Non-state rules and private international law

Introductory remarks

Table of Contents:

The previous chapter examined how far the autonomy of the parties to choose the applicable law to the contract extends. The key question the chapter answered was whether a choice for non-state rules as the applicable law, is allowed in litigation. In many jurisdictions this is not possible as choice of law almost exclusively refers to a choice for a state law. This current chapter analyses the relationship between private international law and non-state rules to understand more fully the limited applicability of non-state rules as the governing law of the contract, what the reasons behind these limitations are, and whether there arc any exceptions to this general rule.

The chapter first examines how international conventions on choice of law deal with non-state rules. The chapter then analyses several jurisdictions where a choice of law for non-state rules is possible. This can either be expressly by direct reference to non-state rules in the law, implicitly through a definition of law that can be interpreted more widely than just state law, or if so interpreted by the courts if the law is ambiguous or silent on the issue. The final part of the chapter analyses the reasons why party autonomy in choice of law usually does not extend to non-state rules and whether these reasons are convincing.

International legislation

There are only few private international conventions focusing on choice of law in international contracts. Choice of law therefore remains primarily an area of domestic law or EU law. There is no general choice of law in (commercial) contracts convention. There are some examples of private international law conventions that discuss choice of law, albeit these are more limited in scope (either regionally or contract type).

The Inter-American Convention on the Law Applicable to International Contracts (the Mexico City Convention) was drafted by the Organisation of American States (OAS) to create a uniform choice of law regime in the

Americas.^[1] Article 7 discusses the applicable law: ‘The contract shall be governed by the law chosen by the parties.’There is no need for a substantive relationship between the contract and the choice of law. The article does not specifically say that this law must be a state law. The Spanish version uses the word derecho, which is a wider concept than ley. In arbitration rules and laws the word derecho is often used instead of ley to indicate a broader approach to choice of law. The English language variants of these legislations often use ‘rules of law’ and ‘law’ to distinguish between a broader and a more restricted concept of law. However, the OAS Convention uses the word law in its English version. Article 17 of the OAS Convention defines the word law: ‘For the purposes of this Convention, “law” shall be understood to mean the current law in a State, excluding rules concerning conflict of laws. ’ This would indicate that non-state rules are excluded. However, the main purpose of this Article seems to be the exclusion of private international law which limits the effect of renvoi as renvoi can have unintended consequences for the parties to the contract.

Article 9 determines the applicable law in the absence of a choice of law: ‘If the parties have not selected the applicable law, or if their selection proves ineffective, the contract shall be governed by the law of the State with which it has the closest if«/This refers to the law of a state and excludes non-state rules. Article 9 continues with: ‘shall also take into account the general principles of international commercial law recognized by international organizations.’ Some non-state rules would thus be applied regardless of whether the parties have included them in the contract. This might include the UPICC as these were recognised and endorsed by UNIDROIT.

Article 10 reads: Tn addition to the provisions in the foregoing articles, the guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case. ’ This gives a prominent place to non-state rules as an equitable tool, both in the absence of a choice of law or when a choice of law is made. This article was debated amongst scholars and no consensus was reached whether under the convention the parties could choose non-state rules as the governing law.

This OAS Convention was only ratified by Venezuela and Mexico so the exact extent of party autonomy under this instrument has not been tested extensively in practice.³ It can be seen as indicative that Supreme Court decisions in both Mexico and Venezuela have demonstrated a permissive attitude for non-state rules as a choice of law.⁴

The Hague Convention of 1955 (Convention on the Law Applicable to the International Sale of Goods) applies to conflicts of law in the international sale of goods.⁵ It entered into force in 1964 and currently has eight members.⁶ The convention allows parties to choose the applicable law. Article 2 only mentions the option to choose the domestic law of a country.⁷ This article leaves no room to choose non-state rules. There are no additional articles that allude to the possibility to choose non-state rules or incorporate these in the contract. It can be concluded that under this Convention a choice of law for non-state rules is not permissible.

