I. The UNIDROIT Principles: an indispensable tool for business

In the space of a few years, the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles or Principles) have become an essential tool for the development of international commercial law. They make it possible to create a uniform legal framework for international contracts, to the advantage of those who draft and negotiate cross-border agreements and the courts and arbitrators that decide the disputes to which they give rise.

While ex mercatoria l and similar theories have been viewed with great scepticism by the business world, the UNIDROIT Principles have generally been received with enthusiasm. This is probably due to the fact that they answer an actual need of parties engaged in international trade, by offering a set of clear and easily understandable rules on contracts.

Now that the UNIDROIT Principles have been enlarged to include several additional issues, there is every reason to believe that acceptance of the Principles will continue to grow.

II. Incorporation of the UNIDROIT Principles in model contracts

As a fair and balanced set of rules that take into account the particular needs of international trade, the UNIDROIT Principles are a valuable resource for those who draw up international model contracts and would like to place them within a uniform and predictable legal framework.

It is possible for the drafters of international model contracts to evade the problem of determining the rules governing the contract by leaving the choice to the parties. Although this is the solution most commonly adopted in international model contracts, it makes it impossible for the drafters to know what law will in fact govern the contract and thus to ensure that all the clauses of the model will be fully effective. Consequently, the parties must check in each case whether the model conforms to the domestic law they wish to apply. [Page58:]

One way of helping to overcome this problem is to submit the contract to a transnational system of uniform rules, or at least, where this is not possible, to minimize the differences between the national laws that may apply from case to case by introducing a set of more 'neutral' principles in addition to the domestic law. The UNIDROIT Principles can be, and already have been, used for this purpose.

I will consider here two examples of model contracts that have included a reference to the UNIDROIT Principles, with a view to placing the contract within a more 'international' legal framework:

- the model contracts of the International Chamber of Commerce (ICC models), and

- the model contracts of the International Trade Center of the United Nations (ITC models).

First, however, consideration must be given to some critical issues that may arise when the UNIDROIT Principles are incorporated by reference in a contract.

III. Different ways of incorporating the UNIDROIT Principles in a contract

The UNIDROIT Principles were prepared mainly with a view to their being incorporated by reference in individual contracts. The Preamble, which sets out the purpose of the Principles, states, in the first place, that they 'shall be applied when the parties have agreed that their contract shall be governed by them'.1

However, if we look at existing case law on the subject,2 it appears that in almost all cases where the Principles have actually been applied the parties did not refer to the Principles in their contracts. Thus, most arbitral awards have applied the Principles in cases where the parties expressed the wish to have the contract governed by general principles of law applicable to international contracts,3lex mercatoria4 or similar rules,5 or where it appears that they did not want domestic law to apply.6 There are cases where the parties agreed to apply the Principles in the course of the arbitral procedure,7 but I have no knowledge of arbitral awards (or court judgments) relating to contracts containing an express clause providing for the application of the UNIDROIT Principles. This is probably the reason why little consideration has been given to the problems that may arise when the parties submit their contract to the UNIDROIT Principles through an express choice. It may therefore be useful to consider in some detail the various options that the parties have in this context and their advantages and disadvantages. I will consider the following possibilities of incorporating the UNIDROIT Principles in a contract:

- as contractual rules in the context of a domestic law;

- as international trade usages;

- as the 'governing law' instead of a domestic law.

1. Incorporation within a specific national law

The parties may submit their contract to a domestic law and at the same time make a general reference to the UNIDROIT Principles. If this solution is chosen, the UNIDROIT Principles will be considered as part of the contractual provisions and thus be placed on the same level as the other provisions of the particular contract. [Page59:]

Since, however, the Principles have been drafted and organized as a body of rules governing the contract, more akin to rules of law than to contractual rules (thus, for example, the Principles provide that certain rules are mandatory and cannot be derogated from in an individual contract subject to the Principles),8 their coexistence with domestic rules having the same purpose may give rise to some problems.

