Advantages of arbitration in the application of the UNIDROIT Principles in the United States

There are several reasons for preferring arbitration to litigation in a US court if the UNIDROIT Principles of International Commercial Contracts are to be applied. Apart from the international perspective characteristic of arbitrators, arbitral proceedings avoid some of the difficulties that the Principles would pose for a US court. These concern discovery, hardship, mandatory rules and formation.

Many contract disputes involve interpretation. In such cases, if there are questions about the relevance of the negotiations leading up to the contract, is there any way of restraining parties in an American court from demanding discovery - not just production of documents, but interrogatories and depositions relating to the negotiations? The answer lies in the 'plain meaning rule', which at least enables a judge who thinks that the language is clear to decide there is no need for discovery on the issue of interpretation.

The UNIDROIT Principles state that '[a] contract shall be interpreted according to the common intention of the parties' (art. 4.1) and that 'regard shall be had to all the circumstances, including . . . preliminary negotiations between the parties' (art. 4.3). If a US court were called upon to apply this provision, it would be very difficult for it to refuse discovery relating to interpretation, on the ground that the meaning is plain. In my view this is a significant difficulty.

In the event of hardship, defined as a situation 'where the occurrence of events fundamentally alters the equilibrium of the contract' (art. 6.2.2), the UNIDROIT Principles allow the disadvantaged party to request negotiations and, upon failure to reach an agreement, either party to resort to a court, which may either terminate the contract or adapt it so as to restore its equilibrium. Whether US courts would be willing to undertake that task is an open question. The courts normally consider their function as one of interpretation and application of contracts, not reformation of them. Perhaps a court would appoint a Special [Page22:] Master to undertake this. One simply does not know. This therefore is another possible difficulty with the Principles if they were to find their way into a US court.

Finally, there are a few mandatory rules in the UNIDROIT Principles. How does this square with the fact that the Principles are to apply by the agreement of the parties? In my view, this is likely to trouble a US court. A similar difficulty arises out of the Principles' rules on the formation of contracts: how can rules on formation govern the contract if they are, so to speak, preliminary to the existence of the contract?

The Principles in arbitral practice

Having given some reason for preferring arbitration as a forum for applying the UNIDROIT Principles, I turn to how these Principles have been handled by arbitrators. My study will be based on some three dozen awards, including but not limited to ICC awards, drawn mainly from the UNILEX database on the UNIDROIT Principles edited by Professor Bonell. 2 It will be structured around the purposes set out in the Preamble to the Principles and will attempt to show the extent to which arbitral practice fulfils those purposes.

The most important conclusion that should be highlighted at the outset is that arbitrators really do regard the UNIDROIT Principles as a representative statement of general principles of international contract law or, if you will, lex mercatoria. According to a study entitled Central Enquiry, the results of which appear in the Bulletin of the Swiss Arbitration Association, 3 practitioners frequently tend to avoid the term lex mercatoria and prefer to make reference to the UNIDROIT Principles. In the United States, lex mercatoria tends to conjure up images of strange civil law conceptions, which explains why in common law countries in general and the United States in particular, people are happier thinking of the UNIDROIT Principles. Unlike lex mercatoria, we can hold the Principles in our hands.

I turn now to the Principles' stated purposes to see how each is reflected in arbitral practice.

i) 'These Principles set forth general rules for international commercial contracts.'

In the award on preliminary issues in ICC case 7375, it is reported that the arbitration clause provided that the arbitrator was not bound to apply the substantive law of any jurisdiction when interpreting the contract. Under the ICC Rules of Arbitration, the arbitral tribunal decided to apply 'general principles of law and the general principles of equity commonly accepted by the legal systems of most countries', stating the UNIDROIT Principles to be 'a reliable source' of such principles 'that have enjoyed universal acceptance' and 'have consistently been applied in arbitral practice'.

