Application of non-state rules as the governing law of the contract

Party autonomy in international commercial contracts

Introduction

The previous chapters examined the nature of non-state rules and came to the key conclusion that the legal authority of non-state rules can be measured through their application. Therefore, the second and third part of this book concentrate on the application of non-state rules. Part 2 (chapters 5, 6 and 7) examines the agency of the parties and the courts to choose non-state rules as the substantive law governing the contract. This current chapter five focuses on the interaction between private international law and non-state rules through an exploration of party autonomy. It discusses whether a choice for non-state rules would be acceptable and concludes that this is not allowed in most jurisdictions, although they can usually be included by reference in addition to an applicable state law. This is followed by chapter six which focuses on the extension of party autonomy to include non-state rules. Chapter 7 finally examines the role of non-state rules in international arbitration and concludes that overall, in arbitration there is considerably more leeway to use non-state rules. Courts will also enforce arbitral awards based on non-state rules because of the more extensive concept of party autonomy under arbitration laws. Together these chapters lead to an understanding, under which circumstances non-state rules can be applied as the substantive law governing the contract. This discussion ensures first of all clarity around the use of non-state rules as the governing law and how these are applied, and second contributes to the overall discussion in this book through furthering the understanding of the legal authority of non-state rules when these serve as the governing law.

This chapter starts by discussing what it means if non-state rules arc applied as the governing law. It then examines the concept of party autonomy with regards to choice of law. The chapter analyses the three main approaches to choice of law clauses in commercial contracts, which are:

• • Choice of law is not permitted or severely restricted
• • The need for a clear link between the contract and the chosen law.
• • Choice of law is permitted even when such a link is absent.
• 1

This chapter does not discuss choice of jurisdiction as this is less pertinent in a discussion on the application of non-state rules.

The three examples used to examine these three different approaches are Brazil, the USA, and the EU.

Using non-state rules as the governing law

If non-state rules are applied as the governing law this means that the dispute between the parties is solved using only non-state rules to regulate all the issues. This happens when the parties made a choice of law for non-state rules or if in absence of a choice of law the court or tribunal decides to apply non-state rules as the applicable law.

The application of non-state rules as the substantive governing law delocalises the contract to the transnational sphere. This means that the court or tribunal should not apply non-state rules within the framework of a specific national legal system but as much as possible detach it from domestic law. The court/tribunal faces two significant hurdles in this process: deciding how non-state rules should be interpreted and how any gaps should be filled.

If a court applies a foreign law, it should apply and interpret this, as it would be applied/intcrpreted in its home jurisdiction. As a consequence, non-state rules should be interpreted as intended by the originators and promulgators (which could be an international organisation, the international business community, or a trade association). This means referring to official commentary, traveaux préparatoires, academic commentary etc. This causes difficulties because courts might not be aware of how the rules should be interpreted, contradictory interpretations exist, or there is no information available. Turis Novit Curia’ does not apply to the application of a foreign law (or non-state rules) and courts often interpret the law as they would interpret the lex fori as evidenced by experiences with the CISG.

If the parties have made a choice for arbitration, the tribunal is faced with the same questions on how to interpret non-state rules. First, the arbitral tribunal could be composed of lawyers or other legal experts but that is not necessarily the case. Most arbitration laws/rules allow the parties to choose whomever they want as the arbitrator. This includes business experts and other professionals without a legal background. There is of course again the risk of bias in interpretation; this could be either because of the specific legal system the arbitrator is from, or because they use their own sense of justice to decide what ‘the right approach’ is to the dispute. The latter is not necessarily a bad thing as one of the reasons the parties might choose arbitration is because they prefer for ‘common sense’ to prevail over ‘legal technicalities.’ Arbitrators can and do interpret the law more loosely sometimes to ensure commercial efficiency even if from a legal perspective an interpretation in line with the principles underlying the rules is preferable.

¹

John O. Honnold, Documentary History of the Uniform Law for International Sales: The studies, deliberations and decisions that led to the 1980 United Nations Conventions with Introductionsand Explanations 1 (1989).