It should first of all be pointed out that any mandatory rules in the national law will prevail over the Principles. This means that in principle the parties should check in advance whether the applicable domestic law contains mandatory rules conflicting with the Principles.9

Even with non-mandatory rules in the applicable domestic law, there may still be a problem of coordination with the Principles. In the event of a contradiction between two provisions regarding the same issue, which should prevail? The likely answer is that the Principles, as contractual rules, should prevail over non-mandatory rules of the domestic law governing the contract: if the parties have incorporated the Principles in their contract, this means that they wanted them to apply-insofar as admissible-in the place of other rules.

However, a further problem might arise where the scope of application of certain rules of the Principles does not correspond to that of similar rules in the applicable (domestic) law. Let us consider, for example, Article 3.10 of the UNIDROIT Principles on gross disparity and possible domestic rules on rescission (e.g. Article 1448 of the Italian Civil Code). The situations covered by these two provisions are similar, but they do not correspond exactly:10 many situations that may fall under Article 3.10 of the Principles are not covered by Article 1448 of the Italian civil code. As the two provisions cover matters that are partially different, the question arises as to whether they are mutually exclusive or (at least for those issues covered by one provision and not by the other) complementary.

A similar problem might arise with respect to Article 7.1.7 on force majeure. Can we be sure that this rule is to be applied instead of the principles on frustration or on impossibility of performance in the domestic law(s) governing the contract?

I do not regard the above difficulties as insurmountable, but the fact remains that the coexistence of two sets of rules governing similar issues offers many opportunities for lawyers wishing to raise formal defences in the event of a dispute.

An interesting contractual way of overcoming such problems is to define the respective positions of the two sets of rules by clearly placing the domestic law in a subordinate position with respect to the Principles. In a footnote to the Preamble, the drafters of the UNIDROIT Principles propose the following clause for parties wishing the Principles to apply together with a domestic law: 'This contract shall be governed by the UNIDROIT Principles (2004) [except as to Articles…], supplemented when necessary by the law of [jurisdiction X].' If a clause of this kind can be interpreted to mean that the rules of the domestic law should be applied only where the UNIDROIT Principles give no answer, the problems examined above should not exist (except for possible mandatory rules of the domestic law, which would of course prevail in any case).

2. Incorporation as trade usages

In their contract, the parties may refer to the UNIDROIT Principles as 'trade usages'. Such a solution is more likely to be accepted by parties who would in any [Page60:] event insist on the application of their domestic law. For a party forced to accept that the contract be governed by the domestic law of the other party (because it knows this to be a non-negotiable issue for that party), the possibility of thereby including a reference to the UNIDROIT Principles may limit the risk of this choice.

Although there would still be problems of coordination, as discussed above, this solution at least has the advantage of reducing the risk of application of an unknown domestic law, since the rules of that law would need to be coordinated with those prevailing in international trade, as reflected in the UNIDROIT Principles.

There is, of course, a theoretical problem, namely the difficulty of qualifying a set of legal rules as usages of trade. It may indeed be questionable whether legal rules-normally not familiar to, or understood by, parties to a contract-can be considered as a usage of trade simply because they correspond to the standards normally accepted in international trade. On the other hand, it should be noted that there is a consistent trend in international arbitration towards qualifying as trade usages legal rules that conform to the needs and expectations of international traders, such as the UNIDROIT Principles.11

An interesting example of this attitude can be found in a case where the arbitral tribunal, in a case involving a sales contract between a Vietnamese seller and a French buyer decided to apply the 1980 Vienna Convention on Contracts for the International Sale of Goods (which would not otherwise have been applicable, since Vietnam was not a contracting party at the time) and the UNIDROIT Principles as 'international trade usages and customs'.12

Although such an approach may give rise to some criticism, if seen from a theoretical perspective, it is my personal opinion that it should be encouraged, given that a wide interpretation of 'international trade usage' as including also sets of rules that conform to the needs of international trade may help the future development of international commercial law.

