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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Fabio Bortolotti
2.1 The Need to Distinguish Between Applicable Law and Jurisdiction
Before taking up the problems of applicable law, we must deal with a preliminary question of paramount importance, that is, the need to clearly distinguish between the issues regarding the applicable law and those concerning jurisdiction.
At first sight it may seem surprising that one should underline such an obvious point. However, we prefer to insist on this point, since traders (and, sometimes, even lawyers) tend to confuse these two issues, which must be kept clearly separated if one wants to deal correctly with an international contract.
Actually, the distinction is very simple.
.Applicable law Which rules govern the contract?
Jurisdiction Who is to decide possible disputes
Nevertheless, many business people are convinced that when they choose the jurisdiction (by submitting possible disputes to the courts of a certain country) they are at the same time choosing the substantive law of that country as the applicable law and, vice versa, that by choosing the applicable law they are also determining the jurisdiction of the courts of the country whose law they have chosen.
These assumptions are mainly due to the fact that non-lawyers simply do not see the difference between these two issues. An interesting example of total confusion between the issues of jurisdiction and applicable law is demonstrated by in the arbitration clause set out in the following example.
Clause 2-1 — A pathological arbitration clause
12. COMPETENT JURISDICTION
12.1 This contract, as well as all its provisions, will be governed in all respects by the “INTERNATIONAL CHAMBER OF COMMERCE” or in its absence by a neutral legislation defined by mutual agreement of the parties, but in no case by the Tribunals of Justice of the respective countries of the contracting parties.
12.2 All the interpretations required for this contract as well as any disputes that may arise between the contracting parties, will be submitted to the Judges and Tribunals of the Courts defined in clause 12.1, which implies that the parties renounce other jurisdictions, if existing.
Comment: The above clause is a clear example of confusion between applicable law and jurisdiction. The first part of the clause, by referring to a “neutral legislation”, apparently implies a choice of the applicable law (although the indication of the International Chamber of Commerce in this context makes little sense), but thereafter it is said that the contract should in no case be governed by the “Tribunals of Justice of the respective countries of the contracting parties”, which is a clear reference to the issue of jurisdiction. A clause of this type is very dangerous because it is almost impossible to foresee (at least until a decision by a court or by an arbitral tribunal has been taken) if the clause will be considered valid, and in case of affirmative answer, what the clause actually means.
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In the actual case (ICC arbitration case No. 10.422 published in Journal du droit international, 2003, 1142 et seq.), the defendant contended that the clause was not an arbitration clause but only an invalid choice of law clause (since the law of the ICC, chosen by the parties, does not exist), and consequently argued that the arbitrator had no jurisdiction. The sole arbitrator upheld the clause and came to the conclusion that the parties wanted a neutral legislation to be applied by arbitrators appointed under the ICC arbitration rules but, of course, a better clause would have avoided a lot of discussion.
Another common mistake is to believe that the two issues coincide, in the sense that by choosing the jurisdiction of the courts of a given country one automatically also chooses the law of such country as the law governing the contract.
However, this assumption is also definitely wrong.
The courts chosen by the parties will apply the law chosen by the parties (which may or may not be their law) and, if no such choice has been made, they will determine the applicable law according to their conflict of law rules which may (or may not) entail the application of their law.
Thus, the final result may, in some cases, be that the court applies its own law1 (courts tend to prefer, where possible, to apply rules they are familiar with), but the fact remains that the choice of jurisdiction as such does not imply a choice of law.
There are, of course, close links between the issues of applicable law and jurisdiction. So, as we will see, by choosing the jurisdiction of the courts of a given country one chooses the system of private international law of that country (since national courts always apply their own conflict of law rules). Another relevant issue is that the court chosen will in principle be bound to respect the internationally mandatory rules of its own legal system (infra, § 2.7.3).
However, all of this only confirms the need not to confuse the two issues, because only by keeping them apart is it possible to understand and to correctly apply the principles regarding the applicable law and, respectively, jurisdiction.
2.2 The Importance of Determining the Applicable Law
Many traders think that the above issue is a merely theoretical problem of little practical relevance. The important thing, they believe, is to draft and conclude well-written contracts which will resolve all, or almost all, of the problems that may arise.
This attitude is mainly due to the following reasons:
The first reason (sometimes also put forward by lawyers, unfortunately) is no more than an excuse for not dealing with matters one is not familiar with. As we will show in this chapter, conflict of law issues are not more complicated than other issues; they simply need to be explained and understood in the right way.
As to the second reason, it is essential to bear in mind that the contract must be placed in the context of the governing law, which may substantially affect its contents, by filling possible gaps and/or by influencing the effectiveness of certain provisions.
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A few practical examples may show how important the issue of the applicable law may be from a practical point of view.
Example 2-1 – Agent’s indemnity under two different laws
A German exporter wishes to appoint a French company as its agent for the territory of France. A detailed contract is negotiated, but when it comes to the issue of the applicable law, a difficulty arises because the French agent requests that the contract be submitted to French law, while the German principal would prefer German law. The German principal decides that no time should be wasted with purely legal matters and the parties decide not to deal at all with the issue of applicable law.
After three years, the German principal decides to discontinue the manufacture of the goods the French company was promoting and consequently terminates the agency agreement. The French agent requests a goodwill indemnity equal to two years of commission according to French law (which is applicable in the absence of choice: see infra, § 2.5.2). When the German principal consults a lawyer, he is told that if German law had been applicable, the principal would have paid no indemnity at all.
In fact, under French law, goodwill compensation has no maximum limit, and is normally determined by the courts on the basis of two years of commission, such indemnity being due by the mere fact that the agent loses commissions he would have earned if the contract had continued.
Under German law, the goodwill indemnity cannot exceed one year of commission and is only due if the agent has developed a customer base which the principal can benefit from after the end of the contract. This implies that no indemnity at all is due in the exceptional case where the principal discontinues the activity (because he can take no advantage of the goodwill developed by the agent).
The final result is that, depending upon the applicable law, the principal will have to pay a goodwill indemnity of two years or no indemnity at all.
If the German principal had insisted on the choice of German law, he would have avoided the indemnity (or, in the context of a “normal” termination, not due to discontinuance of the activity, he would have paid an indemnity calculated according to the German rules, within the maximum amount of one year’s commission).
Example 2-2 – Penalty or liquidated damages?
A French manufacturer purchases production equipment from a US manufacturer. Since he absolutely needs the equipment within a certain date, in order to fulfil deliveries already agreed with his customers, the parties agree that in case of delayed delivery of the equipment the supplier will pay a penalty of 10% of the price of the equipment for each week of delay. There is no agreement on the applicable law.
If US law (or, to be more precise, the law of the state of the US supplier) applies,3 it is very likely that the penalty clause will be considered null and void, since under US law only liquidated damages are admitted (see infra, § 6.5.3). Under French law the clause would be valid, although the courts would be entitled to reduce the penalty if it were considered excessive.
In this case, the same clause is valid if the law of the purchaser applies, but is not valid if the law of the seller applies. Consequently, a responsible negotiator should draft the clause only after having determined (possibly by a choice of law clause) which law is to apply. Once it is certain which law is to apply, the parties can draft a clause that complies with the applicable law (e.g. a clause on liquidated damages, not exceeding the likely damage the buyer may suffer if US law is to apply) and so avoid the risk of having agreed upon a clause that would be ineffective.
These two examples show how substantial the issue of applicable law is.
[Page23:]Even when the parties give the utmost attention to drafting a detailed contract, its actual contents will (also) depend upon the applicable law, because the contractual rules must be coordinated with the rules of the law which governs the contract. This is why, in case of a dispute, the first question for the lawyer is to know under which law he should verify the validity and effectiveness of the various clauses, and which law he should consider when looking for rules that must fill the gaps left by the parties.
In other words, the actual meaning of an international contract, even if drafted with the greatest attention, depends on the applicable law, which will tell us, on the one hand, if certain clauses are admissible or not, and on the other, how issues left open by the parties (a situation impossible to avoid) will be regulated.
This does not exclude that there may be situations where the best option is to avoid raising the problem of the applicable law (see infra, § 2.9.5). However, where this extreme solution appears to be inevitable, the parties should at least be conscious of the risk it involves and try to minimize it, for instance by examining in advance which law is likely to apply in the absence of choice.
2.3 Two Alternatives: Traditional Approach v Lex Mercatoria
In order to determine the law applicable to an international contract, two kinds of approach can be taken.
1. The traditional view is based on the assumption that the applicable law must be a national (domestic) law system. In this context, the problem is mainly to decide which domestic law is to apply. The answer to this question will be found in the rules of private international law (conflicts of law rules) that tell us which law must be applied in the specific case if the parties have made no choice (and, if a choice has been made, to what extent the choice is effective).
2. An alternative approach (which is actually only possible — at least at present — if disputes have to be decided by arbitration) is based on the assumption that it is more appropriate to apply general principles of law recognized as applicable to international trade (the so-called lex mercatoria), than a national law. According to this theory, a transnational set of rules and principles of international contracts responding to the needs and practices of business in international trade, said to be gradually emerging from commercial practice, can be applied instead of a national legal system, which, by its nature, is inappropriate for cross-border contracts. Based on this theory, arbitrators in several cases have applied “general rules and principles regarding international commercial contractual obligations enjoying a wide international consensus”4 or “general principles and rules of law applicable to international contractual obligations”,5 instead of a national law.
At the outset, it should be said that the recourse to lex mercatoria is rather exceptional and that the traditional conflicts of law approach is still used in the large majority of cases.
So, from case law on international commercial agreements decided by national courts, it appears that the courts almost always apply the rules of a domestic legal system, determined on the basis of their rules of private international law. But international arbitrators, who have a more “open” approach towards “a-national” or “trans-national” rules, also tend, in most cases, to refer to the rules of national legal systems.
This will be of course the case when the parties have expressly chosen to apply a specific domestic law, which is by far the most common situation. Thus, if we look at the Dispute Resolution Statistics of the years 2011-2015 published by the ICC, it appears that a choice of law clause had been agreed by the parties in about 84 to 90% of the cases, but only in 1 to 3% of these reference was made to a-national rules (a category including not only lex mercatoria and general principles of law, but also EU law and CISG).
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But also when the parties made no express choice of the applicable law, the common approach by arbitrators will be to identify the applicable domestic law on the basis of the conflicts of law rules, except when it appears that the parties do not want the law of the respective countries to apply,6 or when the parties agree in the course of the arbitration to have recourse to an a-national solution, like the UNIDROIT Principles.7
In any case, although recourse to lex mercatoria is still rather exceptional, we can see in recent years a growing number of cases in which this choice is made by the parties, especially with reference to the UNIDROIT Principles.8
As we will see later (infra, § 2.8.3 and 2.9.4) this alternative tool, which has the advantage of submitting the contract to rules that may, in certain cases, be more appropriate than those of domestic law systems, can be successfully used, especially in the context of international arbitration, provided appropriate precautions are taken in order to warrant the existence of a sufficiently precise legal framework.
We will first examine the problems of applicable law in the traditional framework of private international law (infra, § 2.3-2.6) and thereafter look into the theory of lex mercatoria (§ 2.7). At the end of this chapter, we will analyze the solutions among which the parties can choose when deciding the issue of the applicable law.
2.4 The Rules of Private International Law (Conflicts of Law)
All national legal systems have rules regarding the determination of the law applicable to issues that are not merely domestic. These rules (called “rules of private international law” or “conflict of law rules”)9 make it possible to apply to “international” matters the domestic law that appears to be more appropriate to govern these situations.
Of course, the rules of private international law cover a much wider range of issues than those relating to contracts (such as family relations, wills and succession, etc.). In this context, however, we will only consider the rules relating to obligations, which are of interest for the purposes of this book.
2.4.1 The problems arising from the lack of uniformity
The conflict of law rules are part of the domestic law system of each country, which implies that they may be different (and actually are different in most cases) from one country to another. Therefore, when a national court has to decide a case that has connections with other countries (like a contract between a national and a foreign party), it will look at its own conflict of law rules to determine the law it should apply.
Of course, the variety of conflict of law rules may create uncertainty and give contradictory results. If courts of different countries apply different conflict of law rules to the same situation, they may come to different conclusions. For example, if one [Page25:]country has a rule which says that the law of the place of conclusion of the contract shall apply, while in another country reference is made to the law of the place of performance of the contract, the final results may be quite different, as shown in the example below.
