I. Introduction

The subject of this paper calls for an assessment of the UNIDROIT Principles of International Commercial Contracts in contemporary contract practice. There is no doubt that they have won considerable praise. 2 Published awards3 show the frequency with which some of the Principles are applied in international arbitration, especially those relating to basics like good faith and fair dealing (article 1.7) or contract interpretation (chapter 4). Adding to the praise, I consider the Principles to be an outstanding example of intellectual legal draftsmanship. However, I feel it necessary to temper the praise with one remark of caution and four desiderata. My comments are intended to be constructive, their aim being to increase the significance of the Principles.

II. Use of the Principles during contract drafting

1. Starting point is a recent survey by the Centre of Transnational Law (CENTRAL) of the University of Münster on the use of transnational law in international contract law and arbitration. 4 Questionnaires were sent out worldwide to in-house counsel in global firms and practising international lawyers and arbitrators. According to the results of the survey, the UNIDROIT Principles play an important part when international commercial contracts are being drafted and negotiated and in arbitrations concerning such contracts. They are an important and reliable resource for parties when negotiating and drafting contracts and their legal terminology can be used to overcome language barriers encountered by non-English-speaking parties. They may be further used as a check-list of issues needing to be addressed in any substantial contract, such as force majeure or contract formation (e.g. if both parties use their own standard forms ('battle of forms')). 5 In such practical aspects of contract drafting, the advantages of the UNIDROIT Principles are self-evident.

2. Less evident is the question of whether the parties to an international commercial contract should use the UNIDROIT Principles as their governing law. The Preamble to the Principles seems to suggest this is possible and even desirable. 6 Here is my word of caution: DO NOT, unless it is a very simply-structured deal and the parties are sure that nothing may go wrong during the [Page100:] lifetime of the contract, or they have satisfied themselves that the provisions of the Principles are sufficient to cure any conflict which may arise during its performance. The Principles are incomplete at present. Important as they are, they are still work in progress. They have not yet developed into a self-sufficient legal system as have national laws like Swiss law or English law. The table of contents of the 1994 edition of the Principles shows that they cover only a limited number of areas. Their seven chapters deal with the very basics like formation, interpretation and performance of contracts. UNIDROIT working parties have now been established for the following additional and important areas of law:

agency,

limitation of actions,

assignment of contracts,

contracts for the benefit of a third party,

set-off,

waiver. 7

As yet, a new edition of the Principles incorporating these topics has not been published by UNIDROIT.

Even if these additional areas of law are addressed in an amended edition, the UNIDROIT Principles would still not constitute a self-sufficient legal system capable of dealing with all legal issues resulting from complex international transactions such as a typical BOT project. Imagine a large infrastructure project like a dam combined with a power plant, where multiple parties and lenders are involved and many interdependent contracts are concluded. Such complicated long-term projects are prone to conflicts. Suppose this project is to be undertaken in a country that ranks high on the list of countries with corrupt practices, as published regularly by Transparency International. 8 In such cases the prudent attorney drafting the contracts will wish the following topics to be covered by the law which is to govern them:

partnership,

plurality of creditors and debtors,

tort,

restitution or unjustified enrichment.

UNIDROIT has not yet announced that it is planning to address these topics in its Principles. The institution competing with UNIDROIT in the field of transnational law - the Commission on European Contract Law, more commonly known as the Ole Lando Group - has already made known its intention to deal with these subjects of law (except for partnership), which are important for complex international business transactions. 9

Where does this leave the prudent attorney? In a complicated and complex project, where the parties wish to use the UNIDROIT Principles because of their transnational law character, these rules should and must be supplemented by a fully developed neutral national law, like Swiss law, for predictable answers in potential areas of conflict not covered by the Principles. Choosing an additional law may save considerable time, energy and substantial legal costs in the event of a conflict. This is the reason why in April 1999 the Governing Council of UNIDROIT approved a model clause which reads:

This contract shall be governed by the UNIDROIT Principles (1994) [except as to Articles . . . ], supplemented when necessary by the law of [jurisdiction X]. 10[Page101:]

If this model clause is used in a complex international transaction, it is highly advisable to fill in the bracket with a neutral national law like Swiss law as a lifesaver.

