking at the actual use of the Unidroit Principles. There are several ways that the Principles could come up in court as can be gathered from the possible uses defined by the preamble to the Principles. The following section will look at potential applications of the Unidroit Principles in France and the US The Application of the Unidroit Principles in France and the US The first situation that can occur is when the parties have actively chosen the Principles as the law of the contract. In France soft law such as the Principles can be incorporated in an international contract but only in so far as non-mandatory provisions are concerned. If the parties would draw up a contract with solely the Unidroit Principles as the choice of law the court would still look for the applicable law though private international law as a contract without as state law is considered a contract with no law. This was established in the Messageries Martimes case (1950) where the French Supreme Court ruled that an international contract must be attached to a state law. 6 Given that there is no statutory law on this subject this case stands. It seems likely that in a contract based solely on the Unidroit Principles the court would respect this choice as far as any non-mandatory provisions are concerned. So far no cases of this nature have come up but as will be seen further on there have been several positive decisions of the courts regarding soft law as a source of law. Two important pieces of international legislation are also applicable in France: the Rome I Regulation and the 1955 Hague Convention on the Law Applicable to International Sales of Goods. This Convention refers solely to domestic law as a choice of law in its articles and therefore would leave little scope for a choice for the Unidroit Principles or similar 4 D Oser, The Unidroit Principles of International Commercial Contracts: a governing law, (Martinus Nijhoff, 2008), p123 5 C Baasch Andersen, Uniform Application of the International Sales Law/Understanding Uniformity, the global jurisconsultorium and Examination and Notification Provisions of the CISG, (Wolters Kluwen 2007), p Attendu que, si tout contrat international est nécessairement rattaché à la loi d un Etat, la cour d appel, interprétant souverainement le contrat litigieux (Messagerie Maritimes, Cour de Cassation, Chambre Civile, 21 June 1950) 4

5 instruments. 7 In the original proposal the Rome I regulation allowed considerable scope for the application of non-state laws. 8 However the final regulation has reduced this scope by implying that the choice of law needs to be a state law whilst leaving some room for the choice of non-state legislation for non-mandatory provisions. 9 In the US private international commercial contracts are regulated by state law but the Uniform Code of Commerce has been enacted by all states; although in some cases with changes or not in its entirety. 10 The Uniform Code of Commerce seems to restricts the choice of law to state law as can be observed from Section (c) (2): an agreement by parties to an international transaction that any or all of their rights and obligations are to be determined by the law of this state or of another state or country is effective, whether or not the transaction bears a relation to the State or country designed. 7 Hague Convention on the Law Applicable to International Sales of Goods (Corporal Movables): Article 2 La vente est régie par la loi interne du pays désigné par les parties contractantes. Cette désignation doit faire l'objet d'une clause expresse, ou résulter indubitablement des dispositions du contrat. Les conditions, relatives au consentement des parties quant à la loi déclarée applicable, sont déterminées par cette loi. (Official version has only been published in French) 8 Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations (Rome I), article 3 (2): Parties shall be allowed to choose as the applicable law the principles and rules recognised internationally or in the community 9 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) Freedom of choice 1.A contract shall be governed by the law chosen by theparties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. 2. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties. 3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. 4. Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties' choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement. 5. The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and For more information on the adoption of the UCC by states please see: Legal Information Institute, Cornell University Law School: 5

6 The official comments however do allow for the possibility to choose other laws: This Section does not address the ability of parties to designate non-legal codes such as trade codes as the set of rules governing their transaction. The power of parties to make such a designation as part of their agreement is found in the principles of Section That Section, allowing parties broad freedom of contract to structure their relations, is adequate for this purpose. This is also the case with respect to the ability of the parties to designate recognized bodies of rules or principles applicable to commercial transactions that are promulgated by intergovernmental organizations such as UNCITRAL or Unidroit. See, e.g., Unidroit Principles of International Commercial Contracts. 11 The Section to which this refers allows the parties to determine their own standards for the contract as long as these meet certain obligations and are not unreasonable. On this legal ground the application of the Principles would be permissible. 12 The Restatement on Conflicts of Law (Second) supports this position: 187. Law of the State Chosen by the Parties(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.again it is necessary to look beyond the actual text to find the reference to the possibility to include a non-state law. Comment C on subsection 1 reads: In the alternative, they may incorporate into the contract by reference extrinsic material which may, among other things, be the provisions of some foreign law. The Reporter s Notes state that may also stipulate for the application of trade association rules or well-known commercial customs. 13 It should be noted that the Restatements are not binding but they are highly persuasive and are meant to reflect the current positive law and case law in the US. 11 Uniform Commercial Code 1957, 1-302, Comment 2 (2001 Revision) Variation by Agreement.(a) Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement. (b) The obligations of good faith, diligence, reasonableness, and care prescribed by [the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable. Whenever [the Uniform Commercial Code] requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.(c) The presence in certain provisions of [the Uniform Commercial Code] of the phrase "unless otherwise agreed", or words of similar import, does not imply that the effect of other provisions may not be varied by agreement under this section. 13 Reporter s Note to Subsection 1, article 187 6

