Using codified non-state rules as lex mercatoria: the UNIDROIT Principles

The Preamble to the UPICC considers their application as lex mercatoria:

2. They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria, or the like.^[1]

There was thus from the moment that the Principles were created a deliberate push for them to be accepted as lex mercatoria. This is prescriptive, and was not descriptive of the current state of affairs in 1994. The UPICC can state that they may be applied as lex mercatoria but that of course does not mean that they are lex mercatoria. That acceptance can only come from usage by the merchant community. It is not clear from the pre-amble whether the UNIDROIT Principles should be applied as a guide to finding the lex mercatoria, a reflection of the lex mercatoria, or an expression of the lex mercatoria. They are used in all these ways.

The UPICC are used as a guide to establish what the lex mercatoria is. A Canadian company (service provider) and the UN (buyer) agreed that the law governing their dispute should be the ‘generally accepted principles of international commercial law.’ The arbitral tribunal decided that to define these generally accepted principles it would refer to the UPICC. The published abstract does not mention the reasons of the tribunal to do so.

In a dispute between a French company and an Illinoisan company both parties argued that their own domestic law was applicable, but that as an alternative, general principles of law should be applied. The tribunal decided that there were not enough connecting factors to a specific domestic law and that it would base its decision on the general principles of law or the lex mcr-catoria. The tribunal then stated that several ICC cases had considered the UNIDROIT Principles as the best approach to understand what the general principles of law are.^[2]

The UPICC were applied ‘as a primary set of guidelines in determining international rules of law applicable to the parties’ contract", but the tribunal would also ‘duly consider the lex mercatoria in its two fundamental principles, i.e. the standards of good faith which the parties should observe when performing the contract and the rule of pacta sunt servanda.' The tribunal thus distinguished between the UPICC and the lex mercatoria. The UPICC are used as a guide to determine the international rules of law, which the tribunal differentiated from the fundamental principles of the lex mercatoria.

The UPICC are used as a reflection of the lex mercatoria. In 2000 a Court of Appeal in New Zealand stated that the UPICC are a ‘document, which is in the nature of a restatement of the commercial contract law of the world.⁷¹² In another case an English company (BAE) dealing in anti-missile systems and the Iranian government concluded nine contracts for the supply of equipment. After the Islamic Revolution the contracts were terminated on the initiative of the new Iranian government. BAE decided to sue for damages while the Iranian Ministry of Defence requested restitution of advance payments. The contracts contained an arbitral clause, but the only reference to the applicable law was that settlement should be according to natural justice. The arbitral tribunal interpreted natural justice to ‘exclude the application of any specific domestic law and to have their contracts governed by general principles and rules which, though not enshrined in any specific national legal system, are specially adapted to the needs of international transactions and enjoy wide international consensus.’ In a first partial final award the Tribunal stated that ‘the contracts should be interpreted in accordance to, the UNIDROIT

Principles with respect to all matters falling within the scope of such Principles'^ In subsequent partial awards the Tribunal applied the UPICC on several points.

In the final partial award four years later the tribunal referred to the UPICC, but did not consider them 'in all cases as the expression of generally accepted principles of law.*' It is not clear from the judgment whether the tribunal meant something different by the word expression than by their earlier use of the word reflection. BAE sought the annulment of the four Partial Final Awards, but this was unsuccessfi.il.^[3] The tribunal thus distinguishes between, on the hand the UPICC, and on the other hand general principles of law whilst at the same time acknowledging there exists an overlap between the two.

In a contract between a Romanian seller and an English buyer the choice of law clause stated: ‘this contract is governed by international law.*⁷ During the arbitration the parties disagreed on what this meant. The seller stated that it meant ‘general principles of law and the lex mercatoria which meant in accordance with Article 1.101 (3) of the PECL and paragraph 3 of the Preamble of the UNIDROIT Principles that the dispute should be governed by the PECL to be interpreted in the light of the UNIDROIT Principles.' The buyer stated that English law was applicable. The tribunal decided that by referring to international law the parties demonstrated that they wished to exclude the application of state law. The tribunal then decided that international law should be understood as the lex mercatoria and general principles of law, which arc reflected in the UPICC. Although international law and the lex mercatoria are not the same it is clear why the tribunal took this decision. If by international law is meant public international law, then this cannot be practically applied to a commercial law dispute. The lex mercatoria is

The application of codified non-state rides 193 considered the international law of commerce. Of course, whether the lex mcrcatoria can be equated with the UPICC and the PECL based on these instruments’ self-declaration is another matter.