In ICC arbitration 7110, 4 after finding 'that the general legal rules and principles, enjoying wide international consensus, applicable in international contractual obligations . . . are primarily reflected by the UNIDROIT Principles', the arbitral tribunal went on to explain why it considered the UNIDROIT Principles 'to be the central component of the general rules and principles regarding international contractual obligations and enjoying wide international consensus'. [Page23:]

In a decision of the United Nations Compensation Commission, 5 the panel referred to the UNIDROIT Principles as among the 'relevant rules of international law'.

In an award made in a Berlin arbitration in 1990, 6 prior to the publication of the UNIDROIT Principles, the tribunal referred to their draft provisions on hardship as evidence of the increasing international support for that principle.

A different view is taken in two more recent ICC awards. In case 9419, 7 the tribunal refused to apply the Principles because 'they cannot constitute a normative body in themselves that can be considered as an applicable supranational law to replace a national law, at least as long as the arbitrator is required to identify the applicable law 8 by choosing the rule of conflict that he considers most appropriate'. In the second award, in case 9029, 9 the tribunal refused to apply the Principles on the ground that 'at present there is no necessary connection between the individual principles and the rules of the lex mercatoria'.

ii) 'They shall be applied when the parties have agreed that their contract be governed by them.'

The following four cases implemented this purpose.

Three of the cases involved contracts that contained no choice-of-law clause. In a case brought before the Milan National and International Arbitration Court, 10 the parties agreed at the outset of the proceedings that the dispute would be settled 'in conformity with the UNIDROIT Principles tempered by recourse to equity'. In a case handled by the Chamber of Commerce and Industry of the Russian Federation, 11 the parties agreed, when the dispute arose, that the arbitral tribunal should apply the UNIDROIT Principles to resolve any question not resolved in the contract. The third case was an ad hoc arbitration in Paris, 12 in which the parties agreed, when the dispute arose, that the tribunal should apply Russian law 'if necessary supplemented by the UNIDROIT Principles'. In the fourth case, ICC case 8331, 13 the parties agreed that the UNIDROIT Principles should be applied 'to the extent that the Arbitral Tribunal finds it necessary and appropriate'.

iii) '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.'

In interpreting the expressions 'general principles of law' and 'lex mercatoria', arbitrators have been very receptive to the UNIDROIT Principles. In ICC case 8264, 14 the contract contained a clause choosing Algerian law and authorizing the arbitral tribunal to take into account the 'the general principles of law and the usages of international trade'. In so doing, the arbitrators looked at the UNIDROIT Principles.

Guidance was likewise sought from the UNIDROIT Principles in two other ICC cases. In case 8874, 15 an arbitrator who had been given the powers of amiable compositeur made reference to the interest rate recommended by the UNIDROIT Principles. In case 7365, 16 the contract contained a clause choosing the law of Iran. The parties subsequently agreed that general principles of international law and trade usages should be applied in addition, causing the tribunal to be guided by the UNIDROIT Principles. [Page24:]

In a 1995 LCIA case 17 involving a contract which provided for the settlement of disputes on the basis of 'Anglo-Saxon principles of law', rather than go back to 1066, the arbitrators looked to the UNIDROIT Principles to find out what Anglo-Saxon principles of law might be.

When parties refrain from choosing a national law, this may be interpreted as a negative choice justifying the application of general principles. In ICC case 7110, 18 the tribunal explained, in its first partial award, that although a draft clause providing for the application of the Principles 'when the parties have not chosen any law to govern their contract' was abandoned in the final version of the contract lest it be conducive to 'pre-empting the application of the domestic law of the national legal system rendered applicable by private international law rules', the fact that six out of nine contracts contained references to 'natural justice' and the 'negative choice' by the parties, who refrained from choosing any national law, justified the application of 'general legal rules and principles, enjoying wide international consensus, applicable in international contractual obligations'. In a later partial award 19 in the same case, the tribunal looked to the UNIDROIT Principles, including their provisions relating to the mitigation of damages. The first partial award in ICC case 7110 was followed in another ICC case, 7375, 20 where it was stated that 'the absence of a choice-of-law clause must be understood as a so-called "implied negative choice" of the Parties . . . in the sense that none of the Parties' national laws should be imposed' and, for this reason, the tribunal should consider the UNIDROIT Principles at least 'as far as they can be considered to reflect generally accepted principles and rules'.

