[...]
7
I am delighted to preface this publication of the Principles on Choice of Law in International Commercial Contracts (the "Hague Principles"), the first normative soft-law instrument developped and approved by the Hague Conference on Private International Law.
In addition to the 12 articles of the Hague Principles and their Preamble, this publication includes the Introduction to the Principles, which describes the general framwork, nature, purpose, structure, and scope of the Hague Principles. This publication also includes the article-by-article Commentary, an interpretative and explanatory tool for the better understanding of the Hague Principles.
At their core, the Hague Principles are designed to promote party autonomy in international commercial contracts. By acknowledging that parties to a contract may be best positioned to determine which set of legal norms is most suitable for their transaction, party autonomy enhances predictability and legal certainty - important conditions for effective cross-border trade and commerce. At the same time, the Hague Principles also set balanced boundaries to party autonomy and thus may provide a refinement of the concept where it is already accepted. In essence, the Hague Principles may be considered to be an international code of current best practice in relation to party autonomy in international commercial contracts.
Work on the Hague Principles started in 2006, when the Council on General Affairs and Policy of the Hague Conference invited the Permanent Bureau to prepare a feasibility study on the development of an instrument concerning choice of law in international contracts (a succinct overview of the development of the Hague Principles follows below at p.9). In 2009, the Council invited the Permanent Bureau to set up a Working Group, composed of experts in the fields of private international law, international commercial law and international arbitration law, with a view to developing a draft non-binding instrument on choice of law in international commercial contracts. Under the excellent chairmanship of Mr Daniel Girsberger (Switzerland), the Working GRoup met at regular intervals between 2010 and 2012 and developed the 12 articles of the future instrument. Then, in November 2012, a Special Commission meeting was held to review the draft articles. The Commission approved them and tasked the Working Group with also developing a commentary. Thanks to the efforts of several experts who took on the primary drafting of different parts of the Commentary, and to further discussions within the Working Group, work on the full "package" (Introduction, Preamble, Articles, Commentary) was completed in 2014. On 19 March 2015, the Members of the Hague Conference formally approved the Hague Principles.
8The Hague Principles are not formally binding; they provide a comprehensive blueprint to guide users in the creation, reform, or interpretation of choice of law regimes at the national, regional, or international level. The Hague Principles have already proven their usefulness in eraly in 2015, when they served as a model to the legislator of Paraguay in promulgating a low on the Law Applicable to International Contracts.
The Permanent Bureau hopes that other jurisdictions will follow this pioneering initiative, reaffirming the usefulness of the Hague Principles as an inspiring international standard, which has, as a further most encouraging sign of their approval by the international legal community, received UNCITRAL's endorsement in July 2015.
The development of the Hague Principles represents a truly collective efforts. The extraordinary commitment, dedication, and sheer hard work of each member of the Working Group and of the experts who participated in the 2012 Special Commission meeting was instrumental to seeing this project come to fruition. The active participation of a select group of Observers enriched and contextualised the drafting process over the years (a list of participating experts can be found below on p.13). Above all, Mr Daniel Girsberger played a key role as the Chair of both the Working Group and the 2012 Special Commission meeting. His wise guidance throughout the years, with the assistance of Ms Marta Pertegàs as the lawyer with primary repsonsibility for this project at the Permanent Bureau, was essential to the completion of this important Hague instrument.
On behalf of the Permanent Bureau, and personally, I wish to extend my sincere and deep appreciation to all the members of the Working Group and all other experts who were involved in the development of the Hague Principles. Thanks should also go to the many colleagues and interns of the Permanent Buereau for their important contributions to this project. While they are too numerous to be listed here, they all know they belong to the growing community of "Hague Principles Ambassadors" from around the world.
I am confident that this publication will help with promoting, disseminating, and applying the Hague Principles around the world.
Christophe Bernasconi
Secretary GeneralHague Conference on Private International Law
9
June 2006The Special Commission on General Affairs and Policy of the Conference decides to invite the Permanent Bureau to prepare a feasibility study on the development of an instrument concerning choice of law in international contracts. The study should consider in particular whether there is a practical need for the development of such an instrument.
January 2007The Permanent Bureau circulates questionnaires addressed to Member States and stakeholders in the field of international commercial arbitration to examine the practical need for the development of an instrument concerning choice of law in international contracts.
March 2007On the basis of the responses of the different target groups, the Permanent Bureau conducts a series of feasibility studies. Their purpose is not only to provide an overview and an analysis of existing instruments, with a special focus on international arbitration, but also to foreshadow any problems of shortfalls of a future instrument relating to choice of law in international commercial contracts.
10April 2008The Council invites the Permanent Bureau to continue its exploration of this topic concerning international business-to-business contracts with a view to promoting party autonomy. The Permanent Bureau is asked to explore, in co-operation with relevant international organisations and interested experts, the feasibility of drafting a non-binding instrument, including the specific form that such an instrument might take.
March 2009The Permanent Bureau issues a Report on Work Carried out and Suggested Work Programme for the Development of a Future Instrument, in which a possible work programme for the development of a non-binding instrument on the law applicable to international contracts is proposed.
March - April 2009The Council invites the Permanent Bureau to continue its work on promoting party autonomy in the field of international commercial contracts. In particular, the Permanent Bureau is invited to form a working group consisting of experts in the fields of private international law, international commercial law and international arbitration law and to facilitate the development of a draft non-binding instrument within this working group.
January 2010The Working Group on Choice of Law in International Contracts (Working Group) meets in the Hague for the first time. It sketches the scope of the future instrument.
April 2010The Council invites the Working Group to continue its work for the progressive development of a draft instrument of a non-binding nature.1
11November 2010The Working Group holds a second meeting in The Hague. The participating experts tentatively agree on the text of certain provisions of the draft instrument.
April 2011The Council decides that the draft articles and the commentary prepared by the Working Group should be reviewed by a Special Commission at a later stage.
June 2011The Working Group holds a meeting in The Hague for the third time. The participating experts finalise the text of the draft articles of the future instrument and identify relevant issues which will either be referred to in a document as requested by the Council indicating the policy choices involved and/or elaborated in greater detail in the commentary.
April 2012The Council decides to establish a Special Commission to discuss the proposals of the Working Group and make recommendations as to future steps to be undertaken, including the decision to be taken on the form of the non-binding instrument and the process through which the commentary shall be completed.
November 2012A Special Commission meeting is convened in The Hague to review the work carried out by the Working Group. The Special Commission is tasked with the in-depth review of the draft Principles. It unanimously approves a revised form of the Principles, and makes a number of recommendations to the Council relating to the completion of the instrument.
April 2013The Council gives its preliminary endorsement of the Draft Hague Principles on Choice of Law in International Contracts and mandates the Working Group to complete the Commentary. The Council will then be invited to either give its final endorsement of the
12complete package of the Principles and the Commentary, of if necessary submit the package to the Special Commission.
June 2013The Working Group holds a fourth meeting in The Hague, which focuses on the formulation of the draft Commentary.
January 2014The Working Group meets in The Hague for the fifth time. The participating experts continue and complete their discussions on the wording of the Commentary accompanying the Draft Hague Principles. An Editorial Committee is established within the Working Group. This Committee is charged with finalising the text of the draft Commentary.
April 2014Further to the April 2014 Council meeting, a written consultation procedure on the draft instrument is organised, where Members are invited to submit comments. The instrument is to be approved if no objection is raised within 60 days.
March 2015Upon completion of the written procedure without objection, the Principles on Choice of Law in International Commercial Contracts are formally approved on the 19 March 2015.
13
Members of the Working Group (certain experts had primary drafting responsibility for particuar Articles of the Commentary and this is indicated with an *below).
Mr Neil B. COHEN, Professor of Law, Brooklyn Law School, Brooklyn, New York, United States of America (Member of the Editorial Committee, *Article 10)
The Hon. Justice Clyde CROFT, Supreme Court of Victoria, Melbourne, Australia
Mr Sibidi Emmanuel DARANKOUM, Professor of Law, University of Montreal, Montreal, Quebec, Canada
Mr Andrew DICKINSON, Fellow of St. Catherine's College and Professor of Law at the University of Oxford, Oxford, United Kingde, (*Article 11)
Mr Ahmed Sadek EL KOSHERI, Partner of Kosheri, Rashed & Riad, Legal Consultants & Attorneys at Law, Cairo, Egypt
Ms Bénédicte FAUVARQUE-COSSON, Professor of Law, University Paris II Panthéon-Assa, PAris, France (Member of the Editorial Committee, *Article 7)
Mr Launa GAMA E. SOUZA Jt., Lawyer specialising, in international law and commercial arbitration; Associate Professor, Pontifical Catholic University of Rio de Janeiro, Brazil (*Articles 2 & 3)
Mr Francisco J. GARCIMARTIN ALFEREZ, Professor of Law,
Universidad Autonoma de Madrid, Madrid, Spain (*Articles 1, 9 & 12)
Mr Daniel GIRSBERGER, Professor, University of Lucerne, Faculty of Law, Lucerne, Switzerland (Chair of the Working Group, member of the Editorial Committee, *Introduction & Article 10)
Ms Yujun GUO, Professor of Law, Wuhan University, Institute of International Law, Wuhan, China
Mr Thomas KADNER GRAZIANO, Professor, University of Geneva, Faculty of Law, Geneva, Switzerland (Member of the Editorial Committee, *Article 6)
14Mrs Marielle E. KOPPENOL-LAFORCE, Professor of Law, University of Leiden; Lawyer (International Contracts, Arbitration and Litigation), Houthoff Buruma, Rotterdam, Netherlands (*Article 6)
Mr Dieter MARTIN, Professor Em. of Law, Europa, University Viadrina, Frankfurt (Oder); guest researcher at the
Max-Planck-Institut für ausländisches und internationales Privatrecht, Hamburg, Germany (*Articles 4, 5 &8)
Mr Campbell McLACHLAN, Professor of Law, Victoria University of Wellington, Wellington, New Zealand
Mr José Antonio MORENO RODRIGUEZ, Professor, CEDEP - Centro de Estudios de Derecho, Economia y Politica, Asuncion, Paraguay; member of the International Chamber of Commerce (ICC) International Court of Arbitration.