III. Use of the Principles in a conflict situation

1. There are two stages at which it is frequently suggested that the UNIDROIT Principles shall be applied: by negotiators when a contract is being drafted and by arbitrators after a conflict has arisen. However, between these two stages lies a vast gap during which the parties manage their conflict by themselves prior to and even in the initial phase of dispute resolution proceedings such as arbitration or mediation.

In the majority of cases parties to an international commercial contract settle their differences themselves, either without even resorting to arbitration, or outside arbitral proceedings if already begun. Leaving mediation aside, this is most often accomplished in direct negotiations between the parties, conducted by either their in-house counsel or outside attorneys. It should be noted that parties very often change their counsel when a substantial conflict arises, with the result that the counsel that handles the conflict situation is not the same as the counsel that negotiated and drafted the contract. In such situations it is desirable that the parties and their counsel should be able to use the UNIDROIT Principles as an unambiguous tool for solving their conflict themselves. Are the Principles in their current form able to perform this role? I have my doubts.

2. Imagine a large infrastructure project in Europe which has given rise to a conflict between the principal and the main contractor over whether or not circumstances have changed, giving cause for additional remuneration. The main contract has a clause stating simply: 'This contract shall be governed by general principles of law'.

The Preamble to the UNIDROIT Principles provides that 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'. The lawyer handling the conflict has also heard of the Principles of European Contract Law 11 and there finds the following text: 'These Principles may be applied when the parties: (a) have agreed that their contract is to be governed by "general principles of law", the "lex mercatoria" or the like; . . .' 12

The UNIDROIT Principles claim to embody 'general principles of law', as do the European Principles. The careful lawyer therefore looks up both of them to see what they say on changed circumstances and finds two different sets of rules with two very different titles and different structures. The title of article 6.2.2 of the UNIDROIT Principles reads 'definition of hardship', whereas that of article 6.111 of the European Principles reads 'change of circumstances'. Apart from this, although the content of the relevant articles is similar, their wording differs. 13[Page102:]

For jurists, a different wording generally implies a different meaning. Should the lawyer choose one or the other set of principles and, if so, which, or fall back on a collection of general principles of transnational law as, for example, collected by Professor Berger in his book The Creeping Codification of the lex mercatoria? 14 Rule 42 of Professor Berger's collection reads simply: 'Each party has a good faith obligation to renegotiate the contract if there is a need to adapt the contract to changed circumstances and the continuation of performance can reasonably be expected from the parties.' 15

To decide whether there is a substantive difference between the UNIDROIT and the European Principles would require a detailed study of its own. But do we really need or want new comparative studies on different sets of rules, each claiming to be codified general rules of law? I think not. The real danger that two different sets of rules could be seen as elements of the disunification of law should be avoided. 16 A common approach underlies both the UNIDROIT Principles and the European Principles, which is hardly surprising, given that the working groups that drafted them had certain prominent members in common. 17

Not having been promulgated as an international convention, the UNIDROIT Principles have the advantage of being easy to review, alter or amend, if necessary or desirable. That leads to my first <i>desideratum</i> as a practitioner: harmonize the UNIDROIT Principles and the European Principles as much as possible and use the same legal terms when addressing identical legal issues. Since both working groups are interlinked through common members, the possible issue of who defers to whom should not really arise. The articles on hardship and change of circumstances show that harmonization of the presently different wording is feasible. There should be no competing transnational rules. Unnecessary differences in wording between the UNIDROIT Principles and the European Principles greatly reduce the authority of each set of rules as a valid expression of lex mercatoria.

3. My second desideratum as a practitioner is related to the necessary review of the UNIDROIT Principles as they currently stand. Delete rules which are unique and without analogy in either the European Principles or other collections of transnational law like Professor Berger's. The provisions of articles 6.1.14 to 6.1.17 of the Principles, dealing with the effects of refusal of public permission on the validity of a contract, are a case in point. Such provisions have their roots mainly in political considerations connected to the East/West divide, which no longer exists. They do not form part of lex mercatoria for commercial transactions in a world where planned centralized economies are a thing of the past.

