Incoterms_® and Commercial Contracts

2.1 The basic contents of the lex mercatoria

The contents of the lex mercatoria are mainly principles of law generally recognized in international trade.

Such principles, which have been applied by international arbitration tribunals and which are generally considered – by the supporters of the lex mercatoria theory – to be part of the lex mercatoria, ⁸include:

- Parties are bound to respect the terms of the contract (Pacta sunt servanda), unless there is a significant change of circumstances (rebus sic stantibus).

- Parties must perform the contract in good faith.

- Parties may be liable for not respecting good faith during negotiations (culpa in contrahendo).

- A contract obtained by bribes is void, or at least unenforceable.

- A party can refuse to perform its obligations if the other has committed a substantial breach (inadiplenti non est adimplendum).

- Damages for breach of contract are limited to the foreseeable consequences of the breach and include actual loss and loss of profit.

- A party which has suffered a breach of contract must take reasonable steps to mitigate the damage.

A very exhaustive list of 130 general principles of the New Lex Mercatoria, together with thousands of full text comparative references, the “TransLex-Principles”, is published on "TransLex”, the online platform on transnational commercial law, operated by the Center for Transnational Law (Central) at Cologne University Faculty of Law (www.trans-lex.org).

It is undeniable that these very general principles, which may not always answer the specific questions that arise in a dispute, leave much latitude to the discretion of the arbitrators, and may not warrant the foreseeability of the possible outcome of a dispute, which the parties normally expect. At the same time, it should be remembered that the contents of the lex mercatoria are gradually becoming more precise⁹.

Many lawyers tend to refuse a priori the choice of the lex mercatoria as the applicable [Page11:]law, because of the lack of sufficiently detailed rules.

However, this objection can be overcome by incorporating in the agreement, within the framework of the lex mercatoria, a set of rules specially designed for international contracts, such as the Unidroit Principles (or other similar rules), which can warrant a sufficient certainty and predictability, as we will see in the following paragraphs.

In other words, what is proposed here is to use the lex mercatoria theory for establishing a general alternative framework to be integrated by further transnational rules (like the Unidroit Principles) with the purpose of setting up a system of rules which are independent from the domestic laws and at the same time sufficiently structured to answer the parties' need for certainty and foreseeability.

2.2 The Unidroit Principles

The Principles of International Commercial Contracts (hereafter “Unidroit Principles”) were published by Unidroit in 1994. A third edition, which covers several new issues was published in 2010.

The comment to the preamble,¹⁰states that the Unidroit Principles

« ... represent a system of principles and rules of contract law which are common to existing national systems or best adapted to the special requirements of international commercial transactions.»

2.2.1 General characteristics

The Principles deal with most legal issues of a general nature concerning contracts (such as formation, validity, performance, non-performance, damages, etc.). By submitting a contract to the Principles, parties can establish a neutral legal framework which is, at the same time, certain and adapted to the needs of international trade.

The Principles are proposed to the business world mainly as a set of “private” rules that parties may incorporate by reference into their contract. The preamble¹¹states that:

“ ... they shall be applied when the parties have agreed that their contract be governed by them.”

The “normal” situation in which the Principles are to be applied is, therefore, when the parties have expressly submitted their contract to them, by an express reference in the contract itself.

However, the Principles may also be applied, absent a choice by the parties to incorporate them into their contract, as part of the general principles of law within lex mercatoria. [Page12:]

For example in the ICC case 711012 concerning several contracts, which made reference to “natural justice”, the arbitrators came to the conclusion that the parties intended to have their contracts governed by rules other than their respective domestic laws, and thus by general rules and principles:

“ ... which, though not necessarily enshrined in any specific national legal system, are specially adapted to the needs of international transactions like the Contracts and enjoy wide international consensus.”

And thereafter the arbitrators came to the conclusion that these rules could be found in the Unidroit Principles, by stating that:

“ ...this Tribunal finds that general legal rules and principles enjoying wide international consensus, applicable to international contractual obligations and relevant to the Contracts, are primarily reflected by the Principles of International Commercial Contracts adopted by Unidroit [...]. In consequence, without prejudice to taking into account the provisions of the Contracts and relevant trade usages, this Tribunal finds that the Contracts are governed by, and shall be interpreted in accordance [with], the Unidroit Principles with respect to all matters falling within the scope of such principles, and for all other matters, by such other general legal rules and principles applicable to international contractual obligations enjoying wide international consensus, which would be found relevant for deciding controverted issues falling under the present arbitration.”