Mr Jan L. NEELS, Professor of Private International Law, Faculty of LAw, University of Johannesburg, South Africa (*Preamble, Articles 4 & 5)
Ms Yuko NISHITANI, Professor, Kyushu University, Faculty of Law, Fukuoka, Japan (*Articles 1, 8 & 12)
Mr Richard F. OPPONG, Assistant Professor of Law, Faculty of Law, Thompson Rivers University, Kamloops, British Columbia, Canada (*Article 9)
Ms Geneviève SAUMIER, Professor of Law, McGill University, Faculty of Law, Montreal, Quebec, Canada (Chair of the Drafting Committee of the Special Commission, memeber of the Editorial Committee, *Articles 2, 3 & 11)
Mr Symeon C. SYMEONIDES, Alex L. Parks Distinguished Professor of Law and Dean Emeritus, Willamette University College of Law, Salem, United States of America (Member of the Editorial Committee)
Mr Ivan ZYKIN, Professor of Law, First Deputy President of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation, Moscow, Russia (*Article 7)
Observers
Mr Michael Joachim BONELL, Chair of the Working Group Contract Principles, UNIDROIT, Rome, Italy
Mr Fabio BORTOLOTTI, Chair of the ICC Commission on Commercial Law and Practice, International of Commerce, Paris France
Mr José Alejandro CARBALLO LEYDA, Legal Counsel, Energy Charter, Brussels, Belgium; observer of the International Law Association (ILA)
Mr Simone CUOMO, Senior Legal Advisor, Council of Bars and Law Societies of Europe, Brussels, Belgium (alternate:
Ms Enrica SENINI, Studio Legale Senini, observer of the Council of Bars and Law Societies of Europe, Brescia, Italy)
15Mr Timothy LEMAY, Principal Legal Officer, Head, Legislative Branch, UNCITRAL Secretariat, Vienna, Austria (alternates:
Ms Miriana BELHADJ, Associate Legal Officer, Mr Cyril EMERY, Legal Officer, UNCITRAL Secretariat, Vienna, Austria)
Ms Francesca MAZZA, Counsel, former Secretary of the ICC Commission on Arbitration, International Court of Arbitration, Paris, France, currently Secretary General, German Institute of Arbitration
Mr Klaus REICHERT, Senior Counsel at the Bar of Ireland, observer of the International Bar Association (IBA), London, United Kingdom
Mr Peter WERNER, Senior Director, International Swaps and Derivatives Association (ISDA), London, United Kingdom
1617
1. This instrument sets forth general principles concerning choice of law in international commercial contracts. They affirm the principle of party autonomy with limited exceptions.
2. They may be used as a model for national, regional, supranational or international instruments.
3. They may be used to interpret, supplement and develop rules of private international law.
4. They may be applied by courts and by arbitral tribunals.
1. These Principles apply to choice of law in international contracts where each party is acting in the exercise of its trade or profession. They do no apply to consumer or employment contracts.
2. For the purpose of these Principles, a contract is international unless each party has its establishment in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen law, are connected only with that State.
3. These Principles do not address the law governing -
(a)
the capacity of natural persons;
(b)
arbitration agreements and agreements on choice of court;
(c)
companies or other collective bodies and trusts;
(e)
the proprietary effects of contracts;
(f)
the issue of whether an agent is able to bind a principal to a third party.
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 or the rights of third parties.
4. No connection is required between the law chosen and the parties or their transaction.
The law chosen by the parties may be rules of law that are 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.
A choice of law, or any modification of a choice of law, must be made expressly or appear clearly from the provisions of the contract or the circumstances. An agreement between the parties to confer jurisdiction on a court or an arbitral tribunal to determine disputes under the contract is not in itself equivalent to a choice of law.
A choice of law is not subject to any requirement as to form unless otherwise agreed by the parties.
1. Subject to paragraph 2 -
a)
whether the parties have agreed to a choice of law is determined by the law that was purportedly agreed to;
19
b)
if the parties have used standard terms designating two different laws and under both of these laws the same standard terms prevail, the law designated in
the prevailing terms applies; if under these laws different standard terms prevail, or if under one or both of these laws no standard terms prevail, there is no choice of law.
2. The law of the State in which a party has its establishment determines whether that party has consented to the choice of law if, under the circumstances, it would nàt be reasonable to make that determination under the law specified in paragraph I.
A choice of law cannot be contested solely on the ground that the contract to chich it applies is not valid.
A choice of law does not refer to rules of private international of the law chosen by the parties unless the parties expressly provide otherwise.
1. The law chosen by the parties shall govern all aspects of the contract between the parties, including but not limited to -
(b)
rights and obligations arising from the contract;
(c)
performance and the consequences of non-performance, including the assessment of damages;
(d)
the various ways of extinguishing obligations, and prescription and limitation periods;
(e)
validity and the consequences of invalidity of the contract;
(f)
burden of proof and legal presumptions;
(g)
pre-contractual obligations;
2. Paragraph I(e) does not preclude the application of any other governing law supportinf the formal validity of the contract.
20
In the case of contractual assignment of a creditor's rights against a debtor arising froma contract between the debtor and creditor -
(a)
if the parties to the contract of assignment have chose the law governing that contract, the law chose governs mutual rights and obligations of the creditor and the assignee arising from their contract;
(b)
if the parties to the contract between the debtor and creditor have chose the law governing that contract, the law chosen governs -
(i)
whether the assignment can be invoked agains the debtor;
(ii)
the rights of the assignee against the debtor; and
(iii)
whether the obligations of the debtor have been discharged.
1. These Principles shall not prevent a court from applying overriding mandatory provisions of the law of the forum which apply irrespective of the law chosen by the parties.
2. The law of the forum determines when a court may or must apply take into account overriding mandatory provisions of another law.
3. A court may exclude application of a provision of the law chose by the parties only if and to the extent that the result of such application would be manifestly incompatible with fundamental notions of public policy (odre public) of the forum.
4. The law of the forum determines when a court may or must apply or take into account the public policy (ordre public) of a State the law of which would be applicable in the absence of a choice of law.
5. These Principles shall not prevent an arbitral tribunal from applying or taking into account public policy (ordre public), or from applying or taking into account overriding mandatory provisions of a law other than the law chosen by the parties, if the arbitral tribunal is required or entitled to do so.
If a party has more than one establishment, the relevant establisment for the purpose of these Principles is the ona which has the closest relationship to the contract at the time of its conclusion.
21
| ABBREVIATION |
NAME OF INSTRUMENT |
| 1978 Hague Agency Convention |
Hague Convention of 14 March 1978 on the Law
Applicable to Agency |
1978 Hague Matrimonial Property
Convention |
Hague Convention of 14 March 1978 on the Law
Applicable to Matrimonial Property Regimes |
| 1986 Hague Sales Convention |
Hague Convention of 22 December 1986 on the
Law Applicable to Contracts for the International
Sale of Goods |
| 1989 Hague Succession Convention |
Hague Convention of 1 August 1989 on the Lwa
Applicable to Succession to the Estates of Deceased
Persons |
| 2005 Hague Choice of Court Convention |
Hague Convention of 30 June 2005 on Choice of
Court Agreements |
| 2006 Hague Securities Convention |
Hague Convention of 5 July 2006 on the Law
Applicable to Certain Rights in Respect of
Securities held with an Intermediary |
| 2007 Hague Protocol |
Hague Protocol of 23 November 2007 on the Law
Applicable to Maintenance Obligations |
| CISG |
United Nations Convention on Contracts for the
International Sale of Goods (1980) |
| ICC Rules |
International Chamber of Commerce Rules of
Arbitration (2012) |
| LCIA Rules |
London Court of International Arbitration Rules
(2014) |
| |
|
22
| Mexico City Convention |
Inter-American Convention of 17 March 1994 on
the Law Applicable to International Contracts |
| New York Convention |
Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958) |
| PECL |
The Principles of European Contract Law (2002) |
| Rome Convention |
Rome Convention of 19 June 1980 on the Law
Applicable to Contractual Obligations |
| Rome I Regulation |
Regulation (EC) No 593/2008 of the European
Parliament and of the Council of 17 June 2008 on
the Law Applicable to Contractual Obligations
(Rome I) |
| UNCITRAL Arbitration Rules |
UNCITRAL Arbitration Rules (as revised in 2010) |
| UNCITRAL Model Law |
UNCITRAL Model Law on International
Commercial Arbitration (1985), with amendments
as adopted in 2006 |
| UNCITRAL Secured Transactions Guide |
UNCITRAL Legislative Guide on Secured
Transactions (2007) |
| UNIDROIT Principles |
UNIDROIT Principles of International Commercial
Contracts (2010) |
| UN Receivables Convention |
United Nations Convention on the Assigment of
Receivables in International Trade (2001) |
| Vienna Convention |
Vienna Convention on the Law of Treaties (1969) |
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I.1 When parties enter into a contract that has connections with more than one State, the question of which set of legal rules governs the transactions necessarily arises. The answer to this question is obviously important to a court or a arbitral tribunal that must resolve a dispute between the parties but it is also important for the parties themselves, in planning the transactions and performing the contract, to know the set of rules that governs their obligations.
I.2 Determination of the law applicable to a contract without taking into account the expressed will of the parties to the contract can lead to unhelpful uncertainty because of differences between solutions from State to State. For this reason, among others, the concept of "party autonomy" to determine the applicable law has developped and thrived.
I.3 Party autonomy, which refers to the power of parties to a contract to choose the law that governs that contract, enhances certainty and predictability within the parties' primary contractual arrangement and recognises that parties to a contract may be in the best position to determine which set of legal principles is most suitable for their transaction. Many States have reached this conclusion and, as a result, giving effect to party autonomy is the predominant view today. However, this concept is not yet applied everywhere.
I.4 The Hague Conference on Private International Law ("
the Hague Conference") believes that the advantages of party autonomy are significant and encourages the spread of this concept to States that have not yet adopted it, or have done so with significant restrictions, as well as the continued development and refinement of the concept where it is already accepted.
I.5 Accordingly, the Hague Conference has promulgated the Hague Principles on Choice of Law in International Commercial Contracts ("
the Principles"). The Principles can be seen both as an illustration of how a comprehensive choice of law regime for giving effects to party autonomy may be constructed and as guide to "best practices" in establishing and refining such a regime.
I.6 The parties' choice of law must be distinguished from the terms of the parties' primary contractual arrangement ("main contract"). The main contract could be, for example, a sales contract, services contract or loan contract. Parties may either choose the applicable law in their main contract or by making a separate agreement on choice of law (hereinafter each referred to as a "choice of law agreement").
I.7 Choice of law agreements should be also be distinguished from "jurisdiction clauses" (or agreements), "forum selection clauses" (or agreements) or "choice of court clauses" (or agreements), all of which are synonyms for the parties' agreement on the forum (usually a court) that will decide their dispute. Choice of law agreements
24should be also distinguished from "arbitration clauses" (or agreements), that denote the parties' agreement to submit their dispute to an arbitral tribunal. While these clauses or agreements (collectively referred to as "dispute resolution agreements") are often combined in practice with choice of law agreements, they serve different purposes. The Principles deal only with choice of law agreements and not with dispute resolution resolution agreements or other matters commonly considered to be procedural issues.
I.8 As their title suggests, the Principles do not constitute a formally binding instrument such as a Convention that States are obliged to directly apply or incorporate into their domestic law. Nor is this instrument a model law that States are encouraged to enact. Rather, it is a non-binding set of
principles, which the Hague Conference encourages States to incorporate into their domestic choice of law regimes in a manner appropriate for the circumstances of each State. In this way, the Principles can guide the reform of domestic law on choice of law and operate alongside existing instruments on the subject (see Rome I Regulation and Mexico City Convention both of which embrace and apply the concept of party autonomy).