3. Incorporation as the governing law of the contract

A third possibility is to incorporate the Principles as the rules of law governing the contract, i.e. as a system of rules having the same function as a domestic law's rules on contracts. In a footnote to the Preamble, UNIDROIT recommends a clause to this effect: 'This contract shall be governed by the UNIDROIT Principles (2004) [except as to Articles …].'

The comment on the Preamble explains that this choice should be combined with an arbitration agreement. Where domestic courts have jurisdiction, the above solution would not be advisable because it is likely that the courts will refuse to consider the clause as a choice of law (since they tend to admit only the choice of a domestic legal system as the applicable law) and may consequently consider the reference to the UNIDROIT Principles as their mere incorporation as contractual rules, to be applied within the context of the domestic law determined pursuant to private international law rules.

The above considerations are certainly right, although there is a risk that, even in the context of international arbitration, the UNIDROIT Principles may not always be accepted as the 'applicable law'. Indeed, it cannot be ruled out that arbitrators with a more traditional approach to this issue might interpret the clause proposed by [Page61:] UNIDROIT as a provision simply incorporating the Principles in the contract, which would leave open the problem of determining the governing law.

In my opinion, it is therefore preferable for the parties first to expressly state that they wish to submit the contract to 'transnational' rules (instead of a domestic legal system) and then to specify that they wish to apply the UNIDROIT Principles within the context of such rules.

Here too, there is, in theory, a problem of coordination between the UNIDROIT Principles and the general principles constituting the 'governing law'. However, since the 'general principles generally recognized in international trade' are few and very general, the risk of incompatibility with the UNIDROIT Principles is very limited.13 On the contrary, the UNIDROIT Principles are necessary to give substance to a set of general principles that as such appear insufficient to ensure the necessary predictability.

Considering all this, it would seem preferable to incorporate the UNIDROIT Principles within a contract not submitted to a domestic law. However, this solution is feasible only in international arbitration. Where the parties have reasons to prefer the jurisdiction of national courts, this alternative is not workable and should not be envisaged.

IV. Model contracts referring to the UNIDROIT Principles

To my knowledge, in only two series of model contracts-those of ICC and those of the International Trade Center-has it been decided to include a reference to the UNIDROIT Principles.

1. The ICC models

Several ICC model contracts incorporate the UNIDROIT Principles by reference.14

The first ICC model to contain an express reference to the UNIDROIT Principles was the ICC Model International Franchising Contract (ICC Publication 557), which, in Article 32 A, contains the following clause as an alternative to the choice of a domestic law provided for in Article 32 B:

This Agreement is governed by the rules and principles of law generally recognized in international trade together with the UNIDROIT principles on International Commercial Contracts.

A similar clause is found in Article 13.1 of the ICC Model Occasional Intermediary Contract-Non-circumvention and Non-disclosure Agreement (ICC Publication 619):

Unless otherwise agreed in writing . . . , any questions relating to this NCND Agreement shall be governed by the rules and principles of law generally recognized in international trade as applicable to international contracts with occasional intermediaries together with the UNIDROIT Principles on International Commercial Contracts.

A more complex clause was subsequently drawn up and included in several models published in the following years.15 In the second edition of the Model [Page62:] Distributorship Contract, for example, the following clause is found in Article 24 as an alternative to the clause containing the choice of a domestic law:

Any questions relating to this contract which are not expressly or implicitly settled by the provisions contained in this contract shall be governed, in the following order: (a) by the principles of law generally recognised in international trade as applicable to international distributorship contracts, (b) by the relevant trade usages, and (c) by the UNIDROIT Principles of International Commercial Contracts, with the exclusion - subject to Article 24.2. hereunder - of national laws.

It should first of all be said that the purpose of the clause is to place the contract in a 'truly international' context, which the drafters considered to be the only solution capable of ensuring that the provisions of the contract comply with the rules of law applicable to it. Were the contract to be submitted to an indefinite number of domestic laws, chosen by parties in individual cases, it would be impossible to draft clauses complying with all of them. Users of the model would therefore have to be invited to check if and to what extent the model complies with the chosen domestic law, which would make it far less attractive.