In other cases, arbitrators have applied the Unidroit Principles as trade usages13, considering them to be “the latest codification of international commercial trade usages”.¹⁴

It can therefore be said that the choice of lex mercatoria as the applicable law may by itself include the Unidroit Principles and consequently make it possible to overcome the lack of certainty of the general principles of the lex mercatoria.

However, since the automatic inclusion of the Unidroit Principles in the lex mercatoria is a theory which may or may not be followed in a specific case, it is safer for the parties to expressly incorporate the Unidroit Principles in their agreement, within the framework of the lex mercatoria as the applicable law, as we will see later in more detail in § 2.3.

2.2.2 Precautions to be taken when incorporating the Unidroit Principles

The Unidroit Principles have been worked out with the purpose of producing a “restate-ment” of the law of international commercial contracts and should therefore be in line with the standards generally accepted by business people engaged in international trade. [Page13:]

However, this does not mean that the Principles reflect the “common core” of the various national systems. In fact, the intention of the drafters was not to choose the solutions which prevail in most legal systems, but to select those which had the most persuasive value and/or appeared to be particularly well-suited for cross-border transactions. In other words, the drafters of the Principles, although taking into account the prevailing rules and practice, made a choice in favor of what they considered to be the “best” rules for cross-border contracts, particularly as concerns the need to protect parties against unfairness⁸

The result of this approach is that there may be, in certain cases, a substantial gap between the Unidroit Principles and the rules or general principles that companies engaged in international trade would consider to be the appropriate rules to govern their contracts.

Let us take, for instance, Article 3.2.7(1) of the Unidroit Principles 2010 (Article 3.10 in the previous version of the Principles) on gross disparity, according to which:

“ ... a party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

1. the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and

the nature and the purpose of the contract.”

While the basic principle that a contract can be avoided in extreme cases – where a party has taken an unfair advantage of the other party’s dependence, economic distress or urgent need – can be considered to be generally acceptable, no businessperson engaged in international trade would accept the idea that its counterpart may put forward its own “improvidence, ignorance, inexperience or lack of bargaining skill” as a reason for requesting the avoidance of the contract.¹⁶

In fact, unless engaged in negotiation with a counterpart having an extraordinary high level of fairness, no responsible lawyer would take the risk that a counterpart may use its pretended ignorance, inexperience or lack of bargaining skill for the purpose of avoiding a contract (or even a contract clause)¹⁷it dislikes. One may, of course, object that Article 3.2.7 requires an excessive and unfair advantage, which would normally prevent the above principle from being applied too widely. However, even admitting that an experienced arbitrator would not take too seriously the position of a businessperson who claims to have made a bad deal because of inexperience or lack of bargaining skill,¹⁸the simple fact that the rule exists and that the counterpart can [Page14:]invoke it, remains a danger and makes Article 3.2.7 in its present wording unacceptable for international trade. In order to overcome this problem, it would be sufficient to exclude the words “or of its improvidence, ignorance, inexperience or lack of bargaining skill” in the last sentence of Article 3.2.7(1)(a).

Another example of rules that go beyond the solutions normally accepted in international trade are the provisions on hardship contained in Articles 6.2.1–6.2.3. These rules state that where the occurrence of events which fundamentally alter the equilibrium of the contract (and provided such events become known after the conclusion of the contract, are unforeseeable, are out of the control of the disadvantaged party, and the disadvantaged party did not assume their risk), the disadvantaged party may request renegotiation of the contract and, if renegotiation fails, resort to the court, which may terminate the contract or adapt it with a view to restoring its equilibrium.

Now, this solution is much broader (in protecting the disadvantaged party) than most domestic laws existing in this field¹⁹and does not at all correspond with contractual practice. In fact, hardship clauses are normally not drafted in general terms, but tend to limit their operation to specific situations and to provide specific solutions (which almost never imply adaptation by a third party) in case of the occurrence of hardship.