I.9 As a non-binding instrument, the Principles differ from other instruments developped by the Hague Conference. While the Hague Conference does not exclude the possibility of developing a binding instrument in the future, it considers that an advisory set of non-binding principles is more appropriate at the present time in promoting the acceptance of the principle of party autonomy for choice of law in international contracts and the development of well-crafted legal regimes that apply that principle in a balanced and workable manner. As the Principles influence law reform, they should encourage continuing harmonisation among States in their treatment of this topic and, perhaps, bring about circumstances in which a binding instrument would be appropriate.
I.10 While the promulgation of non-binding principles is novel for the Hague Conference, such instruments are relatively common. Indeed, the Principles add to a growing number of a non-binding instruments of other organisations that have achieved success in developing and harmonising law. See, e.g., the influence of the UNIDROIT Principles and the PECL on the development of contract law.
I.11 The overarching aim of the Principles is to reinforce party autonomy and to ensure that the law chosen by the parties has the widest scope of application, subject to clearly defined limits (Preamble, para. I).
25I.12 In order for the Principles to apply, two criteria must be satisfied. First, the contract in question must be "international". A contract is "international" within the meaning given to that term in the Principles unless the parties have their establishments in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen law, are connected only with that State (see Art. I(2)). The second criterion is that each party to the contract myst be acting in the exercise of its trade or profession (see Art I(1)). The Principles expressly exclude from their scope certain specific categories of contracts in which bargaining power of one party - a consumer or employee - is presumptively weaker (Art. I(1)).
I.13 While the aim of the Principles is to promote the acceptance of party autonomy for choice of law, the principles also provide for limitations on that autonomy. The most important limitations to party autonomy, and thus the application of the parties' chosen law, are contained in Article II addresses limitations resulting from overriding mandatory rules and public policy (ordre public). The purpose of those limitations is to ensure that, in certain circumstances, the parties' choice of law does not have the effect of excluding certain rules and policies that are of fundamental importance to States.
I.14 The Principles provide rules only for situations in which the parties have made a choice of law (express or tacit) by agreement. The Principles do not provide rules for determining the applicable law in the absence of party choice. The reasons for this exclusion are twofold. First, the goal of the Principles is to further party autonomy rather than provide a comprehensive body of principles for determining the law applicable to international commercial contracts. Secondly, a consensus with respect to the rules that determine the applicable law in the absence of choice of is currently lacking. The limitation of the scope of the Principles does not, however, preclude the Hague Conference from developing rules at a later date for the determination of the law applicable to contracts in the absence of a choice of law agreement.
I.15 The Preamble and 12 articles comprising the instrument may be considered to be an international code of current best practice with respect to the recognition of party autonomy in choice of law in international commercial contracts, with certain innovative provisions as appropriate.
I.16 Some provisions reflect an approach that is the subject of wide, international consensus. These include the fundamental ability of the parties to choose the applicable law (Preamble, para I and Art. 2(1)) and appropriate limitations on the application of the parties' chosen law (see Art. II). It is to be expected that a State that adopts a regime that supports party autonomy would necessarily adopt rules consistent with these provisions.
26I.17 Other provisions reflect the view of the Hague Conference as to best practice and provide helpful clarifications for those States that accept party autonomy. These include provisions addressing the ability of parties to choose different laws to apply to different parts of their contract (see Art. 2(2)), to tacitly choose the applicable law (see Art. 4) and to modify their choice of law (see Art. 2(3)), as well as the lack of a required connection between the chosen law and the transaction or the parties (see Art. 2(4)). Also, in line with many national regimes and regional instruments, Article 7 provides for the separate treatment of the validity of a choice of law agreement from the validity of the main contract; and Article 9 describes the scope of the applicable law. Other best practice provisions provide guidance as to how to determine the scope of the application of the chosen law in the context of a triangular relationship of assignment (see Art. 10) and how to deal with parties that have establishments in more than one State (see Art. 12). Such best practice provisions provide important advice to States in adopting or modernising a regime that supports party autonomy. However, the Hague Conference recognises that a State can have a well-functioning party autonomy regime that does not accept all of these best practices.
I.18 Certain provisions of the Principles reflect novel solutions. One of the salient features is found in Article 3, which allows the parties to choose not only the law of a State but also "rules of law", emanating from non-State sources, within certain parameters. Historically, choice of norms or "rules of law" has typically been contemplated only in an arbitral context. Where a dispute is subject to litigation before a State court, private international law regimes have traditionally required that the parties' choice of law agreement designate a State system of law. Some regimes have allowed parties to incorporate by reference in their contract "rules of law" or trade usages. Incorporation by reference, however, is different from allowing parties to choose "rules of law" as the law applicable to their contract.
I.19 Other innovative provisions are contained in Articles 5, 6 and 8. Article 5 provides a substantive rule of private international law that no particular form is required for a choice of law agreement to be valid, unless otherwise agreed by the parties. Article 6 provides, inter alia, a solution to the vexed problem of the "battle of forms" or, more specifically, the outcome when both parties make choices of law via the exchange of "standards terms". Article 8 provides for the exclusion of renvoi but, unlike many other instruments, allows the parties to expressly agree otherwise.
I.20 The envisaged users of the Principles include lawmakers, courts and arbitral tribunals, and parties and their legal advisors.
a.
For lawmakers (whether legislators or courts), the Principles constitute a model that can be used to create new, or supplement and further develop, existing rules on choice of law (Preamble, paras 2-3). Because of their non-binding nature, lawmakers at a national, regional supranational or international level can implement the Principles in whole or in part. Lawmakers also retain the possibility of making policy decisions where the Principles defer to the law of the forum (see Arts 3, 11(2) and 11(4)).
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b.
For courts and arbitral tribunals, the Principles provide guidance as to how to approach questions concerning the validity and effects of a choice of law agreement, and resolve choice of law disputes within the prevailing legal framework (Preamble, paras 3-4). The Principles may be useful, in particular, for addressing novel situations.
c.
For parties and their legal advisors, the Principles provide guidance as to the law or "rules of law" that the parties may legitimately be able to choose, and the relevant parameters and considerations when making a choice of law, including important issues as to the validity and effects of their choice, and the drafting of an enforceable choice of law agreement.
I. 21 Users of the Principles are encouraged to read the articles in conjunction with the Preamble and Commentary. The Commentary accompanies each article and serves as an explanatory and interpretative tool. The Commentary includes many practical examples illustratinf the application of the Principles. The structure and length of each commentary and illustration varies depending on the level of detail required to understand each article. The Commentary also includes comparative references to regional, supranational, or international instruments and to drafting history, where such references assist with interpretation. Users may also wish to consult the bibliography and materials accessible on the Hague Conference website.
P.1 The Preamble introduces the nature (Preamble, para. 1), objective (Preamble, para. 1) and intended purposes (Preamble, paras 2-4) of the Principles as a non-binding instrument.
P.2 The provisions of the instrument are "general principles"; a term that reflects their character as part of a non-binding instrument. The Principles address party autonomy in choice of law in international commercial contracts, as described in Article 1(1)-(2); they do not apply to consumer or employment contracts (see Art. 1(1)). The instrument may be considered as a code of current best practice with respect to choice of law in international commercial contracts, as recognised at an international level, with certain innovative provisions where appropriate.
P.3 The objective of the Principles is to encourage the spread of party autonomy to States that have not yet adopted it, or have done so with significant restrictions, as well as the continued development and refinement of the concept where it is already accepted. Party autonomy meets the legitimate expectations of the parties in this environment and, as such, advances foreseeability and legal certainty. Certainty is enhanced, in particular, as the law to be applied in the absence of a choice of law by the parties depends on the forum in which a dispute is heard. Party autonomy enables the parties to choose a neutral law or the law they consider most approriate for the specific contract. The Principles therefore affirm the freedom of parties to an international commercial contract (see Art. 1(1)-(2)) to choose the law applicable thereto (see Art. 2-3). The Principles, however, provide limited exceptions to party autonomy in Article 11 (overriding mandatory rules and public policy).
28P.4 One of the objectives of the intrument is the acceptance of its principles in present and future private international law instruments, producing a substantial degree of harmonisation of law, on a national, regional, supranational and international level, giving effect to party autonomy in choice of law in international commercial contracts.
P.5 The Principles may be used by courts and arbitral tribunals (Preamble, para. 4) to interpret, supplement and develop rules of private international law. These rules may exist on a national (including state and provincial), regional, supranational or international level and may be found in, for instance, conventions, regulations, legislation or case law.
Interpretation here refers to the process of explaining, clarifying or construing the meaning of existing rules of private international law.
Supplementation in this context refers to the refinement of an existing rule of private international law that does not sufficiently or appropriately provide for a particular type of situation. Although the
development of rules of private international law may include their constructive interpretation or supplementation, the concept in the context of this paragraph particularly refers to the addition by legislatures or, in certain systems, by courts, of new rules where none existed before or effecting fundamental changes to pre-existing ones. Of course, the interpretation, supplementation and development of rules of private international law must take place within the boundaries of binding law (for instance, the Vienna Convention).
P.6 Both courts and arbitral tribunals are invited to apply the Principles. All articles have been drafted for use by courts and arbitral tribunals and, with only two exceptions, the articles do not differentiate between courts and arbitral tribunals. The last portion of Article 3 ("unless
the law of
the forum provides otherwise") applies exclusively to courts, while Article 11 differentiates between courts (see Art. 11(1)-(4)) and arbitral tribunals (see ARt. 11(5)).
1.1 The purpose of Article 1 is to determine the scope of application of the Principles. This scope is defined by three criteria: the Principles apply to choice of law agreements (a) in contractual matters when the contract is (ii) international (see paras 1.13-1.21) and (iii) commercial (see paras 1.5-1.12).
1.2 Article 1(1) delimits the scope of application of the Principles and describes the types of contracts to which the Principles apply. Article 1(2), together with Article 12, contains a definition of international contracts. Article 1(3) contains a list of issues or matters excluded from the scope of the Principles.
29
1.3 The Principles apply to choice of law agreements in international contracts in which each party is acting in the exercise of its trade or profession. An explicit clarification is included confirming that the Principles do not apply to consumer or employment contracts.
1.4 The scope of application of the Principles is confirmed to commercial contracts because in these contracts party autonomy is widely accepted. In 2008, "
the Council invited
the Permanent Bureau to continue its exploration of this topic concerning international business-to-business contracts with a view to promoting party autonomy" (Conclusions and Reommendations adopted by the Council on General Affairs and Policy of the Conference (1-3 April 2008), and in 2009, "
the Council invited
the Permanent Bureau to continue its work on promoting party autonomy in
the field of international commercial contracts" (Conclusions and Recommendations adopted by the Council on General Affairs and Policy of the Conference (31 March-2 April 2009), p.2). The rationale is to establish and enhance party autonomy in international contracts, but only in those situationsin which both parties act in their professional capacity, and the risks of an sbuse of party autonomy are therefore minimised.
1.5 As indicated in the Preamble (para. 1), the Principles address only "commercial contracts", a term that is used, among other instuments, by the UNIDROIT Principles. Article 1(1) more precisely delineates this aspect of the scope of the Principles by (i) describing the types of contracts to which the Principles apply, and (ii) expressly excluding consumer and employment contracts.