Take the example of an infrastructure project, where the principal is a state or a state-dependant entity and where a state-owned bank has issued a bank guarantee payable on first demand to the main contractor to secure prompt payment by the principal. According to article 6.1.17(1) of the UNIDROIT Principles, the bank guarantee is void ab initio if the state bank requires permission from its Ministry of Finance in order to issue it but has failed to obtain such permission. Once a conflict has arisen, the necessary permission will certainly not be granted if the state considers that the contractor has no right to draw the guarantee. In these circumstances, under the present UNIDROIT Principles, the bank guarantee is void and the state bank has no liability towards the contractor. Its guarantee issued to the bona fide investor is economically worthless.

Domestic laws of convenience of this kind no longer have a place in international commercial transactions. Articles 6.1.14 to 6.1.17 should either go completely (the [Page103:] better solution, in my view) or be amended. They must at least be supplemented by a duty to disclose during the negotiation period prior to signing the contract or issuing a unilateral instrument like a bank guarantee. The state bank must make it absolutely clear that its bank guarantee is invalid and not worth a penny unless it obtains the permission from the Ministry of Finance required by its domestic law. Failure to disclose in due time must lead to full damages for non-performance 18. In my view, article 4.103 of the European Principles provides a more equitable solution to the problem. 19

4. My third desideratum concerns an issue of capacity, which is at present expressly excluded from the UNIDROIT Principles. 20 States and state-owned or state-controlled entities are very often parties to international commercial contracts, particularly where they involve infrastructure projects, the exploitation of natural resources or simply procurement. Any such contract entered into by a state or state-owned entity should not subsequently be invalidated on the ground that the state's own domestic law is not in accordance with accepted principles of transnational law.

A transnational rule already exists to the effect that states and state-dependent entities may not rely on their incapacity under their domestic law in order to invalidate an arbitration agreement into which they have entered. Article II of the 1961 European Convention on International Commercial Arbitration affirms the capacity of public law entities to be parties to arbitration and this principle was later taken up and developed in article 177(2) of the 1987 Swiss Private International Law Act (PILA) and has since become generally accepted. 21 A similar rule on the validity of an international arbitration agreement to which a state or a state-owned entity is a party should be incorporated into the UNIDROIT Principles. This would relieve arbitrators of having to decide whether to use the traditional choice-of-law approach or the new substantive approach 22 to determine the validity of such an arbitration agreement. The wording of article 177(2) PILA 23 seems to fit perfectly into the present set of UNIDROIT Principles.

In my view this principle of transnational arbitration law should be extended into transnational contract law in general. If arbitration agreements with states are held to be valid by international arbitrators, regardless of what the domestic law of the state says, there is no reason why this should not be true of all other types of contracts into which a state or a state-controlled entity may enter as part of an international commercial transaction - subject, of course, to any invalidity that might result from a rule of transnational law itself, as would be the case if the contract had been tainted by bribery or corruption. 24 Such a rule might read: 'A state or state-controlled entity may not invoke its domestic law to avoid a contract relating to an international commercial transaction to which it is a party, unless such law is recognized to be part of general principles of law.' If this rule were incorporated into the UNIDROIT Principles, their value would be greatly enhanced, as an entire category of international business transactions would become more secure.

5. My last desideratum relates to the example of the construction of a dam and a power plant in a country where bribery is not uncommon. Let us assume the project has been realized as a BOT transaction. The dam has been completed, a reservoir created and the power plant is producing electricity, which, in order to refinance the project, is being sold to the state-owned power distributor on terms agreed upon in the main contract. A change of government occurs in the state in question and the new government considers the main contract and all related contracts to be invalid and void ab initio due to bribery benefitting senior [Page104:] members of the former government. Evidence shows that there was indeed bribery at the time of finalizing the contracts, since when high-ranking members of the former government have been receiving substantial sums. 25

