1. Applicable substantive law options in contracts involving states or intergovernmental organizations

To put the application of the UNIDROIT Principles of International Commercial Contracts to contracts involving states or intergovernmental organizations into context, it would seem helpful to provide a short overview of the applicable substantive law options in contracts with states or intergovernmental organizations. Given that both in theory and in practice (contractual and arbitral) the range of these options is considerably wider than those usually available for contracts between private parties, such an overview would indeed appear necessary. Present circumstances do not allow us to go into detail; rather, we shall present the options in the form of a checklist, including bibliographical references, where appropriate, for further information.

1.1 Applicable conflict-of-laws rules

We are dealing here with commercial contracts which have the added characteristic of involving state or intergovernmental organizations. Hence, it came as no surprise to find, in research I conducted some years ago, that the view generally held was that the normal principles of private international law that are followed in contracts between private companies should also be applied to contracts involving state parties. 2 In my view, this belief still holds true, in principle, subject to the following qualifications:

1) The arbitral tribunal is not bound to apply the conflict of laws rules either of the state where the seat of the arbitration is located or of the state party involved in the arbitration.

2) Applying conflict of laws rules to such contracts will not necessarily lead to the application of a national system of private law, but may lead to the application of other substantive legal systems, as mentioned hereafter. [Page52:]

1.2 Choice of law by the parties

For contracts involving state parties, like those involving private parties, arbitral tribunals generally seem to accept the priority of party autonomy. Thus, if the parties have inserted in their contract a choice-of-law clause specifying the application of a particular substantive law system, their choice will be respected.

In contracts involving state parties, the variety of choice-of-law clauses is much wider, however, than in those between private parties. In research I conducted a number of years ago, 3 I identified no less than 12 different kinds of options revealed by contractual practice in this field, and these are but broad categories which could be further sub-divided into a great many varieties.

1.3 National law and stabilization clauses

The application of a national law remains the most common solution for contracts involving state parties, as it is for those involving private parties. Within the former category, this will usually mean the application of the national law of the state party involved in the contract, although this is obviously not the case where intergovernmental organizations are concerned.

It frequently happens that the choice of the national law of the state party will be combined with a stabilization clause to ensure that the state does not alter or manipulate the applicable law after the conclusion of the contract to the disadvantage of the other party to the contract.

1.4 Mandatory or public law

Rules in the national legal system of the state party involved that are mandatory or part of public law come into play much more in arbitrations involving state parties than in those between private enterprises. State parties or their contractual behaviour may be subject to specific restrictions in the public interest. Limitations may also be imposed by public policy or ordre public.

1.5 General principles of law

A further option, which is rather specific to contracts involving state parties and the possible arbitrations in connection therewith, is the applicability of general principles of law. It is not uncommon to find in practice that such general principles of law, although recognized as one of the sources of public international law, are themselves chosen as the applicable law, both by parties in choice-of-law clauses in their contracts and by international arbitrators deciding cases in the absence of a choice-of-law clause.

1.6 Public international law

Contracts involving state parties may be subject to public international law where treaties lay down applicable rules or mandatory restrictions. Sometimes there is even reference to public international law in the choice-of-law clause in a contract between a state party and a foreign private enterprise. 4

1.7 The 'public international law contract'

Specific considerations apply to contracts which I have in the past suggested calling 'public international law contracts'. Readers are referred to my earlier research for [Page53:] information on the specific conditions of such contracts. 5 A number of so-called 'economic development agreements' fulfil these conditions.

1.8 Lex mercatoria and trade usages

When state parties enter into international commercial contracts, unless an agreed choice-of-law clause provides otherwise, they have to accept the 'rules of the game'. This implies the applicability of relevant trade usages, to which most modern institutional arbitration rules expressly refer and, in so doing, oblige their arbitrators to take them into consideration. It may also imply the applicability of lex mercatoria if it is accepted in principle and in concrete rulings.

1.9 UNIDROIT Principles

Last but not least, a further option for contracts involving state parties is the application of the UNIDROIT Principles. This goes without saying if there is a reference to the UNIDROIT Principles in the choice-of-law clause, but it may also be the case without such a choice, as I shall demonstrate below.

2. Relevance of the UNIDROIT Principles to contracts involving states or intergovernmental organizations

2.1 Practical experience from cases

Arbitral tribunals have been applying the UNIDROIT Principles in a variety of cases since even before the final version of the Principles was published. Although there are fewer cases involving state parties than in purely private arbitration, a number of cases are nonetheless to be found. Without wishing or attempting to recall all of those reported, let me simply indicate that the first case reported by Bonell 6 is an award of 1992 involving an economic unit of the former German Democratic Republic. Berger, in his report published in the American Journal of Comparative Law in 1998, 7 rightly refers also to cases of the Iran-United States Claims Tribunal which, of course, typically involve a state party on one side. There is a further case, reported in the ICC International Court of Arbitration Bulletin, 8 where the arbitrator referred to articles 1.3 and 1.7 of the UNIDROIT Principles in support of his findings concerning a contract involving a Czech state entity governed by Czech law.

From my own practical experience as an arbitrator - apart from that acquired in my former position at the Iran-United States Claims Tribunal - I can report on two cases involving state parties in which reference was made to the UNIDROIT Principles.

The first was an ad hoc arbitration under the UNCITRAL Arbitration Rules between a group of Canadian companies and individuals as claimants and the United Nations as respondent. Owing to the customary confidentiality restrictions, and as the award itself has not been published, I can only refer to this case insofar as it has become known through reports in the press and a press release. The subject matter was the transport of United Nations personnel and military personnel on behalf of the United Nations throughout the world. The underlying contract did not contain a choice-of-law clause. The seat of the arbitration was in New York. [Page54:]

At the first procedural meeting early on in the proceedings, the issue of the applicable law was discussed with the parties, after which each side filed its respective submissions. On that basis, the tribunal relied in particular on the following considerations in its award.