The second issue is how the gaps would be filled. Should the court turn towards the lex fori or towards the putative applicable law? If the parties have not indicated anything in their contract, then the court would apply its own private international law to decide which law to use to fill the gaps. Tribunals have more leeway in deciding which law to apply as they arc not held by the same restrictions as courts, who need to follow their private international law. They might refer to the lex arbitri, putative applicable law, or another law of their choosing.

If the parties, make a choice for non-state rules as the governing law and do not mention any state law in the contract then ideally the court/tribunal should use the non-state rules to cover every single aspect of the dispute. This would cover the capacity of the parties, validity of the contract, formation and execution of the contract, and remedies among other issues.

This is not necessarily possible. The lex mercatoria, general principles of law, and trade usages arc not complete, are not written down, and arc flexible and subject to conflicting opinions on interpretation. The gaps would need to be filled by referring to a substantive law, other non-state rules (like the UPICC), or the courts/tribunal’s owns sense of justice. The latter is problematic as it is unpredictable but could very well field acceptable dispute resolutions, especially in the case of arbitration where the procedure is less judicial.

The emergence of codified non-state rules provides a partial solution. The CISG is a convention and was not designed to function as a standalone instrument but was always to be embedded in a national law. The CISG covers formation of the contract, obligations of the buyer and seller, performance and non-performance, and remedies, and also contains general principles of interpretation. However, it does not deal with several key issues including validity of contract and capacity of the parties. Therefore, applying the CISG or similar conventions as the sole applicable law would be difficult.

Incoterms, the UCP, and other similar trade terms only cover part of the contract and whilst they play an important role and are often included in contracts, they would not be able to fulfil the role of governing law because of their limited scope.

The most promising option would thus be the restatements of law, the UNIDROIT Principles or one of the regional restatements, the PECL or the PLACL. These arc mostly complete, come with extensive commentary, and form a coherent whole. The UNIDROIT Principles having been tested the most thoroughly in practice and having been updated already three times since their initial publication and arc the most complete instrument. There are still several issues that are not covered of which capacity is the most important. The UPICC do cover general contract law principles, formation of the contract including validity, agency, third party rights, assignment, performance, non-performance, limitations, long-term contracts, multi-party contracts, and

¹

UNIDROIT Principles, chapter 3 validity, section 1: general provisions article 3.1.1.

remedies.^[1] This means that they form a (almost) complete contract law instrument that can be applied and interpreted without reference to national law.

If the UPICC are applied in arbitration, then the procedure becomes almost completely detached from any jurisdiction. Whilst the UPICC cover most issues that can arise in a dispute, the UNILEX database shows that in most of the cases where the UPICC are applied as the governing law, this is in conjunction with an applicable domestic law, even if only as a fallback option. The database also contains examples of where it seems that the UPICC are applied as the sole governing law. It is thus possible to solve a dispute using non-statc rules without needing to refer to a domestic law.

• [1] UNIDROIT Principles of International Commercial Contracts 2016. 2 See for instance: ICC International Court of Arbitration 18795 where the tribunal applied the UPICC ‘supplemented if necessary, by the law of country x’ and International Arbitration Court of the Chamber of Commerce and Industry of the Russian Federation 233/2012 where the UPICC were applied supplemented by Russian law. 3 See for instance: Centro de Arbitraje de Mexico (CAM) 30-11-2006 where the parties agreed for the UPICC to be applied and ICC International Court of Arbitration 12889 where the contract was silent on the applicable law and the tribunal proposed the UPICC which the parties accepted. 4 Although non-state rules would of course give way to mandatory laws and international public policy (in the same way as a foreign domestic law would.). 5 For a more thorough historical expose see for instance: Véronique Ranouil, L’Autonomie de la Volonté : Naissance et Evolution d’un Concept (Presses Universitaires de France 1980) Matthias Lehmann, ‘Liberating the Individual from Battles between States: Justifying Party Autonomy in Conflict of Laws’ (2008) 41 Vanderbilt Journal of Transnational Law 381 ' Hessel E Yntema, ‘Autonomy’ in Choice of Law’ (1952) 1 The American Journal of Comparative Law 341 Henri Battifol, Les Conflits de Lois en Matière des Contrats (Librairie du Recueil Sirey 1938).