Party autonomy without limits
This section examines the objections raised against extending party autonomy to include non-state rules. The main objections arc lack of protection for the weaker party, lack of predictability for the parties, difficulties in establishing the content of non-state rules, and lack of completeness.
Non-state rules might not give the contracting parties the same rights as a state law. This would especially be problematic if the contracting parties have unequal bargaining power and therefore the choice is imposed upon them. An example is the UCP 600 whereby the bank is usually the stronger party and can impose their usage on the party that seeks a documentary credit.
Yet, it is not necessarily so, that the rights of the parties would inherently be better protected by choosing a state law. The same concerns that non-state rules raise can come into play when parties choose a state law. It is not always possible to know in advance with sufficient certainty whether astate law protects the rights of the parties. The approach to contract law differs between states whereby a more liberal approach that prioritises freedom of contract would not have the same protectionism in place as other states where the rights of the parties arc balanced against each other through more state intervention. International public policy and mandatory laws do protect the parties against an imbalance of rights in non-state rules in the same way as they can against an imbalance of rights in a foreign state law. The fact that non-state rules fold before mandatory provisions already provides some guarantee of protection to the parties if there is a severe misbalance in rights. Thus, the choice of forum can be just as crucial or even more crucial in protecting the rights of the parties
Symeonides is sceptical about allowing parties to choose non-state rules as the law of contract: ‘Nevertheless, history cannot - and the merchant community will not - protect the individual contractor, much less the consumer, of the 21” century, the contemporary state can and will.745 He discusses that there is a lot of attention (and praise) for those non-state rules which have been designed by respected institutions like UNIDROIT and UNCITRAL, but that it should not be forgotten that many instruments are not like those ‘paragons’ of transnational commercial law and arc utilitarian instruments drafted by organisations that have a direct (financial) stake in the outcome of disputes, these would for instance be the rules promulgated by banking clearing houses and trade associations.[1]
There is a tendency for these instruments to be biased towards the service provider or the seller, who is a member of the association as the instrument serves to protect the business interests of the group. The quality of, for instance, the UPICC is not in question, but that the recognition of the UPICC as a choice of law sets precedent for more questionable instruments that arc not of a similar quality. Scholars might concentrate on those instruments that are drafted by respected institutions and this leads to a general assumption that the quality of non-state rules is high. It should be noted that standard contract terms set up by trade associations have a long history and can count on strong support from the business community who resort to these far more frequently to regulate the contract than that they resort to for instance the UPICC.
Snyder identifies three types of private law making. The first type is private law making by institutions such as ALL The instruments drafted by these organisations need to be adopted by a legislature or applied by the court. These would for instance include international conventions. They do not become law unless they have been ratified by the state. The second type, are rules made by trade associations. These usually only affect a limited number of parties: only direct participants in the specific trade and they have little bearing on outsiders.[2] The third category is that of rules which affect other parties beyond the direct participants in a specific trade.
These include rules for users of financial products such as cheques, credit cards, and letters of credits. For example, the UCC gives clearing houses power to impose their rules on all who use a cheque regardless of whether these users consent to this. These are non-state rules that people cannot avoid unless they stop using cheques. The UCP 600 are drafted by a private organisation (ICC) and imposed by other private organisations (banks). The UCP are imposed not just on the parties to the documentary credit, but also involve third parties such as the carrier of the goods who issues the bill of lading. It is virtually impossible for parties to avoid them unless they do not take out a letter of credit, which would hamper their business in other ways. Officially the UCP arc variable, yet in practice the disproportionate difference in bargaining power between a bank and most traders would make this impossible. Therefore, for all intents and purposes the UCP impose themselves as law upon the contracting parties despite being non-state rules.
Trade associations form a closed community. The landscape of trade associations is diverse with many functioning as a resource for information and they take a more or less focused approach to lobbying policy makers to ensure their interests are taken into account. Others function as an almost completely independent private institution. They have their own dispute mechanisms and regulations. This is especially common in the commodity trade. If traders want access to the resources of the association they will need to join. In some cases, it might be very difficult or even impossible to trade outside the confines of the organisation. Members agree to stick to the rules and bring any disputes to the association. Of course, the organisation has no power of enforcement of decisions and in theory members might decide to ignore the decision of the association in case of conflict. These decisions often take the form of an arbitral award and can be enforced in the same way as any other arbitral award. In practice members usually adhere to the rules and decisions. Reputations mechanisms play a key role in this.[3] A merchant adheres to the rules of the association because if he does not then the other traders will avoid doing business with him and the merchant might end up expulsed from the association and the benefits it provides (such as access to other traders (or even the entire trade), access to information and other resources.) Whilst in individual cases members might perceive some injustice overall the system is beneficial because it supports and advances the trade.