The choice of lex mercatoria-i.e. to have the contract governed by a-national rules of law-is made very clearly by expressly excluding the application of domestic laws. However, an exception is made for 'internationally mandatory' rules of domestic legal systems that have a close connection with the contract. Article 24.2 of the ICC Model Distributorship Contract, for instance, states:

In any event consideration shall be given to mandatory provisions of the law of the country where the distributor is established which would be applicable even if the contract is governed by a foreign law. Any such provisions will be taken into account to the extent that they embody principles which are universally recognized and provided their application appears reasonable in the context of international trade.

This clause makes it possible to take account of internationally mandatory rules in the distributor's country, which will normally have a close connection with the contract. However, flexibility is required, since, before applying such rules, arbitrators must check whether they are the expression of universally accepted principles and whether it appears reasonable to apply them outside the domestic context in which they have been enacted.

An interesting aspect of the ICC clause in its latest version is that it provides a hierarchy of rules: first the contract clauses, followed by general principles, then trade usages, and finally the UNIDROIT Principles. The purpose of this provision is to make clear that trade usages apply only if they comply with the general principles and that the UNIDROIT Principles apply only to the extent that they conform to the general principles (lex mercatoria) and trade usages. The arbitrators may thus refuse to apply the provisions of the UNIDROIT Principles that they consider not to be in accordance with the reasonable expectations of business people engaged in international trade.

It must be said that such a contradiction is likely to arise only in very exceptional cases, since the main purpose of the UNIDROIT Principles is precisely to reflect the standards prevailing in international trade. Indeed, it was the belief that the Principles are the most appropriate tool for establishing a fair and secure legal framework that led to the inclusion of references to them in the ICC model contracts.

What might give rise to occasional problems are clauses that protect a party against unfairness of the other party to an extent that traders would normally consider excessive, especially where this would tend to jeopardize the principle ofpacta[Page63:]sunt servanda.16 The rules giving arbitrators or courts the possibility to adapt the contract in case of gross disparity (Article 3.10) and hardship (Article 6.2.3) are good examples.

As regards Article 3.10, the principle that a party may invoke its 'improvidence, ignorance, inexperience or lack of bargaining skill' as a reason for avoiding a contract that gives the other party an excessive advantage is difficult to reconcile with the principle that professional traders engaged in international trade cannot argue that they were not aware of the contractual obligations to which they have agreed.17

As regards the rules on hardship, the most controversial aspect of the solution proposed in the UNIDROIT Principles is the power given to the courts (or arbitrators) under Article 6.2.3(4)(b) to adapt the contract with a view to restoring its equilibrium. Most business people would never agree to include such a provision in their contracts because they believe that the parties should have control over possible adaptations to the contract:18 if they cannot arrive at an agreement through renegotiation, then termination is preferable. This is why the ICC Hardship Clause 2003 does not provide for adaptation by the courts, if renegotiation fails, but only termination of the contract.19

These are two examples of provisions in the UNIDROIT Principles that cannot, with absolute certainty, be regarded as conforming to the general principles and trade usages of international trade. The drafters of the ICC models chose to avoid too rigid a position (i.e. by expressly excluding certain provisions of the Principles20), preferring a more flexible approach where arbitrators are to verify the compliance of the Principles with general principles and trade usages.

2. The ITC models

Consideration will be given to the Contract for the International Commercial Sale of Perishable Goods and the Contractual Joint Venture Model Agreement.

The ITC Model Contract for the Commercial International Sale of Perishable Goods contains the following clause on applicable law:

14. Applicable Rules of Law

In so far as any matters are not covered by the foregoing provisions, this Contract is governed by the following, in descending order of precedence:

The United Nations Convention on Contracts for the International Sale of Goods

The UNIDROIT Principles of International Commercial Contracts, and

For matters not dealt with in the above-mentioned texts, the law applicable at ____________ or, in the absence of a choice of law, the law applicable at the Seller's place of business through which this Contract is to be performed.