Article 3 determines that the law applicable to the contract in the absence of a choice made by the parties is the law of the state where the seller has his place of business, except in some specific cases when it is the law of the country where the buyer has his place of business.⁸ This territorial determinant excludes any possible application of non-state rules.

3 In April 2017 Venezuela announced their departure from the OAS. It is unclear at the time of writing how this will affect the position of the conventions and treaties signed under the OAS.

The Private International Law Act of Venezuela has incorporated the Mexico City Convention and therefore even if the convention is denounced the rules are likely to stay the same.

4 Claudia Madrid Martinez, ‘Notas Sobre La Lex Mercatoria: entre el Silencio del Legislador Europeo y el Silencio de los Estados Americanos’ in J. Moreno Rodríguez and D. Fernández Arroyo (editors) Derecho internacional privado y Derecho de la Integración. Libro Homenaje a Roberto Díaz Labrano (CEDEP 2003) 333.
5 This includes most goods with the exception of sales of securities, sales of ships and of registered boats or aircraft, or to sales upon judicial order or by way of execution

http://www.hcch. net/index_en.php?act=conventions.text&cid=31.

6 These are Denmark, Finland, France, Italy, Norway, Sweden, Switzerland, and Niger. http://www.hcch. net/indcx_en.php?act=conventions.status&cid=31.
7 Article 2

A sale shall be governed by the domestic law of the country designated by the Contracting Parties. Such designation must be contained in an express clause, or unambiguously result from the provisions of the contract.

8 Article 3

In default of a law declared applicable by the parties under the conditions provided in the preceding Article, a sale shall be governed by the domestic law of the country in which the vendor has his habitual residence at the time when he receives the order. If the order is received by an establishment of the vendor, the sale shall be governed by the domestic law of the country in which the establishment is situated.

Nevertheless, a sale shall be governed by the domestic law of the country in which the purchaser has his habitual residence, or in which he has the establishment that has given the order, if the order has been received in such country, whether by the vendor or by his representative, agent or commercial traveller.

In case of a sale at an exchange or at a public auction, the sale shall be governed by the domestic law of the country in which the exchange is situated or the auction takes place.

The Hague Convention on the Law Applicable to Contracts for the International Sale of Goods of 1986 was drafted to replace the 1955 Convention. This document covers choice of law in article 7. The wording used in the article is ‘a contract of sale is governed by the law chosen by the parties.’ Article 8 concerns the applicable law in absence of a choice of law clause and refers expressly to the law of a state.^[2] This indicates that a wider interpretation of the word law could be used when applying article 7. Yet, if one looks at article 15 the word law is defined further: ‘In the Convention “law” means the law in force in a State other than its choice of law rules. ’ This is the same as under the OAS Convention and therefore it is unclear whether choice of law is restricted to a state law. This convention has not entered into force and given its completion date it is not likely that it ever will so no further work has been done on the interpretation.

The protocols of the Cape Town Convention allow the parties to choose the applicable law (Article VIII of the Aircraft Protocol, Article VI of the Railway Protocol, Article VIII of Space Protocol, and Article VI of the MAC', Protocol.) These arc drafted in the same way with point 2 of the article stating that the parties can agree on the law, which is to govern their contractual rights. Point 3 of the Articles clarifies this by qualifying this choice as the law of a State.

The Hague Principles on Choice of Law in International Commercial Contracts (The Hague Principles) were elaborated by the HCCH. The Hague Conference decided on this undertaking because there is currently a great deal of ambiguity regarding choice of law clauses and there is no comprehensive international legislation. Instead of elaborating a convention the HCCH decided to draft a model law. Research indicated that the probability that a convention would be ratified by a large number of countries was small (because of the difficulties of agreeing on rules regarding concepts such as mandatory laws) and that therefore the costs would outweigh the benefits. A model law is cheaper to draft and more versatile and flexible in usage. The Principles can be used by courts or arbitral tribunals as guidance or they can be adopted by states.

