Incoterms_® and Commercial Contracts

1.1 The growing importance of transnational rules in international contracts

Parties negotiating international contracts will often feel the need to submit their agreement to neutral rules which do not favor either of the parties.

A traditional compromise solution, which is frequently used in international trade, consists in submitting the contract to the law of a third country, as for instance Swiss law, English law or Swedish law.

This solution is certainly more balanced than the choice of the law of the country of one of the two parties, since it will give neither of them the advantage of having recourse to its own law. In fact, both parties will be in the same condition, i.e. both will need to deal with a law with which they are not familiar.

Since it is rare that parties have a good knowledge of the chosen law of a third country (and since they will typically not have the time to verify whether the contract fully complies with such law), it may emerge later (especially in case of dispute) that some provisions of the contract do not comply with the applicable third-country law or that some of the gaps inevitably left will be filled by provisions which give rise to unexpected results.

Moreover, in case of controversy, both parties will need to retain a lawyer of the third country whose law has been chosen, which will often imply substantial costs and additional complications.

This is why businesspeople and their legal advisors are increasingly interested in transnational rules which can help them to create an alternative neutral legal framework for their international contracts.

In order to obtain this result two different approaches can be taken:

- the first, more traditional, approach is to remain within the framework of domestic laws and to refer, within such framework, to rules designed specially for international transactions, like uniform laws (such as, for instance the UN Convention on Contracts for the International Sale of Goods: CISG) or "private" rules drafted by non-state organizations (such as the Incoterms® rules of the ICC or the Unidroit Principles);

- the second, more "revolutionary", approach is to assume the existence of an auto-nomous legal system (the so-called lex mercatoria) that can govern international contracts instead of domestic laws, and to develop tailor-made solutions within such framework.

We will examine in more detail these two possible approaches in the following paragraphs. - [Page5:]

1.2 The traditional approach to transnational rules

The traditional approach consists mainly of referring to rules for international commerce which have been established within the framework of national (domestic) legal systems.

Thus, several international conventions have established uniform rules which can be incorporated into the domestic laws.

The most important example of this approach is the UN Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980), in force in more than 70 countries. Through this solution the uniform rules in the Vienna Convention (which can be considered “transnational” as to their contents) are incorporated into the domestic law of a ratifying country so that all the countries that have adopted the Convention have common (domestic) rules governing international sales.

Through this mechanism parties in states which have ratified the Convention are put in a situation where their international contract is governed by the same rules whichever of the two parties’ domestic laws are applicable (as long as it is of a CISG state party).

The limit of this system is that the few international conventions which have introduced uniform laws (see, in addition to the CISG, the Unidroit conventions on financial leasing and international factoring) cover only a very limited number of contract types and furthermore do not apply to all countries of the world (for example, the 1980 Vienna Convention has not been ratified by the United Kingdom). Moreover, the uniform rules governing a specific type of contract deal mainly with the issues regarding that contract, but do not include all rules on contracts in general. This means that some more general issues (like for instance the validity of penalty clauses in contracts of sale) remain governed by the applicable national law, which can be very different from country to country.

A further important contribution to the creation of transnational rules is that of establishing “private” sets of rules for international transactions which may be incorporated by reference in the parties’ contracts. Examples of this approach are general rules on international contracts such as the Unidroit Principles or the Lando Principles, or rules dealing with more specific issues, such as ICC rules including Incoterms® 2010, UCP 600, etc.

As we will see hereafter, general sets of rules governing contracts (such as the Unidroit Principles) can be applied within the context of a domestic law (infra, § 3.3) or autonomously, as "the applicable law" (infra, § 2.4) or within the context of the lex mercatoria (infra, § 2.3).

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1.3 The theory of lex mercatoria

An alternative response to the demand to have international contracts governed by transnational rules is offered by the theory of lex mercatoria.

According to this theory, international contracts can be ruled by an "a-national" system of principles and rules generally accepted in international commerce, the so-called new lex mercatoria or law merchant, which can be applied instead of national law systems.

Parties engaged in international commerce can thus refer – according to this theory – to a system of transnational rules, capable of constituting an alternative legal frame-work for their transactions, closer to their needs and expectations than most domestic laws.

The theory of lex mercatoria was developed in the second half of the twentieth century by a number of authors¹who sustained that this system of transnational rules, which could replace or integrate the domestic laws, was gradually emerging from international business practice. These rules could be found in the uniform practice of contracts and clauses commonly used in international commerce and in the general principles of law developed in international law.

This theory offered arbitrators a means for "delocalizing" international disputes and escaping the narrow limits of domestic laws, by directly applying autonomous rules of international commerce.

And, in fact, in the 1970's we encounter some arbitral awards applying «principes généralement admis»²or «principes généraux largement admis régissant le droit commercial international»³, followed later by awards which take the further step to formally use the term lex mercatoria⁴.

