Preliminary remarks

The above title contains two expressions - 'lex contractus' and 'choice of law' - that are such familiar and traditional ingredients of private international law that there is a risk of their being passed over and misunderstood, even by legally-trained international arbitration practitioners. Misunderstanding may arise for two main reasons:

(1) To the extent that generalizations are possible in a field so complex and confidential as international arbitration, it is fair to say that at least a substantial minority of international arbitrators display not only a definite - and quite understandable - reluctance to deal with questions of private international law, but also - which is less understandable - a surprising ignorance of that field of law. It is nonetheless a field which - notwithstanding the remarkable progress of international unification evidenced by the works of UNIDROIT, UNCITRAL and others - remains and will continue to remain of great practical importance.

(2) A second cause of misunderstanding and confusion is the increasing popularity of concepts such as lex mercatoria or transnational law and the very success of the UNIDROIT Principles of International Commercial Contracts.

Enthusiasm for globalization and international harmonization or unification of laws has led some practitioners all but to forget that conflicts of law may still and do occur and that mandatory national laws may still create serious or even insurmountable obstacles to the international recognition or enforcement of both contracts and awards.

A further remark should be made by way of a caveat. It is a curious paradox that in international arbitration the question of the law applicable to the merits of the dispute may be considered both as a fundamental and decisive problem and as a secondary issue of rather minor practical importance. Many, if not most, cases can be decided 'directly' by interpreting the terms of the contract in dispute and without any precise reference to the particular provisions of a given [Page78:] national law. We all know that in a large proportion of cases arbitrators feel it unnecessary, and perhaps dangerous or counterproductive, to mention or discuss questions of applicable law, if they can avoid it. Let it not be thought, however, that the absence of any such reference in the text of the award shows the arbitrator to have been unaware of the private international law context! Some of you may recall the advice given by the French politician Gambetta to his compatriots after the Franco-Prussian war of 1870, concerning the lost provinces of Alsace and Lorraine: 'N'en parlons jamais, mais pensons-y toujours.' 1 A number of international arbitrators would do well to keep such advice in mind when it comes to private international law!

Some private international law generalities

To understand whether, and in what circumstances, the UNIDROIT Principles may be chosen as the proper law of an international contract, and the meaning of such choice of law, it is worth recalling a few basic generalities about private international law.

1. The first point to be noted is that the principle of autonomie de la volonté, or contractual autonomy, in private international law now enjoys almost universal recognition in national legislations and case law and in conventions such as the Rome Convention on the Law Applicable to Contractual Obligations of 19 June 1980.

2. However, this does not mean that its precise meaning and scope are defined and understood in the same way all over the world - hence the possibility of a number of problems of real interest, both practical and theoretical. A number of these problems are briefly listed below.

(i) A traditional question is whether the parties are free to choose as the governing law a set of 'neutral' rules of law, i.e. a system having no objective connection with the facts of the particular case. No one today would hesitate to answer in the affirmative, subject to the specific question of the possible impact of the mandatory rules of another legal system.

(ii) Then there is the question of whether the autonomy of the parties to an international contract allows them to select as lex contractus, not a given national system of law taken as a whole, but only a part of it (i.e. the so-called 'splitting' method).

(iii) A third problem is whether, instead of choosing one or more state laws, the parties are allowed to choose some other body of rules, e.g. of private origin, such as the UNIDROIT Principles, or rules of a similar nature referred to by expressions such as 'general principles of law', 'transnational law' or 'lex mercatoria' and the like.

Present arbitral and judicial practice and recent legal literature suggest that the answers to these questions should now be yes.

(iv) A fourth and somewhat more controversial question is whether arbitrators have as much freedom as parties when the latter have not explicitly chosen the governing law. My personal response would be yes, for a variety of reasons including the fact that an error in law, and especially in the selection of the applicable lex contractus, is not a recognized ground for setting aside an arbitral award. There is a risk that this fact may well cause incautious or overconfident [Page79:] arbitrators to pay insufficient attention to the specific complexities of private international law and possibly also, in some cases, induce them to refer too readily to the UNIDROIT Principles. Subject of course to the specificities of the particular contractual dispute and to the attitude of the parties with respect to the applicable law, a prudent arbitrator should be mindful of the criticism levelled in recent decades at non-traditional solutions such as the application of general principles or lex mercatoria.