Example 2-3 – Conflicting rules of private international law
A Danish exporter enters into a contract of sale with a Thai purchaser. The contract, which contains no choice of law clause, is signed in Bangkok. When a dispute arises, the lawyers of the parties ask themselves under which law they should evaluate the respective positions of the parties.
Since Thailand is not a party to the Vienna Convention on international sales (while Denmark has ratified it), CISG is not automatically applicable (see, infra, § 7.3.1.1). It must therefore be ascertained which law is applicable under the respective conflict of law rules of the two countries.
Under Thai private international law (Conflicts of Law Act of 1938, Article 13), reference should be made to the place of conclusion of the contract: thus Thai law should apply.
Under Danish private international law (Rome Convention), the law of the party that effects the characteristic performance (in this case, the seller) must apply.
This means that, if the dispute is brought before Thai courts, these should apply Thai law, while in case of a dispute brought before Danish courts, Danish law (in the present case, the CISG) would be applicable.
The above example shows how different conflict of law rules can entail contradictory results. In such a case, each court would have applied its own law. However, if the two elements considered above are inverted and the seller is from Thailand and the contract has been signed in Denmark, the opposite result will follow: the Thai courts should apply Danish law (as the law of the place of conclusion), while the Danish courts should refer to Thai law (this being the law of the seller’s domicile).
In order to bring some order to this chaotic situation, attempts have been made to unify the rules of private international law.
Some conventions unifying private international law in the field of contracts:
In any case, one of the most successful attempts to unify private international law in the field of contracts has been achieved within the European Union through the Rome Convention of 1980 and the Rome 1 Regulation, which will be examined in the following paragraph.
2.4.2 The Rome Convention of 1980 and the Rome I Regulation (593/2008)
One of the most successful initiatives in the field of harmonization of private international law is the Rome Convention of 198012 which has been replaced as of 18 December 2009 by the Rome I Regulation (Regulation 593/2008) at present in force in all Member States of the European Union except Denmark where the Rome Convention is still in force.
Considering the wide geographic coverage of the Rome Convention and the Rome I Regulation, we will pay special attention to their rules. As regards other systems of private international law, it is impossible to consider them here. Consequently, the situation of a particular country outside the EU should be examined on a case-by-case basis.
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Since the Rome I Regulation applies to contracts entered into after 17 December 2009, the Rome Convention of 1980 may still apply in several cases. We will therefore deal in parallel with the Rome Convention and with the Rome I Regulation.
The Rome I Regulation only refers to contractual obligations: concerning non-contractual obligations a specific regulation — Rome II — was enacted in 2007.13
2.4.3 Private international law rules and international arbitration
When a dispute is brought before a national court, there is no doubt that such court must apply its own conflict of law rules. Therefore, when a court must determine the proper law of the contract, it will base its decision on its own system of private international law.
If the dispute is submitted to arbitration, the answer is less simple. Unlike state courts, arbitrators are not bound to a lex fori: they need not apply private international rules of a given country, and they consequently have a much wider flexibility when deciding the applicable law.
On this assumption, the principle has been developed that the arbitrators can choose the system of private international law they wish to apply in order to determine the applicable law. For example, Article 28 (2) of the UNCITRAL Model Law on Arbitration says that:
Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.
But recent developments go even further and tend to grant the arbitrators an even wider freedom of choice. So, Article 21(1) of the Rules of Arbitration of the International Chamber of Commerce provides as follows:
The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.
This means that the arbitrators have a much greater freedom than national courts when it comes to determining the applicable law in the absence of a choice by the parties. Since this can be an advantage (or disadvantage) according to the circumstances, this should be carefully considered when establishing the contractual strategies regarding the applicable law (see, infra, § 2.9).
Of course, it is difficult to foresee how arbitrators will proceed in a particular case. In most cases arbitrators determine the applicable (domestic) law on the basis of principles of private international law that appear to be widely used in international trade. In this context, connecting criteria such as the characteristic performance and the place of performance will be frequently used.
However, in using their wide discretion, arbitrators will often tend to prefer the law they consider to be more appropriate for solving the dispute in question, which need not necessarily be a domestic law. An example of this approach can be found in the following case, decided by an arbitral tribunal under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce:14
It seems obvious to the Tribunal that the parties in this case deliberately refrained from agreeing on the applicable law to the 1980 Agreement, which otherwise bears the mark of a well prepared and qualified approach to contract drafting. It may well be that either or both of the parties had hopes or expectations on the application of a law, in case of a dispute between them, with which they would feel comfortable. But there is no indication that they at the time contemplated the actual effects of any particular law on hypothetical instances of breaches under the contract; nor have any such effects so far been presented by the parties in the arbitration. In the Tribunal’s view, it is reasonable to assume that the contracting parties expected that the eventual law chosen to be applicable would protect their interest in a way that any normal business man[Page27:]would consider adequate and reasonable, given the nature of the contract and any breach thereof, and without any surprises that cou1d result from the application of domestic laws of which they had no deeper knowledge. This leads the Tribunal to conclude that the issues in dispute between the parties should primarily be based not on the law of any particular jurisdiction, but on such rules of law that have found their way into international codifications or suchlike that enjoy a widespread recognition among countries involved in international trade. Apart from international conventions such as the Convention on International Sales of Goods (CISG) and other conventions that are not directly applicable on a licence agreement, the only codification that can be considered to have this status is the UNIDROIT Principles of International Commercial Contracts.
If we consider that this type of approach tends to be followed in recent years by many international arbitrators, parties may consider the option to leave the decision on the applicable law to the arbitral tribunal.15
2.5 The Law Applicable in the Absence of a Choice by the Parties
As we will see later (§ 2.6), in most cases it is advisable to choose the applicable law in the contract itself, through a specific clause to this effect (infra, § 2.6.4).
However, this does not always happen in practice: contracts without a clause on the applicable law are rather common. Sometimes this is simply due to the fact that the parties ignore the problem; but in many cases the reason is that no agreement could be reached on this issue and the parties consequently preferred to leave the matter open.
As long as the contractual relation proceeds smoothly, the parties can live very well without knowing which law governs the contract. But when a discussion arises about their respective rights and obligations, the need will arise to identify the applicable law in order to be able to evaluate, from a legal point of view, to what extent the respective claims of the parties are founded. In some cases the answer can be found in the contract itself. But even where this occurs, it may be necessary to check if the contract clauses conform to the law, and this can be done only after having ascertained which law governs the contract.
In other words, when conflicts arise between the parties and lawyers begin to be involved, the issue of the applicable law will inevitably become crucial.
If this issue has not been resolved contractually through a choice of law clause, it will be necessary to make reference to the rules of private international law that apply in the specific case. If it is clear that the courts of a given country have jurisdiction (e.g. because of a choice of forum clause), the conflict of law rules of that country will apply. If the jurisdiction issue is open, one will need to examine the problem under the private international law rules of the courts that might come into consideration in case of dispute. And if arbitration is foreseen, one must expect that the arbitrators will have wide discretion on the issue, which of course makes it difficult to make a forecast.
Once it is established which system of conflict of law rules applies, one should in principle be able determine the applicable law on the basis of such rules.
In practice, this will not always be the case, because often the rules of private international law do not give clear and definite answers. Consequently, several private international law systems leave a wide discretion to the courts in order to enable them to apply the solution which appears to be the most appropriate in the specific case. When this approach is followed, the possibilities of predicting the outcome will be very limited, and it will be almost impossible for the parties to establish in advance (i.e. before a judgment by the competent court) which law is to be applied.
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2.5.1 Which criteria will be used for the determination of the applicable law?
It is impossible to answer this question in general terms, since it depends on each specific system of private international law.
As we have seen, the criteria used in the various laws are manifold: some systems make reference to the place of conclusion of the contract;16 others refer to the law of the country which has the closest connection to the contract; some conflict of law systems consider the place of performance of the contract;17 others refer to the residence or domicile of the party that effects the characteristic performance.18
Moreover, some private international law systems, in addition to general rules, provide special provisions for particular types of contracts.
Considering the variety of solutions implemented in the various systems of private international law, it would make little sense here to try to recount a general overview of the various criteria used.
On the contrary, such an approach is possible and useful with respect to the EU Rules (1980 Rome Convention and Rome I Regulation), considering their wide geographical coverage and the fact that they represent one of the most modern instruments. This is why we will examine in more detail the main rules of the Rome Convention and the Rome I Regulation in the following paragraphs.
2.5.2 The criteria contained in the Rome Convention
The Rome Convention sets out in Article 4 the criteria for determining the applicable law in the absence of a choice by the parties.
Article 4 of the Rome Convention — Applicable law in the absence of choice
According to Article 4(1), the contract is governed by the law of the country with which it is most closely connected.
However, this general rule has little significance, since it does not say when a close connection actually exists.
The really important criterion is contained in Article 4(2), according to which the closest connection is presumed to exist with the country of residence of the party that effects the characteristic performance of the contract.19
This means that for each type of contract one has to look at which party effects the characteristic performance of that contract, it being understood that when a party does something in exchange for money, the non-monetary obligation will be considered to be the characteristic performance. Once it is established which of the [Page29:]parties effects the characteristic performance, it will be easy to determine the applicable law, which will be the law of the country where such party has its residence or domicile. The advantage of this criterion is that one can know in advance, with respect to many types of contracts, which law is to be applied.
This means, for example, that in a contract of sale the characteristic performance is that of the seller; in a commercial agency agreement that of the agent. Consequently the governing law will be that of the country where the seller or the agent is domiciled.
However, the criterion of the characteristic performance does not always offer a clear answer. This happens, for example, with respect to contracts where both parties perform a non-monetary obligation (like a barter, for instance). When this situation arises, one must revert to the general rule (closest connection) which makes the final result rather unpredictable.
A special case is that of distributorship agreements (infra, § 7.4.7.), where court decisions have been contradictory. If one looks at the activity of the distributor as reseller on the market for which he is responsible, the characteristic performance will be that of distributing the supplier’s goods and consequently the law of the distributor’s habitual residence will apply.20But if one focuses on the sale-purchase relationship between the supplier and the distributor, it is the supplier who effects the characteristic performance, and thus his law should be applied in the absence of a choice by the parties.21
Another contract for which it is difficult to determine the closest connection is the master franchising agreement, whereby the master franchisor grants the master franchisee the right to establish a network of sub franchisees. While it is normally accepted that within a franchise agreement it is the franchisor who effects the characteristic performance (by granting certain IP rights and providing certain services to the franchisee), in the case of master franchising the master franchisee as well agrees to perform an activity of substantial importance (the development of a network).
It should finally be noted that, according to paragraph 5 of Article 4, the characteristic performance criterion must be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country. This rule leaves space for unpredictable results and thus reduces certainty, but may at the same time be a useful tool in order to deal with situations where the characteristic performance rule would conduct to unreasonable results. This may be for instance the case where, in the context of a dispute, closely connected contracts would be submitted to different laws.
2.5.3 The criteria contained in Rome I Regulation
While the Rome Convention provided a general rule for determining the applicable law in the absence of a choice by the parties (i.e. that of the habitual residence of the party effecting the characteristic performance of the contract), the Rome I Regulation now lists a number of specific rules for different contracts.
Article 4 of the Rome I Regulation — Applicable law in the absence of choice
Instead of departing from the general criterion (the closest connection), together with the criterion of the characteristic performance, Rome I Regulation provides:
This solution should in principle give more foreseeability, especially for the types of contracts expressly mentioned. However, there is still space for uncertainty.
Thus, for example, it is not clear which contracts fall under the broad definition of “provision of services”. No doubt that this notion will cover an agency contract, or a contract for the provision of professional services. But the situation would be doubtful for the provision of a bank guarantee or the supply on a turnkey basis of a production line.22 Finally, as regards licensing contracts, it has been expressly excluded (although with respect to Regulation 44/2001, now 1215/2012) that these can be qualified as contracts for the provision of services.23
On the contrary, the problem regarding the law applicable to distribution contracts should have been clarified through the express reference contained in Article 4(1)(f) of Rome I Regulation. Although the notion of “distribution contract” is not defined in the Regulation, the Court of Justice has given some indications in this respect in the context of Regulation 44/2001 (now Regulation 1215/2012), stating in particular that the contract with a reseller containing specific terms concerning the distribution by the distributor of goods supplied by the grantor is to be qualified as a distribution agreement, which must be considered as a contract for the supply of services for the purpose of article 5(1)(b) of Regulation 44/2001).24
Finally, there are many contracts which do not fall under the list contained in Article 4(1), such as licensing agreements, joint ventures and other cooperation agreements. With respect to these contracts reference will be made to the criterion of the characteristic performance and where this does not give an answer to the more general one of the closest connection.