Some non-state rules are drafted to protect the interests of only one of the parties. This becomes especially problematic when these rules impose themselves upon parties that have no knowledge of these rules or have no choice but to consent to their application, as there is no practical alternative available. This could be to the detriment of the rights of the weaker parties, depending on rules chosen.
The second argument against allowing a choice for non-state rules is that the unfamiliarity of the court with their application could lead to unexpected results. The choice of a foreign law does not necessarily represent a safer choice for the parties. Lando refers to a study made by Max Rheinstein who analysed 40 cases in which American courts applied a foreign law. Rheinstein found that out of the 40 cases in 32 instances the law was not applied correctly, and in four of the remaining cases it was doubtful whether the application of the foreign law was correct. Even if the parties know the foreign law well the result could be different than expected because of how the rules arc interpreted and applied. Overall, courts have a preference to apply the lex fori, instead of a foreign law, even if this foreign law is designated through conflicts of law.
While the degree of freedom available to the parties would not increase significantly by permitting to choose a non-state law, the degree of uncertainty would increase. This is only in part due to the difficulty of ascertaining the exact content of the lex mercatoria. Even assuming that the parties chose a codified restatement of the lex mercatoria, such as the UNIDROIT Principles or the PECL, there would be considerable uncertainty in respect for example of gaps and legal standards that need concrétisation by the judge. These restatements have to be interpreted autonomously and in the light of principles of international trade: but how can any gaps be integrated, or legal standards interpreted in the cases where there are no underlying principles and no generally acknowledged principles in international trade that permit autonomous interpretation?[4]
Moss raises two important issues: first, the content of non-statc rules can be difficult to ascertain and second, even if the first problem is circumvented by choosing codified non-statc rules there are no clear general principles for an autonomous interpretation of these rules. This raises the important point of interpretation. There is no real (body of) (international) (case) law on how non-statc rules should be interpreted. This leads to different interpretations and therefore to more uncertainty for the contracting parties. Yet, this problem of interpretation is not exclusive to non-statc rules as was seen from Rheinstein’s study and is also relevant in the application of foreign law, where such principles of interpretation exist but might not be known to the judge who is applying this law. Non-state rules are applied less often (especially in court litigation) and there is thus limited case law available to guide their interpretation. This would especially be problematic for unwritten non-statc rules whose content is the most ambiguous. On others, such as the UNIDROIT Principles there is a wide amount of material available regarding interpretation, which could ensure consistency.
The other issue that Moss mentions is that non-statc rules arc not complete. Domestic law is needed to fill in the gaps. An example is an ICC case, which was to be decided by applying the lex mercatoria as expressed by the UPICC. At the time the UPICC did not cover the issue of illegality so the tribunal resorted to French law for this issue. Thus although non-statc rules were applied ultimately recourse to a state law was necessary to supplement the non-state rules. This decreases predictability for the parties as they might not know in advance which state law will be applied. This could be the putative applicable law, the lex fori, or even another law that the court/tribunal judges to be the most appropriate. The interaction between state law and non-statc rules can lead to unexpected results. Parties can consider this issue in advance and decide to use non-statc rules for parts of the contracts whereas they will have other parts governed by a state law or other non-statc rules (dépeçage). This choice could prove difficult, as one of the reasons why the parties might choose non-state rules in the first place is that they could not agree on a state law. As non-statc rules arc less complete than most state laws this issue is germane to a choice for non-statc rules.
The main objections against non-statc rules as the governing law thus are: balance of the rights of the parties (which includes protection of weaker parties), the undemocratic element of non-statc rules (no public sanction), the difficulties in establishing the content, the interpretation of non-state rules, and their lack of completeness.
Arc these arguments enough to disallow a choice for non-statc rules? First of all, many objections against extending party autonomy to non-statc rules arc not inherent to just these, but also occur when a foreign law is chosen. A foreign state law might not provide the protection or the freedom that the lex fori does. Mandatory rules and public policy can protect the rights of the parties although this does interfere with the autonomy of the parties and can lead to unpredictability as to the application of the law. The more safeguards there arc in place to protect the parties, the less it protects the freedom of the parties to choose the applicable law. It is in between these that a balance must be found.
