Introduction

The present report is a follow-up to an initial article on the application of the UNIDROIT Principles of International Commercial Contracts in ICC arbitration,1 which was published in volume 10, no. 2 of this Bulletin. That article covered 23 cases decided between 1995 and 1998. 2 The present study covers the period from January 1999 to December 2000, during which the UNIDROIT Principles were applied in 14 ICC cases. 3 In light of the increasing interest in the UNIDROIT Principles, it has been thought that an update on the subject would be instructive and helpful.

To aid comparison, the same basic classification will be adopted in this report as in first one, where a distinction was made between application of the UNIDROIT Principles as the proper law of the contract, their application as a means of interpreting or supplementing applicable national law, and their use as a means of interpreting or supplementing international uniform law.

Applications of the UNIDROIT Principles

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I. The UNIDROIT Principles as the proper law of the contract (lex contractus)

In order to highlight the reasoning of international arbitrators, a distinction will be drawn between cases in which parties made an express reference to the UNIDROIT Principles and those in which no such choice was made. In the latter case, the choice was made by the arbitrators, pursuant to article 17 of the ICC Rules of Arbitration of 19984 or article 13 of the former (1988) version of the Rules.

1. Choice of lex contractus by the parties

In three of the new cases, the parties chose the UNIDROIT Principles as the governing law in their original contract or during the arbitration proceedings. 5 The Principles were here considered either as international trade usages, an expression of modern international commercial law, or general principles of law.

In case 9479 , the dispute concerned the interpretation of a trademark licensing agreement. During the proceedings, the respondent argued that the contract should be revised by replacing some of the agreed terms with those of Council Directive 89/104/EEC of 21 December 1988 to approximate the laws of the Member States relating to trademarks. The respondent pleaded it had suffered hardship, as defined in article 6.2.2 of the UNIDROIT Principles. 6 The arbitral tribunal found that the parties' express choice of New York law to govern their contract related only to its validity. No other national law having been agreed upon, the tribunal concluded that the contractual provisions and international trade usages should be applied to decide remaining contractual issues. It considered the UNIDROIT Principles to be an accurate representation of international trade usages and on this basis came to the conclusion that no hardship had been suffered.

In case 9474 , at the suggestion of the arbitral tribunal, the parties agreed on the application of 'the general standards and rules of international contracts'. In the arbitrators' view, there was no one convention directly expressing such principles. Whilst the United Nations Convention on Contracts for the International Sale of Goods (CISG) could be thought to embody universal principles of international contracts, its application to that particular case would have required the parties expressly to choose it in their contract. The arbitral tribunal also pointed to other more recent texts expressing current general standards and rules of commercial law which could equally have been used, such as the Principles of European Contract Law (PECL), the UNIDROIT Principles of International Commercial Contracts and domestic laws too, both common law and civil law (e.g. the Uniform Commercial Code of the United States).

The third case - 9797 - has already been the subject of much discussion in various publications. For present purposes, suffice it to say that in the final award the sole arbitrator eventually found the principles of contractual interpretation needed to decide the case embodied in the UNIDROIT Principles and PECL. 7 The former were further used to establish a number of important conclusions such as: (a) the 'member firms' implicit obligation to [Page52:] cooperate and to pursue their professional practice in accordance with the principles of good faith and fair dealing inherent to international contracts'; 8 (b) party Z's duty of best efforts 'to ensure cooperation, coordination and compatibility among the member firms' practices'; 9 (c) release of the parties from their obligation to carry out and receive further performance, upon termination of their contract; 10 and (d) the impossibility for party X to claim full compensation as defined in article 7.4.2 of the UNIDROIT Principles. 11

These cases show modern arbitration to be increasingly affected by the multiplication of general principles of contract law. In award 9797 the arbitrator felt it was necessary to refer to two sets of principles, which is in itself striking, since the case was a good example of global litigation, where the UNIDROIT Principles could have sufficed. There is a risk that such multiplication may undermine the UNIDROIT Principles and complicate choice-of-law problems in international arbitration. The phenomenon therefore needs to be monitored.

2. No explicit choice of law by the parties

The UNIDROIT Principles have been applied by arbitrators even where the parties did not expressly refer to them. 12 In such cases they are generally treated as an expression of lex mercatoria.