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2.5.4 The main problem for business: lack of predictability
The above description of the criteria for determining the applicable law in the absence of a choice by the parties shows that the final result may not always be clearly predictable.
First, under different conflict of law rules the criteria may be different, and thus the results may change from case to case, depending on the jurisdiction in which the case is brought (since, as we have seen before, each court will apply its own rules of private international law).
Second, even when uniform rules exist (as under the Rome Convention and the Rome I Regulation), these rules leave wide discretion to the courts. This is due to the fact that many legislators wish to give the courts the freedom to select the legal system they consider to be the most appropriate in the specific case. However, although this approach may have the advantage of warranting a “better” solution in the actual case, it has the substantial disadvantage of being far less predictable, which makes it inappropriate for business people who need to know in advance (and not at the end of a procedure in court) which rules govern their contract.
We can therefore conclude that, if parties wish to be absolutely sure about the applicable law, they should expressly agree upon this issue through a choice of law clause. We will examine this solution in more detail in the following paragraphs.
2.6 The Choice of the Governing Law
We will now discuss the problems related to the choice of the applicable law and particularly those concerning the effectiveness of this choice with respect to mandatory rules of the legal system that would otherwise be applicable. This is, as we will see later, the main and most complicated issue that must be dealt with in this context.
2.6.1 The principle of freedom of choice
In principle, almost all legal systems (with some important exceptions, like for instance Brazil and Saudi Arabia) allow the parties to choose the law to be applied to an international contract. This means that, as a general rule, it is possible to choose a law other than the law that would apply in the absence of choice (e.g. the law of the purchaser’s country instead of the law of the seller’s country, or the law of the principal instead of the law of the agent).25
This is clearly expressed in Article 3(1), of the Rome 1 Regulation.
Article 3 or Rome I Regulation - Freedom of choice
Under the Rome 1 Regulation, the law chosen need not have a connection to the contract, i.e. the parties may choose the law of a third country not having any particular link to the contract.26
In principle, the choice of the applicable law implies that the parties must comply with the mandatory rules of the domestic law that governs their contract.27
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Unless one follows the theory mentioned hereafter in paragraph 2.6.3.1, parties cannot exclude the application of such mandatory rules, i.e. they cannot choose only the rules they like and avoid the mandatory rules they (or the party having more negotiating power) dislike.
Article 3 of the Rome I Regulation also admits the possibility of an implicit or tacit choice of the governing law, provided such choice results clearly from the contract or other circumstances, for instance when the contract shows a close connection with a given national law (e.g. by expressly mentioning provisions of that law) or when the parties base their submissions before the court on a particular domestic law.28
The above principle should be interpreted narrowly in order to avoid that the tacit choice is used by the courts as a device for applying their own law, instead of determining the applicable law under Article 4 of the Rome I Regulation. Thus, the argument that the choice of the courts of a given country implies a choice of the law of that country should in principle be rejected, unless there is evidence that the parties knowingly made this choice in order to have their dispute decided under that particular law.
This being said, it must be considered that there is a certain trend toward considering the choice of forum as implying a choice of law. Thus, for instance, in a case regarding a contract between a German and a Japanese company, the English High Court decided that by using an English standard form and arbitration in London, the parties had made an implied choice of English law, stating in particular that:
… having agreed English arbitration for the determination of disputes arising out of a well-known English language form of charter-party which contains standard clauses with well-known meanings in English law it is … to be inferred that the parties intended that law to apply. Having agreed a ‘neutral’ forum the reasonable inference is that they intended that forum to apply a ‘neutral’ law, namely English law and not either German of Japanese law.29Some support to this type of approach is also given in recital 12 of the Rome I Regulation, where it is said that:
… An agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated.
2.6.2 Cases where the freedom of choice is limited
The Rome 1 Regulation, in Articles 3(3), 3(4), 6 and 8(1), lists some special situations where mandatory rules of a given legal system cannot be excluded through a choice of law. In these cases, all mandatory rules of a given legal system will continue to apply (even if not “internationally” mandatory: see infra, § 2.7.1), although the parties have submitted the contract to another law.
2.6.2.1 Purely domestic contracts
Article 3(3) of the Rome 1 Regulation says that
Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.
This means that in case of purely domestic agreements, the mandatory rules of such legal system will apply in any case and that the parties cannot exclude the application of such rules by submitting the contract to a different law.
2.6.2.2 Purely intra-EU contracts
Article 3(4) of the Rome I Regulation says that:
Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law [Page33:]other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement.
Here reference is made to mandatory provisions of EU law which have been implemented in the national legal systems. In case of a contract between parties belonging to the EU, mandatory provisions of EU law cannot be excluded through the choice of the law of a third country.
An example may be helpful for a better understanding of this rule.
Example 2-4 Contract between Italian principal and French agent submitted to the law of the State of New York
An Italian exporter meets at a fair in Paris a French commercial agent who would like to promote the exporter’s products in France. Since the Italian exporter concluded a few days before a contract with a US agent, the parties decide to use the same text limiting themselves to change the name of the agent and the territory. Having been told that French law grants a goodwill indemnity to agents, the Italian principal insists on the choice of the law of the state of New York and is able to convince the agent to sign.
Since this is a purely intra-EU contract (which has no connection with non-EU countries), the choice of the law of a third country cannot exclude the application of mandatory provisions of Community law. Now, the rule of Community law which provides the agent’s right to indemnity or compensation (Article 17 of Directive 86/653) is mandatory and must therefore be applied notwithstanding the choice of New York law.
However, Article 17 of the Directive cannot be applied as such (since this is a rule directed to the Member States). Consequently, if the case is brought before a court in the EU such court shall apply the rule of its own law which implemented the directive: thus, for instance, an Italian court would apply Article 1751 of the civil code, while a French court would apply Article 134-12 of the commercial code.
2.6.2.3 Certain consumer contracts
According to Article 6 of Rome I Regulation a choice of law may not deprive the consumer of the protection afforded to him by mandatory rules of the law which would be applicable in the absence of choice, i.e. the law of the country where the consumer has his habitual residence.
This situation should be of limited interest for most of the readers of this book, mainly concerned with B2B contracts, except when they decide to sell to consumers through their own website.
2.6.2.4 Individual employment contracts
According to Article 8 of Rome I Regulation a choice of law in an employment contract shall not have the result of depriving the employee of the protection afforded to him by the mandatory rules of the law which would be applicable in the absence of choice, i.e. the law of the country where the employee habitually carries out his work. This means that, if the parties choose a different law, the mandatory rules of the law of the country where the employee works will nevertheless apply.
2.6.3 Special problems: exclusion of mandatory rules; dépeçage
We will deal in this paragraph with two special issues that imply the recourse to rather sophisticated legal tools, which should not be used by traders without the assistance of a lawyer experienced in international contracts. Business people may therefore skip this rather “technical” paragraph, which is mainly directed at lawyers.
2.6.3.1 Exclusion of mandatory rules of the law chosen
As noted before, where the parties submit the contract to a given law, they must as a general rule respect the mandatory provisions of such law.
However, it could be argued against this well-established principle that, if the parties are free to choose the applicable law, they should also be free to exclude certain mandatory rules of that law, for instance by stating in the contract that its terms will in
[Page34:] any case prevail over possible mandatory rules of the law they have chosen. Therefore, it has been argued that arbitrators should respect the choice of the parties to exclude the application of certain mandatory rules of the law selected by them (for example, when they say that this law will apply to the extent it does not conflict with the provisions of the contract).30
The above solution, consisting in choosing the applicable law and excluding at the same time certain of its mandatory rules — although theoretically possible — is unlikely to be admitted by national courts, and even by arbitrators. For example, in two cases where a commercial agency contract between an Austrian principal and a foreign agent had been submitted to Austrian law “with the exclusion of mandatory rules applicable to domestic agents”,31 the arbitrators decided that the parties could not choose Austrian law and, at the same time, exclude mandatory rules of that law on goodwill indemnity. Consequently, they applied Austrian law in its entirety.32
2.6.3.2 Dépeçage
A possible tool for overcoming the problem described in the preceding paragraph is to submit different parts of the contract to different laws. For example, in the case of the agency contract mentioned in the preceding paragraph, the parties could have submitted the part of the contract regarding termination and goodwill indemnity to the law of a country that does not contain mandatory rules protecting the agent, and all of the rest of the contract to Austrian law.
In principle, solutions of this type are possible under systems of private international law (such as the Rome I Regulation, for instance) that allow the parties to choose different laws for different parts of the contract (the so-called “dépeçage”).
This possibility may be considered in particular circumstances, but clauses of this kind should be drafted with the greatest caution and only where really necessary; splitting a contract into different parts, submitted to different laws, may give rise to contradictions and confusion.
Cases in which one might consider using this kind of solution are, for example, when a part of the contract (e.g. a warranty obligation) has a close link to a particular country different from the country whose law is applicable.
Another situation where dépeçage could be of some interest arises when the parties wish to avoid certain mandatory rules of a given law, by submitting only these issues to another law, as explained before. However, the use of dépeçage for the purpose of avoiding mandatory rules of the otherwise applicable law should be handled with extreme caution for several reasons: first, solutions of this kind indicate that a stronger party is trying to “bypass” mandatory rules to the disadvantage of the other party, which will put that party in a bad light in case of dispute; second, the application of different laws to the same contract (although to different parts of it) almost inevitably gives rise to contradictions and problems of interpretation (especially considering the difficulty of drawing a clear borderline between different subject matters within the same contract). Finally, it is likely that such a complicated solution may not be understood by the other party, and by the courts in case of a dispute.
It is therefore preferable to have recourse to this kind of solution only in very specific cases where there is a real need for it and, in any case, to work it out with the assistance of an expert who can make sure that it is practicable.
2.6.4 How to draft the choice of law clause
As a general rule the clause on the applicable law should be as simple as possible.
A standard clause is the following:
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Clause 2-2 – Choice of law clause I
This contract is governed by the laws of ……….. (name of the country the law of which is to apply)
Clauses which add further unnecessary elements, such as “in case of dispute …” or “with respect to the interpretation of the contract …”, should be avoided, because they may reduce the scope of the clause and offer the other party pretexts for challenging its application.
For example, the other party might argue that the clause does not apply because no dispute has been brought before the competent courts, or that the issue in dispute concerns the validity of the contract, and not its interpretation and that the choice of law clause does not apply to it. It is likely that objections of this kind, based on a literal and formalistic interpretation of the clause, will be rejected by most courts. However, it is better to prevent any risk of discussion by avoiding, whenever possible, wordings of this type.
Sometimes the clause specifies that the choice of law does not include the conflict of laws rules of the legal system chosen, in order to avoid the risk that the choice of law is also intended to include the conflicts of law rules of that country, which would imply that the substantial rules to be applied would be those determined according to the conflict of laws rules of the country chosen.33 An example of a clause containing this specification is the following:
Clause 2-3 – Choice of law clause II (US style)
This Agreement shall be governed and construed in all respects by and in accordance with the laws of the state of Connecticut, United States of America, without regard to application of conflict of laws principles that would require the application of any other law.
Parties may also wish to specify that their choice of law concerns only the material rules of the legal system chosen and not its rules of procedure. Such a specification will, in most cases, be superfluous, since the common practice is to interpret choice of law clauses as implying a choice of the rules concerning the substance; the procedural rules will be those of the competent court, and they may, of course, be other than those of the law governing the contract.
2.7 The Effectiveness of the Choice of the Governing Law
THE BASIC PRINCIPLE
As a general rule the choice of a given law implies that the parties must respect all mandatory rules of such law (and do not need to respect possible mandatory rules of other legal systems).
THE EXCEPTION
Only in rather special cases may mandatory rules of the law that has been excluded through such choice nevertheless remain applicable.
The freedom to choose the applicable law means that the parties can select a law they consider to be more convenient in place of the law which would otherwise be applied.
However, where the law that would otherwise be applicable contains mandatory rules, is it possible to exclude the application of such rules by submitting the contract to a legal system that does not contain these rules?
For instance, when a domestic law contains mandatory rules that protect a “weaker” party (licensee, commercial agent, distributor, employee), is it possible to validly derogate these rules by submitting the contract to a more flexible national law?