Thanks to this arbitral jurisprudence and to the fact that it resisted the attacks brought against it before the domestic courts (which refused to set aside awards applying the lex mercatoria⁵), the principle was gradually established that arbitrators have the right to apply general principles of the lex mercatoria instead of a domestic law.

At present in most jurisdictions the decision by arbitrators to apply lex mercatoria will not be questioned by national courts. Consequently, recourse to the lex mercatoria as the governing law of an international contract is an option which is lawful and effective, at least when any possible disputes are submitted to arbitration (see infra, § 3.3)

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This means that opting for this “a-national legal system”, instead of a national law, can constitute a workable legal framework, provided its rather general principles are integrated by additional and more specific rules, such as the Unidroit Principles, as we will see in more detail hereafter (infra, § 2.3).

1.4 The increasing acceptance of transnational rules

In principle, systems of private international law tend to refuse the possibility of applying transnational rules, and in particular the lex mercatoria, as the law governing an international contract. According to this view, the applicable rules of law should be those of a domestic legal system; rules which are not part of a domestic legal system may apply, but only within the framework of the applicable domestic law, for example if they have been incorporated by reference into the agreement of the parties or if they can be qualified as a trade usage.

There have been attempts in recent years to soften this approach by recognizing a more important role for transnational rules.

During discussions within the European Union on the revision of the Rome Convention of 1980, which would have become Regulation 593/2008 (Rome I Regulation), the issue whether a “non-state body of law” could be chosen by the parties as the applicable law was debated. The proposal submitted by the European Commission in 2005, stated that:

«The parties may also choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community.
However, questions relating to matters governed by such principles or rules which are not expressly settled by them shall be governed by the general principles underlying them or, failing such principles, in accordance with the law applicable in the absence of a choice under this Regulation.»

Nevertheless, at the end this proposal was rejected and the final version of Article 3 “Freedom of choice” clearly states that “a contract shall be governed by the law chosen by the parties”, where the use of the term “law” is normally understood to mean that it must be a state law.

Paragraph 13 of the recitals of the Rome I Regulation says that “this Regulation does not preclude the parties from incorporating by reference into their contract a non-State body of law or an international convention”, the notion of incorporation meaning that the non-state law in question would have the value of a contractual clause to be applied and interpreted within the context of the national law applicable to the contract. This confirms that the European rules of private international law applicable to obligations do not in principle recognize lex mercatoria and, more generally, transnational rules, as rules that can govern an international contract instead of a specific national law.

A more flexible approach has been taken recently by the draft “Hague Principles on the Choice of Law in International Contracts” approved in November 2012 by the Special [Page8:]

Commission of the Hague Conference on Private International Law.

Article 3 of the draft Hague Principles recognizes the possibility of applying a-national rules under certain conditions by stating the following:

«In these Principles, a reference to law includes rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise.»

Also the Inter-american Convention on the Law Applicable to International Contracts (Mexico 17 March 1994) considers principles of international commercial law, by stating the following in Article 10:

« In addition to the provisions in the foregoing articles, the guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case.»

Furthermore, several domestic laws on arbitration recognize that arbitrators may apply “rules of law” (see: infra, § 4.1 for further details). This implies a recognition of the arbitrators’ right to apply transnational rules instead of a domestic law.

Finally, it may be interesting to mention that the standard conditions of the United Nations for the provisions of goods and services provide in clause 17.2 that possible decisions of the arbitral tribunal shall be based on "general principles of international commercial law".

All this shows that there is a trend towards a gradual recognition of the possibility of applying transnational rules, particularly within the framework of international arbitration.

1.5 The purpose of this study

Since the appearance of the lex mercatoria theory as a possible alternative to the traditional approach based on application of a specific domestic law, determined by the rules of private international law, many lawyers have shown great scepticism concerning this solution.

We will not discuss here the theoretical foundation of lex mercatoria.⁶

It is sufficient to say that this theory has been successful in the sense that it is generally admitted that – provided possible disputes are brought before international arbitrators – the parties can lawfully submit their contracts to “general rules and principles regarding international commercial contractual obligations enjoying a wide international consensus”⁷instead of national laws, and that such choice will be effective, i.e., the arbitrators will apply such rules, and the awards applying lex mercatoria will normally be recognized by national courts (for further details, see § 3.3).

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In other words, the main purpose of this study is to deal with the issue of the lex mercatoria and/or general principles of law as a contractual solution for the choice of the governing law which can be used when no agreement on a domestic law is possible or appropriate. At the same time this study is intended to help users of ICC model contracts (many of which contain this type of solution: see in particular the clauses mentioned in § 2.3, hereunder) to better understand the actual meaning of the lex mercatoria approach and to evaluate the pro's and con's of this solution as opposed to the traditional one, consisting in submitting the contract to a national law.

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