Similar reasoning is found in ICC case 5835, 21 where the tribunal referred to the UNIDROIT Principles as 'principles generally applicable in international commerce', considering this 'particularly justified in view of the fact that the Parties refrained from choosing explicitly Kuwaiti law'.

As the above cases illustrate, negative choice of law leads to internationalization to fill a vacuum left when there is no explicit choice of law by the parties. This may be of practical appeal to arbitrators. Fabio Bortolotti 22 cites the example of an arbitrator, faced with the possible requirement of applying a foreign law which happens to be that of a co-arbitrator. Such an arbitrator would find it easier to refer to more neutral principles, the application of which would not place him or her in a position of inferiority with regard to the co-arbitrator.

iv) 'They may provide a solution to an issue raised when it proves impossible to establish the relevant rule of the applicable law.'

This purpose is well illustrated by an ad hoc arbitration in Auckland, New Zealand, in 1995. 23 Here, New Zealand law was applicable. The tribunal referred to the UNIDROIT Principles because that law was 'in a somewhat unsettled state' and 'there could be no more definitive contemporary statement governing the interpretation of contractual terms'.

Not unconnected with this purpose is the frequent practice of referring to the UNIDROIT Principles in support of the application of domestic law in an international context. For instance, in ICC case 8486, 24 Dutch law was applicable and the tribunal referred to the UNIDROIT Principles on the ground that the application of Dutch law in an international context required attention to be given to the prevailing view in the field of international commercial contracts. [Page25:]

In a Zurich Chamber of Commerce arbitration, 25 in which Swiss law was applicable, the arbitral tribunal referred to the UNIDROIT Principles to show that the interpretation rule that it applied 'reflects a . . . worldwide consensus'. A similar reference intended to provide international confirmation of a rate-of-exchange rule under Swiss law is found in ICC case 8240. 26 The arbitral tribunal in ICC case 9333 27 quoted an author's reference to the UNIDROIT Principles in support of its decision on interest pursuant to Swiss law.

Reference was made to the UNIDROIT Principles in ICC case 8540 28 to show that a provision in New York law relating to the enforceability of an agreement to negotiate in good faith was consistent with general principles of law.

In an arbitration conducted under the auspices of the Arbitral Court of the Economic Chamber and the Agrarian Chamber of the Czech Republic, 29 in which Polish law was applicable, the tribunal referred to the UNIDROIT Principles to lend international support to its conclusion regarding the effect of payment by a third person.

References to the UNIDROIT Principles are found in ICC case 8223 30 to confirm a decision reached under French law and in an ad hoc arbitration in Helsinki, Finland, 31 to confirm a finding made pursuant to Nordic contract law.

An ICC arbitral tribunal 32 applying the Italian Civil Code referred to the UNIDROIT Principles to support its application of the principle of good faith to a 'contract of an international nature'.

In another ICC case, 9593, 33 an arbitral tribunal applying the law of the Ivory Coast drew support from the UNIDROIT Principles to impose an obligation of cooperation.

In the above examples the Principles serve to validate a rule in domestic law by showing it to be consistent with international standards. The question remains open as to what would happen if Dutch, Swiss, New York, Polish, French or Italian law, or Nordic contract law, or the law of the Ivory Coast said one thing and the Principles said another thing. Would arbitrators feel free to use the Principles to override domestic law? The awards studied provide no answer. In my view, it is likely to be no.

v) 'They may be used to interpret or supplement international uniform law instruments.'

In ICC case 8128, 34 the UNIDROIT Principles were used to supplement the United Nations Convention on Contracts for the International Sale of Goods (CISG), as the latter did not determine the rate interest.

The examples of the use of the Principles to interpret or support international uniform law instruments are more numerous. More often than not, they relate to CISG, whose general principles, according to one ICC arbitral tribunal, 35 are 'now contained in the UNIDROIT Principles of International Commercial Contracts'.