What is missing and urgently needed by an arbitrator required to render an award in a case similar to that involving the Hub Power Company (HUBCO) is a set of transnational law rules on restitution and unjustified enrichment that go beyond articles 3.17 and 7.3.6 of the UNIDROIT Principles. 26 In their present form, the UNIDROIT Principles, like section 812 of the German Civil Code, have rather simple transactions, such as invalid sales and construction contracts, in mind when addressing the issue of restitution. They are unfit to solve problems related to complex international commercial transactions like a BOT project of the HUBCO type. Since Judge Lagergren's famous ICC award of 1963, contracts tainted by bribery have been held to be invalid. 27 The simple solution in the second sentence of article 817 of the German Civil Code or in article 66 of the Swiss Code of Obligations, providing that no party may reclaim what it has rendered to the other party if aware that its performance was illegal, is clearly unsuited to a BOT project as mentioned above, where a construction has been completed, the plant is in operation, and the electricity produced is being sold to the state's utility company. There is no reason why the utility company or the state should receive electricity for free. The BOT company is entitled to a fair price, allowing it to refinance the project, even if bribery occurred when the project was put together. The HUBCO settlement shows how such a situation could be resolved. In that case, the purchase price for electricity produced by the HUBCO power plant to be paid by the Pakistani state agency was reduced. In all other aspects the main contract was confirmed as valid. Arbitrators should have the discretion and the power to restructure the project on the basis of the original contracts, eliminating all elements they consider to be contrary to international public policy (ordre public international). It would greatly facilitate the work of many arbitrators if UNIDROIT were to publish a set of rules on this subject, which is of great importance in international commerce.

IV. Conclusion

In international commercial transactions the UNIDROIT Principles are a useful tool when drafting contracts. However, they should be used as the governing law only if supplemented by a fully developed national law. They should be harmonized as much as possible with other rules of transnational law, like the Principles of European Contract Law. The scope of the UNIDROIT Principles should be extended to cover areas of law such as restitution in complex international commercial transactions.

1
This paper is an expanded and updated version of the author's presentation at the seminar.

2
See e.g. The UNIDROIT Principles for International Commercial Contracts: A New lex mercatoria? (Paris: ICC Publishing, 1995 (ICC Publication No. 490/1); K.P. Berger, The Creeping Codification of the lex mercatoria (The Hague: Kluwer, 1999) at 143ff; E. Gaillard, 'Transnational Law: A Legal System or a Method of Decision Making?' (2001) 17 Arbitration International 59.

3
e.g. (1991) 10:2 ICC ICArb. Bull. 33ff; (2001) 12:2 ICC ICArb. Bull. 56ff.

4
K.P. Berger, H. Dubberstein, S. Lehmann, V. Petzold, 'The CENTRAL Enquiry on the Use of Transnational Law in International Contract Law and Arbitration' in K.P. Berger, ed., The Practice of Transnational Law (The Hague: Kluwer, 2001) 91.

5
Ibid. at 107ff.

6
Preamble: 'These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed by them. . . .'

7
See UNIDROIT web page: www.unidroit.org./english/principles/wg-1998.htm

8
Web site: www.transparency.org

9
Ole Lando, 'The Principles of European Contract Law and the lex mercatoria' in Private Law in the International Arena. From National Conflict Rules Towards Harmonization and Unification. Liber Amicorum Kurt Siehr (The Hague: T.M.C. Asser Press, 2000) 396.

10
See UNIDROIT web page: www.unidroit.org/english/principles/model.htm

11
Ole Lando & Hugh Beale, eds., Principles of European Contract Law - Parts 1 and 2 (The Hague: Kluwer, 1999). Also available at:www.ufsia.ac.be/~estorme/PECL2en.html