1.6 Unlike the Preamble, however, Article 1 does not use "commercial contracts" and therefore does not formally define this term. Rather, Article 1(1) describes as falling within the scope of the Principles those contracts in which "...
each party is acting in
the exercise of its trade or profession". For the Principles to be applied, both (or all) parties must be acting in the course of their respective trade or profession. This formulation is inspired by the Rome I Regulation (Art. 6(1)), which defines a consumer as a natural person acting for a purpose which can be regarded as being outside his or her trade or profession. Article 1(1) is the converse, in the sense that it affirmatively describes commercial contracts as those in which each party is acting in the exercise of its trade or profession. Article 1(1) is important because it introduces an autonomous concept for determining when the Principles apply; it does not urs the term "commercial contracts", which may have different connotations in different States. For example, this formulation does not necessarily mirror the traditional distinction in some States between civil and commercial transactions and it does not follow the practice in some other States where contracts between business and consumers are considered to be "commercial".
301.7 As used in Article 1(1) and throughout the Principles, the term "party" includes any natural or legal person; for example: independent contractors, companies, foundations, partnerships, unincorporated bodies or publicly owned entities. Parties are not required to have extensive experience or skill in their specific trade or profession. Moreover, the use of the terms "trade or profession" makes it clear that the definition includes both commercial activities of merchants, manufacturers or craftsmen (trade transactions) and commercial activities of professionals, such as lawyers or architects (professional services). Insurance contracts and contracts transferring or licensing intellectual property rights between professionals fall within the scope of the Principles, as do agency or franchise contracts.
1.8 Whether a party "...is acting in
the exercise of its trade or profession" depends on the circumstances of the contract, not on the mere status of the parties. Hence, the same person may act as a trader or professional in relation to certain transactions and as a consumer in relation to others.
Illustration 1-1Party A is a practising lawyer. When Party A concludes a legal service contract with Party B, a company, Party A is acting in the exercise of his or her profession. However, when Party A concludes a rental contract for an apartment in which to spend his or her vacation. Party A is acting outside the exercise of his or her profession.
1.9 If the contract comes within the scope of Article 1, the Principles apply irrespective of the means through which it was concluded. Thus, the Principles apply, for example, to e-commerce transactions and any type of contract concluded by electronic means, as long as the parties are acting in the exercise of their trade or profession.
1.10 Non-commercial contracts are excluded from the scope of application of the Principles. In particular, and to avoid any doubt, Article 1(1) explicitly excludes consumer and employment contracts. This exclusion encompasses both individual and collective contracts of employment. This exclusion is justified by the fact that the substantive law of many States subjects consumen and employment contracts to special protective rules from which the parties may not derogate by contract. These rules are aimed at protecting the weaker party - consumer or employee - from an abuse of the freedeom of contract and this protection extends to private international law where it appears as an exclusion or limitation on party autonomy. However, the exclusion of consumer and employment contracts under Article 1(1) is merely illustrative of the type of non-commercial contracts to which the Principles do not apply. Other non-commercial contracts, such as a contract concluded between two consumers, are also outside the scope of application of the Principles.
311.11 The fact that the Principles, by their terms, apply only to contracts in which each party is acting in the exercise of its trade or profession should not lead to a negative inference that party autonomy is not available in non-commercial contracts. The Principles do not provide private international law rules for such contracts.
1.12 Article 1(1) describes the contracts to which the Principles apply in general terms, in keeping with the nature of the instrument as a set of non-binding general principles. With regards, in particular, to consumer contracts, the Principles do not explicitly address the characterisation of the so-called "dual-purpose contracts",
i.e., contracts intended for purposes that fall partially outside a party's trade or profession. Likewise, the Principles are silent with regard to the perspective from which the purpose of the contract is to be evaluated,
i.e., whether it is necessary for the professional to have been aware of the purpose of the contract (see ARt. 2(a) CISG).
1.13 To fall within the scope of the Principles, the contract must qualify as an "international" contract. This requirement is consistent with the traditional understanding that private international law applies only to international cases. The definition of "internationality" varies considerably among national and international instruments (see para. 1.15).
1.14 For the purpose of the Principles, the notion of an international contract is deined in Article 1(2). Pursuant to this provision, the only contracts that are excluded as lacking internationality are those in which "each party has its establishment in
the same State and
the relationship of
the parties and all other relevant elements, regardless of
the chosen las, are connected only with that State". This negative definition excludes only purely domestic situations, aiming to confer the broadest possible scope of interpretation to the term "international". This provision is primarily inspired by the 2005 Hague Choice of Court Convention (Art. 1(2)).
1.15 Article 1(2) of the Principles does not adopt a positive definition of internationality of the contract as found in some other instruments (see,
e.g., Art. 1(a)-(b) 1986 Hague Sales Convention). Nor does Article 1(2) take a broader approach of referring to all cases involving a "conflict of laws", or a "choice between
the laws of different States" whereby the parties' choice of law alone may constitute a relevant element (see,
e.g., Art 3 2006 Hauge Securities Convention).
32
1.16 The ascertainment of internationality of the contract proceeds from the following two steps.
1.17 First, Article (12) refers to the establishments of the parties as a relevant element. When the parties' establishments are located in different States, the contract is international and the Principles apply. This is a simple test that facilitates the ascertainment of internationality without having to refer to other relevant factors. If a party has more than one establishment, the relevant establishment is the one that has the closest relationship to the contract at the time of its conclusion.
Illustration 1-2Party A (which has its main establishment in State X but whose establishment that has the closest connection to the contract in the sense of Article 12 is in State Y) signs a contract through its establishment in State Y with Party B, which also has its main establishment in State X and is acting through its main establishment in State X. because the parties acted through establishments located in different States (State Y for Party A and State X for PArty B), the contract is international and thus is governed by the Principles.
1.18 Second, even if the first test does not apply, a contract still qualifies as international unless "all other relevant elements" are located in the same State. These relevant elements may be, for example, the place of conclusion of the contract, the place of performance, a party's nationality, and a party's place of incorporation or establishment. If a party has more than one establishment involved in the transaction, subordinate establishments that have been disregarded in the first step pursuant to Article 12 (see para. 1.17) may still be taken into consideration.
1.19 The ascertainment of internationality may require a careful case-by-case analysis. For example, the sale of land located in State X between parties who have their establishments in State Y satisfies the requirement of internationality of the contract because of the location of the land abroad. However, the same considerations do not apply with regard to a domestic sale of tangible goods in State X, that are produced abroad, i.e., in State Y (or several States). This is because, at all times germane to the sale, all relevant elements are located in State X. Similarly, the fact that pre-contractual negotiations took place abroad, or that a particular language is used in the contract, without more does not fulfill the requirement of internationality.
1.20 The contract qualifies as international and falls within the scope of the Principles unless there is no relevant element establishing internationality. This interpretation derives from the negative definition of internationality provided in Article 1(2).
33
1.21 The phrase "regardless of
the chosen law" in Article 1(2) means that the parties' choice of law is a not relevant for determining internationality. In other words, the parties may not establish internationality of the contract solely by selecting a foreign law, even if the choice is accompanied by a foreign choice of court or arbitral tribunal, when all the relevant objective elements are centred in one State (see Art. 1(b) 1986 Hague Sales Convention). This definition of internationality differs from that of the 2006 Hague Securities Convention (Art. 3) and the Rome I Regulation (Art. 1(1)).
1.22 The Principles do not address conflicts of laws among different territorial units within one State, for example, within Australia, Canada, Nigeria, Spain, the United Kingdom or the United States of America. Hence, the fact that one of the relevant elements is located in a different territorial unii within one State does not constitute internationality of the contract in the sense of Article 1(2). However, the Principles do not prevent lawmakers or other users from extending the scope of application of the Principles to intra-State conflits of laws.
1.23 The Principles appy to choice of law agreements for
contracts. Following the approach of other international instruments, the Principles do not provide a definition of the term "contract". Nevertheless, in order to facilitate the application of the Principles, Article 1(3) excludes from their scope certain matters for which there is no wide consensus on (a) whether they qualify as contractual, or (b) whether, in any event, they should be subject to party autonomy. The list of exclusions includes six items: (i) capacity of natural persons; (ii) arbitration agreements and agreements on choice of court; (iii) companies or other collective bodies and trusts; (iv) insolvency; (v) proprietary effects of contracts; and (vi) the issue of whether an agent is able to bind a principal to a third party. This list is inspried by, among others, the 1986 Hague Sales Convention (Art. 5), the Rome I Regulation (Art. 1(2)) and the Mexico City Convention (Art. 5).
1.24 The reasons for Article 1(3) are twofold: the legal nature of the enumerated issues, and the lack of consensus on whether to characterise them as contractual issues or exclusions should not be interpreted as a policy decision against party autonomy in respect of the matters excluded. The Principles are neutral on this point and, therefore, do not preclude lawmakers or other users from extending party autonomy to some or all of the excluded matters.
1.25 First, the Principles do not address the law governing the
capacity of natural persons. In this context, capacity means the ability of natural persons to act and enter into contracts independently. It does not include the authority of agents or organs to represent a principal or entity (see Art. 5(b) 1986 Hague Sales Convention). Capacity is a matter that may appear as an incidental question to the validity of the contract, including the choice of law agreement itself. The lack of capacity entails a restriction
34on party autonomy because of the need to protect the person due to, for example, his or her age (a minor) or mental state. In some States, legal capacity is regarded as a matter of status and does not qualify as contractual. The determination of the law applicable to this question is excluded from the scope of the Principles. The exclusion means that the Principles determine neither the law governing the capacity of natural persons, not the legal or judicial mechanisms of authorisation, nor the effects of a lack of capacity on the validity of the choice of law agreement (see paras 39-40 Explanatory Report to the 1986 Hague Sales Convention).
1.26 Secondly, the Principles do not address the law governing
arbitration agreements and agreements on choice of court. This exception mainly refers to the
material validity of such agreements, i.e., to the contractual aspects of those jurisdictional clauses, and includes questions such as fraud, mistake, misrepresentation or duress (see also para. 126 Explanatory Report to the 2005 Hague Choice of Court Convention). In some States, these questions are considered procedural and are therefore governed by the
lex fori or
lex arbitri. In other States, these questions are characterised as substantive issues to be governed by the law applicable to the arbitration or choice of court agreement itself. The Principles do not take a stance among these different views. Rather, Article 1(3)(b) excludes these issues from the scope of the Principles.
1.27 Thirdly, the Principles do not address the law governing
companies or other collective bodies and trusts. The term "collective bodies" is used in a broad sense so as to encompass both corporate and unincorporated bodies, such as partnerships or associations.
1.28 The exclusion under Article 1(3)(c) encompasses the constitution and organisation of companies or other collective bodies and trusts. The excluded issues are, in general, the creation, membership, legal capacity, internal organisation, decision-making processes, dissolution and winding-up of companies and other collective bodies. The same exclusion applies to issues concerning the internal administration of trusts. In many States, these issues are subject to specific private international law rules pointing to the law of companies (in general, the law of the place of incorportation or central administration) or the law of other collective bodies or trusts.