In two awards made under the auspices of the Austrian Chamber of Commerce, 36 the tribunal quoted the UNIDROIT Principles when applying CISG's principle of full compensation in order to underpin its reference to interest at the rate in the creditor's country. Reference is also made to the [Page26:] Principles on the question of interest rate in ICC case 8769, 37 in which the underlying contract provided for the application of French law and CISG.

In ICC case 9117, 38 the tribunal confirmed the results it reached pursuant to CISG by discussing at length the provisions on merger clauses and written modification clauses in the UNIDROIT Principles, noting that these 'are said to reflect a worldwide consensus in most of the basic matters of contract law'.

Can the Principles be considered as usages?

A further function not originally contemplated in the list of purposes set out in the Preamble to the Principles is their role as usages. Arbitrators are divided in their opinions on this question.

In ICC case 8502, 39 the underlying contract contained no choice-of-law clause but referred to international trade usages. Here, the tribunal applied 'trade usages and generally accepted principles of international trade', including the UNIDROIT Principles 'as evidencing admitted practices under international trade law'.

In an ad hoc arbitration in Buenos Aires, Argentina, 40 there was likewise no choice-of-law clause in the underlying contract. However, the parties had authorized the arbitrators to act as amiables compositeurs. Although the parties based their claims on Argentinian law, the tribunal applied the UNIDROIT Principles as prevailing over domestic law on the ground that they constituted 'usages of international trade reflecting the solutions of different legal systems and of international contract practice'.

In an ad hoc arbitration in Rome, 41 Italian law had been chosen in the contract. The Italian Code of Civil Procedure requires a tribunal in an international arbitration to take account of trade usages. The tribunal repeatedly referred to the UNIDROIT Principles, which it described as a 'parameter of the principles and usages of international trade', to show that the solutions provided in Italian law were consistent with international standards.

Arbitrators in certain other cases took an opposite view. In ICC case 8873, 42 where Spanish law was chosen to govern a construction contract, to the exclusion of any other law, the contractor tried to invoke the provisions of the UNIDROIT Principles on hardship on the ground that they were trade usages. However, this was refused by the tribunal, which held that the Principles at that time did not correspond to current practices in international trade.

A further refusal to consider the UNIDROIT Principles as trade usages is found in ICC case 9029. 43 Here, Italian law was designated as applicable in the contract for financing an aeronautical project between Italian and Austrian parties. The Austrian party invoked the provisions of the UNIDROIT Principles on gross disparity and hardship, claiming them to be trade usages. The tribunal refused to apply those provisions on the ground that 'recourse to the Principles is not purely and simply the same as recourse to an actually existing international commercial usage'.

The Principles in the practice of the courts

Although arbitral tribunals are the chief source of decisions relating to the UNIDROIT Principles, courts in some jurisdictions have also contributed to this increasing body of case law. [Page27:]

Australia

The Australian cases concern duties of good faith in contract performance. In Hughes Aircraft Systems International v. Airservices Australia, 44 the dispute involved a Californian company and an Australian government agency and arose from a contract relating to bidding procedure. In determining whether to follow English law, under which there is no implied duty of good faith performance, or American law, under which there is such a duty, the Federal Court observed that good faith 'has been propounded as a fundamental principle to be honoured in international commercial contracts', citing the UNIDROIT Principles. This decision was referred to by the Supreme Court of New South Wales in Alcatel Australia Pty Ltd v. Scarcella, 45 which concerned a long-term rental contract. The issue of good faith came before the Supreme Court of New South Wales again in 1999, 46 this time in relation to construction contracts. The contracts laid upon the parties an obligation to 'make diligent and good faith efforts' to resolve disputes before commencing mediation. In determining the extent to which this imposed an objective standard of good faith, the Supreme Court quoted the UNIDROIT Principles, including its commentary, as incorporating an objective standard and mentioned 'the interest generated by international instruments such as the UNIDROIT Principles . . ., which specifically refer to a requirement of "good faith"'.

