UNIDROIT Principle

IMPORTANCE OF UNIDROIT PRINCIPLES IN INTERNATIONAL COMMERCIAL CONTRACT LAW

Author: Sankalpita Pal

Introduction

The Principles of International Commercial Contracts 2016 also known as PICC in short is currently in its 4th edition. These sets of principles govern International commercial contracts. They were drafted by an inter-governmental organization known as UNIDROIT. It stands for the International Institute for the Unification of Private Law. The Principles comprise of a Preamble and 119 articles which are spread over seven Chapters. Since most countries are dualist in nature thus 64 governments have ratified the UNIDROIT principles.

The practical state of the laws governing international commercial contracts is not very satisfactory owing to the traditional approach of nationalizing the cross-border transactions by subjecting such contracts to the law of a particular country poses a problem of uniformity. Treating cross- border transactions under domestic laws are traditional but cease to be practical in recent times. Thus, this is where the UNIDROIT principles step in, in order to bring about uniformity to the governing laws of international commercial contracts. Despite the unprecedented growth trade and the increase in globalized/integrated markets the laws governing cross-border transactions still remain under doubt as a lot of jurisdictional dispute arises due to breach of such contracts. Even at the regional level, such disputes arise. Such disputes are resolved before the forum of either of the countries involved. Sometimes such disputes end up in arbitration which is still more effective however the enforceability of foreign arbitral awards is challenged, more often than not in domestic courts thus, prolonging the dispute.

Backdrop of UNIDROIT principles

The idea of “restatement of laws” under international commercial contracts was advanced for the first time on the occasion of an international colloquium. This colloquium was held in Rome for the celebration of the 40th anniversary UNIDROIT foundation day. During this colloquium, the matter of the experience of Restatements of the laws in the US was discussed. Subsequently, a question was raised on whether a similar initiative could be taken at a more international level in order to facilitate trade laws.

After a few serious deliberations in 1980, a Working Group was set up who were appointed to draft the principles that would govern International Commercial Contracts. The Working group constituted of legal experts who had a profound research background in Contract law and International Trade law. In May 1994 a governing Council gave its formal approval to the UNIDROIT principles which was drafted by the Working Group. The Governing Council also recommended a wide distribution of the principles for practice.

Importance of UNIDROIT Principles

The UNIDROIT principles were drawn up with a purpose. The idea was to elaborate on International principles that govern international contracts. The main idea was to avoid the strict “localization” international contracts. The persisting problem before these principles came into being was that these international commercial contracts were subject to a single system, as in rigid national laws. This view was criticized. The objections raised against this point were that there should be a more precise definition of the subject and the nature and content of these principles would eventually lead to unpredictability.

However to put it simply there were 2 main objectives of the UNIDROIT

  1. To facilitate international trade law by bridging the gap between foreign and domestic law.
  2. To bring about some uniformity between common and civil laws in order to facilitate cross-border transactions
  3. To expedite the dispute resolution process by introducing arbitration proceedings in its provisions.
  4. To bring about reasonable changes in the legislative policies in order to develop trade flow. Legal barriers create a lot of hindrances with regard to commercial cross-border transactions. If such difficulties are eliminated through a uniform system then the international commercial contracts can acquire a transnational identity.

It has been observed that though these principles are novel and practical per se, however, their application is rather limited. Cross-border transaction contracts still stick to the traditional approach. A possible reason behind this is that a multitude of contracts that are domestic in nature are entered into on a daily basis within the boundaries thus, most nations rather apply the same national laws to cross border commercial contracts too. Domestic laws are known and practiced and can provide advantages in case of disputes in the future. The legal advantages or deficiencies in domestic laws might as well facilitate the parties to escape the enforcement of foreign awards and orders when disputes arise. This also becomes more of a reason as to why there is a need for a uniform system and the UNIDROIT principles come to play a significant role in order to eliminate such discrepancies.

Thus, in the present scenario, the only question that props up is that what exactly is the actual role of UNIDROIT principles?