In an ICSID arbitration the Tribunal cited the UPICC in support of the ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts and justified this reference by stating that ‘it would be possible to illustrate these general principles from several other national systems (both common law and civilian), but it is unnecessary to do so here because, first, such principles are broadly restated in the UNIDROIT Principles And, second, the Tribunal is in no doubt that similar principles form part of international law, as expressed in the ILC Articles.'⁸ The UPICC are thus used as a reflection of general principles of law.

In an ICC case, the UPICC were used to supplement the applicable state law.^[4] This case concerned the enforcement of an arbitral award based on Iranian law supplemented by ‘general principles of international law, including the lex mercatoria and trade usages.’The arbitral tribunal decided on the UPICC to guide them: ‘as to the contents of such rules, the Tribunal shall be guided by the Principles of International Commercial Contracts. ’ The tribunal referred to the Principles on most points when it rendered the award except from the timing that interest should be awarded. The tribunal doubted that the solution provided for by the UPICC formed part of general accepted legal principles.

The award was disputed in court by Cubic Defense systems on the grounds that the tribunal had exceeded its mission by referring to the UPICC. Cubic Defense systems did not object to the application of general principles of international law and trade usages, but specifically objected to the use of the UNIDROIT Principles. Therefore, one of the questions in dispute was whether the UPICC are a reflection/expression of these general principles and trade usages. The court enforced the award and thereby confirmed theassumption of the tribunal that the UPICC are indeed a refleetion of general principles of law.

In a dispute between a Chinese and Indonesian company before the China International Economic and Trade Arbitration Commission (CIETAC), the contract referred to Singaporean law. Neither of the parties could provide sufficient evidence of how Singaporean law dealt with the concerned issues. Therefore, CIETAC decided on settling the dispute through international practices and that for this purpose it would refer to the UPICC which represent, ‘ the general principles of contract laws’ unless the parties could prove these ran contrary to Singaporean law, which they could not.^[5]

The UNIDROIT Principles are used as an expression of the lex mercato-ria. The UN Compensation Commission referred to the UPICC as ‘principles of international commercial contract law’ and when deciding an issue in ‘conformity with general principles of law’ referred to the UPICC. In a case between an Italian company and a governmental agency of a Middle Eastern country the tribunal decided that, in the absence of a choice of law clause, it would base its decision on ‘terms of the contract, supplemented by general principles of trade as embodied in the lex mercatoria.’ In the final award the tribunal referred to the provisions of the UNIDROIT Principles as a source of the lex mercatoria.

In a contract between a French company and a Costa Rican company the parties agreed that any dispute should be resolved ‘on the basis of good faith and fair usages and with regard to the soundest commercial practices and friendly terms.’ The tribunal applied the UNIDROIT Principles as it considered these ‘the central component of the general rules and principles regulating international contractual obligations and enjoying wide international consensus. ’

A dispute arose between a Russian company and a German company after they concluded a contract for the marketing of goods produced by the respondent. The contract stipulated that disputes should be settled in accordance with the general principles of the lex mercatoria. There was a further provision that all terms were subject to the legislation of both Germany and the Russian Federation. The tribunal stated that by making both legal systems applicable this was tantamount to the absence of a choice of law. The tribunal decided to apply the UPICC as an expression of the general principles of the lex mercatoria.

The Civil Chamber of the Venezuelan Supreme Court ruled in a case between a Venezuelan and a Dutch company that international contracts are governed by the closest connected law and that to determine this law all objective and subjective elements of the contract should be taken into account on top of ‘ the general principles of international commercial law recognised by international organisations.⁸⁸ The Court specifically mentioned the UPICC as an example of these general principles. In a Paraguayan case the court referred to the UPICC as ‘widely recognised principles in international commercial law.™

Other tribunals have been more cautious in linking the UNIDROIT Principles to the lex mercatoria or its elements. In a dispute the ICC Tribunal decided to apply the general principles of law in absence of a choice of law clause.^[6] The tribunal stated that ‘those general principles and rules of law applicable to international contractual obligations which qualify as rules of law and which have earned a wide acceptance and international consensus in the international business community, including notions which are said to form part of a lex mercatoria, also taking into account any relevant trade usages as well as the UNIDROIT Principles, as far as they can be considered to reflect generally accepted principles and rules.' The tribunal justified this choice by stating the UPICC ‘contain in essence a restatement of those principes direc-teurs that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice. ** The tribunal followed this by stating that the UPICC had not ‘yet stood the test of detailed scrutiny in all their aspects, some of their individual provisions might not reflect international consensus. ’ This award was rendered only two years after the UPICC were first published which would account for the reluctance of the tribunal.