The following syllogism is a well-known example of such criticism: an international arbitrator has a duty to decide a dispute according to law (unless specially authorized to act as amiable compositeur); the so-called lex mercatoria is not 'law' in the usual sense of the term; hence an arbitral award cannot be based on lex mercatoria or on general principles derived from private comparative study, such as the UNIDROIT Principles. This kind of reasoning may well appear singularly dated today, in the light of recent legislation (e.g. article 1496 of the French New Code of Civil Procedure, or article 187 of the Swiss Private International Law Act) or decisions such as Norsolor and Valenciana.

To sum up, there is no longer any doubt that parties may choose to have their contracts governed by practically any rules of law they like and not just by national laws. The question remains as to whether the UNIDROIT Principles represent a valid choice. Since, to quote the words of the UNIDROIT Governing Council in 1994, the Principles are 'not a binding instrument' and have only 'persuasive authority', can they be considered and applied as 'rules of law' as this expression is understood in modern private international law?

Let me confess, perhaps bluntly, that I see little point in yet another theoretical debate on this issue. Nor, a priori, do I see great difficulty in responding positively to the question in general.

What is more interesting in the present context is to consider the relationship between the choice or choices made by parties regarding lex contractus, whether explicit or otherwise, and the solutions adopted by arbitrators. An obvious and simple way of proceeding is to deal successively with the following three situations, ranging from the simple to the problematic:

1. The parties have expressly chosen the UNIDROIT Principles as lex contractus, either in the contract itself or at an early stage of the arbitration. This is the most straightforward case.

2. The parties may be considered by the arbitrators to have chosen the UNIDROIT Principles as lex contractus tacitly or implicitly. Although less straightforward than the previous case, this situation is still fairly simple.

3. In the absence of a choice of law by the parties, be it explicit or tacit, can or should the UNIDROIT Principles be applied as lex contractus? Here arbitrators may encounter serious difficulties, as illustrated in Julian Lew's accompanying article. 2

1. Express choice

This situation, which is perhaps still comparatively rare but likely to increase in practice, calls for little comment or explanation. The earlier reference to the modern view of party autonomy in international contracts should suffice to show that arbitrators should respect an express and common choice of the Principles by [Page80:] the parties, just as they would any other choice-of-law clause, all the more so as, generally speaking, such a choice is likely to be much better suited to a transnational contractual relationship than the choice of a national law and also likely to be more in keeping with the equality of the parties in arbitration.

Two further brief remarks may be made which show how inseparable the situation discussed here is from the traditional problems of private international law.

Firstly, the express choice of the Principles as lex contractus may, in some cases, create conflicts with the mandatory rules, or what are sometimes misleadingly called lois d'application immédiate ou de police (laws of immediate application or for the maintenance of public order), of some country, e.g. that of the place of performance. Another, somewhat similar, difficulty might arise if the parties have chosen as lex contractus, not the whole of the UNIDROIT Principles, but only some of them, excluding for instance some of the provisions which the Principles themselves define precisely as mandatory. With regard to such difficulties, I need only refer to the standard treatises on private international law in their chapters on international contracts.

Secondly, and more interestingly, as has been pointed out by Professor Bonell in several of his authoritative writings, the UNIDROIT Principles are, by their very nature as a private restatement of the law, an 'ongoing and continuous exercise'. 3 In other words, they cannot be seen as fixed or static but are evolving, which sets them apart from national codes. Another of their distinctive features is that not all the provisions they contain can be considered to reflect universal or generally accepted principles and rules.

Does it follow that an express choice of the Principles as lex contractus is fundamentally different from - and less effective than - a standard choice-of-law clause, designating say Swiss or English law? The present context allows but a cursory answer to this question, which in any case should be no, for at least the following reason. No national system of law has ever been either complete or immutable and static. When a choice-of-law clause in a contract mentions for instance the law of France or the law of Guatemala, it must be interpreted as referring to a living law, including its future changes (hence the problem of the possibility or validity of so-called 'freezing clauses' in state contracts). In this respect, a choice-a-law clause referring to lex mercatoria or the UNIDROIT Principles is not fundamentally different; so there is no reason why, in exercising their autonomy, parties to an international contract could not select them as lex contractus or the proper law of the contract, notwithstanding their evolving character.

2. Tacit or implicit choice

Again, a brief look at the general private international law of contracts may be useful, all the more so since, as any experienced arbitrator should be able to confirm, the number of obscure and badly drafted contractual clauses does not seem to be decreasing.