Choice of law is discussed in the second article:

1. A contract is governed by the law chosen by the parties.
2. The parties may choose-
a) The law applicable to the whole contract or to only part of it; and
b) Different laws for different parts of the contract.

3. The choice may be made or modified at any time. A choice or modification made after the contract has been concluded shall not prejudice its formal validity on the rights of third parties.
4. No connection is required between the law chosen and the parties or their transaction.

The term law is not specified further. The official commentary stipulates that with law is meant the law of a state.^[3] The official notes also discuss that The Hague Principles arc not applicable in contracts between businesses belonging to separate territorial units of one nation state (unless domestic law says otherwise). The notes do not specify whether the parties can choose the law of such a territorial unit, provided that they themselves are from different countries.

So far this is familiar territory, but Article 3 pushes the concept of party autonomy further and explicitly allows the parties to choose non-state rules as the applicable law:

The law chosen by the parties may be the rules of law that arc generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise.

The article itself does not define what exactly rules of law arc although it gives some criteria to help establish which rules constitute an acceptable choice. These guidelines seem to disallow rules elaborated by trade associations and other professional bodies, as these arc not neutral. This is supported by the official commentary, which states that neutral should be understood as a neutral, impartial body that represents diverse legal, political, and economic perspectives. A set of rules made by an impartial, neutral body also excludes the lex mercatoria, general principles of law, or other such formula. The Principles are silent on trade usages and their application is left to the governing law. The Principles leave it to the forum whether a choice for non-state rules is possible. The last point is a drawback as this brings an clement of uncertainty to the instrument. Nor was it necessary as The Hague Principles arc a model law and states could adapt the provisions regardless.

The official notes define rules of law as rules, which do not emanate from state sources, thus equating these with non-state rules. The official notes elaborate the criteria mentioned above and give some examples of acceptable choices. International treaties and conventions are an acceptable choice as arc non-binding instruments formulated by established international bodies and independent groups of experts. The instruments mentioned by name arc the UNIDROIT Principles, the PECL, and the CISG. Finally, the notes also mention that as the number of non-state rules is growing this list should not be considered exhaustive. These conditions are imprecise: what is a set of rules and why can only sets of rules be chosen? What is generally accepted and neutral?^[4]

The official commentary gives no solution on gap filling if the applicable non-statc rules arc not complete but reminds the parties that they should take this into account when deciding on choice of law. As The Hague Principles do not cover the applicable law in the absence of a choice of law clause this issue is not dealt with further. This could be problematical, as non-statc rules do not form a complete legal system. Therefore, if the parties choose a non-statc law, but no other applicable law, it would be up to the forum to decide on how the gaps should be filled. As different private international laws could lead to different applicable laws this heightens uncertainty. It would have been better if the Principles could have included an article indicating how any gaps should be filled. This would have provided security for the parties, as the approach to gap filling would then be uniform.

In the original working draft no limits were placed on which non-statc rules could be chosen. This proved too controversial because of the different views of states on this matter so the Working Group added the conditions set forth in article 3. Michaels argues that if this choice is made possible, then there should be no conditions so that the parties can be certain their choice would be accepted. This would also be more in line with transnational legislation, as these normally do not define non-statc rules. However, Symeonidcs argues that placing these conditions was the right approach: adding the requirements excludes the potential application of trade association rules, which can favour one of the parties too strongly. At the same time, the parties are also protected through mandatory laws and international public policy against the application of biased rules. Of course, too much reliance on public policy and mandatory laws reduces the effects of the applicable law and this raises unpredictability for the contracting parties. Excluding the lex mercatoria is questionable. Whilst indeed this is not a well-defined body of law and its application is unpredictable, it is also the law that is most closely associated with the autonomy of the merchant community and which was developed by that community. If the Hague Principles truly place autonomy at the centre, then a choice for the lex mcrcatoria should be allowed. If the contracting parties deliberately choose the unpredictability and flexibility of the lex mcrcatoria then this choice is just as valid as a choice for the PECL for instance.