A dispute arose from a contract containing a choice of law clause for Spanish law. The contractor argued that the contract should be renegotiated for reasons of hardship in accordance with UNIDROIT Principles articles 6.2.2 and 6.2.3 and that these were applicable because they arc trade usages, which the tribunal should take into account under the applicable ICC Arbitration Rules. The tribunal decided that the UPICC were not applicable because they should only be applied when the parties have expressly agreed to do so or where the contract refers to the lex mercatoria, general principles of law, or similar formulation in accordance with the pre-amble of the UPICC. As in this case Spanish law was applicable and the parties had made no reference to any non-state rules in the contract the UPICC should not be applied. Furthermore, the tribunal argued, the provisions of the UNIDROIT Principles on hardship are not the current practice in international trade. This decision recognises that the UPICC can be applied as lex mcrcatoria or general principles of law but did not consider them trade usages.

A Brazilian court applied the CISG and the UPICC to an international contract in absence of a choice of law clause. Whilst Brazilian private international law pointed to the application of Danish law the court stated that the new lex mcrcatoria, as expressed by the UPICC and the CISG should be applied. The court saw the content of the UNIDROIT Principles as coinciding to a large extent with the new lex mcrcatoria. The court defined the latter as ‘the principles and rules, model contracts and clauses, usages and customs, which have been developed independently from the States by international trade practice and may therefore be considered “an authentic transnational commercial law.’

These cases demonstrate that there are several ways in which the UPICC arc linked to the lex mcrcatoria and its two main components: general principles of laws and trade usages. The UPICC are a guide, a reflection, a primary reflection, and an expression of the lex mcrcatoria. The weakest of these criteria is a guide. If the UNIDROIT Principles are used as a guide, this can mean different things. A guide could be something someone refers to on occasion or it could be a strong guiding force. It also means that the UNIDROIT Principles themselves, are not a source of the lex mcrcatoria, but that they merely serve as aid to discover what the lex mcrcatoria is. The second strongest usage is that of a reflection. If they arc the primary reflection it means that they are the key text that reflects the lex mcrcatoria. They are therefore the most important piece of evidence of the substance of the lex mcrcatoria or its elements. If they are a reflection, they are just one of more pieces of evidence. As a reflection of the lex mcrcatoria the UPICC themselves are not lex mcrcatoria. They are evidence of the lex mcrcatoria, but they are not a source.

The UNIDROIT Principles are also applied as an expression of the lex mcrcatoria. They are a source of the lex mcrcatoria. Their authority does not derive from other sources, but they are the authority in their own right. Finally, in some cases the lex mcrcatoria and the UPICC are likened without any further explanation and it almost seems as if the UPICC are just equated with the lex mcrcatoria. It is doubtful this is intentional and it is likely meant that they are a reflection or expression of the lex mcrcatoria.

If the UPICC are a source of the lex mcrcatoria, then this could mean that case law that recognises the lex mcrcatoria as law (such as Valenciana de Cementos Portland SA. v Primary Coal Inc) also indirectly recognises the UPICC as law. Section 2.4 established that codified non-state rules are not

¹

Court of Appeal of Rio Grande do Sul, Noridane Foods S.A. v. Anexo Comercial Importacao e Distribuijao Ltda. 14.02.2017.

The application of codified non-state rules 197 part of the lex mercatoria under the most acceptable definition of the latter. Yet, the trend that emerges here links the UPICC to the lex mercatoria and considers that the UPICC are part of the lex mercatoria. The results also show that the UPICC were used as lex mercatoria very soon after their initial publication and that they continue to be applied in this fashion. The earlier cases show more reticence when referring to the UPICC as general principles of law, which demonstrates a gradually furthering acceptance of the UPICC as lex mercatoria.

