Incoterms_® and Commercial Contracts

5.1 In what circumstances is the choice of lex mercatoria + Unidroit Principles appropriate?

Choosing lex mercatoria (in conjunction with the Unidroit Principles) may be appropriate in the following situations:

1. Where there is no space for choosing a national law which the negotiating party considers appropriate, in particular when the other party insists on the choice of a national law which is not acceptable (e.g., because it is impossible or difficult to have sufficient knowledge of that law).
2. Where the type of contract is not regulated by national laws, and a common drafting practice has been developed in business, as for example with respect to joint venture or licensing agreements. In this case a well drafted contract submitted to general principles of law and the Unidroit Principles may often offer a better legal framework than a national law. Moreover, when applying general principles recognized in the specific trade, arbitrators will have more space for filling possible gaps with solutions taken from the practice commonly followed within such type of contract. Of course, this implies the need to have possible disputes decided by arbitrators having specific experience in that type of contract.
3. When the parties need to use a standard contract in several jurisdictions and there is no space for submitting it to their own national law. In this case lex mercatoria may be a good compromise solution.

5.2 In what circumstances should lex mercatoria not be chosen?

Lex mercatoria is not an appropriate solution when possible disputes are to be decided by state courts, because national courts will in principle not recognize such a choice (see, supra, Chapter 3, § 3.3).

Thus, contracts of sale where each individual transaction is for a limited amount of money will normally not provide for arbitration for possible disputes, and in this case lex mercatoria is not an appropriate solution.

The parties may of course refer to transnational rules within the framework of a national law, as we have seen in § 3.3.

The choice of a domestic legal system as the applicable law will also be preferable when the parties can agree on a national law which is acceptable to both of them. This will be in particular the case where a party is able to negotiate the choice of its own law, or where the parties can agree on a law of a third country which they consider appropriate[Page27:]

5.3 In case of choice of the lex mercatoria, should the parties incorporate the Unidroit Principles in their contract?

In principle yes, since the principles of law commonly considered to be part of the lex mercatoria are too vague and general and do not offer enough guidance and foreseeability in case of dispute.

When incorporating the Unidroit Principles, parties should check whether certain provisions should be excluded: see above § 2.2.2.

5.4 How should the clause be worded?

See the examples of clauses in Chapter 6.

5.5 If the parties submit their contract to the lex mercatoria, can the arbitrators refuse to follow such indication ?

Arbitrators are in principle bound to respect the choice made by the parties.

If the clause which submits the contract to lex mercatoria is clear, there is in principle no reason to fear that arbitrators will not follow the choice made by the parties.

If the clause is unclear, arbitrators may consider the choice non-effective and apply a domestic law, but this outcome is unlikely, especially where it appears that the parties did not want any domestic laws to apply.

5.6 Is there a risk that arbitrators will make unforeseeable decisions under the lex mercatoria?

It should be said at the outset that such a risk exists before any court or arbitral tribunal, whatever the applicable rules of law.

This risk can be minimized by choosing competent and independent arbitrators and by submitting the contract to specific rules, thus limiting their discretion.

By choosing lex mercatoria in conjunction with the Unidroit Principles, the parties establish a reasonably complete and foreseeable legal framework with respect to the general contract issues (formation, validity, interpretation, performance, non performance, limitation periods, etc.).

However, when choosing this option there will be no specific rules on the particular type of contract in question, as are found in several national laws with respect to "named" contracts, like sales, agency, lease, etc. This means that for certain contracts a domestic law containing detailed provisions and case law may warrant greater foreseeability (although the parties may overcome, at least in part, this problem by providing detailed rules in the contract itself).

With respect to "unnamed" contracts, as are used in most transactions in international trade (e.g., distribution, franchising, joint venture agreements, trademark and patent licenses, know-how contracts, transfer of technology, turnkey contracts, etc.), most domestic laws do not contain specific rules[Page28:]

In these cases general principles together with the Unidroit Principles and a detailed contract may in most cases give as much certainty and foreseeability as a national law.

5.7 Does the choice of lex mercatoria exclude the application of domestic laws?

This depends first of all on the wording of the clause. If the reference to general principles and/or to the Unidroit Principles is worded in such a way that no intention to replace national laws appears, the clause may be interpreted to mean that the parties wished to apply transnational rules within the framework of a domestic law (expressly chosen by the parties or determined on the basis of the rules of private international law).

This situation may in particular arise where the parties choose general principles or Unidroit Principles together with an express reference to a national law.

It is therefore recommended that the parties, once they decide to apply the lex mercatoria, make a clear choice in this direction by expressly excluding the application of domestic legal systems.

5.8 To what extent will the exclusion of national laws be effective?

It is generally recognized that by submitting a contract to the lex mercatoria or general principles of law, with the exclusion of national laws, possible mandatory rules of domestic laws are excluded.

However, this principle only applies to "simply" mandatory rules.

As regards "internationally" mandatory rules (also called “overriding provisions”, “lois de police”, “norme di applicazione necessaria”: see Article 9, Regulation 593/2008 on the law applicable to contractual obligations - Rome I), such rules will in principle prevail over the lex mercatoria, to the extent the arbitrators consider them to be applicable to the dispute³⁹.

This means also that an arbitral award based on lex mercatoria which does not comply with internationally mandatory rules of the country where recognition is sought, may not be recognized by the courts of such country.

5.9 Is there a risk that a domestic court will refuse recognition and enforcement of an award which applies lex mercatoria ?

In the past the objection has been raised that by applying general principles of law, arbitrators would actually have decided ex aequo et bono, and that recognition of the award should be refused if the parties had not given the arbitrators such power. [Page29:]

However this theory has been rejected and it has been recognized that, by applying the lex mercatoria, arbitrators are in any case applying "rules of law". This means that a national court will recognize arbitral awards which apply lex mercatoria, even where such court would not itself respect such choice.

To our knowledge, there are no cases where courts have denied recognition to foreign awards because such awards applied lex mercatoria.

Of course this does not exclude that recognition and enforcement may be denied for other reasons, e.g., because the award which applied lex mercatoria did not comply with internationally mandatory rules of the country where recognition is sought

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