France

In 1996, the Court of Appeal of Grenoble 47 delivered a decision on a French carrier's limitation of liability clause in a dispute between French and American parties. In interpreting the clause it relied upon the rules of interpretation contained in the UNIDROIT Principles.

Applying CISG in a dispute between a French buyer and a German seller, the Court of Appeal of Grenoble 48 considered CISG's default rule regarding place of payment under a contract for the sale of goods to be an example of the more general default rule on place of payment in the UNIDROIT Principles.

Other

In upholding, under its 'circumscribed' jurisdiction, a foreign arbitration award in favour of an Iranian agency and against an American company, an American federal trial court 49 noted that the tribunal's reference to and application of the UNIDROIT Principles did not exceed the terms of the submission to arbitration and therefore did not violate the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

A Dutch court in Zwolle, 50 delivering a judgment in a case in which CISG was applicable as part of French law, cited the UNIDROIT Principles to support its application of a broader definition of good faith than that prevalent in French law.

Finally, a passing reference to the Preamble of the UNIDROIT Principles is found in a decision of the Supreme Court of Venezuela 51 when discussing the meaning of 'international contract'.

Conclusion

In my view, the most noteworthy point that emerges from this brief survey of case law relating to the role of the UNIDROIT Principles is that arbitrators consistently regard the Principles as a statement of general principles of law, which is quite remarkable given that they date merely from the mid-1990s.

1
This paper has been drafted by Virginia Hamilton on the basis of the outline provided by Professor Farnsworth for the ICC/UNIDROIT 2001 seminar and the transcript of his speech.

2
M.J. Bonell et al., eds., UNILEX - International Case Law & Bibliography on the UNIDROIT Principles (Ardsley, NY: Transnational, 2000) [hereinafter UNILEX/UNIDROIT Principles]. See also www.unilex.info

3
K.P. Berger, 'The Central Enquiry on the Use of Transnational Law in International Contract Law and Arbitration - Selected Results from the First Worldwide Survey on the Practice of Transnational Commercial Law' [2000] ASA Bulletin 654 at 660. The survey was based on a questionnaire sent out to 2,733 practitioners in many different countries. Data were used from 639 of the 808 answers received.

4
(1999) 10:2 ICC ICArb. Bull. 39, UNILEX/UNIDROIT Principles D.1995-1, www.unilex.info

5
UN Compensation Commission, No. S/AC.26, 23 September 1997 UNILEX/UNIDROIT Principles C.1997-7, www.unilex.info

6
UNILEX/UNIDROIT Principles C.1990-1, www.unilex.info

7
(1999) 10:2 ICC ICArb. Bull. 104, UNILEX/UNIDROIT Principles D.1998-8, www.unilex.info

8
In this case, French law.

9
(1999) 10:2 ICC ICArb. Bull. 88, UNILEX/UNIDROIT Principles D.1998-2, www.unilex.info

10
Case No. A-1795/51, 1 December 1996, UNILEX/UNIDROIT Principles C.1996-8, www.unilex.info

11
Case No. 116, 20 January 1997, UNILEX/UNIDROIT Principles C.1997-1, www.unilex.info

12
21 April 1997, UNILEX/UNIDROIT Principles C.1997-3, www.unilex.info

13
(1999) 10:2 ICC ICArb. Bull. 65, UNILEX/UNIDROIT Principles D.1996-13, www.unilex.info

14
(1999) 10:2 ICC ICArb. Bull. 62, UNILEX/UNIDROIT Principles D.1997-4, www.unilex.info

15
(1999) 10:2 ICC ICArb. Bull. 82, UNILEX/UNIDROIT Principles D.1996-12, www.unilex.info

16
UNILEX/UNIDROIT Principles C.1997-5, www.unilex.info

17
UNILEX/UNIDROIT Principles C.1995-1, www.unilex.info

18
See supra note 3.

19
(1999) 10:2 ICC ICArb. Bull. 39 at 56, UNILEX/UNIDROIT Principles D.1998-5, www.unilex.info

