The UNIDROIT Principles of International Commercial Contracts were first published in 1994, and last updated in 2016 for their fourth edition. The Principles represent a non-binding codification of international contract law. Being a “soft law” instrument, they offer plenty of possibilities when using them during the execution of a contract or in the resolution of disputes.
These Principles represent a work of standardization between different legal traditions and are particularly well suited for application in international commercial dispute resolution, as they are a modern interpretation of an internationally accepted commercial law for arbitrators to use in the proceedings in which they are involved.
One of the best ways to ensure the application of the UNIDROIT Principles in arbitration proceedings is through model clauses in contracts, indicating more precisely how the Principles are intended to be used in the evolution of a commercial relationship or in the event of disputes arising, as they more accurately reflect the intention of the parties regarding the manner or instances in which they wish the Principles are applied in their commercial relationship.
Model clauses can be divided into different categories, and the one that will be covered in this paper is the choice of the UNIDROIT Principles as the law governing the contract and their recognition by the Arbitral Tribunal as the substantive law when the parties failed to indicate it.
The selection of the law applicable to the merits of a dispute is not usually a simple task, because generally the parties in an international transaction will hesitate to establish as applicable law the national law of any of them, and thinking of a “neutral law” has disadvantages because it could be alien to both parties and their business practices, in addition to the fact that it could be difficult to know its content without the intervention of a third party who is an expert in the chosen law, always existing the possibility that such law does not adjust to how the parties conducted their business relationship.
In these cases, the UNIDROIT Principles are a useful alternative for resolving conflicts regarding the applicable law, since they cover such important issues as formation, interpretation, validity, illegality, enforcement of remedies,[MAM1] assignment, set-off, a plurality of obligors and claimants, authority of agents and limitation periods, to name but a few.
Thus, one may choose to apply the UNIDROIT Principles in a contract without reference to any other legal source, or by supplementing them with a specific national law or even by general principles of international commercial law, as well as by referring to all or some of the provisions. Similarly, the Principles may serve as a reference when it is agreed that the arbitral tribunal shall decide ex equo et bono that the Principles shall apply only to the extent that their strict application would not lead to an inequitable result in a dispute.
Derived from the above, when you only wish to use the UNIDROIT Principles, you should foresee that the arbitration or dispute resolution clause must contain this provision, an example of which would be:
- – “This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts”;
In the above example, by only including the Principles, if any issue falls outside their scope, it will be necessarily governed by other sources determined in accordance with the rules of private international law, in this way bringing uncertainty because the application of State rules is not always predictable and it also gives rise to some uncertainty as to the source of the rules.
To avoid the mentioned issue, choosing the UNIDROIT Principles supplemented by a particular domestic law is possible. If this is the parties’ intention, the clause to be included in the contract could be as follows:
- – “This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts and, as to matters not covered by the said Principles, by the law of (State X)”.
Thus, the contract or the resolution of disputes shall be governed by the UNIDROIT Principles and in matters not covered under the UNIDROIT Principle, the local law of the State chosen as backup shall apply.
However, in the event that the parties fail to include an arbitration clause or do not specify the law applicable to the merits of the dispute, it is not uncommon for Arbitral Tribunals to refer to the use of the UNIDROIT Principles to resolve the applicable law conflict.
The foregoing was the case in Case No. 12111 (January 6, 2003) of the ICC International Court of Arbitration in which, based on the arguments of the parties, the arbitrator concluded that the contract stating “this contract is governed by international law” denoted the intention of the parties to depart from national law, and it was consequently possible to conclude international law made reference to the lex mercatoriaand the general principles of law applicable to international contracts reflected in the UNIDROIT Principles.
Likewise, in case No. 15089 (September 15, 2008) the parties, two Middle Eastern countries, failed to indicate in the contract the law applicable to the merits, but indicated that the resolution of disputes would be carried out through arbitration administered by the ICC in London. In this case, the ICC International Court of Arbitration proposed in a partial award
the UNIDROIT Principles as a solution to the omission taking into consideration several issues, being the two most relevant the following: i) these Principles were shaped by the laws of the business community engaged in international trade, as well as the codification of international customary law in its most modern application and ii) the Principles are widely known not only in international trade but have been sufficiently interpreted and applied in hundreds of arbitral awards, so there is no doubt about their application in international transactions.