The reason for this caution is obvious: traders perceive the adaptation of the contract terms by a third party to be a great danger, and are not willing, except in very exceptional circumstances, to accept such a risk. This is why the model hardship clause established by ICC (ICC Hardship Clause 2003²⁰) does not provide, in case of failure of the renegotiation, for the adaptation of the contract, but only for its termination. This result can be obtained by incorporating in the contract the model ICC Hardship Clause or by deleting letter (b) of Article 6.2.3(4) of the Unidroit Principles.

We can therefore conclude that, when choosing the Unidroit Principles as applicable rules, it is recommended to add some words to the clause that incorporate the Unidroit Principles by reference, in order to expressly exclude the incorporation of some specific articles which may not correspond to the expectations of parties engaged in international trade.

The parties should also check whether the limitation periods provided for in Chapter 10 of the Principles are suitable for them or if they prefer to shorten or to extend these periods. - [Page15:]

2.3 The combination of lex mercatoria and Unidroit Principles

For those who wish to submit their contract to transnational rules in order to avoid the problems of conflicting domestic laws, and at the same time to establish a reasonably predictable legal framework for their contract, the choice of submitting the contract to the lex mercatoria together with the Unidroit Principles should be seriously considered.

This kind of solution has been provided for in several ICC models.

The first model contract containing an express reference to the Unidroit Principles was the ICC Model International Franchising Contract (ICC Publication No. 557, now replaced by a new version published as Publication No. 712²¹), which, in Article 32 A, contained the following clause as an alternative to the choice of a domestic law provided for in Article 32

Clause 1 – ICC Franchising Model (lex mercatoria + Unidroit Principles)

This Agreement is governed by the rules and principles of law generally recognized in international trade together with the UNIDROIT principles on International Commercial Contracts.

A more complex clause was subsequently drawn up and included in several models published in the following years.²²In the second edition of the Model Distributorship Contract²³, for example, the following clause is found in Article 24 as an alternative to the clause containing the choice of a domestic law:

Clause 2 – ICC Distributorship Model (lex mercatoria + Unidroit Principles)

“Any questions relating to this Agreement which are not expressly or implicitly settled by the provisions contained in this Agreement shall be governed, in the following order:

1. by the principles of law generally recognized in international trade as applicable to international distributorship contracts,
2. by the relevant trade usages, and
3. by the Unidroit Principles of International Commercial Contracts, with the exclusion – subject to Article 18.2. hereunder – of national laws.”

The above clause aims to create the following hierarchy of rules: first, the contract clauses; second, the general principles; third, the trade usages and finally the Unidroit Principles, with the aim of clarifying that the Unidroit Principles will apply only to the extent they conform to the general principles (lex mercatoria) and the trade usages. The main reason for this solution is to give arbitrators the possibility of excluding the application of rules contained in the Unidroit Principles which they may consider not to be in accordance with the reasonable expectations of business, such as those mentioned above in § 2.2.2[Page16:]

Another possible solution is to expressly mention the Articles of the Unidroit Principles that should be excluded.

Clause 3 – Choice of law: lex mercatoria and Unidroit Principles

This contract is governed by general principles of law generally recognized in international trade (lex mercatoria) together with the Unidroit Principles of International Commercial Contracts (except for Articles 2.20, 3.2.7 and 6.2.1).

2.4 The choice of the Unidroit Principles as the governing law: the Unidroit Model Clauses

Another possible option, which has been proposed in the Model Clauses for the use of the Unidroit Principles, published by Unidroit²⁴, consists of submitting a contract directly to the Unidroit Principles, as provided in the following model clause, proposed by Unidroit.

Clause 4 – Unidroit Model Clause 1.1(a)

This contract shall be governed by the Unidroit Principles of International Commercial Contracts (2010)

This clause expressly indicates the Unidroit Principles as the applicable law, without any reference to general principles of law or lex mercatoria.

The difference with respect to the approach followed in the ICC models is that there is no reference to a system of law (be it the alternative system of the lex mercatoria or a domestic law): the Unidroit Principles standing alone are the applicable law.

