Incoterms_® and Commercial Contracts

As regards the relation between lex mercatoria and national courts there are mainly two issues to be considered.

The first one is whether a domestic court would accept the idea that a contract can be governed by transnational rules instead of a national legal system; the second issue is whether a national court should refuse to recognize and enforce an international award which applied lex mercatoria instead of a national law.

We will examine these two aspects in the following paragraphs.

3.1 National courts do not in principle recognize lex mercatoria as a possible “applicable law”

National courts determine the applicable law (and the lawfulness of a possible choice made by the parties) on the basis of their own rules of private international law, i.e. by applying the conflict of laws rules of the forum.

Now, since at present almost all systems of private international law only recognize state laws as possible rules governing a contract, it is very unlikely that a national court may accept a choice of law clause in favor of the lex mercatoria.

A possible reference to general principles of law is likely to be understood by a national court as a reference to transnational rules to be applied within the framework of the domestic law and not as an alternative legal system which governs the contract instead of a domestic law.

In other words, the state judge will normally be unable to consider a possible choice of “general principles of international trade law”, “transnational rules”, or “lex mercatoria” as a choice of the applicable law, since the applicable rules of private international law normally only admit the choice of a domestic legal system.

Thus, for example, we have seen in § 1.4 that EC Regulation no. 593/2008 of 23rdJune 2008 regarding the law applicable to contractual obligations (Rome I regulation), and its predecessor, the Rome Convention of 19^th June 1980, do not consider the lex mercatoria as a possible “applicable law”.

3.2 Lex mercatoria is not an appropriate solution when disputes are to be submitted to domestic courts

Considering what has been said above, it appears clearly that a possible reference to lex mercatoria or general principles of law as the law governing the contract would not be considered by a domestic court as a valid choice of the applicable law, but would be viewed as only a reference to rules to be applied within the legal system applicable on the basis of the private international law rules of the forum. [Page20:]

This is why the possible option of submitting the contract to the lex mercatoria instead of a domestic law is not recommended when the parties wish to have their disputes decided by national courts.

When possible disputes must be decided by domestic courts, and the parties wish to have recourse to transnational rules, the only way is to incorporate such rules by reference and remain within the framework of a national law, as shown in the next paragraph.

3.3 The possible application of transnational rules within the context of a national law

If a dispute is to be decided by national courts, the only way to warrant a more “transnational” framework is to incorporate transnational rules, such as the Unidroit Principles or the ICC force majeure or confidentiality clauses²⁶, by reference into the contract. In this case the above rules will be considered as contractual clauses to be applied and interpreted according to the applicable (domestic) law.

This implies two main differences with respect to the situation where the transnational rules are to be applied within the framework of the lex mercatoria instead of the framework of domestic law.

First, if the contract is governed by a domestic law, its provisions (including possible sets of rules incorporated by reference) must conform to the mandatory rules of the applicable domestic law. In case of conflict, the mandatory provisions of the governing law will prevail.

Second, the transnational rules incorporated by reference into the contract must be coordinated with those of the applicable law. Now, if we take a set of rules on contracts, such as the Unidroit Principles, such coordination may not always be easy, since the two sets of rules tend to treat the same (or partially overlapping) issues in different ways, for instance with respect to force majeure.

This being said, the possible option of referring to the Unidroit Principles within the context of the choice of a national law should not be disregarded, especially when the application of a given domestic law is a non-negotiable issue.

Leaving aside the solution mentioned in clause 5 (where the Unidroit Principles are the governing law, but a domestic law applies to issues not covered by the Principles), it is possible to simply incorporate the Unidroit Principles into the contract, as proposed in clause 3 of the Unidroit Model Clauses.

Clause 7 – Unidroit Model Clause 3

The Unidroit Principles of International Commercial Contracts (2010) are incorporated in this contract to the extent that they are not inconsistent with the other terms of the contract. [Page21:]

By choosing this option the provisions of the contract will prevail over the Unidroit Principles (even with respect to clauses which are mandatory under the Principles) and the applicable law (chosen by the parties or determined by the adjudicating body in absence of such a choice) will govern the contract. This means that mandatory rules of the governing law will prevail over the Unidroit Principles.

An even "softer" approach could be that of referring to the Unidroit Principles as a means for interpreting and supplementing the applicable domestic law, which option is proposed in the Unidroit Model clauses under n. 4, which states the following.

Clause 8 – Unidroit Model Clause 4

This contract shall be governed by the law of [State X] interpreted and supplemented by the Unidroit Principles of International Commercial Contracts (2010).

3.4 Domestic courts will normally recognize and enforce arbitral awards which apply lex mercatoria

The fact that domestic courts do not recognize lex mercatoria as a system of rules which may govern a contractual relationship does not mean that they will not recognize and enforce arbitral awards which apply lex mercatoria or general principles of law. In fact, when a domestic court is called to give effect to a foreign arbitral award, such court is not entitled to judge the merits of the case and can refuse recognition only in the presence of the strict conditions stated in Article V of the New York Convention of 15thJune 1958²⁷.

In other words, the fact that the arbitrators have applied transnational rules instead of a domestic law which would have been otherwise applicable is not a reason for refusing to recognize the award, unless it is shown that this amounts to a violation of the public order of the country where enforcement is requested or in case of a violation of other conditions of Article V of the New York Convention.

Now, it is true that with respect to the first cases in which the lex mercatoria was applied by arbitrators, the objection was raised that this would have implied that the arbitrators decided the dispute ex aequo et bono (instead of applying rules of law) without having been authorized by the parties to do so. However, this objection was rejected by the courts, because it was considered that, by applying general principles of the lex mercatoria, the arbitrators in fact applied rules of law²⁸.

Thereafter, in most cases where the question of the lawfulness of arbitral awards which applied the lex mercatoria instead of a domestic legal system has been brought before national courts, the courts have upheld the arbitral award²⁹. [Page22:]

We can therefore conclude that the choice of the lex mercatoria or general principles of law as the applicable law by the contracting or disputing parties will normally be effective: the arbitral tribunal will respect this choice and the award delivered in accordance with such transnational rules shall be recognized and enforced by the national courts³⁰.

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