The answer to this question is not easy. In fact, it is one of the most controversial issues in the law of international contracts. It is therefore important to devote the necessary attention to this issue, as we will do in the following paragraphs.
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2.7.1 “Simply” mandatory rules and “internationally” mandatory rules
If we leave aside the special situations described above in § 2.6.2, where rules of private international law limit, in general terms, the effectiveness of the choice of law with respect to certain situations (purely domestic agreements) or contracts (consumers, employees), as a general rule the choice of the applicable law implies that the mandatory rules (if any) of the law chosen will apply instead of those of the law which would apply in absence of a choice.
In other words, the law chosen by the parties will replace the otherwise applicable law, even if this implies the non-application of some mandatory rules of such law.
Example 2-5 – Contract with French agent submitted to German law
A German principal appoints an agent in France. The contract expressly states that the contract is submitted to German law. When the contract is terminated, the French agent claims a goodwill indemnity amounting to two years of commission, calculated in accordance with French law, arguing that the French rules are mandatory. The German principal sustains that this does not matter: since German law is applicable, it is sufficient that German mandatory rules (which fix a maximum amount of one year’s commission) are respected.
Comment: The German principal is right. French mandatory rules protecting the agent can be validly derogated by submitting the contract to another law: Cass. 28 December 2000, Alfin c. Allium, in La lettre de la distribution, Jan. 2001.34
This general principle is based on the assumption that, in normal conditions, mandatory rules must be respected within the legal system they belong to. If parties opt for another legal system, they will need to respect the mandatory rules of that law, but not those of the law that has been replaced through the choice of law.
However, national legislators may decide to give some of their mandatory rules a stronger position, by stating that they cannot be derogated by submitting the contract to a foreign law. These “internationally mandatory rules” (also called “overriding mandatory provisions”, “lois de police” and “norme di applicazione necessaria”) must be respected — according to the law of the country enacting them — even if the contract as a whole has been submitted to a different law.
Example 2-6 – Contract with a Belgian distributor submitted to Italian law
An Italian supplier appoints a Belgian distributor to market his goods in Belgium. The contract expressly states that it is governed by Italian law. When the contract is terminated, the distributor brings a claim before the courts of his country and requests payment of various indemnities due under the Belgian law of 27 July 1961 on distributorship agreements.
Comment: In fact, Article 4 of this law says that if a dispute regarding termination of a distributorship agreement performed in Belgium is brought before Belgian courts, these will exclusively apply Belgian law and consequently recognize the indemnities (which would not be due under Italian law).
In the case of the above example, the mandatory rules protecting the concessionnaire are to be applied even when the contract is submitted to another law. Moreover, a Belgian court, which is bound to recognize the internationally mandatory character of such rules, must in principle apply them, even when the parties have chosen a different law.
A further example of this kind can be found in Article 2(2) of the Finnish Act 417/92 on Commercial Representatives and Salesmen, which states as follows:
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Section 2(2) of the Finnish Act on Commercial Representatives and Salesmen(Law 417/1992)
A provision in an Act which, under this Act, cannot be derogated by agreement to the detriment of the commercial representative, can neither be derogated to his detriment by an agreement according to which foreign law is to be applied to the legal relationship between the commercial representative and the principal if the relationship should otherwise be governed by this Act.
This means that when an agency contract with a Finnish agent (to which Finnish law would apply in the absence of choice of law: see above, § 2.5.2) is submitted to a foreign law, Finnish mandatory rules on agency will nevertheless apply. Under Finnish law these rules are considered as “internationally” mandatory.
The above examples refer to mandatory rules protecting a weaker party.
Another interesting field of application for “internationally” mandatory rules is that of antitrust law. In most jurisdictions it will be impossible to avoid the application of antitrust rules (and thus the nullity of contractual clauses conflicting with such rules), with respect to contracts producing effects in these jurisdiction, simply by submitting the contract to another legal system.
An important point that must be highlighted is that in principle each national legislator is free to decide which rules to consider “simply” mandatory and which “internationally” mandatory.35 Consequently, there may be substantial differences between various legal systems: one country may consider as “internationally” mandatory certain rules that other countries qualify as “simply” mandatory.
Therefore, we can conclude that it depends on the law of each country whether certain of its mandatory rules have — or do not have — an “internationally” mandatory character, i.e. if they will or will not remain applicable although the contract has been submitted to the law of another country.
Consequently, when the law excluded through the choice of law clause contains mandatory rules that may be considered to be of particular importance within a legal system (such as rules protecting local traders or the public interest) it is advisable to check case by case if such rules are “internationally” mandatory and, in case they are, take the appropriate measures.36
2.7.2 National laws implementing European directives: the Ingmar case
A special problem arises with respect to provisions of domestic law that implement European directives.
This issue has been brought up, in the Ingmar case,37 with reference to the directive of 1986 on commercial agents, concerning the agent’s right to compensation (indemnity) in case of contract termination.
The case examined by the European Court of Justice concerned a contract between an American principal and an English agent, which had been submitted to the laws of the state of California. With respect to the question of whether the national court should apply the law chosen by the parties (which law did not recognize a
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compensation in favour of the agent in case of contract termination), and if the court should consequently refuse to grant the compensation due under English law (which implemented the European Directive 86/653/EEC), the Court of Justice decided as follows:
Articles 17 and 18 of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, which guarantee certain rights to commercial agents after termination of agency contracts, must be applied where the commercial agent carried on his activity in a Member State although the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country.
The actual meaning of the judgment is not very clear, considering that it is the national law implementing the directive — and not the directive as such — that governs the contract and that can consequently be applied by the national judge. When the court says that the provisions of the directive on indemnity must be applied to agents carrying out their activity in the European Community although the contract has been submitted to the law of a third country, it probably means that the national court must consider the minimum protection granted by Articles 17 and 18 of the directive as “internationally mandatory”, and that it must consequently make sure that the agent obtains a compensation/indemnity which conforms to the principles of the directive.
However, it is not clear if this means that the national court should simply apply the provisions of the national law of the agent, or if it should grant the minimum protection provided by the directive (which is difficult to determine, since the directive provides two kinds of compensation between which the Member States have to choose). So, for example, in case of a contract between a Swiss principal and French agent, submitted to Swiss law, should the court apply the French mandatory rules (and thus give the agent two years’ commission, according to French case law), or should it determine a sort of “common core” of the rules of the directive on compensation/indemnity (and thus limit the amount to the maximum of one year’s commission)?
If we consider Article 3(4) of Rome I Regulation(which actually refers to a different situation, see § 2.6.2.2 above)) the domestic rules of the country of the court which implement the directive should apply.
It should further be mentioned that the principles stated in the Ingmar case only concern relations with countries outside the European Community. Consequently, if the problem arises within an intra-community relationship (e.g. German principal and French agent with choice of German law), the issue of whether the agent may request the higher protection awarded by French law will be exclusively a problem of French and German private international law,38 and not a problem of European law.39
When the law of the third state chosen by the parties has the same level of protection as the European directive, it is likely that the choice of such law will be fully effective. In fact, if the applicable law conforms to the provisions of the European directive on indemnity, one could say that that articles 17 and 18 are applied, although in the context of the law of a third country instead of the law of a Member State.40
2.7.3 Application of internationally mandatory rules by courts (and arbitrators)
Where certain rules are “internationally” mandatory, there is no doubt they must be applied by the courts of the country which has enacted them. So, if a contract with a Belgian distributor is submitted to the law of another country, a Belgian court must in[Page39:]principle apply the mandatory provisions of Belgian law, since it is bound to respect the rule which provides that such provisions must be applied to a distributor established in Belgium, whatever the applicable law.
However, the answer may not be the same when the question is brought before the court of another country.
In this case, the court must decide whether it should (or should not) apply rules of a foreign law (not being the law chosen by the parties), only because the foreign law pretends that certain of its rules must be applied in any case, whatever the applicable law. In other words, the decision by a state to give certain of its rules a particular force (i.e. to make them “absolutely” mandatory), does not necessarily bind the courts of other states or arbitrators, who are outside of its jurisdiction.
In particular, the courts of a state other than the state enacting the “internationally” mandatory rules will answer this question on the basis of their private international law rules, which may substantially differ from country to country.
The traditional approach to the problem is not to take into consideration “internationally” mandatory rules of a legal system other that the law chosen by the parties (or otherwise applicable in the absence of choice). According to this view, the competent court will apply the law chosen by the parties (after having verified, under its own rules of private international law, that such choice is admissible), and will not be bound by the fact that mandatory rules of another legal system claim to be applicable whatever the governing law.41 Following this approach, the court will disregard the “internationally” mandatory character of the rules of the foreign legal system. Of course, its judgment is likely to be inconsistent with the public policy of the foreign country whose rules were disregarded, and may thus not be enforceable in that country.
The other, more “modern” approach is that the courts should take foreign “internationally” mandatory rules into consideration when a strong connection exists between the contract and the legal system to which they belong.
An example of this position is contained in Article 7, § 1, of the Rome Convention, which states that the courts may, in certain circumstances, give effect to internationally mandatory rules which would not otherwise be applicable.
Article 7, § 1 - Rome Convention
When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.
It should be noted that according to Article 22 of the Rome Convention, the contracting states may reserve the right not to apply Article 7(1). Several Member States of the European Union (e.g. Germany, Great Britain, Ireland and Portugal), have made use of this reservation, and have consequently not incorporated Article 7(1) into their legal system.
A similar approach, although not based on the notion of “rules that must be applied whatever the law applicable to the contract”, can be found in the US, where section 187(2) of the Restatement (Second) of Conflict of Laws says that the law chosen by the parties will be applied unless:
application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
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The Swiss Federal Code on private international law also has a rule (Article 19) under which mandatory provisions of a law other than the law designated by its rules of private international law may be taken into account.
Article 19, Swiss Federal Code on Private International Law
If, pursuant to Swiss legal concepts, the legitimate and manifestly preponderant interests of a party so require, a mandatory provision of a law other than that designated by this Code may be taken into account if the circumstances of the case are closely connected with that law.
In deciding whether such a provision must be taken into account, its purpose is to be considered as well as whether its application would result in an adequate decision under Swiss concepts of law.
Rome I Regulation has substantially reduced the impact of the above principle, through a provision which is unclear and difficult to apply. This is probably the result of a compromise with the states which disagreed with the text of Article 7(1) of the Rome Convention and which preferred to replace it with a less effective provision.
Article 9 of Rome I Regulation - Overriding mandatory provisions
In order to verify the difference between the two provisions (Article 7 of the Rome Convention and Article 9 of Rome I Regulation), it may be useful to refer to an example.
Example 2-6 - Contract with a Belgian distributor
An Italian company appoints a Belgian citizen as its exclusive distributor for Belgium. The contract expressly provides that the contract is governed by Italian law and that the courts of Milano have jurisdiction over possible disputes. After 10 years of successful collaboration, the Italian company decides to establish its own distribution company in Belgium and terminates the distribution agreement with a notice of six months, as provided in the contract. However, the distributor claims to be indemnified for a further period of 18 months, arguing that under the law of his country he would be entitled to a notice period of 24 months.
It is undisputable that the contract is a “concession” contract to which (in Belgium) the protective provisions of the Belgian law of 27 July 1961 apply. At the same time, there is no doubt that the claims made by the distributor are unfounded under Italian law. Now, should the court of Milano apply Italian law or should it respect the internationally mandatory rules of Belgian law?
If we apply Article 7(1) of the Rome Convention, the above case certainly falls under such provision. In fact, under Article 7(1) the Italian court, “when applying the law of a country” (in this case Italy), may give effect to the mandatory rules of the law of another country with which the situation has a close connection (in this case Belgium) “if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract” (which is the situation under the law of 1961).
This means that the Italian court “may” give effect to the Belgian law, although it has a wide discretion when deciding if it should actually do so, since the last sentence of Article 7(1) says that:
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In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.
It is difficult to foresee what decision the court of Milano might actually take (there are at present no judicial precedents on this question). The distributor will argue that he should not be deprived of a right granted by his law in any case; the supplier might sustain that there is no reason to apply a rule which gives an excessive protection (if compared with the laws of other countries) to distributors. We can therefore only conclude that the outcome would be all but certain.
Let us now examine the same situation under Article 9 of the Rome I Regulation.