12
Art. 1.101(3).

13
UNIDROIT Principles of International Commercial Contracts, ch. 6, s. 2 (hardship): 'Article 6.2.1 (Contract to be observed) Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.' '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.' 'Article 6.2.3 (Effects of hardship) (1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. (2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance. (3) Upon failure to reach agreement within a reasonable time either party may resort to the court. (4) If the court finds hardship it may, if reasonable, (a) terminate the contract at a date and on terms to be fixed, or (b) adapt the contract with a view to restoring its equilibrium.' Principles of European Contract Law: 'Article 6:111: Change of Circumstances (1) A party is bound to fulfil its obligations even if performance has become more onerous, whether because the cost of performance has increased or because the value of the performance it receives has diminished. (2) If, however, performance of the contract becomes excessively onerous because of a change of circumstances, the parties are bound to enter into negotiations with a view to adapting the contract or terminating it, provided that: (a) the change of circumstances occurred after the time of conclusion of the contract, (b) the possibility of a change of circumstances was not one which could reasonably have been taken into account at the time of conclusion of the contract and (c) the risk of the change of circumstances is not one which, according to the contract, the party affected should be required to bear. (3) If the parties fail to reach agreement within a reasonable period, the court may: (a) terminate the contract at a date and on terms to be determined by the court; or (b) adapt the contract in order to distribute between the parties in a just and equitable manner the losses and gains resulting from the change of circumstances. In either case, the court may award damages for the loss suffered through a party refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing.'

14
K.P. Berger, The Creeping Codification of the lex mercatoria (The Hague: Kluwer 1999).

15
Ibid. at 297.

16
This risk has been described by G. Herrmann, 'A Vision for UNCITRAL: Global Commerce Needs a Global Uniform Law' [2001] Business Law International 249 at 251ff.

17
e.g. Professor Bonell, who continues to serve on both groups.

18
UNIDROIT Principles, art. 7.4.1 et seq.

19
Principles of European Contract Law: 'Article 4:103: Mistake as to facts or law (1) A party may avoid a contract for mistake of fact or law existing when the contract was concluded if: (a) (i) the mistake was caused by information given by the other party; or (ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error; or (iii) the other party made the same mistake, and (b) the other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms. (2) However a party may not avoid the contract if: (a) in the circumstances its mistake was inexcusable, or (b) the risk of the mistake was assumed, or in the circumstance should be borne, by it.'

20
Art. 3.1(a).

21
A. Redfern & M. Hunter, Law and Practice of International Commercial Arbitration, 3d ed. (London: Sweet & Maxwell, 1999) at 3-19 and 3-20.

22
E. Gaillard & J. Savage, eds., Fouchard, Gaillard, Goldman On International Commercial Arbitration (The Hague: Kluwer, 1999) at § 542ff.

23
'If a party to the arbitration agreement is a state or an enterprise or organization under its power or control, such party cannot rely on its own law in order to contest the arbitrability of a dispute or its capacity to be a party to an arbitration.'

24
Redfern & Hunter, supra note 21 at 3-27.

25
This is not a theoretical problem, as the issue of alleged bribery has actually arisen in international arbitrations on infrastructure projects. See e.g. The Hub Power Company (HUBCO) v. Water and Power Development Authority (Pakistan), an ICC arbitration which was settled outside arbitral proceedings in December 2000. For further information on this project, the largest private sector infrastructure project in Asia, see www.hubpower.com Similar allegations of bribery have been raised in the US$ 15 billion Paiton project in Indonesia, where foreign firms built power plants in exchange for long-term purchase guarantees from the Indonesian state power distributor. It is alleged that construction costs were inflated by about US$ 1 billion, purported to have been paid mostly to members of the Suharto family. See www.worldbank.org/ubi/wbiep/adf/papers/thomas.pdf

26
'Article 3.17 (Retroactive effect of avoidance) (1) Avoidance takes effect retroactively. (2) On avoidance either party may claim restitution of whatever it has supplied under the contract or the part of it avoided, provided that it concurrently makes restitution of whatever it has received under the contract or the part of it avoided or, if it cannot make restitution in kind, it makes an allowance for what it has received.' 'Article 7.3.6 (Restitution) (1) On termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received. If restitution in kind is not possible or appropriate allowance should be made in money whenever reasonable. (2) However, if performance of the contract has extended over a period of time and the contract is divisible, such restitution can only be claimed for the period after termination has taken effect.'

27
J.G. Wetter, 'Issues of Corruption before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren's 1963 Award in ICC Case No. 1110' (1994) 10 Arbitration International 277.