7 On state level most codification tends to be conservative and not favour soft law but there are some exceptions. The 2001 Oregon Choice of law codification uses very deliberately the word law instead of state law. In the official comments it is stated that the parties may select model rules or principles such as the Unidroit Principles. 14 Another example would be Louisiana. It is less explicit than the Oregon Code but regarding choice of law in its Civil Code it again uses the word law instead of state law and thus leaving some leeway to the court to decide on what law is. 15 It can thus be said that parties to the contract in both France and the US can use the Principles but mostly only in conjunction with a state law. If choosing a non-state law such as the Principles as the applicable law is a veritable choice of law then there would be no need for the judge to apply conflict of law rules to search for the applicable law of the contract. In that case the law applicable to the contract is the law chosen by the parties and any gaps should be filled by the lex fori just as the court would do when applying a foreign state law. The second part of this discussion will focus on the application of the Unidroit Principles if these have not been chosen as the law of the contract. In most jurisdictions private international law can only lead to the application of state law. Yet this does not mean that there are no possibilities for application. The Principles could be applied if the private international law of the forum leads to an applicable national law that allows for the application of soft law. For instance both France and the US have ratified the Convention for the International Sales of Goods (CISG). In the CISG article 7.2 it states that if there is no provision in the CISG for the question at hand then the court can use those general principles that inspired the CISG. 16 If the court would consider the Principles part of these general 14 S Symeonides, Oregon s Choice-Of-Law Codification for Contract Conflicts: An Exegesis, Williamette Law Review, 44-2, December 2007, p Louisiana Civil Code article 3540: Art Party autonomy. All other issues of conventional obligations are governed by the law expressly chosen or clearly relied upon by the parties, except to the extent that law contravenes the public policy of the state whose law would otherwise be applicable under Article Acts 1991, No. 923, 1, eff. Jan. 1, The Convention for the International Sales of Goods: Article 7.2 CISG(1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions 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 or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. 7

8 principles then an application of the Unidroit Principles would be feasible if the conflicts of law points to a country which has ratified the CISG. In France the Principles have been used in court as reference. There are for instance two decisions by the court of appeal in Grenoble. In a case in January the court applied French law but supplemented its considerations with reference to the Unidroit Principles and in another casethe court mentioned the Unidroit Principles as further support to the applicable CISG. 18 In the US case law indicates that it is possible to use non-state laws to supplement or interpret a state law. 19 There have so far been no specific cases that have referred to the Unidroit Principles but it does not seem far stretched to accept this possibility based on the existing case law. Through the CISG both France and the US have a possibility to apply the Unidroit Principles as part of their law if the Principles can be considered to be part of the principles underlying the CISG and then only in those cases when the CISG is silent. In French courts references have been made to the Principles which at least indicates a certain recognition of the authority of the Principles; at the very least as a source of scholarly doctrine. The Unidroit Principles as part of the new lex mercatoria Another possibility would be the application of the Unidroit Principles as part of what is commonly known as the new lex mercatoria. That is to say the body of law which consists of trade usages common to the international merchant community and which is independent of national law. The Principles could be an original source of the lex mercatoria or they could beused as evidence of certain aspects of the lex mercatoria. The whole of the Principles could fall under the lex mercatoria or only parts of the Principles. The lex mercatoria is said to be a 17 Société Harper Robinson v. Société internationale de maintenance et de réalisations industrielles, Cour d Appel de Grenoble,January SCEA GAEC Des Beauches Bernard Bruno v. Société Teso Ten Elsen GmbH & COKG,Cour d Appel de Grenoble,October 1996, 19 Several examples of cases where soft law has been used to supplement or interpret a state law are: Alaska Textile Co., Inc v Chase Manhattan Bank, N.A., F.2d 813 (2 nd Cir. 1992), Pribus v Bush, 173 Cal.Rptr.747 (Cal.App. 1981) and Mirabile V Udoh, 399 N.Y.S.2d 869 (N.Y Cit.Ct. 1997) 8