Comparative private international law shows that the attitudes of courts and arbitral tribunals regarding the existence or otherwise of a tacit choice of law in a given case have varied or may vary. In theory, a tacit choice of law may be inferred from some isolated element or, better, from the combination of elements such as the language used by the parties, a choice of specific legal terms, the use of a particular currency, or a choice of the place of performance. [Page81:]

There is no denying that, in the absence of any explicit choice, the common intention of the parties regarding the applicable law can often be deduced with reasonable certainty. One fairly frequent reason for the absence of explicit terms is the inability of the parties to agree on the drafting or expression of that choice, together with the feeling that it is hardly worth delaying the final execution of the contract because of details of drafting, believed to have little or no practical importance. But it is equally true that some arbitrators and, maybe even more so, state judges have in the past been rather bold in reading in a contract a tacit choice of law when none really ever existed.

The ultimate illustration of such tendency is the old German theory of hypothetischer Parteiwille, which is not even a presumed tacit choice but a disguised objective connection. It is supposed to refer to the law that the parties, or reasonable persons in the same position as the parties - which is not exactly the same thing -, would have chosen as lex contractus if they had only given some thought to the question of choice of law. It is clearly a mistake to speak of the 'hypothetical will' of the contracting parties - hence the old, correct decisions (e.g. in Switzerland) which held that there could be no true tacit choice of lex contractus unless it could be shown that two conditions were fulfilled simultaneously: (1) that the parties had been aware of the problem of choice of applicable law and (2) that it had been their common intent to solve that problem (conscience et volonté).

Reference may also be made in this connection to article 3 of the 1980 Rome Convention on the Law Applicable to Contractual Obligations and article 116, § 2, of the Swiss Private International Law Act, which require that the choice of law must be clearly evident from the terms of the contract or the circumstances.

The lesson to be learned by international arbitrators from the general experience outlined above is that, since great caution must be exercised before interpreting vague contractual expressions as a tacit choice of a national system of law by the parties, then, a fortiori, arbitrators should be very wary of assuming that the UNIDROIT Principles have been implicitly chosen as lex contractus in the absence of an explicit reference to them. 4

3. Absence of choice

The third and most interesting situation to consider is when there has been no choice of lex contractus at all and the dispute has several more or less equal connections with different national systems, making traditional rules of conflict appear inappropriate.

A word should first be said about 'negative choice', which illustrates the difficulty sometimes encountered in distinguishing between absence of choice and tacit or implicit choice. As rightly observed by Klaus Peter Berger, 5 the notion of negative choice 'has met with great skepticism', unjustifiably so in my view. Practical experience proves that, in a not insignificant number of contractual situations, parties have in fact clearly agreed to exclude the application of any given national law, including even that of a third, neutral country, while being unable to agree on any satisfactory alternative or positive formula. This too is a variant of the parties' contractual autonomy, which amounts to leaving the arbitrator(s) with the perilous task of choosing the so-called lex contractus.

An arbitrator should give as much respect to a negative choice as to a positive one, whether the latter refers to national law or transnational rules or principles. In the [Page82:] case of negative choice, which must be distinguished from that of the absence of any choice (see below), it is difficult to imagine any more logical or appropriate solution than for the arbitrator to see this as a general reference to transnational principles or to lex mercatoria, of which the UNIDROIT Principles constitute a particularly valid and authoritative expression.

In an ICC award, 6 the parties merely referred to principles of 'natural justice'. This, to say the least, is not a very apposite formula, if only because it might be interpreted by some as verging dangerously on a reference to équité or even as conferring upon the arbitrator(s) the role of amiable compositeur. It is interesting to note that there is an analogy between negative choice, excluding any national law, and a clause providing for a decision in équité, which is very close to an exclusion of national law. If arbitrators are authorized to act as amiable compositeurs, it is conceivable that, in a given case, they would consult the UNIDROIT Principles and even apply them, to the extent they find them to express or accord with equitable principles.

Let us turn now to absence of choice strictly speaking. In the absence of a choice of law by the parties, whether express or tacit, the normal or traditional approach would be for the arbitrator(s) to find the most appropriate proper law or rules of law, either through a conflict rule or by the so-called direct method. As already stated, it is assumed there are equivalent connections (not necessarily territorial only) between the contract and/or the dispute and several (national) legal systems. In such a case, neither the concept of 'closest connection' (territorial or otherwise), nor reference to abstract concepts, such as natural justice, good faith or fairness, appear really helpful. The fact is that it is impossible to generalize and offer all-purpose, ready-made solutions: much, if not everything, depends on the positions and arguments adopted by the parties and their counsel before the arbitral tribunal.