First of all, we should ask ourselves if the Belgian law of 27 July 1961 falls under the definition of “overriding” mandatory rules contained in Article 9(1), which refers to
… provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation …
The answer is uncertain, since it is doubtful whether provisions protecting a “weaker” party can be considered as crucial for safeguarding “the public interests, such as its political, social or economic organisation”of a country.42
Thereafter one has to decide whether the overriding mandatory rule has to be performed in the country which has enacted it (which would seem to be the case in our example) and if such rule “renders the performance of the contract unlawful”. Now, in the case of example 2-6 the second condition does not appear to be met, since it is impossible to sustain that the non-observance of a provision regarding the conditions of termination renders the performance of the contract unlawful.43
We can therefore conclude that under the Rome I Regulation it is rather unlikely that internationally mandatory rules not belonging to the applicable law may be applied (except where the dispute is brought before a court of the country which enacted such rules).
When the parties have chosen to submit possible disputes to arbitration, the situation is even less foreseeable.44
In some cases, arbitrators have applied internationally mandatory rules of a law other than the governing law, but in several other cases they have taken the opposite position. For example, with respect to contracts with Belgian concessionnaires submitted to a foreign law, several arbitral tribunals have decided to apply the law chosen by the parties instead of the “internationally mandatory” Belgian rules protecting the distributor.45
CONCLUSION
While it is impossible to effectively derogate internationally mandatory rules through the choice of a foreign law when the dispute is to be decided by the courts of the country which has enacted such rules, there is much more space for such a derogation if possible disputes are submitted to courts not belonging to the country which enacted the “internationally mandatory rules” or to arbitration.
The extent to which a court (or an arbitral tribunal) would apply (or, on the contrary, disregard) internationally mandatory rules of a third country having a close relation to the contract is difficult to foresee, since it depends not only on the rules of private international law of the lex fori, but also on their interpretation by the courts.
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It is therefore very difficult to foresee which position might be taken by a court or arbitral tribunal when situations of this kind arise. As we will see later (infra, § 2.9.1.2), in these cases a possible choice of law aiming at excluding the application of such rules should be evaluated very carefully, considering all the circumstances of the actual case.
2.8 The Direct Application of Transnational Rules
After having examined the traditional approach to the issue of the applicable law, we must now consider an alternative scenario, where direct reference is made to a set of rules (lex mercatoria, general principles of law, etc.) instead of domestic laws.
This rather “revolutionary” approach shocks many lawyers who fear that it will result in submitting the contract to a set of too-general rules that cannot warrant a sufficient certainty and predictability, and that may leave too much latitude to the discretion of arbitrators. Although this type of criticism is based on sound grounds, it would be wrong to disregard a priori the alternatives offered by transnational rules, which can, in certain special situations, provide better solutions that the recourse to domestic laws.
2.8.1 The theory of lex mercatoria
According to a theory developed in the 1970s, 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 could be applied instead of national law systems.
I do not intend to discuss here the theoretical foundation of lex mercatoria.46 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”47 instead 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.48
2.8.1.1 Objections to the lex mercatoria theory
Since the appearance of this theory as a possible alternative to the traditional approach based on application of a specific domestic law and determined by the rules of private international law, many lawyers (and particularly company lawyers) have shown great scepticism concerning this solution.
The reasons are manifold: a (justified) fear of vague and unforeseeable principles of law; the risk of applying a strange and unproven theory; and, last but not least, the belief that national laws have always been, and therefore still are, the best means for granting legal certainty and predictability.
In fact, it is true that — at least at present — the rules of the lex mercatoria are rather general principles, like the obligation to respect the contract (“sanctity of contract”: pacta sunt servanda), the obligation to perform contracts according to good faith, duty to mitigate damages, etc.,49 which may not give a sufficiently precise legal framework in case of a dispute.
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However, this is not a sufficient reason for rejecting a priori the lex mercatoria approach without considering the possible advantages that this solution can bring and the means that can be used in order to overcome its major deficiencies.
2.8.1.2 Possible advantages with respect to the application of domestic laws
As noted before, 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.
The major objection against the recourse to general principles of law is certainly that they are too general rules, offering insufficient guidance to the parties in case of a dispute. However, this problem can be overcome, at least in part, by integrating the general principles through the express incorporation of a set of rules on contracts, such as the UNIDROIT Principles, and by setting out very precise contractual rules on the specific issues of the particular contract. In doing so, it is possible to create a rather precise and foreseeable legal framework within which the contract can be placed.
A common objection to this view is that national laws always offer more certainty and predictability than “a-national” rules, even if integrated with additional rules like the UNIDROIT Principles.
In fact, this assumption, 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 laws, which — of course — appear 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 application 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.
Second, in most domestic laws several contracts commonly used in international trade (distribution agreements, licences, franchising, M&A, only to mention some examples) are not governed by specific rules, but only by principles — if any — established by the courts, which are not easy to determine. This means that for many widely used contracts, international practice can give more guidance than 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).
We can therefore conclude that recourse to lex mercatoria, possibly in connection with the UNIDROIT Principles (infra, § 2.8.2-2.8.3), should be considered as a possible alternative, particularly in cases where the choice of a domestic law appears to be inappropriate or difficult to agree upon.
For more detailed information about the choice of a-national rules to govern the contract and in particular the model clauses provided in several ICC model contracts, see the study published by the ICC and drafted by a special task force of the CLP Commission: “Developing neutral legal standards for international contracts. A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts”, which can be found in Appendix VI, at § 8.7.
2.8.2 The UNIDROIT Principles
The Principles of International Commercial Contracts (hereafter “UNIDROIT Principles”) were published by UNIDROIT in 1994. A new edition, which covers several new issues (including authority of agents, set off, assignment of rights, transfer of obligations,
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limitation periods, etc.) was published in 2004. Further additions (regarding inter alia illegality, conditions and plurality of obligors and obligees) have been made in the 2010 edition. Finally, the 2016 edition has introduced additional rules and comments on long term contracts.
2.8.2.1 General characteristics
The comment to the preamble,50 states 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.
The Principles deal with most legal issues of a general nature (such as formation, validity, performance, non-performance, damages, etc.) concerning contracts. 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 UNIDROIT Principles rapidly established themselves as one of the most successful sets of rules used in international trade. The main reason for this success is that the Principles fill a very important gap, the importance of which was not adequately perceived before, i.e. the need for a set of uniform rules on contracts that can be applied instead of domestic rules, which differ from country to country.
In most countries, domestic rules on contracts, and particularly those concerning the general aspects of contract law, are the outcome of a long evolution. They are often complicated, not only because of the complexity of the subject matter covered, but also because they take account of several years (if not centuries) of legal thinking, which sometimes complicates even simple things.
It is therefore difficult for a lawyer who is negotiating an international contract (or who must make up his mind about a dispute relating to such a contract) to really understand a foreign country’s rules on contracts. He may, of course, find the text of these rules (if they are codified in that country, which is not always the case), and they may be translated into an accessible language, but he will in most cases be unable to assess with certainty their actual content, which may be quite different from what a first reading may suggest.
Of course, he may try to overcome the problem by imposing the choice of his own law, but where this is not possible (because the other party is not willing to accept such a proposal), the alternative of founding the agreement on a set of “transnational” principles, like those of UNIDROIT, which are simple, well written, and easy to understand, will be a very attractive solution. This probably explains the enthusiasm of most company lawyers for the UNIDROIT Principles, even when they have shown a very cautious approach towards general principles, lex mercatoria, etc.
Although proposed for incorporation into the individual contract, the Principles are structured as a law: they contain mandatory and non-mandatory rules, which means that those which are mandatory should prevail over the provisions of the contract when they have been incorporated by reference;51they are construed as a self-sufficient system of rules governing the contract, and are in principle not meant to apply along with another system of rules of the same kind. This is why it is preferable, as we will see in the next paragraph, to avoid applying them within the framework of a domestic legal system.
2.8.2.2 Different situations in which the UNIDROIT Principles may apply
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 preamble52 states in the first place that:[Page45:]
… 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.53
For example in the ICC case 711054 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 usages,55 considering them to be “the latest codification of international commercial trade usages”.56
In the following example, where a very confused clause showed nevertheless that the parties intended to avoid the application of the respective domestic laws, the arbitrator was faced with the problem of finding a neutral solution which could satisfy their expectations and decided to apply general principles of law and in particular the UNIDROIT Principles.
Example 2-7 - Distribution contract submitted to the “law of the ICC”
In this case (see supra, Clause 2-1), the parties agreed to submit their contract to the legislation of the ICC or in its absence to a neutral legislation. The sole arbitrator decided as follows:
«Le Tribunal arbitral estime que, pour déterminer les règles de droit les plus appro- priées, il faut tenir compte du fait que les parties désiraient une solution neutre.
Or, à défaut d’indication expresse d’un tiers droit national, la solution la plus appropriée dans le cas où il apparaît que les parties désirent une solution neutre est d’appliquer les règles et principes généraux en matière de contrats internationaux ou lex mercatoria.
Dans ce contexte on pourra se référer pour les questions touchant à la réglementation générale des contrats aux « Principes relatifs aux contrats de commerce international » de l’UNIDROIT, qui représentent — exception faite pour quelques règles très particulières (comme par exemple les articles en matière de [Page46:] hardship […] — un « restatement » fidèle des règles que les entreprises opérant dans le commerce international considèrent comme conformes à leurs intérêts et attentes. Ceci est reconnu par de nombreuses sentences arbitrales qui ont appliquéles Principes UNIDROIT comme expression de la lex mercatoria ou des usages du commerce international […].Le Tribunal arbitral appliquera par conséquent les règles et principes généralement reconnus dans le commerce international (lex mercatoria) et notamment les Principes UNIDROIT, dans la mesure où ils apparaissent comme une transposition fidèle des règles reconnues comme applicables aux contrats internationaux par les commerçants engagés dans le commerce international».
ICC arbitration case § 10422/2001 in Journal du droit international, 2003, p. 1142 et seq..
Let us now come back to the possible choice by the parties, which is the main issue to be considered when drafting and negotiating the contract.
In principle, the parties can choose the UNIDROIT Principles as the “applicable law” intended to “govern” the contract instead of the rules on contracts contained in a domestic law system to be determined under the rules of private international law.
Example 2-8 - Choice of the UNIDROIT Principles as the applicable law
A contract between a Mexican producer and a US distributor contained an arbitration clause in which the parties referred to the UNIDROIT Principles as the governing law.
The arbitral tribunal confirmed the validity of the parties’ choice, since according to Article 1445 of the Mexican Commercial Code, the arbitral tribunal shall decide according to the «rules of law» chosen by the parties. The arbitral tribunal expressly stated that the applicable «law» need not to be material Mexican law (derecho positivo mexicano) nor the material law of any jurisdiction and decided the dispute according to the UNIDROIT Principles.
Arbitral award of 30 November 2006 of the Centro de Arbitraje de Mexico, in www.unilex.info.
If this “transnational” approach is chosen, it is appropriate to submit possible disputes to arbitration57 and to make an express reference to lex mercatoria or general principles of law.58
The parties may also opt for the application of the UNIDROIT Principles within the context of a given domestic law system. In this case, however, the Principles will be considered to be contractual rules that must consequently comply with possible mandatory rules of the governing law. Moreover, the coordination of the UNIDROIT Principles with the rules on contracts of the applicable law may give rise to problems. It is therefore preferable, as a general rule, to incorporate the UNIDROIT Principles within the framework of the lex mercatoria as the applicable law. However, where this is not feasible, because the other party insists that the contract should be governed by a domestic law system and there are doubts whether such domestic law actually meets the standards normally accepted in international trade, a reference to the UNIDROIT Principles within the context of a domestic law may be a reasonable compromise solution.
2.8.2.3 Precautions to be taken when incorporating the UNIDROIT Principles
The UNIDROIT Principles have been worked out with the purpose of producing a “restatement” 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.
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[Page47:]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 favour of what they considered to be the “best” rules for cross-border contracts, particularly as concerns the need to protect parties against unfairness.59The 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 appropriate to govern their contracts.
Let us take, for instance, Article 3.2.7(1) of the UNIDROIT Principles 2016 (Article 3.10 Article 3.10 before the 2010 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
This rule is certainly a “better law” than a strict application of the principle pacta sunt servanta.
However, 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 businessman engaged in international trade would accept the idea that his counterpart may put forward his “improvidence, ignorance, inexperience or lack of bargaining skill” as a reason for requesting the avoidance of the contract.60
In fact, unless he is negotiating 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)61 it 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 businessman who claims to have made a bad deal because of his inexperience or lack of bargaining skill,62 the simple fact that the rule exists and that the counterpart can 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), when incorporating the UNIDROIT Principles.