Various experts have placed various views regarding the role of UNIDROIT principles. After analyzing a few, it can be said that in actuality UNIDROIT principles have 3 important roles to play in International commercial contract law.

  1. A uniform law to govern international commercial contracts.

There are a variety of situations that may occur due to the character of the parties involved and how they choose the applicable law on their respective commercial contracts. From big market players to small or medium businesses, often go through dilemma as to what kind of applicable laws must be opted. Most of them are either unable to agree on a particular domestic law or are unwilling to for various reasons. Therefore, such parties end up agreeing to vague terms like the general principles governing international law or in accordance with general laws, etc. now this gives rise to not only jurisdictional issues but also a significant amount of conflict-of-laws.

As the preamble of the UNIDROIT principles say, that it is a valid alternative that can solve such problems. Thus, these principles are important as it solves these problems.

An important question props up that how far does the relevance of these principles are actually utilized by courts and arbitral tribunals. There has been a shift of preference over the years when it comes to choosing the UNIDROIT principles. Contracting parties are more acceptable toward these principles in recent years. This transnational approach is gradually gaining confidence in commercial parties participating in international agreements.

This is evident from a reference to these principles made by the Inter-American Convention on the Law Applicable to International Contracts in 1994. The convention clearly mentioned that soft law instruments (quasi-legal) like UNIDROIT principles can be applied to international contracts effectively owing to its supra-national approach.[1]An official commentary of Hague principles expressly includes the mention of UNIDROIT principles are rules of law that can govern international contracts.

  • These principles provide a means of supplement and interpret international uniform law instruments

A newer concept has started to develop that domestic laws must be the last resort only. International uniform law instruments remain the autonomous body of law even after their incorporation into national legal systems. Thus there arises a need to interpret and supplement them according to internationally accepted autonomous uniform principles. Not forgetting the rules which recourse domestic law making it the last resort. This is where the importance of the UNIDROIT principles can be felt. It can be further explained through the relationship between CISG and UNIDROIT.

CISG

CISG stands for Contracts for the International Sale of Goods. The contract of sale is the backbone of international trade between countries. CISG is one of the core international trade law conventions.

Relation between UNIDROIT Principles and CISG

Both of these principles have comparable characteristics. For example, both of them mention the freedom of contract. They also discuss the binding impact of contracts under various articles under each of the respective principles. Their purpose is also the same. Both are rules of law governing international contracts except CISG is narrower in scope and practice while UNIDROIT is much wider and can govern a large type of commercial contracts. Thus, making it more significant than CISG. Therefore, the universal adoption of UNIDROIT principles id more desirable for the sake of trade.

Both these principles revolve around good faith and fair dealing in contractual terms. Both have similar provisions regarding the performance or non- performance of the contract. A significant similarity is that both CISG and UNIDROIT principles provide the contracting parties with the Right to Cure any non-performance.[2]

  • Finally these principles provide ‘global background law’ to domestic laws for its interpretation.

The PICC forms a bridge between all kinds of undulated lacunas in different domestic laws and sets a transnational approach to the rule of laws. However, the limited application of these principles leads to the belief of its ineffectiveness. However, it must be understood that the PICC plays an important role, in practice, it is used more by judges and arbitrators as well as legislators. Thus, it serves an objective law used as a reference point by officials rather than as an object of choice owing to the rarity of its choice by contracting parties. It is not as such treated as a legal system but as a compendium of individual provisions.[3] There is still hope as gradually most legal systems are realizing its impact and purpose.