1.29 The exclusion in Article 1(3)(c) is confined to matters involving the internal organisation and administration of companies or other collective bodies and trusts and does not extend to contracts that they conclude with third parties. The Principles also apply to commercial contracts entered into between the members of a company (shareholder agreements).
1.30 Fourthly, the Principles do not address the law governing
insolvency. This exclusion refers to the effects that the opening of insolvency proceedings may have on contracts. Insolvency proceedings may interfere with the general pinciples of contract law, for example, by invalidating a contract pursuant to claw-back rules, staying a termination right of the party
in bonis, or giving the insolvency administrator the power to reject the performance of a pending contract or to assign it to a third party. The exclusion of insolvency in Article 1(3)(d) relates to these
35questions. In general, the Principles do not determine the law applicable to the question of how contracts are to be treated in insolvency; nor do they address the legal capacity of the insolvency administrator to enter into new contracts on behalf of the insolvent estate. The term insolvency is used here in a broad sense, encompassing liquidation, reorganisation, restructuring or administration proceedings.
1.31 Fifthly, the Principles do not address the law governing
the proprietary effects of contracts. The Principles allow the parties to choose the law applicable to their contractual obligations, but they do not address the establishment and effects of rights
in rem created by the contract. In other words, the Principles only determine th law governing the mutual rights and obligations of the parties, but not the law governing rights
in rem. For example, in a contract for the sale of an asset, movable or immovable, tangible or intangible, the Principles apply to the seller's personal obligation to transfer and the buyer's personal obligation to pay, but not to questions such as whether the transfer actually conveys property rights without further action, or whether the buyer acquires ownership free of the rights or claims of third parties.
1.32 Finally, the Principles do not address the law governing the issue of whether
an agent is able to bind a principal to a third party. This exclusion refers to the external aspects of the agency relationship,
i.e., to issues such as whether the principal is bound on the grounds of an implied or apparent authority or on the grounds of negligence, or whether and to what extent the principal can
ex post ratify an
ultra vires act of the agent (see Art. 11 1978 Hague Agency Convention). By contrast, the Principles apply to the internal aspects of an agency,
i.e., the agency or mandate relationship between the principal and the agent, if it otherwise qualifies as a commercial contract.
2.1 Article 2 establishes the parties' freedom to choose the law governing their contract. In addition, it provides that this choice may apply only part of the contract, it may be exercised at any time, and that no connection between the law chosen and the parties or their transaction is required. This Article should be read in conjunction with Article 3, which allows parties the freedom to choose "rules of law" to govern their contract.
2.2 The Principles do not provide for the method of determining the law applicable to an international commercial contract in the absence of a choice of law (express or tacit) by the parties.
36
2.3 Article 2 reflects the Principles' primary and fundamental purpose of providing for and delineating party autonomy in the designation of the law governing international commercial contracts (defined in Art. 1). Of particular importance is the fact that under the Principles the freedom of parties to choose the law or 'rules of law" to govern their contract is not dependent on
the method of dispute resolution involved, whether before a court or arbitral tribunal.
2.4 The Principles acknowledge that certain restrictions on party autonomy are necessary, even in
the field of international commercial contracts. Thus
the effect of
the parties' choice of law is expressly limited by overriding mandatory rules and public policy as provided for in Article 11.
The scope of party autonomy under
the Principles is further defined by Articles 1(3) and 9.
2.5 Article 2(1) provides that "a contract is governed by the law chosen by the party". Under
the Principles, parties are free to choose
the law of any State (see para. 1.22 for different territorial units within one State). Parties may also designate "rules of law" as provided in Article 3. Article 2(1) imposes no other limitations or conditions on
the selection of
the chosen law.
Illustration 2-1A contract for
the sale of equipement contains a provision according to which
the law of State X, where
the seller has its principal place of business, shall govern all aspects related to
the formation and validity of
the contract,
the obligations of
the seller and
the buyer, breach of contract and damages. If a dispute arises between
the parties,
the courts or arbitral tribunal will give effect to
the choice made by
the parties and apply
the law of State X.
2.6 The Principles permit partial or multiple choice of law; this is, subjecting separate parts of
the contract to different laws (also known as
dépeçage). Considering that such partial or multiple choice is by its very nature one of
the forms of exercise of party autonomy,
the Principles reserve to
the parties
the option to use that process. However,
the use of
dépeçage carries with it
the risk of contradiction or inconsistency in
the determination of
the parties' rights and obligations.
372.7 Under Article 2(2)(a), parties may choose
the law applicable to only part of
the contract. When
the parties make such a partial choice of law,
the remainder of
the contract is governed by
the law otherwise applicable in
the absence of choice. As noted above in paragraph 2.2,
the Principles do not provide rules for identifying
the applicable law in
the absence of choice by
the parties. Consequently, a partial choice of law under Article 2(2)(a) means that
the law applicable to
the remainder of
the contract will be determined by
the court or arbitral tribunal under
the rules that are applicable in
the absence in
the absence of choice.
2.8 Under Article 2(2)(b), parties may also choose
the law applicable to different parts of their contract with
the effect that
the contract will be governed by more than one chosen law.
2.9 In practice, such partial or multiple choices may concern, for example,
the contract's currency denomination, special clauses relating to performance of certain obligations, such as obtaining governmental authorisations, and indemnity/liability clauses.
Illustration 2-2In a contract for
the supply and installation of a special production line in States X, Y and Z,
the parties have chose
the law of State W to govern all aspects related to
the formation and validity of
the agreement. In such a case,
the remainder of
the contract will be governed by
the law applicable in
the absence of choice by
the parties.
Illustration 2-3Buyer and Seller have concluded a share purchase contract regarding
the control of company D (
the target company). Party C, a third party, has guaranteed Buyer's payment obligations under
the contract.
The contract between Buyer and Seller stipulates that, for
the purpose of price determination,
the financial statements of
the target company must conform to
the law of State X, which is
the place of
the target company's establishment.
The contract also stipulates that
the rights and obligations of Buyer and Seller are governed by
the law of State Y and that
the personal guarantee given by Party C is governed by
the law of State Z, where Buyer has its establishment. In this case, by virtue of
the parties' choices,
the laws of States X, Y, and Z, will govern different aspects of this contractual relationship.
38Illustration 2-4In an international sales contract,
the parties have expressly agreed that all aspects of
the contract are to be governed by
the law of State X, except that
the conditions under which
the seller must obtain inspection certificates will be governed by
the law of
the various States of final destination of
the goods. In this case, as in
the previous illustration,
the result is that
the contract will be governed by more than one law.
2.10 Party autonomy includes
the parties' freedom to make or modifiy their choice of law at ay time. It is generally accepted, therefore, that
the conditions for, and
the effects of, a change in
the choice of law are governed by party autonomy, with certain limitations with respect to
the formal validity of
the contract and pre-existing rights of third parties.
2.11 The Principles provide that
the law chosen by
the parties governs
the validity of
the contract (see Art. 9(1)(e)). As a result, any contractual change in
the law governing
the contract after its conclusion could affect
the formal validity of
the contract. To avoid
the retroactive invalidation of
the contract, Article 2(3) specifies that any change in
the applicable law as a result of a choice or modification of a choice by
the parties shall not prejudice a contract that was formally valid under
the previously applicable law.
The formulation of
the rule makes it clear that it applies whether or not
the law initially governing
the contractwas chosen by
the parties.
2.12 In addition, Article 2(3) is a reminder that
the change in
the law applicable to
the contract affects not only
the parties' rights, but could in some cases have an impact on
the rights of third parties. There is a broad consensus to
the effect that a modification of
the choice of law should not adversely affect
the rights of third parties (see Art. 3(2) Rome I Regulation).
The significance of this potential consequence of party autonomy requires that it be directly addressed in
the Principles rather than relying on expected equivalent protection under
the applicable substantive law. Accordingly, where
the applicable law changes as a result of a contractual choice or modification of a choice, any pre-existing rights of third parties that arise from
the contract should be preserved.
39Illustration 2-5Party A and Party B conclude a contract and agree that it is governed by
the law of State X. Party C guarantees
the obligations of Party A. Subsquently, Party A and Party B modify their contract to change its governing law to
the law of State Y. Under
the law of State Y, Party A has greater liability to Party B than Party A would have had under
the law of State X. While this modification is effective as between Party A and Party B, it may not adversely affect
the rights and obligations of Party C. Those rights and obligations continue to be governed by
the law of State X.
2.13 The Principles do not limit
the timing of
the choice or of
the modification of
the choice of law by
the parties. As noted in
the Introduction,
the Principles do not generally seek to resolve what are commonly considered to be procedural issues before courts or arbitral tribunals. As a result, if
the choice or modification of
the choice of law occurs during
the dispute resolution proceedings,
the effects of
the choice or modification may depend on
the lex fori or
the rules governing
the arbitral proceedings. Similarly,
the Principles are neutral regarding
the issue of proof of foreign law.
Illustration 2-6Party A and Party B conclude a contract which states that it is governed by
the law of State X. A dispute arises and is brought before
the courts of State Y. In
the course of
the proceedings, both parties frame their arguments in terms of
the substantive contract law of State Y. While these facts may be evidence of a tacit modification of
the choice of law under Article 4,
the characterisation and effect of such a change in
the course of proceedings may depend on
the law of State Y.
2.14 Under
the Principles, party autonomy is not limited by any requirement of a connection, whether geographical or otherwise, between
the chosen law and
the contract or
the parties. Accordingly,
the parties may choose
the law of a State with which
the parties or their transaction bears no relation. This provision is in line with
the increasing delocalisation of commercial transactions. Parties may choose a particular law because it is neutral as between
the parties or because it is particularly well-developed for
the type of transaction contemplation (e.g., a State law renowned for maritime transport or international banking transactions).
402.15 By not requiring a connection between
the chosen law and
the parties or their transaction,
the Principles adopt a more expansive concept of party autonomy than some States which require such a connection or another reasonable basis for
the parties' choice of law.
2.16 Contracts governed by "rules of law", as defined in Article 3, do not raise this issue, since such "rules of law" are usually not connected to any national legal order.
3.1 Arbitration statutes and arbitration rules commonly allow for
the parties' choice of "rules of law" (see Art. 28(1) UNCITRAL Model Law; Art. 21(1) ICC Rules). In those instruments,
the term "rules of law" is used to describe rules that do not emanate from State sources.
The opportunity to choose "rules of law" has not typically been afforded to parties litigating before national courts. Article 3 broadens
the scope of party autonomy in Article 2(1) by providing that
the parties may designate not only State law but also "rules of law" to govern their contract, regardless of
the mode of dispute resolution chosen.
3.2 Article 3 establishes certain criteria for "rules of law" that are intended to afford greater certainty as to what
the parties may choose as "rules of law".
The criteria refer to
the admissible sources and
the attributes of those "rules of law" recognised under Article 3. In addition, Article 3 recognises that
the forum State retains
the prerogative to disallow
the choice of "rules of law"
3.3 The criteria established in Article 3 relate to
the source and attributes of "rules of law".