20
UNILEX/UNIDROIT Principles D.1996-2, www.unilex.info

21
(1999) 10:2 ICC ICArb. Bull. 33, UNILEX/UNIDROIT Principles D.1996-3, www.unilex.info

22
F. Bortolotti, 'The UNIDROIT Principles and the Arbitral Tribunals' (2000) 5 Unif. L. Rev. 141 at 142.

23
UNILEX/UNIDROIT Principles C.1995-4, www.unilex.info

24
(1999) 10:2 ICC ICArb. Bull. 69, UNILEX/UNIDROIT Principles D.1996-14, www.unilex.info

25
UNILEX/UNIDROIT Principles D.1994-3, www.unilex.info

26
(1999) 10:2 ICC ICArb. Bull. 60, UNILEX/UNIDROIT Principles C.1995-2, www.unilex.info

27
(1999) 10:2 ICC ICArb. Bull. 102, UNILEX/UNIDROIT Principles D.1998-9, www.unilex.info

28
UNILEX/UNIDROIT Principles C.1996-4, www.unilex.info

29
17 December 1996, UNILEX/UNIDROIT Principles C.1996-10, www.unilex.info

30
(1999) 10:2 ICC ICArb. Bull. 58, UNILEX/UNIDROIT Principles D.1998-4, www.unilex.info

31
28 January 1998, UNILEX/UNIDROIT Principles C.1998-1, www.unilex.info

32
ICC case 8908, (1999) 10:2 ICC ICArb. Bull. 83, UNILEX/UNIDROIT Principles D.1998-7, www.unilex.info

33
(1999) 10:2 ICC ICArb. Bull. 107, UNILEX/UNIDROIT Principles D.1998-11, www.unilex.info

34
UNILEX/UNIDROIT Principles D.1995-3, www.unilex.info

35
Case 8817, (1999) 10:2 ICC ICArb. Bull. 75, UNILEX/UNIDROIT Principles D.1997-10, www.unilex.info

36
UNILEX/UNIDROIT Principles D.1994-1, D.1994-2, www.unilex.info

37
(1999) 10:2 ICC ICArb. Bull. 75, UNILEX/UNIDROIT Principles D.1996-11, www.unilex.info

38
(1999) 10:2 ICC ICArb. Bull. 96, UNILEX/UNIDROIT Principles D.1998-3, www.unilex.info

39
(1999) 10:2 ICC ICArb. Bull. 72, UNILEX/UNIDROIT Principles D.1996-7, www.unilex.info

40
10 December 1997, UNILEX/UNIDROIT Principles C.1997-9, www.unilex.info

41
4 December 1996, UNILEX/UNIDROIT Principles C.1996-9, www.unilex.info

42
(1999) 10:2 ICC ICArb. Bull. 78, UNILEX/UNIDROIT Principles D.1997-11, www.unilex.info

43
(1999) 10:2 ICC ICArb. Bull. 88, UNILEX/UNIDROIT Principles D.1998-2, www.unilex.info

44
(1997) 76 F.C.R. 151, UNILEX/UNIDROIT Principles D.1997-6, www.unilex.info

45
(1998) 44 N.S.W.L.R. 349, UNILEX/UNIDROIT Principles D.1998-6, www.unilex.info

46
Aiton Australia Pty v. Transfield Pty Ltd (1999), [1999] N.S.W.S.C. 996, UNILEX/UNIDROIT Principles D.1999-1, www.unilex.info

47
Société Simri v. Société Harper Robinson, UNILEX/UNIDROIT Principles D.1996-1, www.unilex.info

48
SCEA GAEC des Beauches Bernard Bruno v. Société Teso Ten Elsen GmbH & Co. KG, UNILEX/UNIDROIT Principles D.1996-6, www.unilex.info

49
US District Court, S.D. California, UNILEX/UNIDROIT Principles D.1998-10, www.unilex.info

50
UNILEX/UNIDROIT Principles D.1997-2, www.unilex.info

51
UNILEX/UNIDROIT Principles C.1997-8, www.unilex.info