Like the ICC clauses, this ITC clause ranks the various rules in descending order. However, it places the CISG in first position, followed by the UNIDROIT Principles and then the domestic law chosen by the parties or, in the absence of such a choice, the law of the seller. Although some room is allowed for the applicable domestic law, this is likely to be limited, given that the main issues regarding the obligations of the parties under the sales contract are covered by the CISG and other issues relating to contract law by the Principles. The solution adopted here thus takes into account the need for a truly international legal framework capable of [Page64:] ensuring a high degree of uniformity and certainty, while avoiding reference to lex mercatoria, which could create problems in some jurisdictions.

As for the ITC Contractual Joint Venture Model Agreement,21 it is stated as follows in Article 31.3:

In the interpretation and application of the Parties' rights and obligations under this Agreement, due weight shall be given to applicable practices in international trade. When defining these practices, reference shall be made,inter alia , to the UNIDROIT Principles of International Commercial Contracts.

Whilst encouraging the application of the UNIDROIT Principles as trade usages,22 this ITC model takes a far more cautious approach than either the ICC models or the ITC Model Contract for the Commercial International Sale of Perishable Goods. This is probably due to the belief that in this type of agreement it is preferable to maintain the principle that the contract should be governed in the first place by the domestic law chosen by the parties (or determined by rules of private international law). The inclusion of the UNIDROIT Principles under the trade usages helps to ensure that, within the context of the applicable domestic law, due consideration is given to the needs and expectations of international traders.

On the basis of the above clause, the UNIDROIT Principles will be capable of filling gaps in the applicable law, particularly with regard to more 'international' issues, such as relations between the interest rate and the currency agreed by the parties. Where an issue is dealt with in both the domestic law and the UNIDROIT Principles, the final outcome is less sure, but it is likely that the Principles, as trade usages, would prevail over the former in such instances.

V. Conclusion

The above examples show how the incorporation of the UNIDROIT Principles in international model contracts can become an essential tool in creating a secure and balanced legal framework for cross-border contracts. As such, the UNIDROIT Principles can be considered as an invaluable achievement for the development of international trade law, and can be expected-and deserve-to be used more widely for this purpose in the future.

1
The Preamble goes on to say that the Principles 'may' be applied when the parties have agreed upon lex mercatoria, have not chosen any law, etc.

2
See e.g. the cases published on the web site UNILEX on CISG and UNIDROIT Principles, <www.unilex.info>.

3
Award of 25 January 2002 of the Arbitration Court of the Lausanne Chamber of Commerce and Industry (abstract published on the UNILEX website).

4
Award 11/2002 of the International Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (abstract published on the UNILEX website).

5
e.g. ICC case 7110 (partial awards of 1995, 1998 and 1999, (1999) 10:2 ICC ICArb. Bull. 39), where the contract referred to 'natural justice'.

6
See e.g. award of 5 June 1996 in ICC case 7375, published on the UNILEX website.

7
See e.g. award of 1996 in ICC case 8331, (1999) 10:2 ICC ICArb. Bull. 65; award A-1795/51 of 1 December 1996 of the Camera Arbitrale Nazionale e Internazionale di Milano; ad hoc arbitration, 21 April 1997; award 116 of 20 January 1997 of the International Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (all published on the UNILEX website).

8
In this respect, they differ fundamentally from other rules proposed for incorporation (e.g. Incoterms), which tend to deal with rather specific issues.

9
This might well be the case with respect to the provisions regarding limitation periods (Articles 10.1-10.11 of the Principles).