In case 9875 , the dispute turned on the interpretation of an exclusive licensing agreement between two companies, one from Western Europe, the other from Asia. According to the contract, the claimant was granted an exclusive right to sell the respondent's products in Europe. The claimant contended that the respondent had entered into a separate agreement with a third party breaching the initial exclusive agreement. There was no choice-of-law provision in the contract, and the arbitrators decided to deal with this question in a partial award. Using the objective method, they found there to be no significant connection, which, in the words of the arbitral tribunal, revealed 'the inadequacy of the choice of a domestic legal system to govern a case like this', covering the manufacture and sale of products in various parts of the world. Nor could the choice of Brussels as the seat of the arbitration lead to application of Belgian law. The only path open to the arbitral tribunal was to resort to lex mercatoria, defined as rules and usages of international trade originating from operators, arbitral decisions and institutions such as UNIDROIT. At the same time, however, the arbitral tribunal took account of relevant national laws concerning intellectual property rights issues raised during the proceedings.

II. The UNIDROIT Principles as a means of interpreting or supplementing applicable national law

The number of cases illustrating this category of application is on the increase. As noted in the previous report, such an application falls outside the scope of the Preamble of the Principles. It is a type of application that has been developed by arbitral practice in order to confirm a solution based on other legal grounds. Its effect is to give a transnational status to the application of a domestic law. A distinction will be made between cases in which the parties referred to the Principles and those in which the arbitral tribunal introduced the Principles without a specific request from the parties. 13[Page53:]

1. Application requested by parties

Growing awareness amongst parties of the existence of the Principles has led to their increasing use. Thus, arbitrators apply the Principles not only to reach a solution consistent with general principles of law, but also because this is the wish of the parties.

In case 9759 , the Principles were used to determine the validity of an arbitration clause in which a national law was chosen to govern the parties' contract. The parties disagreed in their interpretation of the arbitration clause, which they sought to elucidate during the arbitral proceedings by referring to the UNIDROIT rules of interpretation. Referring to articles 4.514 and 1.6(2) 15 of the Principles, the arbitral tribunal found that the parties had intended to resort to arbitration and that their arbitration agreement was valid.

Case 10114 concerned an after-sales agreement between an East European and a Chinese company, in which there was no choice of law. During the proceedings the Chinese claimant argued for the application of Chinese law, calling at the same time for the application of international practices, as expressed in the UNIDROIT Principles and CISG, noting that the latter concerns sales contracts only. The East European respondent contended that Chinese law should apply 'to the extent CISG, UNIDROIT or general principles of international trade law do not prevail over or complete the Chinese law'. The arbitral tribunal reasoned as follows: Chinese law is applicable by mutual consent; CISG is part of Chinese law and is applicable sub specie; the UNIDROIT Principles are rules of law within the meaning of article 17(1) of the ICC Rules. In its final decision it dismissed the claim for punitive damages as neither Chinese contract law nor the principles of international trade law contained any provision for such damages.

Another interesting illustration of the joint application of national law and transnational principles is found in case 9651 . The contract underlying the dispute between the parties was governed by Swiss law. However, it also contained a clause referring to 'justice, equity and good conscience', which led the respondent to refer to the UNIDROIT Principles as 'a useful guide in relation to such principles of justice and equity as are internationally acceptable'. The respondent was alleging that the claimant had obtained the contract by fraud and material misrepresentation. In order to decide difficult issues of contract interpretation, the arbitrators resorted to transnational principles, finding that principles of contract interpretation drawn from Swiss law were consistent with Indian law, 'all civilized jurisprudence' and the UNIDROIT Principles.

Case 10022 illustrates an application of the UNIDROIT Principles via the notion of trade usages and article 17(2) of the ICC Rules of Arbitration. 16 The claimant argued that since arbitrators are required to take into account international trade usages and since the UNIDROIT Principles are a codification of trade usages, the arbitrators should rely on the UNIDROIT Principles. This however begs the question of.what is meant by 'take account of trade usages', which has been and still is a source of much discussion amongst scholars. 17 It is also unclear whether or not the UNIDROIT Principles are a codification of trade usages. 18 Besides, they are not alone: as already mentioned, there are also the Principles of European Contract Law and other similar codifications may be developed in the future. Will the multiplication of such principles of uniform contract law lead arbitrators to multiply their references to them ad abundantiam? There would seem to be a tendency in this direction, without as yet any clear solution to the choice-of-law problems this will raise. 19

2. Application by arbitrators

In four cases a solution reached via the applicable national law was confirmed by reference to the UNIDROIT Principles. [Page54:]

In case 9594 , the arbitrators applied English law on mitigation of damages, noting that 'a similar standard has been established internationally, primarily in the UNIDROIT Principles'. In case 9753 , the sole arbitrator gave due consideration to the Czech Commercial Code as well as to broader principles such as pacta sunt servanda and the duty to cooperate in good faith as proper grounds for resolving the dispute. 20