The case was decidedly international in nature. The contract was signed between a Canadian corporation and the United Nations, an intergovernmental organization. When the issue of the governing law was raised by the tribunal early in the proceedings, the parties declined to select any national law as the law to be applied to the contract. Rather, they agreed that 'generally accepted principles of international commercial law' were to be applied, such principles being informed by reference particularly to the UNIDROIT Principles. The facts at issue in the dispute related to events which occurred around the world. In these circumstances, given the international context of the case, the tribunal found that it would not be appropriate to draw substantial guidance from any particular system of national law in deciding upon the content of 'generally accepted principles'. Instead, the UNIDROIT Principles were considered to provide the more appropriate international guideline. Hence, it was decided that the tribunal would rely upon the UNIDROIT Principles for guidance in defining the generally accepted principles of international commercial law under which it would interpret the contract.

The second case was also an ad hoc arbitration. However, as confidentiality restrictions have not been lifted and the case was finally settled, I can only report on it in abstract terms. The underlying contract had been concluded between a US oil company and the government of a state formerly belonging to the Soviet Union. The US company was to invest a large amount of money and construct a power station, in return for which it would be granted a long-term contract for the supply of electricity to customers in that state at prices fixed in such a way that a return from the investment could be expected. The national law of the state in question was applicable, on the basis of a choice-of-law clause. However, the tribunal found that this national law had not yet been fully developed following the changeover to a market economy and contained a number of lacunae and ambiguities having a bearing on the dispute. The energy supply system in the state in question was fundamentally changed by law, making it impossible for the power station constructed by the US company to supply energy at profitable prices. Given this, the tribunal found that the application of the national law of such state should be supplemented by taking into consideration particularly articles 1.4, 6.2.2/6.2.3 and 7.1.7 of the UNIDROIT Principles.

2.2 Particularly relevant Principles

As mentioned before, if state parties enter into international commercial contracts they have to accept the 'rules of the game'. In theory, therefore, the full range of the UNIDROIT Principles could be relevant to such contracts.

However, certain articles may be found to be of particular import if one of the parties to the contract and to the arbitration is a state or an intergovernmental organization.

Article 1.4 (mandatory rules)

Article 1.4. may be particularly relevant to contracts involving state parties if, as already mentioned, they are subject to mandatory rules laying down restrictions regarding contracting by state parties or the areas in which state parties are entitled to contract, e.g. public utilities, infrastructure, etc. [Page55:]

Article 1.7 (good faith and fair dealing)

The mandatory obligation of parties in article 1.7 to act in accordance with good faith and fair dealing in international trade may have more extensive applications where state parties are concerned, insofar as this obligation might be considered to apply also to acts of state entities in the field of public law and acts of intergovernmental organizations not directly related to the performance of the contract.

Article 1.8 (usages and practices)

Article 1.8, according to which parties are bound by usages and practices, may have to be interpreted to the effect that, since state entities that conclude commercial contracts enter the field of international trade, they cannot rely on any specific national procurement practices, unless these are expressly referred to in the contract.

Articles 6.2.2 / 6.2.3 (hardship)

Where contracts and arbitrations involving state parties are concerned, the application of articles 6.2.2 and 6.2.3 may be of special relevance, if the circumstances of the case are due to legislative, administrative or political acts of the state or the intergovernmental organization.

Article 7.1.7 (force majeure)

Finally, in the context of article 7.1.7 on force majeure, the question may notably arise as to whether the state party can claim to be excused for non-performance due to legislative, administrative or political acts by authorities of the same state. This, of course, is an issue which has come up in a considerable number of international arbitration cases. I have in the past suggested principles for lifting the corporate veil of the state in such cases. 9

3. Concluding remark

As a necessarily brief and rather general closing remark, I would conclude that the UNIDROIT Principles are one of a number of options of applicable rules of law for contracts and arbitrations involving states or intergovernmental organizations. Cases from arbitration practice provide examples of the application of the UNIDROIT Principles to such contracts. Certain UNIDROIT Principles may prove to be of particular relevance to such contracts and may have to be applied to circumstances peculiar to state parties.

1
The text published here corresponds to the speech presented by Professor Böckstiegel at the ICC/UNIDROIT 2001 seminar, updated and with minor amendments to adapt it to the written medium. For the sake of simplicity, 'state or intergovernmental organizations' are referred to hereafter as 'state parties', which expression should be understood to cover both states and intergovernmental organizations, unless specific considerations apply to one or other of them.

2
K.-H. Böckstiegel, Arbitration and State Enterprises: A Survey on the National and International State of Law and Practice (Deventer: Kluwer, 1984) at 26ff.

3
Ibid. at 29.

4
On the great variety of choice-of-law clauses found in contractual practice, see K.-H. Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Frankfurt, 1971) at 84ff.

5
K.-H. Böckstiegel, 'The Legal Rules Applicable in International Commercial Arbitration Involving States or State-controlled Enterprises' in International Arbitration 60 Years On: A Look at the Future (ICC Court of Arbitration 60th Anniversary) (Paris: ICC Publishing, 1984 (ICC Publication No. 412)) 115 at 165ff.

6
M. J. Bonell, An International Restatement of Contract Law, 2d ed. (New York, 1997) at 240.

7
K.P. Berger, 'International Arbitral Practice and the UNIDROIT Principles of International Commercial Contracts' (1998) 46 Am. J. Comp. L. 129 at 136 and footnote 31.

8
Final award in ICC case 9753, (2001) 12:2 ICC ICArb. Bull. 82.

9
Supra note 5 at 130ff and 134ff; supra note 2 at 34ff and 41ff.