The criteria should assist parties in identifying which "rules of law" they can choose and decision-makers in determining
the "rules of law" applicable to
the dispute. While
the criteria will be examined separately below, they should be understood in relation to one another because Article 3 admits only those "rules of law" that are generally accepted as a neutral and balanced set of rules.
3.4 This criterion stipulates that
the "rules of law" chosen by
the parties must have garnered recognition beyond a national level. In other words,
the "rules of law" cannot refer to a set of rules contained in
the contract itself, or to one party's standard terms and conditions, or to a set of local industry-specific terms.
3.5 International treaties and conventions may be considered a generally accepted source of "rules of law" when those instruments apply solely as a result of
the parties' choice of law. For example,
the CISG may be designated by
the parties as "rules of law" governing their contract in situations where
the CISG would not otherwise
41 apply according to its own terms (see Art. 1 CISG). In other words,
the parties may designate
the substantive rules of
the CISG as a free-standing set of contract rules and not as a nationalised version of
the CISG attached to
the law of a CISG Contracting State. Following such a choice,
the CISG applies as "rules of law", without consideration of any State declaration or reservations that might otherwise intervene if
the CISG were applied as a ratified treaty or as part of State law. Model choice of law clauses proposing a designation of
the CISGas "rules of law" are available (see,
e.g.,
the model clause suggested by
the Chinese European Arbitration Centre (CEAG)).
3.6 Another source of "rules of law" that would satisfy this first criterion may come from non-binding instruments formulated by established international bodies. One example is UNIDROIT, an inter-governmental organisation responsible solely to its Member States, which operates on
the basis of consensus.
The UNIDROIT Principles are an example of "rules of law" that are "generally accepted on an international level". Moreover,
the UNIDROIT Principles expressly provide that parties may designate them to govern their contract and suggest choice of law clauses to that end (see
the footnote to
the UNIDROIT Principles' Preamble and
the Model Clause for
the Use of
the UNIDROIT Principles of International Commercial Contracts).
3.7 As for possible supranational or regional sources, an example might be
the PECL, which have been developed by an independent group of experts.
3.8 The dynamic and evolving nature of international commercial law suggests that sources of "rules of law" that are becoming, or will become, generally accepted at an international, supranational or regional level are likely to grow in number. Accordingly,
the examples provided above should not be considered exhaustive.
3.9 Article 3 requires that "rules of law" be generally accepted as possessing three attributes: there must be a
set of rules,
the set must be neutral and it must be balanced. Each of these three attributes has a distinct meaning.
3.10 First,
the "rules of law" must be a set of rules and not merely a small number of provisions. While comprehensiveness is not required,
the chosen "rules of law" must be such as to allow for
the resolution of common contract problems in
the international context.
3.11 The second attribute is
the neutrality of
the set of rules. This aspect may be satisfied by
the fact that
the source of
the "rules of law" is generally recognised as a neutral, impartial body, that is, one that represents diverse legal, political and economic perspectives.
3.12 The third attribute - that
the set of "rules of law" be generally accepted as balanced - is justified by: (i)
the assumption underlying party autonomy in commercial contracts according to which parties have relatively equal bargaining power; and (ii)
the fact that
the presumption that State laws are balanced is not necessarily transferrable to "rules of law". This requirement would likely preclude
the choice of a set ofrules that benefit one side of transactions in a particular regional or global industry.
42
3.13 The Principles are silent regarding
the application of trade usages.
The effect of trade usages on
the parties' rights and obligations is typically determined either under
the chosen law itself or by other rules governing
the dispute (see Art. 9 CISG; Art. 1.9 UNIDROIT Principles; Art. 28(4) UNCITRAL Model Law; Art. 21(2) ICC Rules).
3.14 As noted in paragragh 3.1, arbitration statutes and arbitration rules commonly allow for
the contractual choice of "rules of law". However, national laws have not allowed
the same choice in disputes brought before courts.
The Principles recognise this in Article 3 by deferring to
the law of
the forum if that law confines
the parties' freedom to a choice of State la.
3.15 Where parties have designated "rules of law" to govern their contract, there may be matters which these "rules of law" do not cover. For example,
the UNIDROIT Principles' provisions on
the authority of agents do not deal with
the relationship between principal and agent (see, e.g., Art. 2.2.1 UNIDROIT Principles); similarly
the CISG in Article 4 states that it does not regulate
the validity of contracts for
the sale of goods except as otherwise expressly provided in that Convention. While these instrumentsmay address gap-filling (see, e.g., Art. 7(2) CISG and Art. 1.6. UNIDROIT Principles),
the Principles do not provide gap-filling rules. Parties designating "rules of law" to govern their contract should therefore be mindful of
the potential need for gap-filling and may wish to address it in their choice of law.
The following illustrations may be used as a point of reference.
Illustration 3-1A choice of law agreement provides that: "This contract shall be governed by the United Nations Convention on Contracts for the International Sale of Goods (CCISG) without regard to the provisions of any national law, except povisions of the law of State X which apply to those matters or governed by the CISG."
Illustration 3-2A choice of law agreement provides that: "This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts and, with respect to issues not covered by those principles, by the law of State X."
43
4.1 Article 4 states
the different ways in which a choice of law in
the sense of Article 2(1) can be made. By limiting tacit choice of law to situations in which
the choice appears clearly, Article 4 promotes predictability of results by lessening
the likelihood of disputes as to whether there has been a choice of law.
4.2 Article 4 provides that
the parties may choose a law to govern their contract either expressly or tacitly. Article 4 is in line with similar provisions in other instruments (see Art. 7 Mexico City Convention; Art. 3 Rome I Regulation).
The parties may also expressly or tacitly choose "rules of law" as provided in Article 3.
4.3 The parties may expressly choose a law to govern their contract. An express choice of law agreement may be made before, at
the same time as, or after
the conclusion of
the main contract (see Art. 2(3)).
The term "main contract" refers to
the contract for which
the choice of law is made. Choice of law agreements are usually included as an express clause in
the maint contract.
The use of particular words or phrases is not necessary. Phrases such as
the contract is "governed by" or "subject to" a particular law meet
the requirement of an express choice. While Article 4 allows a tacit choice,
the parties are advised to identify explicitly
the law governing
the contract.
Illustration 4-1Party A und Party B conclude a contract.
The choice of law agreement provides that: "This contract shall be governed by the law of State X." This is sufficient to constitute a choice of law by
the parties. Therefore, as stated in Article 2,
the law of state W governs
the contract.
Illustration 4-2Party A and Party B conclude a contract.
The choice of law agreement provides that: "This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts."
The UNIDROIT Principles therefore govern
the contract, unless, as stated in Article 3,
the law of
the forum provides otherwise.
444.4 An express choice can also be made by reference to some external factor, for instance
the place of establishment of one
the parties.
Illustration 4-3Seller and Buyer conclude a contract of sale.
The choice of law agreement provides that: "This contract shall be governed by the law of the State of th establishment of the seller." Seller has its establishment in State X at
the time of
the conclusion of
the contract.
The law of State X at
the time of
the conclusion of
the contract.
The law of State X therefore governs
the contract.
4.5 Article 4 does not require a choice of law agreement to be in writing. Therefore, an express choice of law may also be made orally (see Art. 5 and para. 5.2).
4.6 A choice of law may also be made tacitly. To qualify as an effective choice of law under Article 4,
the choice must be a real one although not expressly stated in
the contract. There must be a real intention of both parties that a certain law shall be applicable. A presumed intention imputed to
the parties does not suffice.
4.7 A tacit choice of law must appear clearly from
the provisions of
the contract or
the circumstances. One has to take into account both
the terms of
the contract and
the circumstances of
the case. However, either
the provisions of
the contract or
the circumstances of
the case may conclusively indicate a tacit choice of law.
4.8 A choice of law is found to appear clearly from
the provisions of
the contract only when
the inference drawn from those provisions, that
the parties intended to choose a certain law, is strong. There is no fixed list of criteria that determines
the circumstances under which such an inference is strong enough to satisfy
the standard that a tacit choice must "appear clearly"; rather,
the determination is made on a case-by-case basis.
4.9 A widely accepted example of a tacit choice that appears clearly from
the provisions of
the contract arises in
the context of
the use of a standard form by
the parties. Where
the contract is in a standard form which is generally used in
the contract of a particular system of law, this may indicate that
the parties intended
the contract to be governed by that law, even though there is no express statement to this effect.
45Illustration 4-4Party A and Party B conclude a marine insurance contract in
the form of a Lloyd's policy of marine insurance. Because this contract form is based on English law, its use by
the parties may indicate that
the parties intend to subject
the contract to English law.
4.10 The same is true when
the contract contains terminology characteristic of a particular legal system or reference to national provisions that make it clear that
the parties were thinking in terms of, an intended to subject their contract to, that law.
Illustration 4-5Party A and Party B conclude a contract that uses
the legal language characteristic of
the law of State X. This may indicate that
the parties intend their obligations to be determined according to
the law of State X.
4.11 The choice of law applicable to a contract and
the choice of a forum for dispute resolution should be distinguished. According to
the second sentence of Article 4, an agreement between
the parties to confer jurisdiction on a court to determine disputes under
the contract (a choice of court agreement) is not in itself equivalent to a choice of law (see Art. 7(2) Mexico City Convention). For example,
the parties may have chosen a particular forum because of its neutralityor experience.
The fact that
the chosen court, under
the applicable private international law rules, may apply a foreign law also demonstrates
the distinction between choice of law and choice of court. Nevertheless, a choice of court agreement between
the parties to confer jurisdiction on a court may be one of
the factors to be taken into account in determining whether
the parties intended
the contract to be governed by
the law of that forum.
Illustration 4-6Party A and Party B conclude a contract and include a choice of court agreement designating
the courts of State X. In
the absence of other relevant provisions in
the contract or particular circumstances suggesting otherwise, this will be insufficient to indicate a tacit choice of
the law of State X.
46
4.12 While ther are important differences between choice of court clauses and arbitration clauses, Article 4 adopts a unified general rule as to whether a choice of forum or arbitral tribunal necessarily entails a choice of law. An agreement between
the parties to confer jurisdiction on a specified arbitral tribunal to resolve disputes under
the contract is not
the same as a choice of law. Acoording to
the sencond sentence of Article 4,
the choice of such an arbitral tribunal is also not a sufficient indicator, in itself, of
the parties’ tacit choice of law.
The parties may have chosen a tribunal because of its neutrality or expertise.
The tribunal may also apply a foreign law pursuant to applicable rules of private international law or
the chosen arbitration rules. However, an arbitration agreement that refers disputes to a clearly specified seat may be one of
the factors in determining
the existence of a tacit choice of law.
Illustration 4-7Party A and Party B conclude a contract under which they agree that all disputes arising out of, on in connection with,
the contract are to be submitted exclusively to arbitration in State X under
the rules of
the ABC Chamber of Commerce. In
the absence of other relevant provisions in
the contract or particular circumstances suggesting otherwise, this will be insufficient to indicate a tacit choice of
the law of State X.