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[Page48:]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 field63 and does not at all correspond with contractual practice.
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 ICC64 does not provide, in case of failure of the renegotiation, for the adaptation of the contract, but only for its termination.
Finally, we should mention another critical issue, i.e. the provision on “surprising terms”, contained in Article 2.1.20(1), which gives an excessive protection to the disadvantaged party, thus leaving space for possible abuses.
Article 2.1.20(1) of the UNIDROIT Principles 2016
No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.
If one accepts a wide interpretation of the definition of “standard terms” contained in Article 2.1.19(2)65 which would include the case where the parties negotiated some clauses of a standard contract (i.e. a contract “prepared in advance for general and repeated use by one party”), without actually discussing a number of “surprising terms”, there is a risk that the other party may thereafter contest the validity of “surprising terms” on which it did not raise objections during negotiations. Since it is not clear if courts or arbitrators may follow this wide interpretation, it is advisable to exclude the application of Article 2.1.20(1) when incorporating the UNIDROIT Principles.
2.8.2.4 Conclusions
As discussed later, the idea of submitting the contract to the UNIDROIT Principles (possibly within the lex mercatoria framework: infra, § 2.8.3) can, in certain cases, be an interesting solution.
Apart from the few exceptions mentioned in the preceding paragraph, the UNIDROIT Principles represent a balanced system of carefully worded and easy to understand rules which can be recommended as an appropriate legal framework for international contracts.
However, when choosing the UNIDROIT Principles as applicable rules, it is recommended to add some words to the clause that incorporates the UNIDROIT Principles by reference, in order to expressly exclude the incorporation of those specific articles which may not correspond to the expectations of parties engaged in international trade and which have been examined in the previous paragraph.
The parties should also check if 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.
2.8.3 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 and to the UNIDROIT Principles should be seriously considered.
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This kind of solution has been provided for in several ICC model contracts.
The first to contain an express reference to the UNIDROIT Principles was the ICC Model International Franchising Contract (ICC Publication No. 557, now replaced by an updated model, ICC Publication No. 712) which, in Article 32 A, contained the following clause as an alternative to the choice of a domestic law provided for in Article 32 B:
Clause 2-4 – ICC Franchising Model (lex mercatoria and 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.66 In the second edition of the Model Distributorship Contract, for example, the following clause is found in Article 24 as an alternative to the clause containing the choice of a specific domestic law:
Clause 2-5 – ICC Distributorship Model (lex mercatoria and 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:
The above clause aims to create the following hierarchy of rules: first, the contract clauses; then the general principles; 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 expectations of business, such as those mentioned above in § 2.8.2.3.
Another possible solution is to mention expressly the Articles of the UNIDROIT Principles that should be excluded.
Clause 2-6 – 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 2016 (except for Articles 2.1.20, 3.2.7 and 6.2.1-6.2.3), with the exclusion of domestic laws.
Another possible option, which has been proposed in the Model Clauses for the use of the UNIDROIT Principles, published by UNIDROIT,67 consists of submitting a contract directly to the UNIDROIT Principles, as provided in the following model clause, proposed by UNIDROIT.
Clause 2-7 - UNIDROIT Model Clause 1.1(a)
This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010)
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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 trade.68
2.9 The Options for the Choice of the Governing Law
We shall now examine, with a practical approach, the main options that the parties have with regards to the applicable law. Of course, it is not possible in this context to indicate the most appropriate solutions, since this depends on the circumstances of each particular case. This is why we will limit ourselves to setting out the general criteria that one should consider when choosing between the various options.
2.9.1 Choice of the law of its own country
The most obvious solution for a party negotiating an international agreement is to submit the contract to its own law (normally together with a jurisdiction clause in favour of its own courts). This is in many cases the safest and simplest solution, provided, of course, that it is accepted by the other party.
This is why business people (as well as a number of lawyers) believe that the choice of a party’s own domestic law is always the preferable solution.
However, this conclusion is incorrect, because each general rule has its exceptions which must be taken into consideration before making a choice.
We will point out some of the situations where the “normal” choice, i.e. to submit the contract to its party’s own law, may not be appropriate.
2.9.1.1 Situations where this choice may not be appropriate: excessively burdensome rules
When the domestic law of a party contains mandatory rules protecting the other party that are more onerous than those of the latter’s country, the first party’s choice of its own law may not be appropriate. In fact, since it is impossible in principle to exclude the application of mandatory rules of the applicable law (see above, § 2.6.3.1), the choice of such law may not be advisable, as shown in the following example.
Example – Distributorship agreement between a German supplier and an Italian distributor
A German supplier appoints a distributor for the Italian market. The contract — which expressly provides for the application of German law — provides a very close control over the distributor’s activity including the obligation of the latter to pass information about the names of its customers. It is expressly stated that the distributor will have no right to goodwill indemnity or similar compensation in case of termination.
Comment: German law assimilates the distributor, who is bound to inform the supplier about the names of his customers to a commercial agent. Thus the distributor will be entitled to indemnity under the German rules on agency (and particularly § 89 b of the German Commercial Code), while no such indemnity is due under Italian law.
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Other examples are those of a Belgian supplier appointing a foreign distributor69or a French principal appointing a foreign agent.70
The above examples show that a party should check the contents of its own law in detail before choosing it as the governing law.
Of course, the above considerations do not imply that one should always make an in-depth evaluation of the convenience of one’s own law before choosing it. In many cases, the interested party will have nothing against granting its counterpart those conditions that are customary under its own law, even if they are more burdensome than those of the law of the country of the other party, if it can have the advantage of having the contract governed by rules it is familiar with. But in extreme cases, where the difference is substantial, the possibility of an alternative solution should be envisaged.
2.9.1.2 Internationally mandatory rules of the country of the other party
Another critical situation arises where a party wishes to avoid the application of internationally mandatory rules of the law of the other party, by submitting the contract to its own law.
In this case, the question is, as we have noted (§ 2.7.3), whether this choice would be effective against mandatory rules of the law of the other party, which pretend to be applied whatever the governing law chosen by the parties.
If the issue has to be decided by the courts of the country that has enacted the internationally mandatory rules, there is little doubt that the choice of another law will be ineffective, in the sense that the mandatory rules will nevertheless be applied.
If, on the contrary, the issue is brought before the courts of another jurisdiction (or before arbitrators), the outcome will be less certain, considering the wider discretion of a foreign court (or arbitrators) when deciding if the internationally mandatory rules of a law other than the applicable law should be applied.
Let us come back to example 2-6 and suppose that the parties have agreed the exclusive jurisdiction of Italian courts.
Example 2-10 – Contract with Belgian distributor submitted to Italian law
An Italian supplier appoints a Belgian distributor to market his goods in Belgium. The contract expressly states that it is governed by Italian law and that the courts of the seat of the Italian supplier will have exclusive jurisdiction. Italian law does not foresee a goodwill indemnity for distributors, while the Belgian law of 27 July 1961 on distributorship agreements, which is internationally mandatory, provides for substantial indemnities in favour of the distributor.
When the contract is terminated, the distributor makes a claim before the competent court in Italy and requests payment of the various indemnities due under the Belgian law, arguing that the court must give effect to the Belgian mandatory rules since such rules are internationally mandatory and since there is a close connection with Belgium (where the distributor whom the law in question intends to protect carries out his activity).
As we have seen above in § 2.7.3, the likelihood that the Italian court will apply the Belgian law is not high under Article 7(1) of the Rome Convention and is almost inexistent under Article 9 of Rome I Regulation.
This means that, by joining choice of law and choice of forum, the Italian supplier may have some chance to escape the application of the Belgian law’s protective rules (while these rules would be applied in any case if the issue was brought before a Belgian Court, which is bound to respect the internationally mandatory character of a law of [Page52:]that country). Consequently, the solution described in example 2-10 may be a good choice for the supplier, also bearing in mind that the distributor must claim in Italy and cannot be sure of the final result, which will put the supplier in a more favourable position when negotiating a settlement.
At the same time, it should not be forgotten that if the Italian court decides it should not apply the Belgian rules which protect distributors, this decision could be unenforceable in Belgium if the refusal to apply internationally mandatory rules of Belgian law is considered to be a violation of Belgian public order.71 This would not be a problem if the only issue were a claim for indemnity made by the distributor (since the supplier need not enforce in Belgium a judgment which rejects the distributor’s claim). But if the supplier also has a counterclaim for unpaid goods (a very likely situation when a distributorship contract is terminated), the issue of having the Italian judgment recognized and enforced in Belgium might become crucial.
This means that the strategy of avoiding internationally mandatory rules of the country of the other party through a joint choice of law and forum has little chance of success when it is likely that, in case of dispute, the party making this choice will need to enforce the judgment against its counterpart, as can be seen in the following example.
Example 2-11 – Transfer of technology to a developing country
A US manufacturer grants a manufacturing licence to a counterpart of a developing country. The law of the licensee’s country requires a government authorization for the payment of royalties to foreign licensors and, in any case, prohibits payment of royalties exceeding a certain rate. The rules protecting local licensees are considered to be internationally mandatory.
The parties submit the licence agreement (which contains reasonable conditions, according to the standards of international trade, but does not comply with the provisions of the law of the licensee’s country) to Swiss law and international arbitration in Switzerland.
After a certain period of time, the licensee stops paying the royalties, and the licensor decides to make a claim in order to get paid.
If the licence agreement respects reasonable international standards, it is likely that the arbitrators will apply Swiss law (in conformity with the choice made by the parties) without feeling bound to apply the mandatory rules of the licensee’s country.72However, a possible award condemning the licensee to pay cannot be enforced in the latter’s country, because the local courts would refuse recognition and enforcement of an award not complying with its internationally mandatory rules as being contrary to the public policy of that country.73
In cases of this kind, it is normally preferable to accept the application of the law of the other party and to adapt the contractual clauses to such law, unless solutions can be found whereby it is not necessary to enforce a possible award in the country of the other party.74
Another aspect to be considered, when examining the possibility of excluding the application of internationally mandatory rules of the country of the other party, regards the effectiveness of the choice of forum clause. In fact some legislators[Page53:]provide, when enacting internationally mandatory rules, that their courts must always retain jurisdiction with respect to the application of these rules, which can make the above strategy ineffective.
Example 2-12 – Contract with a Lebanese distributor
A European supplier appoints a Lebanese company as his distributor in Lebanon and other neighbouring countries. The contract is submitted to the law of the supplier’s country, and it is also provided that the courts of the supplier’s country will have exclusive jurisdiction.
When the supplier terminates the contract and the distributor claims an indemnity and damages, he discovers that the choice of forum clause is ineffective in Lebanon, according to Article 5 of the decree-law § 34 of 5 August 1967.75
In the above example, the supplier might disregard a possible action by the distributor, on the assumption that a possible Lebanese court judgment would not be enforceable in his country.76However, if he wishes to continue distributing in Lebanon, he will be forced to defend himself before the Lebanese court,77which will apply the internationally mandatory rules of Lebanese law.
With respect to the issue of the effectiveness of the choice of forum, one should also consider recent trends in case law against the enforceability of choice of forum clauses aiming at excluding the protection granted by internationally mandatory rules to “weaker” parties, like commercial agents. (Belgian Court of Cassation, 3 November 2011, § 593, Air Transat;78 OLG Stuttgart, 29 December 2011 and 16 January 2012;79 OLG München 17 May 2006;80 BGH, order of 5 September 2012, VII ZR 25/12, which confirms the judgment of OLG Stuttgart and rejects the request to submit the issue to the EU Court of Justice).
When faced with situations of this kind, it will normally be preferable to accept that the contract will be submitted to the law of the distributor and to work out, in the context of such law (and with the advice of a local lawyer), contractual solutions which can protect the supplier’s interests in the best possible way (e.g. through clauses imposing minimum purchase requirements and entitling the supplier to terminate the distribution agreement if these targets are not attained).
We can therefore conclude that the choice of a party’s own law, made with the purpose of avoiding internationally mandatory rules of the law of the other party, needs to be studied with great attention, possibly with the advice of an expert.
Should the outcome be that it is impossible (or too difficult) to exclude the application of the other party’s law, one should consider the alternative of accepting that law as the governing law and seeking alternative solutions, such as changing other business parameters (e.g. charging a higher price or reducing the amount of compensation) within the context of that law.