As general and abstract answers are to be avoided, due to the risk of their being misleading, we have preferred to use concrete situations when considering how international arbitrators could, and perhaps should, react when counsel find it advisable and advantageous for the parties they represent to argue that the tribunal should apply the UNIDROIT Principles to the entire dispute or particular issues. These situations will be discussed by Julian Lew in his accompanying article. 7 By way of introduction I would make the following five brief remarks:

(i) The Preamble to the Principles, which describes their purposes, states amongst other things that they 'may provide a solution to an issue raised when it proves impossible to establish the relevant rule of the applicable law' (our emphasis). The accompanying commentary, which deals first with situations where the parties have made an express choice of law referring to the Principles or lex mercatoria, says little or nothing about absence of choice. However, it mentions that recourse to the Principles 'may be justified' 'as a last resort' by the impossibility or excessive cost of establishing the relevant rule of the applicable law. 8

Although an interesting hypothesis, this is obviously more limited and specific than the one we are dealing with here, i.e. the absence of any choice of law. For instance, the question should be asked: when it is quite possible in a given case to establish the relevant rule of the applicable law, which has not been invoked by the parties, can or should the arbitrator(s) have recourse to general principles or the UNIDROIT Principles (or some of them) in the belief that they are more appropriate or better adapted to the case? [Page83:]

(ii) I am assuming that the arbitrator(s) would not apply any rule or principle not invoked by the parties without offering them the opportunity to express their views on such a possible application. This observation, which, notwithstanding the old maxim jura novit curia, is of general relevance to arbitral procedure, is particularly important in the case of general principles of law or lex mercatoria, which, irrespective of their intrinsic merits, can hardly be likened to a binding instrument that would apply automatically even if not expressly chosen or accepted by the parties.

(iii) To avoid misunderstandings, one should keep in mind the classical distinction in private

international law between a choice of the applicable law or rules of law (i.e. submission to those rules or principles) and the incorporation of such rules or principles into the contract by reference.

(iv) It should also be remembered that, irrespective of whether arbitrators apply rules or principles on the basis of a choice - whether express or tacit - or in the absence of any choice, separate consideration must be given to the possible impact or effect of mandatory rules or some public policy.

(v) For the sake of simplicity, the Principles have so far been treated in their entirety, i.e. as if they constituted a coherent whole analogous to the body of law of a given state. This is so obviously not the case that this remark may seem gratuitous. In practice, it is unlikely that any counsel would dream of arguing that the UNIDROIT Principles, lex mercatoria or transnational law, etc. should be applied by the arbitrator(s) as a system.

What will rather happen and has actually happened is that individual Principles will be invoked. In many or most cases, this will inevitably result in a certain splitting of lex contractus. Hence, arbitrators will have to ascertain how to harmonize or reconcile the general principles they find applicable with other rules, be they the provisions of the contract, the usages of international trade or certain (non-mandatory) provisions of one or more national laws.

1
Translation: 'Let us never utter their names, but always keep them in our thoughts.'

2
See J.D.M. Lew, 'The UNIDROIT Principles as Lex Contractus Chosen by the Parties and Without an Explicit Choice-of-Law Clause: The Perspective of Counsel', hereinafter, pp. 85-94.

3
M.J. Bonell, An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts, 2d ed. (Ardsley, NY: Transnational, 1997) at 255

4
For a discussion of the gradually increasing number of reported awards in which the UNIDROIT Principles have been mentioned, and/or partly applied, on a variety of grounds (not all convincing), see the stimulating analyses by M.J. Bonell and K.P. Berger (e.g. K.P. Berger, 'International Arbitral Practice and the UNIDROIT Principles of International Commercial Contracts' (1998) 46 Am J. Comp. L. 129).

5
K.P. Berger, supra note 4 at 144.

6
Partial award of 1995 in case 7110, (1999) 10:2 ICC ICArb. Bull. 39.

7
See J.D.M. Lew, 'The UNIDROIT Principles as Lex Contractus Chosen by the Parties and Without an Explicit Choice-of-Law Clause: The Perspective of Counsel', hereinafter, pp. 85-94.

8
Comment § 5