The lack of public/statc sanction of non-statc rules is less relevant as the forum has not publicly approved a foreign state law cither and would usually apply this at the request of the parties. Of course, the foreign state law has public approval in another state. However, does that public approval meet the standards of the forum? What of a law passed in an undemocratic state by an authoritarian regime? Is that public approval more acceptable than the private approval of non-state rules? Especially if those rules are drafted by a neutral organisation composed of members from a wide array of countries or by merchants in that specific trade? This standpoint becomes even more difficult to maintain if one takes into account that some non-statc rules such as international conventions might precisely have this public approval in other states like the example of the CISG shows (non-statc rules in the UK, publicly approved law in France).
If non-state rules are the product of the international merchant community, then these reflect the societal needs of that community, and these needs could be just as valid as the societal needs of a nation. Non-state rules can be more flexible than state laws. They are quicker to draft, and they can be amended with the same ease. This means that these instruments arc faster to respond to concerns of the market and might better represent the view of the international business community than some state laws do. There is competition between different non-statc rules and those that are chosen regularly have popular backing and therefore a type of public support. If merchants arc not happy with certain non-state rules, they will simply not use them. If specific non-statc rules are used
Non-state rules and private international law 135 frequently that must mean that the participants are content with their functioning.[5]
This does not address those situations where there is a power disparity between the parties. In that case the weaker party cannot object to the choice of law and cannot set up an alternative system. There will also be a lack of incentive for the private entity to respond to the objections and adapt the rules, as there is no competition on the market. The state could provide a legal structure in which non-state rules operate. In the previous sections it could be seen that The Hague Principles on the Conflicts of Law, the Oregon state legislation, and the original proposal for the Rome I legislation all include conditions on what type of non-state rules arc allowed as a choice of law. Codified non-state rules provide clarity and coherence. However a restriction on choice also decreases security for the parties, as they cannot be sure whether their choice will be honoured, unless the legislation is explicit enough to take away any doubts.
Non-state rules are less complete than state laws and therefore recurrence to a state law for gap filling purposes will often be necessary. The original proposal to the Rome I Regulation included that if parties choose non-state rules any matters not settled by these would be governed by ‘general principles underlying them, or failing such principles, in accordance with the law applicable in the absence of a choice under this Regulations.,M There is the issue of how these general principles would be discovered and interpreted, yet the inclusion of such a gap filling rule in private international law would help to deal with the problem of incompleteness. The court could use several mechanisms to full these gaps; it could use its private international law to find the putative applicable law, use the lex fori, or apply general principles of law. In all cases this would lead to a degree of unpredictability for the parties. This cannot be avoided, as non-state rules arc incomplete. Even the UPICC, which is without a doubt the most complete instrument cannot provide for every single eventuality (although their completeness by now is such that they are almost self-contained.)
Conclusion: party autonomy and non-state rules
There are some serious objections against allowing a choice of law for non-state rules. Most of these objections are not exclusive to non-state rules and also apply to a choice for a (foreign) state law. The most substantial objections are that non-state rules are often incomplete and that they may raiseproblems of interpretation: these issues lead to uncertainty as to how the law will be applied. In most cases either the lex fori or the otherwise applicable law would be used to resolve such problems, but that in itself may lead to uncertainty as to how the law and non-state rules interact, and how they are interpreted by the court.
There are two important reasons for allowing the parties to choose non-state rules as the applicable law: first, the risks associated with choosing non-state rules are not intrinsically different from the risks associated with choosing a state law. Second, if parties are given the autonomy to choose the applicable law because it is believed that they know what is the best law for their particular situation and should therefore have the freedom to make that decision, then equally they should be given the agency to determine whether they want to choose non-state rules as the applicable law. Enhancing the freedom of the parties will enhance the expression of the will of the parties in the contract.
It is unclear how often the parties now include a choice of law for non-state rules in the contract. Even if this information were available it would not give a complete understanding of the wishes of the parties as most jurisdictions do not allow for a choice of law for non-state rules outside of arbitration and therefore the parties would refrain from choosing these in the first place. Additionally, any database can only measure how often non-state rules come up in courts. It would not measure how frequently they are chosen by the parties, as most contracts arc executed without any litigious conflicts or are solved through a private dispute resolution mechanism which is usually confidential. Therefore, it is difficult to gauge how necessary an extension of party autonomy to include non-state rules is.