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2.9.2 Choice of the law of the other party
Except when there are special reasons for accepting the law of the other party as the governing law (such as those dealt with at the end of § 2.9.1.2, for example), choosing the other party’s law is generally not advisable, because it puts that party in the more advantageous position of having its own law as the governing law. This is especially the case when it is difficult to become informed about the actual content of the foreign law.
Therefore, one should try to avoid this solution by proposing more neutral alternatives, such as those that will be examined in the following paragraphs.
When this is not possible because the other party insists on the application of its own law and is strong enough to impose its will, one may try to minimize the impact of that law, by referring at the same time to the UNIDROIT Principles. An example of this type of approach can be found in clause 4(a) of the model clauses drafted by UNIDROIT.81
Clause 2-8 – UNIDROIT model clause 4(a)
This contract shall be governed by the law of [State X] interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2010).
Another solution, sometimes used with the purpose of reducing the risk of applying unforeseeable rules of an unknown foreign law is to refer possible disputes to an arbitration ex aequo et bono, i.e. to give the arbitrators the power to decide the dispute according to equity (infra, § 4.5.3.7), without their being bound to respect specific legal rules. This solution implies, however, that the arbitrators are given very wide discretion, which may significantly reduce the predictability of the final result.
When no other solutions are possible and the law of the other party must be accepted (which is frequently the case when the other party is in a stronger position), it is important to obtain the necessary information about the content of the law, possibly with the assistance of a local lawyer. This will, in practice, be feasible only for contracts having a certain importance. If the amounts involved are relatively small, the recourse to a local lawyer will, in most cases, involve disproportionate costs.
Finally, when discussing this issue with the other party, it is important to understand if its request to apply its own law is simply a matter of principle, or if it results from the desire to obtain certain benefits provided by that law. In the latter case, the parties may shift the discussion to this issue and seek a solution to the specific problem at a contractual level, thus bypassing the problem of the applicable law.
Thus, if we take the case of the contract between an Italian supplier and a Belgian distributor (Example 2-10), and we imagine that the distributor is not willing to accept that the contract be submitted to a law other than Belgian law, because he wants to benefit from the protection of such law, a compromise solution may consist in submitting the contract to Italian law, but at the same time to agree contractually on a compromise solution (indemnity and/or long periods of notice) acceptable to both parties.
2.9.3 Choice of the law of a third country
When finding an agreement is difficult because none of the parties is willing to accept that the contract will be submitted to the law of the other party, a possible solution may be to choose the law of a third country, for example, Swiss, Swedish, Austrian or English law.
This solution, which is presently permitted in most systems of private international law,82 places both parties in a similar situation by denying each of them the advantage of having the contract governed by a legal system it is familiar with.
At the same time, this choice will mean that none of the parties will really know the content of the law that governs their contract. Of course, they may inquire about the
[Page55:]content of this law before signing the contract, but experience shows this will almost never occur. In most cases, the parties will base their decision on the assumption that the law of a given country is traditionally considered to be fair and reasonable, an assumption which is not necessarily well-founded when applied to a particular type of contract.
An important point is that the law chosen should be easily accessible in a commonly used language.
When choosing this solution it is preferable to submit possible disputes to arbitration, so that a chairman who has a good knowledge of the applicable law can be appointed. This should also be considered when choosing the law: if Swiss law is chosen, there is a great chance that the chairman of the arbitral tribunal will be Swiss; if Swedish law is chosen the chance of having a Swede as chairman is even greater, since Swedish law is less easily accessible to somebody not familiar with the Swedish language.
A further critical issue to be considered arises in case of dispute, since it will be necessary to consult (and to appoint in case of litigation) lawyers of the third country whose law has been chosen. This may cause additional costs and the problem of overcoming possible lack of understanding between lawyers having a different legal background.
2.9.4 Lex mercatoria and similar solutions
When it is difficult to find an agreement on a domestic law acceptable to both parties, the alternative solution of submitting the contract to the lex mercatoria, general principles and the like, should be considered. This solution may be particularly appropriate when the main issues which may give rise to disputes are well specified in the contract and a possible dispute is to be submitted to experienced arbitrators having a thorough knowledge of the international practice.
This result can be achieved by a clause that submits the contract to general principles of law and excludes the application of the domestic legal systems, without a need to expressly mention lex mercatoria.
An interesting example of this approach can be found in the clause on applicable law contained in a contract, which has given rise to a famous arbitration case.83
Clause 2-9 – Clause on applicable law (Arthur Andersen case)
The arbitrator shall decide in accordance with the terms of this Agreement and of the Articles and Bylaws of Andersen S.C. In interpreting the provisions of this Agreement, the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of Andersen, S.C., taking into account general principles of equity […].”84
It is also possible to expressly refer to the UNIDROIT Principles together with the general principles of law (or lex mercatoria), as we have seen in § 2.8.3 (and in the clauses 2-4, 2-5 and 2-6).
In any case, this “transnational” solution is only possible in the context of international arbitration, since it is very unlikely that a domestic court would accept applying a-national principles of law instead of a domestic law determined according to the rules of private international law.
2.9.5 No choice at all
The last solution to be considered consists in avoiding any choice of law.
At first sight this option may seem surprising, considering that this chapter has insisted on the need to choose, whenever possible, the applicable law.
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However, there are situations where an experienced negotiator knows it is better not to raise the issue, because this would simply induce the other party to require the application of its own law. If this is the case, it may be appropriate to skip the problem and leave it open until a dispute arises and to concentrate efforts on finding a balanced solution for the resolution of possible disputes. So, if the parties agree to have future disputes decided by arbitration, and provided they will be able to choose neutral and experienced arbitrators, they may trust that the arbitrators will use their discretion (which is rather broad with regard to the determination of the applicable law: supra, § 2.4.3) to find a suitable solution, capable of providing an adequate legal framework for the solution of the dispute.
1 It is sometimes argued that, by choosing the courts of a given country, the parties make an implied choice of law in favour of the legislation of such country. This type of argument is favoured by judges who strongly believe in the superiority of their legal system. However, this approach is not in line with the most recent tendencies in private international law, which tend to give a narrow interpretation of the implied choice of law. See infra, § 2.4.2.
2 .This attitude may be explained by the fact that until a few years ago it was normal for most lawyers to be exclusively involved in domestic matters and thus to consider only their own legal system. However, this situation has substantially changed in recent years due to the growing trend towards globalization.
3 Actually the contract of sale would be governed by the UN Convention on the International Sale of Goods (CISG: infra, § 7.3.1) ratified by both countries. However, the issue of penalty is not covered by the CISG and consequently reference is to be made to the applicable domestic law.
4 ICC award in case No. 7110/95, in ICC ICArb. Bull., 2/1999, p. 40 et seq., p. 53.
5 Partial award in the case ICC No. 7375 of 5 June 1996, The Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v Westinghouse Electric Corporation, in Mealey’s International Arbitration Report, vol. 11, 12/1996, A-1 et seq., p. A-42.
6 See, for instance, ICC case § 8.261, in www.info.unilex; ICC case § 9.797, Andersen Consulting Business Unit Member Firms v Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in ICC ICArb. Bull., 2001/2, p. 88 et seq.; ICC case 10422, in JDI, 2003, pp. 1142-1150.
7 See, for instance, ICC case § 8331, in www.info.unilex (UNIDROIT Principles agreed in the terms of reference); ICC case § 12889, in www.info.unilex (UNIDROIT Principles agreed upon proposal by the arbitrator).
8 See Bortolotti, The UNIDROIT Principles and their application in the context of international arbitration, in Liber Amicorum, Mélanges en l’honneur de Serge Lazareff, 2011.
9 Normally the term “private international law” covers the issues relating to the applicable law. However, certain countries follow a wider approach whereby this term also applies to international jurisdiction andrecognition of foreign judgments.
10 Presently in force in Belgium, Denmark, Finland, France, Italy, Niger, Norway, Sweden and Switzerland. A new convention of 22 December 1986, which intended to replace the 1955 convention is not yet in force.
11 Presently in force in Argentina, France, the Netherlands and Portugal.
12 “Convention on the Law Applicable to Contractual Obligations” (Rome 19 June 1980).
13 Regulation No. 864/2007 of 11 July 2007.
14 Arbitral award § 117/1999, in www.unilex.info.
15 In fact, experienced international arbitrators will normally try to take into account the reasonable expectations of the parties when determining the applicable law
16 See, for example: Yemen (Article 24 of the Civil Code of 29 March 1992); Thailand (Conflicts of Law Act of 1938).
17 See, for instance, Turkey, Mexico.
18 This solution, which was adopted by the Rome Convention of 1980 and which is still included in the Rome I Regulation as subsidiary rule (see next paragraph), can also be found in the law of some countries outside the European Union, such as Moldova and Tunisia.
19 We will not deal here with the special criteria which are foreseen for rights in immovable property and carriage of goods in paragraphs 3 and 4 of Article 4.
20 See for instance, Oberlandesgericht Koblenz, 16 January 1992, in RIW, 1992, p. 1019; Oberlandesgericht Düsseldorf, 11 July 1996, in IPRax, 1996, p. 449, where a distinction is made between the frame agreement (governed by the law of the residence of the distributor, who effects the characteristic performance) and the individual contracts of sale (governed by the Vienna Convention – CISG).
21 See, for example: Corte di Cassazione (Italy) 11 June 2001, § 7860, Otto Kogler v Eurogames srl, in Riv. dir. int. priv. proc., 2002, p. 157; Cour de Cassation (France) 15 May 2001, Optelec c. soc. Midtronics BV, in Rev. crit. DIP, 2002, p. 86 ss.; Corte di Cassazione (Italy) 20 September 2004, § 18.902, Kling & Freitag GmbH v Società Reference Laboratory srl, in Riv. dir. int. priv. proc., 2005, 443.
22 Where we may find the sale of equipment together with the provision of various services (erection, commissioning, technical assistance) and transfer of IP rights.
23 European Court of Justice, 23 April 2009, C-533/07, Falco Privatstiftung v Weller-Linhorst, in ECR 2009, I-03327, where it is said that « … The second indent of Article 5(1)(b) of Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and enforcement of judgments in civil and commercial matters, is to be interpreted to the effect that a contract under which the owner of an intellectual property right grants its contractual partner the right to use that right in return for remuneration is not a contract for the provision of services within the meaning of that provision».
24 European Court of Justice, 19 December 2013, C-9/12, Corman Collins SA v La Maison du Whisky SA. See also, European Court of Justice, 14 July 2016, C-196/15, Granarolo SpA v Ambrosi Emmi France SA.
25 These two examples are based on the assumption that the criteria contained in Article 4(1) of the Rome I Regulation would apply in the absence of express choice.
26 Some systems of private international law, on the contrary, require a substantial relationship to the chosen state: see, for example, for the USA, § 187 of the Restatement (Second) of Conflict of Laws.
27 Unless such law considers certain rules as non-mandatory when applied within an international context. In this case, however, it is the law itself which makes this choice. So, for example, § 92c (1) of the German Commercial Code makes it possible to derogate from mandatory rules on commercial agency when, according to the contract, the agent must not perform his activity within the territory of the European Community. The purpose of this provision seems to be that of giving German principals the possibility to agree upon the application of German law in contracts with agents of third countries without needing to respect the mandatory rules which protect the agent.
28 See Court of Cassation (France), 6 May 1997, Soc. Hannover International et autre v M. R. Baranger et autre, in Rev. crit. DIP, 1997, p. 514 et seq.
29 English High Court, Egon Oldendorff v Libera Corporation [1996] 1 Lloyd’s Rep 380
30 See Derains, Public Policy and the Law Applicable to the Dispute in International Arbitration, in ICCA, Comparative Arbitration Practice and Public Policy in Arbitration (VIIth International Arbitration Congress, New York 6–9 May 1986), Deventer, 1987, p. 239-240 and 255.
31 The reference to domestic agents was probably due to the (wrong) assumption that Austrian rules protecting the agent were to be considered as mandatory only when the agent performed his activity in Austria. However, while such a principle exists in German law (see above, footnote 27), this was not the case in Austria.
32 Arbitral awards ICC 8251/95 (in ICA Bull., 1/2001, p. 97) and 8711/98 (in ICA Bull., 1/2001, p. 124).
33 Such risk should be rather limited in Europe: see Article 20 of the Rome I Regulation, which states that “The application of the law of any country specified by this Regulation means the application of the rules of law in force in that country other than its rules of private international law, unless provided otherwise in this Regulation.”