9 spontaneous creation by the merchant community yet the Principles were deliberately designed. If the Principles are indeed part of the new lex mercatoria then there is a more pervasive argument that they are indeed a source of law. Two famous cases in France deal with the recognition of the lex mercatoria as law. These are thefougerolle case and the later Valenciana case. In the Fougerolle case an arbitrator applied general principles in absence of choice of law. Respondents opposed enforcement of the award on the basis that the arbitrator had gone beyond the scope of its mission because in applying general principles he had acted, without authority, as amiable compositeur. The Cour de Cassation stated that by referring to general principles of obligation generally applicable in international trade the arbitrators had complied with the duty imposed up on them to define the applicable law. 20 In the Valenciana case in 1991 there was objection to the enforcement of an award based on the lex mercatoria because the party claimed that the arbitrator had not rendered a decision in law but had acted as amiable compositeur and thus had exceeded his mission. The court decided that the arbitrator had conformed to the mission and had made his decision in law. 21 This decision therefore acknowledged the lex mercatoria as law. In the US a similar case can be found: The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc, from the United States District Court, S.D. California, 7 December This case comments on the recognition of the Unidroit Principles as a source of the lex mercatoria. The case was about the enforcement of an arbitral award based on Iranian law supplemented by general principles of international law, including the lex mercatoria and trade usages. The arbitral tribunal decided on Unidroit Principles as a source of the lex mercatoria. This was disputed in court by Cubic Defense systems who argued enforcement on the grounds that the arbitral 20 In the Fougerolle case an arbitrator applied general principles in absence of choice of law. Respondents opposed enforcement of the award on the basis that the arbitrator had gone beyond the scope of its mission it and that in applying general principles it had acted, without authority, as amiable compositeur. The Cour de Cassation replied that by referring to general principles of obligation generally applicable in international trade the arbitrators had complied with the duty imposed up on them to define the applicable law.fougerolle v Banque de Proche Orient (1982) Rev Arb 183, (1982) J. Droit. Int Valenciana de Cementos Portland SA v. Primary Coal Inc, Cass civ. Ire, 1991 Bull. Civ. 1 No. 1354, 22/10/ The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc, United States District Court, S.D. California, 7 December

10 tribunalhad exceeded the terms of the mission by basing their decision upon legal theories not designed by the parties such as the reference to the Unidroit Principles. The Court decided that: The Tribunal s reference to and application of the Unidroit Principles do not violate Article V(1) (C) [of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards] 23 Conclusion In the case studies we have seen that the situation in courts in France and the US regarding the Principles is fairly similar. In court the Principles can be applied for any non-mandatory provisions if chosen by the parties but it would be problematic to use them as the sole law of the contract. Private international law leaves little room for a direct application of the Unidroit Principles yet in theory application would be possible as an expression of general principles of law or usages given that through the CISG and other legislation this is possible. The Principles can also be used as reference to back up existing legislation or as proof that a certain trade usage is in vigour. To a limited extent this has been done by courts in France as was seen. Theoretically this would also be possible for courts in the US. The Principles have no coercive force so recognition is mainly accomplished via a bottom up approach. If the Principles are used in practice their status means recognition of the Principles as a form of law. The status of the Unidroit Principles as part of international commercial law scholarly doctrine is largely undisputed as can be gathered from the amount of articles and books devoted to them. In common law jurisdictions scholarly contributions are seen as a secondary source whereas in other jurisdictions such as for instance Germany they are primary sources and can be found in the majority of case decisions. 24 Concluding it can be said the Principles have no direct standing as a source of law in the internal judicial order but that there have been instances when they have indirectly been acknowledged or recognised by courts.it does not seem far to stretch that the Principles have 23 The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems, Inc, United States District Court, S.D. California, 7 December LA Matteo, The Scholarly Response to the Harmonization of International Sales Law, (30 Journal of Law & Commerce, 2012), p1 10

11 a place both as scholarly doctrine in international commercial law as well as a place as customary law or as part of the new lex mercatoria. Professor Bonell writes that it is not whether or the Principles are applicable in theory which should decide the legitimacy of the principles as a source of law but whether or not they are applied in practice. 25 In a pluralistic international community where great store is placed on self-regulation by the merchant community the acceptance of the Principles as a choice of law seems a realistic and even desirable evolution. 25 M J Bonell, The Unidroit Principles and Transnational Law, (Uniform Law Review, 5, 2000 ), p

12 Bibliography Books and Articles: Baasch Andersen, Camilla Uniform Application of the International Sales Law/Understanding Uniformity, the global jurisconsultorium and Examination and Notification Provisions of the CISG, Wolters Kluwer 2007 Bonell, Michael Joachim, The Unidroit Principles and Transnational Law, Uniform Law Review, 5, 2000 Bonell, Michael Joachim, The Unidroit Principles of International Commercial Contracts: Why? What? How?, The Tulane Law Review,Vol. 69, No 5, April, 1995 Matteo, Larry A., The Scholarly Response to the Harmonization of International Sales Law, 30 Journal of Law & Commerce, 2012 Oser, David, The Unidroit Principles of International Commercial Contracts: a governing law, Martinus Nijhoff, 2008 Symeonides, Symeon, Oregon s Choice-Of-Law Codification for Contract Conflicts: An Exegesis, Williamette Law Review, 44-2, December 2007 Legal Instruments: Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) (2008) The Convention for the International Sales of Goods (1980) The Hague Convention on the Law Applicable to International Sales of Goods (Corporal Movables (1955) The Restatement (Second) on Conflicts of Law (1971): The Uniform Code of Commerce (1951, Revision 2001) The Unidroit Principles on International Commercial Contracts (1994, third version 2010) e.pdf 12