4.13 The particular circumstances of
the case may indicate
the intention of
the parties in respect of a choice of law.
The conduct of
the parties and other factors surrounding
the conclusion of
the contract may be particularly relevant. This principle may also apply in
the context of related contracts.
Illustration 4-8In
the course of their previous dealings, Party A and Party B have consistently made an express choice of
the law of State X to govern their contract. If
the circumstances do not indicate that they intended to change that practice in
the current contract, a court or arbitral tribunal could conclude from these circumstances that
the parties clearly intended to have
the current contract governed by
the law of State X even though such an express choice does not appear in that particular contract.
47
4.14 A tacit choice of law must appear clearly from
the provisions of
the contract or
the circumstances. This means that
the choice must be evident as a result of
the existence of strong indications for such a choice.
Illustration 4-9Party A and Party B conclude a contract drafted in
the language of a certain State.
The contract, however, does not use legal terminology characteristic of that State’s legal system. In
the absence of other circumstances,
the use of
the particular language would not be sufficient to establish a tacit choice of law.
4.15 The Principles do not take a position as to procedural issues, in particular,
the taking of evidence and
the standard and mode of proving a tacit choice of law (but see Art. 9(1)(f) on
the burden or onus of proof).
4.16 A modification of a choice of law must be made expressly or appear clearly from
the provisions of
the contract or
the circumstances. A modification occurs when
the parties agree (expressly or tacitly) to subject their contract to a law other than
the one previously applicable (see Art. 2(3)).
4.17 If
the parties’ intention are neither expressed explicitly nor appear clearly from
the provisions of
the contract or from
the particular circumstances of
the case, there is no choice of law agreement. In such a case,
the Principles do not determine
the law governing
the contract.
48
5.1 The purpose of Article 5 is to determine
the formal validity of a choice of law. Article 5 is motivated by a policy of upholding
the parties’ intention unimpeded by formalistic requirements (see Preamble, para.1).
5.2 A choice of law need not comply with any formal requirements; for instance, it does not need to be in writing, drafted in a particular language or attested by witnesses.
The same applies to a modification of a choice of law (see Art. 2(3)). Article 5 applies to both an express and a tacit choice of law (see Art. 4).
Illustration 5-1Party A and Party B conclude a contract and agree orally that
the law of State X will govern
the contract.
The choice of
the law of State X is formally valid.
Illustration 5-2Party A and Party B conclude an oral contract without expressly agreeing on
the applicable law. However, a tacit choice of
the law of State X appears clearly from
the terms of
the oral contract or
the surrounding circumstances.
The choice of
the law of State X is formally valid.
Illustration 5-3Party A (established in State W) and Party B (established in State X) conclude a contract and agree that it is governed by
the law of State Y.
The contract is drafted in
the official language of State Z and no witnesses are present at its conclusion.
The choice of
the law of State Y is formally valid.
49
5.3 Unlike other provisions of
the Principles, Article 5 is not a conflict of laws rules (which refers to a national legal system) but, rather, a substantive rule of private international law. This rule can be justified on several grounds. First,
the principle of party autonomy indicates that, in order to facilitate international trade, a choice of law by
the parties should not be restricted by formal requirements. Secondly, most legal systems do not prescribe any specific form for
the majority of international commercial contracts, including choice of law provisions (see Art. 11 CISG; Art 1(2) (first sentence) UNIDROIT Principles and Art. 3.1.2 UNIDROIT Principles). Thirdly, many private international law codifications employ comprehensive result-oriented alternative connecting factors in respect of
the formal validity of a contract (including choice of law provisions), based on an underlying policy of favouring
the validity of contracts (favor negotii) (see, e.g., Art. 13 Mexico City Convention; Art. 11(1) Rome I Regulation).
5.4 The fact that
the Principles are designed only for commercial contracts (Preamble, para. 1; Art 1(1)) obviates
the need to subject
the choice of law to any formal requirements or other similar restrictions for
the protection of presumptively weaker parties, such as consumers or employees.
5.5 Article 5 concerns only
the formal validity of a choice of law.
The remainder of
the contract (
the main contract) must comply with
the formal requirements of at least one law whose application is authorized by
the applicable private international law rule (see Art. 9(2)). On
the other hand,
the law chosen by
the parties also governs
the formal (as well as
the substantive) validity of
the main contract (see Art. 9(1€).
The examples below attempt to illustrate
the relationship between Articles 5, 9(1)€ and 9(2) and
the applicable binding rules of private international law in respect of
the formal validity of a contract.
Illustration 5-4Party A and Party B conclude a contract which states that it is governed by
the law of State X.
The main contract is formally valid in terms of
the law of State X.
The contract is formally valid.
50Illustration 5-5Party A and Party B conclude a contract. A tacit choice of
the law of State X appears clearly on
the basis of certain provisions in
the contract or
the circumstances of
the case.
The main contract would be formally valid in terms of
the law of State X.
The contract is formally valid.
Illustration 5-6Party A and Party B conclude a contract, including a choice of
the law of State X.
The contract is formally invalid in terms of
the law of State X.
The contract will nonetheless be formally valid if it complies with
the requirements in respect of formal validity of any one of
the other laws whose application is authorized by
the applicable rule of private international law.
Illustration 5-7Party A and Party B conclude a contract which states that it is governed by
the law of State X.
The main contract is formally invalid if it does not comply with
the requirements as to form in terms of
the law of State X and also does not comply with
the formal requirements of any of
the other laws whose application is authorized by
the applicable rule of private international law.
5.6 The principle in Article 5 – no formal requirements for a choice of law – is consistent with Article 7, which provides that a choice of law may not be contested solely on
the ground that
the contract to which it applies is not valid.
5.7 Article 2(3) provides that a choice of law or a modification made after
the contract has been concluded shall not prejudice
the formal validity of
the contract..
5.8 If
the parties agree (for instance, in a letter of intent or a memorandum of understanding) that a choice of law clause between them will only come into existence when certain formalities are met, their agreement in this regard must be respected. Also, if
the parties agree that a choice of law clause cannot be changed except when certain formalities are met (for instance, a no-oral modification clause), this agreement must be respected (see Arts 2.1.13, 2.1.17 and 2.1.18 UNIDROIT Principles).
51
6.1 Article 6 addresses
the question of which law determines whether
the parties have agreed on
the applicable law. Paragraph 1 differentiates between two situations: those in which
the parties have used “standard terms” designating different applicable laws (see Art. 6(1)(b)); and all other situations (see Art. 6(1)(a)). Paragraph 2 introduces an exception applicable in principle to both situations.
6.2 Article 6(1)(a) follows a private international law rule that is well established in international, supranational or regional instruments, such as in
the Rome I Regulation (Art. 10(1)) and
the Mexico city Convention (Art. 12(1)).
6.3 Article 6(1)(b) introduces a new sub-rule that implements
the rule of Article 6(1)(a) by identifying
the purportedly agreed law in situations in which
the parties have used standard terms designating different applicable laws.
The new sub-rule promotes much needed legal certainty by providing a clear solution to a recurring problem that legislators have left unaddressed and courts have been unable to resolve in a consistent and predictable manner.
The provision seeks to maximize party autonomy while, at
the same time, avoiding needless complexities.
6.5 In line with other international and regional instruments, Article 6-1)(a) provides that
the law purportedly chosen by
the parties determines whether they have reached an agreement on
the applicable law. If that law confirms
the existence of a choice of law, then
the law applies to
the main contract, unless
the opposing party can show a lack of agreement under
the limited exception of Article 6(2) (see paras 6.28-6.29).
6.6 Article 6 avoids
the use of
the phrase “existence and material validity of
the choice of law”, which is used in some codifications. These technical terms may have different meanings from one State to another, and may encourage wider grounds of challenge to
the chosen law, thereby jeopardizing
the legal certainty that
the Principles seek to provide. Instead, Article 6 uses
the non-technical term “agreement”, which is intended to encompass all issues as to whether
the parties have effectively made a choice of law.
526.7 Duress, misrepresentation, mistake and other defects of consent are among
the grounds that a party may invoke to demonstrate
the absence of “agreement” if they specifically affect
the parties’ agreement on
the choice of law, which is to be considered independently from
the main contract (see Art. 7).
The existence and effect of these defects of consent is to be determined under
the putatively chosen law, or, if
the exception appearing in Article 6(2) is applicable, under
the law designated in that paragraph.
6.8 In international contract negotiations, parties that enter into a number of similar contracts frequently prepare standard forms or general conditions for use in those contracts. According to a widely accepted definition provided in
the PECL (Art. 2:209, para. 3), “general conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which not have been individually negotiated between
the parties”. According to
the UNIDROIT Principles (Art. 2.1.19, para 2), “standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with
the other party”. One common method for parties to negotiate transactions is by
the exchange of documents containing transaction-specific terms as well as pre-formulated standard form containing their respective standard terms.
6.9 In international contracts,
the parties often include choice of law clauses in their standard forms.
The Principles do not require a particular form for
the parties’ agreement on choice of
the applicable law (see Arts 4 and 5). Hence,
the choice of law can very well be made in standard forms. If both parties designate
the same law in their standard terms, or if only one party uses a choice of lwa clause, Article 6(1)(&) applies and
the designated law determines whether there was indeed an “agreement” with respect to
the applicable law. If, under this law, an agreement on
the applicable law is established (see paras 6.5-6.7),
the chosen law then governs
the main contract as
the applicable law.
6.10 However,
the terms in
the standard forms used by one party often differ from
the terms used by
the other.
The scenario of conflicting standard forms is commonly referred to as
the “battle of forms”. At
the substantive law level,
the rules applies in national jurisdictions to resolve
the battle of forms mostly fall within one of
the four following categories: (1)
the “first-shot rule”, according to which
the forms first used between
the parties prevail; (2)
the “last-shot rule”, according to which
the forms last used between
the parties prevail; (3)
the “knock-out rule”, according to which both standard forms are disregarded; and (4) hybrid solutions that combine elements of
the above solutions.
536.11 The standard forms used by parties to international contracts frequently contain conflicting choice of law clauses. In such cases, one of
the rules described in paragraph 6.10 must be applied to resolve
the inconsistency with respect to
the choice of law clause. If
the standard forms used by
the parties contain choice of law clauses designating different laws, a difficult question arises as to which law should be applied to resolve
the resulting “battle of forms”.
The existing international, supranational or regional instruments and most national private international law statutes have not yet addressed
the question of
the law applicable in situations involving conflicting choice of law clauses in standard forms. Commentators are divided as to which l should govern, and different solutions, some of considerable complexity, have been suggested.
The courts often avoid
the issue, circumvent it, or simply apply
the lex fori. Consequently, parties to international contracts both using their standard forms are unable to reliable predict which law will ultimately govern their contract, which will usually become important when a dispute arises.
6.12 If
the standard forms of each party contain a choice of law clause, but those clauses designate different laws, resolution of
the conflict is challenging inasmuch as those laws may resolve
the battle of
the forms in different ways. This challenge, and its solution, are addressed in Article 6(1)(b). Article 6(1)(b) stets forth a novel rule that is intended to produce clear and predictable solutions to this complex problem.