The UNILEX database shows a comprehensive picture of how the PICC is used globally by the judiciary and legislators. It is used in different countries in a different way. Australia, China, Russia, Ukraine, the UK, the USA etc are some countries that have applied these principles. It has also been observed that in common law jurisdictions PICC has been used very limitedly. The UNIDROIT principles lay down various provisions covering a wide range of contractual concepts and remedies to disputes. However, the common law jurisdictions have only applied them in 2 issues. Civil law countries on the other hand are using these principles in more types of contracts.[4]

The PICC is often referred to as lex mercatoria which means that non-State legal principles drafted for the ease of transnational commerce which exists outside the ambit of any domestic laws and earns only a nominal position, created by merchants and not legislators. This is not convincing at all. The PICC is universal in character that is befitting of a global backdrop. The PICC doesn’t resemble lex mercatoria either from a substantive perspective or from a formal perspective.[5]

With better implementation, the PICC would be an absolute success as it is pretty well-drafted and its purpose is clear and unambiguous. The PICC is utilized as an alternative to domestic laws instead of it being used as a supplement. This is where a comparative problem is realized. These principles should be used as a supplement but it is used as an alternative instead thus leading to its limited application and loss of its real purpose.

A characteristic of background law is that it is residual in nature. A foreground law is interpreted against a background law. The UNIDROIT Principles is simply used as a yardstick to ensure the interpretation and supplementation of domestic laws of respective contracting parties, is consistent with internationally accepted standards. Its purpose is to meet the special needs of transnational trade relationships. It fills in the veritable gaps between domestic law and international standards of contract. This has been very well observed of how the courts and arbitral tribunals have interpreted PICC and applied it.

In fact, a few domestic courts have said that the brilliance of the UNIDROIT principles is such that there is a requirement to revisit the statutes of their own countries.   

Arbitration as a starting point for UNIDROIT principles.

The UNIDROIT Principles are a soft law instrument. However, a significant question to ponder is what gives these principles the quasi-legal identity. According to UNCITRAL Model law for arbitration, whenever disputes arise with regard to an international contract, it can be resolved through arbitration proceedings. The Arbitral Tribunals are supposed to refer to the rules of law chosen by the parties, while adjudication of the matter.

The UNIDROIT principles are combined with arbitration; this confers the soft law characteristics of these principles.[6] These principles ultimately seamlessly bridge the gap between the domestic laws of common law countries and civil law countries.

The only cautionary role of domestic laws is that it will only step in when the UNIDROIT principles are against any fundamental policy of the domestic laws of either of the contracting parties. Even Article 14 of these Principles itself declares that in case if there is a violation of any domestic law due to the application of these principles, these principles itself will restrict such applications. The intent behind this article was that principles of international or even supranational origin cannot have an overriding impact on national or domestic laws. Otherwise, this would breach the spirit of the country’s legislative reasoning.

Experts around the world who have argued in favour of these principles have also said that the UNIDROIT principles are practical and is good from a business perspective too as it saves time and expenses that otherwise are drained due to litigatory approach.

Conclusion

These principles have been re-drafted and modified from time to time ending up in its 4th edition currently. However, these principles is a product of about 35 years of dedicated legal research. These principles are unique and comprise of various approaches to a given contractual concept. The brilliance of the UNIDROIT Principles is that it brings about coherence between different kinds of approaches especially the large difference between the common and civil law systems. It provides a conceptual closure to various contractual subjects which otherwise cause’s disputes when domestic laws are directly applied. It is a sophisticated and pragmatic set of principles as it relaxes the budgetary requirements of the parties and of course saves time during cross-border contract negotiations. These principles need a fair chance in order to show its effectiveness and that could only be given if the international contracting parties choose it as a rule of law applicable in their respective contracts.


[1] 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

[2] PROF. (Dr.) Kondaiah Konnalagadda & Nimisha Jha, The CISG and UNIDROIT Principles: Comparison and Contradiction (2009)

[3] Ralf Michaels, The UNIDROIT Principles as a global Background Law, Unif. L. Rev Vol. 19 (2014)

[4] Ibid

[5]Celia Wasserstein Fassberg, ‘Hoist with Its Own Petard’ (2004) 5 Chicago Journal of InternationalLaw 67, 79–82.

[6] Eckart Brödermann, The Future for Cross-Border Contracts: In combination with Arbitration Clauses, the UNIDROIT Principles of International Commercial Contracts provide a Practice-Proven Bridge between Common and Civil Law (25 March 2018)

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