34 The judgment actually referred to a contract between a US principal and a French agent. In such a context the principle that the rules protecting the agent are not “internationally” mandatory would no longer apply after the Ingmar case (see infra, § 2.7.2), because the French courts must consider certain rules which implement the EU directive as internationally mandatory in relations with principals of non-EU countries. However, with regard to relations between parties of the EU (as in the above example) the Ingmar judgment should not influence the previous case law.
35 However, this well-established principle has been partially put in discussion by article 9 of the Rome I Regulation which defines “overriding mandatory provisions” as provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation …”. This may imply a limitation of the discretionary power of national legislators to decide which rules can be considered as “overriding mandatory provisions”. In the Unamar case (Judgment of the European Court of Justice of 17 October 2013, C-184/12) where it was disputed whether a Belgian court could apply to an agency contract submitted to Bulgarian law the more protective provisions of Belgian law, (although both legislations implemented the EU directive 86/653 on commercial agents), the Court stated that the law chosen by the parties may be rejected in favour of the law of the forum “only if the court before which the case has been brought finds, on the basis of a detailed assessment, that, in the course of that transposition, the legislature of the State of the forum held it to be crucial, in the legal order concerned, to grant the commercial agent protection going beyond that provided by the directive, taking account in that regard of the nature and of the objective of such mandatory provisions.” This means that the Court of Justice seems to require that, in order to have the effect of prevailing over the otherwise applicable law, it is not sufficient that the national law qualifies a given rule as a rule that is to be applied whatever the law applicable to the contract, but that there must be a further condition, i.e. that it must be a provision regarded as “crucial by a country for safeguarding its public interests...”
36 See infra, § 2.9.1.2.
37 Judgment of the European Court of Justice of 9 November 2000, Ingmar GB Ltd v Eaton Leonard Technologies.
38 The likely answer will be that, since the French rules on agency are not internationally mandatory (lois de police), the choice of German law is fully effective, although the German indemnity is less favourable to the agent than the French compensation.
39 39. In fact, it is assumed that possible differences between countries having implemented the directive are not relevant, since the agent still obtains (even under the law of the country granting a lower protection) the minimum rights guaranteed by the mandatory rules of the directive.
40 . It is, however, not certain that this position would be shared by the courts of an EU Member State when applying the principles of the Ingmar case. A possible contractual solution for principals of non-EU countries (when their law substantially conforms to the directive) wishing to submit the agency contract to their own law could be that of expressly stating in the contract that in case of disputes, Articles 17 and 18 of the EU directive must, in any case, be respected.
41 This approach is likely to be followed by the courts of many countries outside of Europe
42 According to Renner, in Calliess, Rome Regulations, 2nd ed. Wolters Kluwer 2015, 250 et seq., in order to give a norm overriding mandatory effect, it is necessary that the provision in question aims at furthering a broader policy objective.recognition of foreign judgments.
43 See Hollander, Questions de droit international privé et d’arbitrage touchant à la distribution commerciale, in Le droit de la distribution, Anthemis, 2009, 271 et seq., p. 302.
44 44. This is mainly due to the fact that, while state courts are bound to respect the rules of private international law of their country (as lex fori), arbitrators have considerably wider freedom and will normally refer to more general principles: see also supra, § 2.4.3.
45 ICC arbitral award 6379/90 in Yearbook, XVII-1992, p. 212 ss.; ICC arbitral award 6752/91, in Yearbook, XVIII-1993, p. 54 ss. A different approach was taken in the ICC award 6500/92 (in Clunet, 1992, p. 1015) with respect to the application of the Lebanese law on distributors, where the arbitrators said that such law should, in any case, be respected
46 . For a general overview of the different opinions, see Berger, The Creeping Codification of the Lex Mercatoria, 1999, 32 et seq.
47 See arbitral award ICC 7110/95, in ICA Bull., 2/1999, p. 40 et seq., p. 53.
48 In most cases, where the question has been brought before national courts of the lawfulness of arbitral awards which applied the lex mercatoria instead of a domestic legal system, the courts have upheld the arbitral award. See, for instance, Tribunal de Grande Instance of Paris, 4 March 1981, Norsolor v Pabalk Tikaret, in Rev. arb., 1983, p. 469; Cass. (France), 9 December 1981, S.N.C.T. Fougerolle v Banque du Proche Orient S.A.I., in Rev. arb., 1982, p. 183. Cass. (France) 22 October 1991, Compañía Valenciana de Cementos Portland v Primary Coal Inc., in Rev. arb. 1990, p. 663; Court of Appeal (England), 24 March 1987, Deutsche Schachtbau- und Tiefbohrgesellschaft mbH c. Ras Al Khaimah National Oil, in Yearbook, XIII-1988, p. 522; US District Court, S.D. California, 7 December 1998, Ministry of Defense of the Islamic Republic of Iran v Cubic Defense Systems, in Uniform Law Review, 1999, p. 799.
49 Case law on the lex mercatoria principles, rules and standards can be found on the Center for Transnational Law (CENTRAL) database (www.tldb.net).
50 UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016, Rome 2016, 3.
51 This implies however that, if they have been incorporated simply as contractual rules, having the same force of the individual provisions of the contract, they should not prevail over possible conflicting individual provisions, since it is to be assumed that the parties did not want to derogate the provisions they have expressly agreed upon by incorporating a set of additional contractual rules. On the contrary, the result could be different where the parties refer to the Principles as the applicable law, i.e. as a set of rules applicable instead of a domestic legal system, intended to “govern” the contract.
52 UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016, Rome 2016, 1
53 Although it may be debateable whether all of them actually conform to the general principles applicable in international trade: see infra, § 2.8.2.3.
54 Three partial awards in 1995, 1998 and 1999, published in ICA Bull. 2/1999, 40.
55 See, for instance: ICC Award 10021 of 2000, in www.unilex.info; ICC award 9479 of 1999, in ICA Bull. 2001/2, 67 et seq.
56 . ICC award 10022, in ICA Bull., 2001/2, 100.
57 Since domestic courts will normally not be willing to recognize the choice of transnational rules as the law governing the contract.
58 .In order to avoid any doubt about the fact that such choice is an alternative with respect to domestic law systems. Otherwise, the risk exists that the arbitrators will also apply a domestic law, which may lead to problems of coordination with the Principles.
59 59. See Bonell, “Policing” the Contract Against Unfairness under the UNIDROIT Principles for International Commercial Contracts, in Dir. comm. intern., 1994, p. 251 et seq.
60 See for example Hill, A Businessman’s View of the UNIDROIT Principles, in Journ. Int’l Arb., 1996, 163, 165-166.
61 Which is, of course, far more dangerous, since it gives the counterpart the possibility of requesting the avoidance of the part of the contract it dislikes, while maintaining the rest of it.
62 62. Also on the basis of the generally recognized principle that business people must know what they do and cannot claim inexperience. In considering all of this, it is difficult to understand how the drafters of the UNIDROIT Principles could include in a set of rules made for business-to-business trade a rule that would have been more appropriate for consumer contracts.
63 In fact, many national systems do not consider hardship at all (but only situations more close to impossibility of performance, such as force majeure or frustration), although there is a recent trend to protect the disadvantaged party in case of hardship: see for instance Article 1195 of the French Civil Code after the reform in force as of 1 October 2016..
64 See Appendix IV of this publication under ICC Hardship Clause, § 9.6.
65 “Standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party”.
66 ICC Model Agency Contract, 2nd ed. (ICC Publication 644); ICC Model Distributorship Contract (sole importer-distributor), 2nd ed. (ICC Publication 646); ICC Model M&A Contract I: Share Purchase Agreement (ICC Publication 656); ICC Model Selective Distributorship Contract (ICC Publication 657); ICC Model Contract for the Turnkey Supply of an Industrial Plant (ICC Publication 653); ICC Model International Trademark Licence (ICC Publication 673); ICC Model International Transfer of Technology Contract (ICC Publication 674); ICC Model International Franchising Contract (ICC Publication 712).
67 UNIDROIT, Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, UNIDROIT, Rome, 2013
68 Another advantage of the reference to general principles and usages as provided in the ICC standard clause (Clause 2) is that the arbitrators will be led to give greater consideration to contractual practice developed within certain types of contracts, for instance when it comes to interpret clauses which have a precise meaning in that type of contract.
69 Due to the high level of protection of distributors (concessionnaires) under the Belgian law of 1961 on distributorship contracts. However, Belgian courts have taken the view that the law in question does not apply to distributors carrying out their business outside Belgium: see Court of Cassation (Belgium), 6 April 2006, Nuclear Laser Medicine srl v Innogenetics SA, in RDC, 2007, p. 162 et seq., where it is said that when a distributorship contract submitted to Belgian law produces its effects exclusively outside the territory of Belgium, the mandatory rules of the law of 27 July 1961 do not apply, unless the parties have made express reference to such law
70 Due to the two years’ termination compensation, which is higher than the indemnity foreseen in most other European domestic laws
71 However, this is not necessarily the case. Particularly with respect to the Belgian Act protecting distributors, it has been argued (Hollander, ‘L’arbitrabilité des litiges relatifs aux contrats de distribution commerciale en droit belge’, in L’arbitrage et la distribution commerciale, Bruylant (Brussels), 2005) that the rules protecting the distributors, although being “d’application immédiate”, would not belong to the public policy (ordre public). This assumption contradicts the general view according to which principles expressed by rules of “immediate application” belong to the public order of the country enacting them.
72 In fact, arbitrators tend to respect internationally mandatory rules of a law other than the law chosen by the parties, mainly when such mandatory rules correspond to “international standards” and not when they express a view specific to a particular country.
73 This conclusion cannot be considered to be absolutely certain, since it depends on various circumstances that may vary from case to case. However, internationally mandatory rules of a given country are almost always the expression of principles considered in such legal system to be part of its public policy.
74 . E.g. by requiring the licensee to warrant the payment of the royalties through a bank guarantee issued by a bank of a country other than that of the licensee.
75 Article 5 says that, “ … notwithstanding any agreement to the contrary, the courts of the place where the commercial representative exercises his activity are competent to adjudicate dispute arising from the contract of commercial representation”. Such provision is also applicable to distributors, since Article 1(2) of the decree of 1967 expressly extends the application of the law to “the merchant who sells for his account what he has bought by virtue of a contract giving him the character of an exclusive representative or distributor”.
76 This depends, of course, on the rules on jurisdiction in the supplier’s country; however, it is rather common that recognition of a judgment disregarding a choice of forum in favour of the supplier’s country may be refused.
77 .Also considering that under the decree-law of 1967 a company against which a judgment based on such law has been passed will be barred from being represented in Lebanon, until it has carried out such judgment, and the former representative may request that the customs authorities refuse to clear for import the goods of such company.
78 The Court stated that no effect can be given to an arbitration clause with application of Quebec law in a contract between a Quebec principal and a Belgian agent; the dispute cannot be taken away from the Belgian judge since Quebec law affords less protection to the agent.
. IHR 2012. A jurisdiction clause in favour of the courts of a foreign court (in the specific case the courts of the state of Virginia) combined with a choice of Virginia law , leads to the result that internationally mandatory rules protecting the German agent are not applied, is not to be enforced by the German court.
80 IPRax 2007, 322 ss. Exclusive forum-selection clause in favour of Santa Clara (California) courts and California law in contract between US principal and German agent. The court refused to enforce the jurisdiction clause because recognizing the jurisdiction of the foreign court would have prevented the application of the internationally mandatory rules on goodwill indemnity. 81. Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, Rome, UNIDROIT, 2016.
81 See, for instance, ICC case § 8.261, in www.info.unilex; ICC case § 9.797, Andersen Consulting Business Unit Member Firms v Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in ICC ICArb. Bull., 2001/2, p. 88 et seq.; ICC case 10422, in JDI, 2003, pp. 1142-1150.
82 It should, however, be borne in mind that there are systems of private international law which require a connection between the contract and the law chosen.
83 . ICC arbitral award 9797 of 28 July 2000, Andersen Consulting Business Unit Member Firms v Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in Dir. comm. int., 2001, p. 211 ss., with comment by Bonell, Un arbitrato “globale” deciso sulla base dei Principi UNIDROIT.
84 On the basis of this clause, the arbitrator decided to apply “the general principles of law and the general principles of equity commonly accepted by the legal systems of most countries”, and in particular the UNIDROIT Principles as “reliable source of international commercial law in international arbitration