This may cause some problems if one needs to fill possible gaps. In fact, if in case of dispute issues arise which are not covered by the Unidroit Principles, it is likely that arbitrators will have to refer to the applicable domestic law, while under the ICC model clauses it is clear that one must refer to the general principles of law generally recognized in that particular trade25.

In any case, this issue has been taken into account in the Unidroit Model clauses, which provide, with respect to issues not covered by the Principles, the possibility to refer to a domestic law (clause 5) or to general principles of law (clause 6).

Clause 5 – Unidroit Model Clause 1.2(a)

This contract shall be governed by the Unidroit Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by the law of [State X] [Page17:]

Clause 6 – Unidroit Model Clause 1.3(a)

This contract shall be governed by the Unidroit Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by generally accepted principles of international commercial law.

Actually, this last model clause is very similar to the clauses of the ICC model contracts, the main difference being that in the ICC clauses the principles generally recognized in international trade prevail over the Unidroit Principles and not vice-versa.

2.5 Conclusion: choice-of-law clauses referring to a-national rules can provide an adequate legal framework

One of the main objections to choice-of-law clauses which refer to a-national rules is that they do not offer sufficient certainty and foreseeability and that consequently, the choice of a national law as the governing law is always a more appropriate solution.

This study does not intend to show that "a-national" solutions are better than the choice of a domestic law. On the contrary, in many cases the latter solution may be preferable.

What we want to clarify is simply that the option to submit the contract to an a-national system of rules (whatever its name: lex mercatoria, general principles, principles of natural justice, etc.) should be considered with an open mind as one of the possible alternatives that an experienced negotiator may consider.

It is also important to stress that we are not proposing the option of simply submitting a contract to general principles of law (or lex mercatoria). What we are suggesting in the ICC model contracts is to use the lex mercatoria as an alternative legal framework and to include, within this framework, a set of rules on contracts, such as the Unidroit Principles, together with a very precise set of contractual provisions provided in the specific model contract.

In doing so, it is possible to create a rather precise and foreseeable legal framework which may guarantee in many cases as much certainty and predictability as a national law.

In fact, the assumption that a domestic law is always the best solution, which many lawyers uncritically accept as indisputable dogma, is not always true.

First, those who support the absolute superiority of domestic laws almost always have in mind their own national law, which – of course – appears to them to be the clearest and most predictable legal framework. However, they forget that, in many cases, the outcome of a negotiation may be the acceptance of a foreign law, the contents of which, although in theory predictable, will normally be difficult to determine.

Experienced lawyers know how difficult it is to really understand a foreign law (even when it is easy to access its sources, which is not always the case). Therefore, when the outcome is to have a foreign law as the governing law of the contract, this is not necessarily the better alternative. This is particularly the case for companies in developing countries and, more generally, for small and medium-sized companies which may not have the necessary resources for specialized advice on a foreign law. [Page18:]

Second, in most domestic laws a number of contracts commonly used in international trade (distribution agreements, licensing agreements, franchising, joint ventures, transfer of technology agreements, only to mention some examples) are not governed by specific rules, but only by principles – if any – established by the courts, which may not be easy to determine. This means that for many widely used contracts, international practice – as reflected for instance in the ICC model contracts – can give at least as much guidance as the rules of a national legal system.

Third, in many cases the domestic rules on specific contracts are not appropriate for international relations, because they are meant to govern other types of situations. Let us imagine, for example, what can happen if a contract with an occasional intermediary engaged in international trade must comply with domestic laws on brokers (e.g., rules enacted with real estate brokers in mind).

Finally, the reference to “principles generally recognized in international trade” may induce the arbitrators to remain close to commercial reality and to give consideration to the current practice in international trade, for instance with respect to the interpretation and application of contractual provisions. This may be very important where certain terms and/or clauses have acquired a specific meaning in a given business or for a specific type of agreement.

It can therefore be concluded that the recourse to lex mercatoria in connection with the Unidroit Principles or similar rules, should be taken into serious consideration as a possible alternative, particularly in cases where the choice of a domestic law appears to be inappropriate or difficult to agree upon. It is on the basis of this assumption that it has been decided to propose in most ICC model contracts the lex mercatoria together with the Unidroit Principles as an alternative solution to the traditional choice of a national law

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