10
For instance, there is a difference between the excessive advantage of Article 3.10 of the UNIDROIT Principles and the disproportion between the obligations of the parties in excess of 50% contemplated in Article 1448 of the Italian Civil Code. Likewise, the requirements for avoidance/rescission of the contract under Article 3.10 (taking unfair advantage of the party's economic needs, improvidence, inexperience, lack of bargaining skill, etc.) and those of Article 1448 (taking advantage of the state of need of the other party) are different.

11
See e.g. the award of 1999 in ICC case 9479 and of 2000 in ICC case 10022, (2001) 12:2 ICC ICArb. Bull. 67, 100; the awards 229/1996 of 5 June 1997 and 302/1997 of 27 July 1999 of the International Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (abstracts published on the UNILEX website).

12
Award of 1996 in ICC case 8502, (1999) 10:2 ICC ICArb. Bull. 72.

13
While the possibility of conflict with domestic laws having a close connection with the contract should be limited to 'internationally' mandatory rules (lois de police and the like)-a situation rather unlikely to occur in the context of general rules on contracts.

14
See: A. Mourre & E. Jolivet, 'La réception des Principes d'UNIDROIT dans les contrats modèles de la Chambre de Commerce Internationale' Unif. L. Rev. 2004-2, 275. On the ICC models in general see H. van Houtte, 'ICC Model Contracts' RDAI/IBLJ 20033, 253.

15
ICC Model Agency Contract, 2d ed. (ICC Publication 644); ICC Model Distributorship Contract (sole importer-distributor), 2d ed. (ICC Publication 646); ICC Model M&A Contract I: Share Purchase Agreement (ICC Publication 656); ICC Model Selective Distributorship Contract (ICC Publication 657); ICC Model Contract for the Turnkey Supply of an Industrial Plant (ICC Publication 653). The wording of the clause is slightly different in the last-mentioned model.

16
In dealings between professional traders, who are supposed to be able to correctly measure the appropriateness of their transactions, it is felt by the business community that overprotection against unfairness might be too easily abused by those who simply wish to avoid a deal that is no longer convenient.

17
See e.g. No. 1.9 (Presumption of professional competence of parties) in the CENTRAL List of lex mercatoria principles, rules and standards, <www.tldb.de>.

18
The idea that a third party may re-establish the balance of rights and duties between the parties is considered unacceptable by most traders. It is therefore likely that the rule in question would be considered by an experienced arbitrator as not conforming to trade usages and general principles of lex mercatoria.

19
A. Mourre & E. Jolivet, supra note 14 at 28, maintain that, apart from the Model Contract for the Turnkey Supply of an Industrial Plant, the ICC Models incorporate the UNIDROIT provisions on hardship instead of the ICC Hardship Clause 2003. This is not entirely correct. The ICC Models incorporate the UNIDROIT Principles only to the extent the latter comply with the general principles of lex mercatoria and trade usages and one of the doubtful cases is precisely the provision on hardship. This is not written in the ICC Models, but the Introduction (e.g. § 5 of the Introduction to the Model Distributorship Contract, footnote 5) expressly mentions as one of the provisions of the UNIDROIT Principles that may not actually reflect the expectations of international traders, and may consequently be disregarded, Articles 6.2.1-6.2.3 on hardship, 'particularly with regard to the rule authorizing courts to modify the contract terms'.

20
The only exception is found in the ICC Model Contract for the Turnkey Supply of an Industrial Plant, where the provisions of the UNIDROIT Principles on hardship have been expressly excluded.

21
See M. Schneider, J.-P. Vulliety & C. Olsburg, 'International Joint Ventures' International Trade Forum 4/2002, 10; J.-S. Roure, 'Joint Venture Contracts: Fifty-five Minds for a Model' International Trade Forum 4/2002, 11; J.-P. Vulliéty, 'Le contrat-type pour les Joint Ventures contractuelles du Centre du Commerce International au regard des Principes d'UNIDROIT et d'autres normes d'unification du droit des contrats' Unif. L. Rev. 2004-2, 295.

22
It should be noted that the French text uses the word 'usages'. We can therefore assume that the term 'practices' actually means trade usages.