• [1] UNI DROIT Principles of International Commercial Contracts 2010, Pre-amble. 2 Unless otherwise specified all case abstracts come from the UNILEX database. 3 Ad hoc Arbitration, Parties Unknown, New York (Unpublished).
• [2] ICC Award No. 13012 (2004). 2 Hideo Yoshimoto v Canterbury Golf International Ltd [2000] NZCA 350 The issue concerned the interpretation of a clause (literally or liberally). The Court stated that a liberal interpretation would be in accordance with Article 8 of the CISG (in force in New Zealand) and articles 4.1 to 4.3 of the UNIDROIT Principles [which] refines and expands the principles contained in the United Nations Convention.’). Despite this the Court chose the literal interpretation because the Privy Council would not allow for the more liberal interpretation on the grounds that a) the CISG is not adopted in England and b) English common law does not support this liberal interpretation. 3 ICC Award No.7110 (1999) As quoted in Michael Joachim Bonell, ‘UNI DROIT Principles: A Significant Recognition by a United States District Court’ (1999) 4 Uniform Law Review 651, 653.
• [3] Bae Systems Pic, U.K. Vs Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran, ICC Award No.7110 (1995). 2 Michael Joachim Boncll, 'UNIDROIT Principles: 'A Significant Recognition by a United States District Court’ (1999) 4 Uniform Law Review 651,654; As an example with regards to question of the whether it was excusable for the claimant to not pay for reasons amounting to force majeure/hardship the corresponding articles of the UNIDROIT Principles (6.2.1-6.2.3) were mentioned and the tribunal said that 'changed circumstances are not part of widely recognised and generally accepted legal principles.’ 3 Bae Systems Pic, U.K. Vs Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran, Rechtbank 'S Gravenhage, 2011, One of these grounds was that the Arbitral Tribunal had exceeded its mission by not referring to the limitation periods as included in the UNIDROIT Principles 2004. The Iranian government stated that the 2004 Principles should not be applied retroactively which the courts agreed with. It was thus not the actual application of the UPICC, which was objected to, but the specific version of the Principles. (The case went to the High Council in the Netherlands in the end. See: Bae Systems Pic V Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran, Hoge Raad 22 May 2015, ECLI:NL:HR:2015:1272. See: http://deeplink.rechtspraak.nl/uitsp raak?id=ECLI:NL:HR:2015:1272). 4 ICC Award No. 12111 (2003).
• [4] Gemplus&Talsud v Mexico, International Centre for Settlement of Investment Disputes (2010) http://www.italaw.com/sites/default/files/case-documents/ita0357.pdf In at least seven more cases between 2007 and 2020 ICSID referred to the UNIDROIT Principles as reflections or expressions of principles of law (See www.unilex.com). 2 The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran v Cubic Defense Systems ICC Award No. 7365 (1997). 3 Another reason for the tribunal to make this decision was that the solution provided by the UPICC ran counter to the corresponding article 721 of the Iranian Code of Civil Procedure. Michael Joachim Bonell, 'UNIDROIT Principles: A Significant Recognition by a United States District Court’ (1999) 4 Uniform Law Review 651, 662. 4 The Ministry of Defence and Support for the Armed Forces of the Islamic Republic of Iran )> Cubic Defense Systems, Inc, United States District Court, S.D. California, 7 December 1998. 5 Michael Joachim Bonell, ‘UNIDROIT Principles: a Significant Recognition by a United States District Court’ (1999) 4 Uniform Law Review 651, 662.
• [5] China International Economic and Trade Arbitration Commission (CIETAC), 31-10-2016. 2 United Nations Compensation Commission, Panel of the Commissioners, Panel Fl, Recommendation S/AC.26; The Commission was set up to ‘process claims and pay compensation for losses and damage suffered as a direct result of Iraq’s unlawful invasion and occupation of Kuwait in 1990-91’ 3 ICC Award No. 8261 (1996). 4 Parties Unknown, Ad Hoc Arbitration (Costa Rica), 30.04.2001. 5 Parties Unknown, International Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, 11/2002.
• [6] Banque Artesia Nederland, N.V., V. Corp Banca, Banco Universal C.A V, Civil Chamber of the Venezuelan Supreme Court, 02/21/2004. http://www.tsj.gov.ve/decisiones/scc/diciembre/172223-RC.000738-21214-2014-14-257.HTML. 2 Tribunal de Apelación en Io Civil y Comercial de Asunción, Edgar Alberto Avala Zalazar v. Carlos Tomas Gonzalez Figueredo, 31-05-2016. 3 ICC Award No. 7375 (1996). 4 Ibid. 5 ICC Award No. 8873(1997).