More interesting than case 10346 , where there are brief references to the UNIDROIT Principles, articles 5.3, 21 1.7, 22 7.4.8, 23 and 7.3.1 on withholding performance, confirming solutions drawn from Colombian law, is the final award in case 10335 . Here, a shareholders agreement was interpreted according to Greek law, expressly chosen by the parties. The sole arbitrator showed the specific rules on interpretation contained in articles 173 and 200 of the Greek Civil Code to be common to most civil law systems. He thence showed these rules to be consistent with the UNIDROIT Principles since: '[m]odern international commercial law is evolving in the same direction (cfr., for example, articles 1.7, 1.824 , 4.1-4.325 of the UNIDROIT Principles of International Commercial Contracts)'. 26

These cases once again show the importance to arbitrators of a neutral set of transnational principles to underpin the validity of their decisions beyond applicable national law.

III. The UNIDROIT Principles as a means of interpreting or supplementing international uniform law instruments

Without entering into the continuing debate over national versus autonomous means of interpreting and supplementing international uniform law conventions, 27 we here simply note the techniques adopted by ICC arbitrators in this field. 28

In case 8547 , the arbitral tribunal used the UNIDROIT Principles to supplement the Uniform Law on the International Sale of Goods (ULIS), deciding that the respondent was entitled to stop payment because of the non-conformity of the goods delivered. It reached this conclusion on the basis of exceptio non adimpleti contractus, a concept reflected in article 7.1.3 of the UNIDROIT Principles, to which reference was made via article 17 of ULIS.

In case 7819 , where French law was applicable, the arbitral tribunal referred both to article 55 of CISG and to article 5.729 of the UNIDROIT Principles in order to conclude in favour of the [Page55:] validity of a sales contract lacking provisions on price. This case is noteworthy since the arbitrators did not refer to the Principles in order to interpret CISG, but rather used them to confirm a solution already expressed in CISG, which, as part of French law, was applicable in the case in question. By referring to the Principles, the arbitrators sought to demonstrate that a contract where the price is not expressly determined is valid and consistent with international commercial practice.

These two cases confirm the possible interplay between the UNIDROIT Principles and international uniform sales conventions.

IV. Exclusion of the UNIDROIT Principles

In none of the cases examined for the present report was the application of the Principles considered and ruled out. 30 They were always applied either pursuant to a request by at least one of the parties or due to a lack of choice of applicable law.

Conclusion

As far as the application of the UNIDROIT Principles as lex contractus is concerned, this seems to be more characteristic of very large economic arbitrations31 than small ones, which consistently prefer a traditional approach based on conflict of (national) laws.

Parties and arbitrators are increasingly aware of the possibility of applying the UNIDROIT Principles, particularly in conjunction with domestic law. 32 However, in some awards arbitrators tend to mix rules from different sources without explaining the reason for their selection, focusing instead on the solution of the issues. This approach can be condoned only from a pragmatic standpoint. Confusion in the choice-of-law process leads to a risk that arbitrators may fail to apply the proper law, which could be detrimental to the legal quality of their final product - the award.

Reference to different sets of general principles of contract law (UNIDROIT Principles, PECL, and whatever else may emerge around the world) may generate problems of 'conflicts of principles'. Whilst we may know how to solve conflicts of laws, 'conflicts of principles' are quite another matter and arbitrators would be well advised to use the technique of multisourcing with extreme caution.

Finally, as regards use of the UNIDROIT Principles to interpret and supplement international uniform law conventions, the predilection continues to be towards CISG. However, arbitral behaviour may change, as shown by cases 9474 and 7819. The latter, in particular, shows arbitrators using the Principles to confirm a solution already existing in CISG. Their reasons for doing so are that they will be sure that the CISG is in line with international practice and standards such as those expressed by the UNIDROIT Principles. Could this be a sign that CISG is beginning to age? Time will tell . . .

1
See F. Marrella & F. Gélinas, 'The UNIDROIT Principles of International Commercial Contracts in ICC Arbitration' (1999) 10:2 ICC ICArb. Bull. 26. For a fuller analysis of these issues, see F. Marrella, 'La nuova lex mercatoria. Principi UNIDROIT e usi dei contratti del commercio internazionale' in Trattato di diritto commerciale e di diritto pubblico dell'economia diretto da Francesco Galgano (Padova: CEDAM, forthcoming, 2002).

2
Although the UNIDROIT Principles were officially introduced in May 1994, no reference was made to them in an ICC arbitration until 1995.