Although the Hague Principles represent a large step forward in extending party autonomy to non-state rules it should be kept in mind that an eventual effect from the Principles will not be felt for some time. This effect will depend on whether states adopt them, or courts and arbitral tribunals use them. So far Paraguay has adopted the Principles into their new private international law legislation.^[5] Given that overhauls of private international law arc few and far between there is unlikely to be a surge of adoptions of the Hague Principles.

[1] Signed by Bolivia, Brazil, Venezuela, Mexico, and Uruguay, but only ratified by Mexico, and Venezuela: http://www.oas.org/juridico/english/sigs/b-56.html Note that whereas current Brazilian internal law has a restrictive view on party autonomy this convention would have significantly extended the scope of party autonomy in Brazil. 2 For instance, Professor Michaels believes that the article intended to refer to state law only (See RalfMichaels, ‘Non-Statc Law in the Hague Principles of Choice of Law in International Contracts’ (2014) 7 http://papers.ssrn.com/sol3/papers.cfnVabstract_id-2386186) whereas Professor Juenger is convinced that the article can be interpreted to allow for non-state rules as a choice of law (Friedrich К Juenger, ‘The Inter-American Convention on the Law Applicable to International Contracts Some Highlights and Comparisons’ (1994) 42 American Journal of Comparative Law 381) Professor Fresnedo de Aguirre is in agreement that non-state rules can be chosen ‘within certain limits’ (Cecilia Fresnedo de Aguirre, ‘Party Autonomy ■ A Blank Cheque?’ (2012) 17 Uniform Law Review 655, 666).
[2] To the extent that the law applicable to a contract of sale has not been chosen by the parties in accordance with Article 7, the contract is governed by the law of the State where the seller has his place of business at the time of conclusion of the contract. http://www.hcch.net/index_en.php?act=conventions.text&cid=61. 2 Symeon C Symeonides, 'The Hague Principles on Choice of Law for International Contracts: Some Preliminary Comments’ (2013) 61 American Journal of Comparative Law 873.
[3] Commentary 2.5. 2 Commentary 3.13. 3 Commentary 3.4-3.13.
[4] Ralf Michaels, 'Non-State Law in The Hague Principles of Choice of Law in International Contracts’ (2014)7 http://papers.ssrn.com/sol3/papers.cfmiabstract_id-2386186. 2 Ibid. 3 Genevieve Saumier, 'The Hague Principles and Choice of Non-State Rules of Law to Govern an International Commercial Contract’ (2014) Brooke Journal of International Law 1,28 4 Ralf Michaels, ‘Non-State Law in The Hague Principles of Choice of Law in International Contracts’ (2014) 7 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2386186. 5 Symeon C Symeonides, 'The Hague Principles on Choice of Law for International Contracts: Some Preliminary Comments’ (2013) 61 American Journal of Comparative Law 873, 893. Cecilia Fresnedo de Aguirre, 'Party Autonomy - A Blank Cheque?’ (2012) 17 Uniform Law Review 655, 667.
[5] Paraguay Promulgates the Law based on the Draft Hague Principles on Choice of Law in International Commercial Contracts http://www.hcch. net/index_en.php?act=events.details&year=2015&varevent=392. 2 Ralf Michaels, ‘Globalizing Savigny? The State in Savigny’s Private International Law and the Challenge of Europeanization and Globalization’ (2005) Duke Law School Legal Studies Research Paper Series, Research Paper N.74, 7 Kenneth C. Randall & John E. Norris, ‘A New Paradigm for International Business Transactions’ (1993) 71 Washington University Law Review 599, 607. 3 Ibid, 28. 4 Friedrich K Juenger, ‘The Lex Mcrcatoria and Private International Law’ (2000) 5 Uniform Law Review 171, 173. 5 Horatia Muir Watt, ‘Party Autonomy’ in international contracts: from the making of a myth to the requirements of global governance’ (2010) 6 European Review of Contract Law 250, 261.