Allowing non-state rules as the applicable law in litigation would enhance their legal authority because not only would their status be on par with a foreign applicable law, it would also contribute to their development. A major drawback of restricting the choice of the parties to state law is that under those circumstances courts can only play a modest role in developing the understanding and interpretation of non-state rules. As arbitral awards are usually not published or are heavily redacted, they cannot assume the same role in developing non-state rules as court decisions can. If non-state rules are applied regularly by courts and an authoritative body of interpretation is developed this would lead to a fuller understanding of non-state rules and this would ensure a more predictable application which would enhance certainty for the contracting parties and further legal harmonisation.
1
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 1,21.
- [1] Symeon C Symeonides, ‘Contracts subject to Non-State Norms’ (2006) 54 American Journal of Comparative Law 209,210. 2 Ibid, 220. 3 Ibid 4 David Oser, The Unidroit Principles of International Commercial Contracts: a Governing Law (Martinus Nijhoff 2008) 24. 5 Ibid. 6 David V Snyder, ‘Private Lawmaking’ (2003) 64 Ohio State Journal 371,371.
- [2] There are more examples of private institutions that have an entry system for members and operate under their own rules. For instance, stock exchanges (Gillian K Hadfield, Privatizing Commercial Law: Lessons from the Middle and Digital Ages, (2000) Working Paper No.195, 17). 2 (b) Federal Reserve regulations and operating circulars, clearing-house rules, and the like have the effect of agreements under subsection (a), whether or not specifically assented to by all parties interested in items handled. 3 David V Snyder, ‘Private Lawmaking’ (2003) 64 Ohio State Journal 371, 391. 4 Lisa Bernstein, ‘Opting out of the Legal System: Extra-legal Contractual Relations in the Diamond Industry’ (1992) 21 Journal for International Legal Studies 115 Lisa Bernstein, ‘the Law Merchant in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms’ (1996) 144 University of Pennsylvania Law Review 1776. 5 Lisa Bernstein, ‘Opting out of the Legal System: Extra-legal Contractual Relations in the Diamond Industry’ (1992) 21 Journal for International Legal Studies 115.
- [3] Gillian K Hadfield, Privatizing Commercial Law: Lessons from the Middle and Digital Ages, (2000) Working Paper No.195, 12. 2 Ole Lando, ‘Principles of European Contract Law and UNIDROIT Principles: Moving from Harmonisation to Unification’ (2003) 8 Uniform Law Review 123. 3 Friedrich K Juenger, the Lex Mercatoria and Private International Law (2000) 5 Uniform Law Review 171, 176.
- [4] Giudetta Cordero Moss, Norwegian National Report to the XVII Congress ofthe International Academy of Comparative Law Contracts without a Proper Law in Private International Law and Non-State Law (2006) as quoted in Lena Gannagé, ‘Le Contrat Sans Loi en Droit International Privé’ (2007) 11 Electronic Journal of Comparative Law 1,16. 2 ICC Award No. 11018(2002). 3 ‘The lex mercatoria is not yet very elaborated on nullity as a consequence of illegality. For instance, the UNIDROIT Principles of International Commercial Contracts or the Principles of European Contract Law do not deal with invalidity arising from illegality. However, many principles of the lex mercatoria related to nullity in general arc relevant in the present case. Moreover, to the extent necessary, French law that is very elaborate on the issue of nullity will be taken into consideration as an additional source of law.’ http://www.unilex.info/case.cfm?pid=2&do=case&id=1420&step=FullText The 2010 version of the UNI DROIT Principles does cover this issue See for instance: Michael Joachim Bonell, ‘The New Provisions on Illegality in the UNIDROIT Principles 2010’ (2011) 16 Uniform Law Review 517 Giles Guniberti, ‘Le Nouvel Article 3.3.1 Des Principes Unidroit 2010 Sur le Contrat Violant une Règle Impérative: un Regard Critique du Point de Vue du Droit International Privé’ (2013)18 Uniform Law Review 490.
- [5] David V Snyder, 'Private Lawmaking’ (2003) 64 Ohio State Journal 371,425. 2 Ralf Michaels, ‘Non-State Law in The Hague Principles of Choice of Law in International Contracts’ (2014) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2386186. 3 Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I) COM (2005) 650 final Article 3 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:5200 5PC0650&from=EN.