3
This update also includes an award from 1997 (no. 7365), which was not included in the previous report.

4
ICC Publication 808, available from the Secretariat of the ICC International Court of Arbitration and on the ICC Court's web site: www.iccarbitration.org

5
Cf. case 8331 (1999) 10:2 ICC ICArb. Bull. 65, where the parties 'agreed that the Arbitral Tribunal shall apply the relevant agreements between the parties and, to the extent that the Arbitral Tribunal finds it necessary and appropriate, the UNIDROIT Principles of International Commercial Contracts of May 1994 shall be applied by the Arbitral Tribunal'. It may also be noted that during the period of reference a further partial award was rendered in case 7110. This case was considered in the first report, to which the reader is referred.

6
'Article 6.2.2 (Definition of hardship): There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.'

7
UNIDROIT Principles, art. 4.1(1) ('A contract shall be interpreted according to the common intention of the parties.') and Principles of European Contract Law (PECL), art. 5:101(1) ('A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words.') and, further, UNIDROIT Principles, art. 4.1(2) ('If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.') and PECL, article 5.101(3) ('If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.').

8
UNIDROIT Principles, art. 1.7: '(1) Each party must act in accordance with good faith and fair dealing in international trade. (2) The parties may not exclude or limit this duty.'

9
UNIDROIT Principles, art. 5.4.2: 'To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.'

10
UNIDROIT Principles, art. 7.3.1(1): 'A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance'; and art. 7.3.5(1): 'Termination of the contract releases both parties from their obligation to effect and to receive future performance.'

11
'(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.'

12
E.g. cases 7375, 8261, 8501, 8502, 8503. See F. Marrella & F. Gélinas, op. cit.

13
This distinction reflects that made in article 17(1) of the ICC Rules of Arbitration (1998).

14
'Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect.'

15
'Issues within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles.'

16
'In all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages.'

17
See Fouchard, Gaillard, Goldman, On International Commercial Arbitration, edited by E. Gaillard & J. Savage (Kluwer Law International, 1999) at 844ff; E. Gaillard, 'La distinction des principes généraux et des usages du commerce international' in Etudes offertes à Pierre Bellet (Paris: Litec, 1991) 203; F. S. Nariman, 'International Commercial Arbitration and the Rule of Law' (1991) 2:2 ICC ICArb. Bull. 7; A. Kassis, Théorie générale des usages du commerce (Paris: LGDJ, 1984).

18
See especially Final Award in case 8873 (1999) 10:2 ICC ICArb. Bull. 78, (1998) 125 J.D.I. 1017 (Annot. D.Hascher).

19
However, see the practical solution adopted in article 32-A of the ICC Model International Franchising Contract (ICC Publication 557, 2000) and the commentary on the model contract by E. Jolivet, 'Loi applicable et règlement des différends dans le contrat-modèle de franchise internationale CCI' [2000:4] Cahiers de droit de l'entreprise 30.

20
These principles are stated in articles 1.3 and 1.7 of the UNIDROIT Principles. Art. 1.3: 'A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles.' Art. 1.7: see supra note 9.

21
'Each party shall cooperate with the other party when such cooperation may reasonably be expected for the performance of that party's obligations.'

22
See supra note 8.

23
'(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.'

24
'(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. (2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such usage would be unreasonable.'

25
Art. 4.1: '(1) A contract shall be interpreted according to the common intention of the parties. (2) If such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.' Art. 4.2 : '(1) The statements and other conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention. (2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.' Art. 4.3: 'In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including: (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages.'

26
The use of 'for example' followed by a reference to the UNIDROIT Principles is becoming a technique commonly employed by arbitrators to show that their decision is in line not only with the applicable national law but also with principles enjoying wide international consensus. See also case 9651.

27
See e.g. P. Schlechtriem, ed., Commentary on the UN Convention on the International Sale of Goods (CISG), 2d ed. (Oxford: Clarendon Press, 1998) sub art. 7, and M. Gebauer, 'Uniform Law, General Principles and Autonomous Interpretation' (2000) 5 Unif. L. Rev. 683.

28
It is clear that if the lex contractus is a given national law, that law may incorporate specific international conventions.

29
'(1) Where a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price. (2) Where the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary. (3) Where the price is to be fixed by a third person, and that person cannot or will not do so, the price shall be a reasonable price. (4) Where the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute.'

30
Examples of previous cases where the UNIDROIT Principles were excluded are 8873, 9029 and 9419. See F. Marrella & F. Gélinas, op. cit.

31
E.g. 9797, where the amount in dispute was more than ten billion dollars.

32
This applied to 10 of the 21 cases studied in the previous report covering the period 1995-1998 (i.e. approximately 48%) and to 8 of the 14 cases studied in the present report (i.e. around 57%).