The following scenarios illustrate these solutions in various situations.
6.13 The first scenario involves situations in which both of
the laws designated by
the parties provide a last-shot rule for solving
the battle of forms.
Scenario 1Party A makes an offer and refers to its standard terms, which contain a clause designating
the law of State X as
the law applicable to
the contract. Party B expresses acceptance of
the offer and refers to its own standard terms, which designate
the law of State Y as
the applicable law. With respect to battle of forms scenarios,
the domestic laws of State X and of State Y both provide that
the standard terms last referred to prevail (last-shot rule).
6.14 Scenario 1 falls within
the scope of Article 6(1)(b), 1st part. It provides that “if
the parties have used standard terms designating two different laws and under both of these laws
the same standard terms prevail,
the law designated in
the prevailing terms applies”. In Scenario 1,
the parties have indeed designated different laws (
the laws of States X and Y), but both of those laws follow
the last-shot rule under which
54the standard terms last referred to prevail, including
the choice of law clause in these terms. Because both laws designated by
the parties solve
the battle of forms in favour of
the same standard terms,
the apparent conflict is in fact a false conflict. Pursuant to Article 6(1)(b), 1st part,
the choice of law clause in
the standard terms last referred to (i.e.,
the choice of
the law of State Y) is deemed to have been agreed upon.
6.15 The same solution applies if both parties designate in their standard terms
the laws of States that follow
the first-shot rule. In Scenario 1, this mean that
the law of State X would be deemed to have agreed upon.
6.16 The second scenario involves situations in which
the laws designated by
the parties provide different solutions to
the battle of forms:
Scenario 2Party A,
the offeror, designates in its standard terms
the law of State X, and Party B,
the offeree, designates
the law of State Y. One of
the designated laws follows
the first-shot rule, while
the other law follows
the last-shot rule.
6.17 Scenario presents a true
conflict situation because
the parties have designated different laws which resolve
the battle of forms differently. This scenario falls within
the scope of Article 6(1)(b), 2nd part: “if
the parties have used standard terms designating two different laws and […] if under these laws different standard terms prevails, […) there is no choice of law”. This means that, in Scenario 2,
the choice of law clauses in both standard terms are to be disregarded and that
the applicable law is to be identified through
the application of
the rules that apply in
the absence of contractual choice. Thus, Article 6(1)(b), 2nd part, establishes a knock-out rule at
the private international law level.
6.18 The third scenario involves situations in which one or both of
the laws designated by
the parties apply a knock-out rule to
the battle of forms:
Scenario 3 Party A designates in its standard terms
the law of State X, while Party B designates
the law of State Y. State X follows a knock-out rule, while State Y follows a different rule, such as
the first-shot rule, or
the last-shot rule.
556.19 This case also presents a
true conflict which falls within
the scope of Article 6(1)(b): “
the parties have used standard terms designating different laws and under one or both of these laws no standard terms prevail”. Because at least one of
the designated laws applies a knock-out rule, “no standard terms prevail”, and thus both standard terms must be disregarded.
The outcome then is that “there is no choice ox law”. As with Scenario 2,
the applicable law is to be identified through
the use of
the rules that apply in
the absence of contractual choice – rules which are not provided by
the Principles.
6.20 At
the substantive law level, some systems apply one rule to battle of forms scenarios under some circumstances and another rule under different circumstances. In cases involving those systems,
the determination of with standard terms “prevail” under Article 6(1)(b) must be based on
the relevant circumstances not in general but
in the specific case under examination.
6.21 At times it may be difficult to accurately determine a foreign law’s precise rule and position on
the battle of forms. This can be particularly problematic in those systems in which
the burden of ascertaining
the content of foreign law rests with
the court rather than
the parties. When adopting
the Principles, national or international legislators may thus consider imposing a duty on
the parties to assist, or co-operate with,
the court in identifying
the relevant foreign rule or position, if such a duty is not already imposed under their procedural laws. In an arbitral context,
the parties are obliged to co-operate in
the resolution of their dispute given
the contractual nature of
the arbitral agreement.
The parties may be subject to an additional obligation to co-operate where
the applicable arbitral rules so provide.
6.22 Some systems have not taken yet a position with respect to conflicting standard terms. In a case involving at least one of those systems, it will be impossible to establish whether “under both of [
the designated] laws” either (a) “
the same standard terms prevail”, or (b) “different standard terms prevail” (see Art. 6(1)(b)). This case should be treated as one in which “no standard terms prevail”, and consequently as a case in which “there is no choice of law” (see Art. 6(1)(b), in fine).
6.23 Contracts for
the sale of goods are a particularly frequent type of international contract that involves
the exchange of standards terms. With respect to such contracts,
the CISG may enter into consideration.
The CISG is in force in more than 80 States worldwide. Given
the practical importance of
the CISG, it seems appropriate to comment on
the relationship between
the Principles and
the CISG.
The interpretations of
the CISG in this Commentary do not purport to be exclusive or authoritative interpretations of
the CISG by
the Hague Conference or its Members.
566.24 In many cases, a party to an international sale designates in its standard terms
the law of a CISG Contracting State as
the applicable law, without further specification regarding this law. According to
the prevailing judicial practice and academic opinion, a choice of
the law of a CISG Contracting State includes
the choice of
the CISG. It is also common for a party to designate
the law of a CISG Contracting State in its standard terms, but expressly exclude
the CISG; Art. 6 of
the CISG allows this possibility.
Scenario 4 combines these two frequent practices of parties to international sales contracts:
Scenario 4:Party A to a transborder sales contract designates in its standard terms
the law of State X, which is a CISG Contracting State, as
the law applicable to
the contract. Party B designates in its standard terms
the law of State Y, which is also a CISG Contracting State, but explicitly excludes
the CISG.
The general contract law of State Y follows a knock-out rule.
The case is brought before a court in a CISG Contracting State.
6.25 If
the conditions for
the application of
the CISG under its Article 1 et seq. are met,
the court in a CISG Contracting State will be treaty-bound to apply
the CISG. However, according to Article 6 of
the CISG,
the parties may exclude its application. If
the parties enter into a choice of law agreement excluding
the CISG,
the CISG will not apply.
6.26 Article 7 of
the Principles adopts
the principle of severability, according to which
the choice of law agreement is a separate contract that is distinguished from
the main contract (e.g.,
the sales contract). This means that in Scenario 4,
the Principles govern
the choice of
the law agreement, whereas
the CISG governs
the sales contract (i.e.,
the main contract).
6.27 Under
the Principles,
the battle of forms concerning
the choice of law agreement in Scenario 4 falls within
the scope of Article 6(1)(b).
The reason is that: (a) Party A’s standard terms designated
the law of State X, including
the CISG, and Article 19 of
the CISG (as interpreted by judicial practice and academic option) provides either
the last-shot or
the knock-out rule; and (b) Party B’s standard terms excluded
the CISG and designated
the law of State Y, which provides (in its general contract law) a knock-out rule. In this situation, under one (or, depending on
the interpretation of
the CISG, both) of
the designated laws
the knock-out rule applies and “no standard terms prevail”, thus leading to
the conclusion that “there is no choice of law”. Consequently, under
the Principles,
the choice of law clauses in both Party A and Party B’s standard terms, as well as
the exclusion of
the CISG in Party B’s standard terms, could be disregarded.
The choice of law clauses in
the parties’ standard terms would thus not apply, and
the sales contract in Scenario 4 would be governed by
the CISG.
57
6.28 It is widely accepted that, in certain circumstances,
the determination of whether a party has consented to a choice of law should not be made on
the basis of
the purportedly chosen law as provided in Article 6(1) (see Art. 10(2) Rome 1 Regulation). To this end, Article 6(2) introduces an exception clause. It applies subject to two concurrent conditions; first, “under
the circumstances, it would not be reasonable to make that determination under
the law specified in paragraph 1”; and, second, no valid agreement on
the choice of law can be established under
the law of
the State in which party invoking this provision has its establishment (e.g., for reasons of duress or fraud or
the consequences of silence in
the process of contract formation).
Illustration 6-1Party A, established in State X, sends an offer to Party B, established in State Y.
The offer contains a choice of law clause designating
the law of State X. Under
the law of State X, silence of
the offeree is regarded as acceptance. Under
the law of
the State Y, silence does not constitute acceptance. Party B may invoke
the law of State Y in order to establish that it did not consent to
the choice of law.
The court or arbitral tribunal will apply
the law of State Y if it concludes that “under
the circumstances”, it would “not be reasonable” to decide B’s consent to
the choice of law agreement under
the law of State X.
Illustration 6-2Party A, established in State X, sends to Party B, established in State Y, an offer to enter into a contract;
the proposed contract designates
the law of State X as
the applicable law. Party B communicates acceptance of that offer under circumstances of economic duress. Such economic duress does not vitiate consent under
the law of State X. Under
the law of State Y, however, such economic duress would render ineffective Party B’s consent to
the choice of law. Party B may invoke
the law of State Y in order to establish lack of consent.
The court or arbitral tribunal will apply
the law of State Y if it concludes that under
the circumstances, it would “not be reasonable” to decide
the issue of B’s consent to
the choice of law under
the law of State X.
6.29 Article 6(2) is an exception from Article 6(1)(a). It should apply only very rarely in cases falling within
the scope of Article 6(1)(b), 2nd part, because In those situations
the Principles apply a knock-out rule and thus “there is no choice of law”.
58
7.1 Article 7 introduces
the principle of severability. This means that a choice of law agreement is autonomous and independent from
the contract that contains it or
the contract to which it applies. Accordingly,
the invalidity of
the contract does not necessarily render invalid
the choice of law. Rather,
the law chosen by
the parties applies to
the issues to be decided following
the invalidity of
the main contract, unless
the choice of law agreement, assessed independently, is also invalid. When
the parties’ choice of applicable law is not affected,
the claim of invalidity, non-existence or ineffectiveness of
the main contract is assessed according to
the applicable law chosen by
the parties.
7.2 A choice of law is based upon agreement of
the parties. Such an agreement has a distinct subject
matter and possesses an autonomous character from
the contract to which it applies. This is consistent with
the approach followed in international and European instruments, such as Article 10 of
the Rome I Regulation, according to which
the parties’ choice of law should be subject to an independent assessment that is not automatically tied to
the validity of
the main contract.
Illustration 7-1A contract is judged to be invalid on
the grounds of mistake under
the law of State X.
The validity of a choice of law agreement remains unaffected unless
the same mistake affects
the choice of law agreement.
Illustration 7-2Party A and Party B conclude containing a choice of
the law of State X. Party A claims performance under
the contract. Party B takes
the position that
the contract should be regarded as a major transaction and should therefore have been subject to shareholder approval at a shareholders’ meeting which had not taken place. Party B asserts that
the contract is therefore invalid, this does not automatically invalidate
the parties’ choice of law agreement.
The validity of
the choice of law agreement should be raised and considered separately.
59
7.3 The choice of law agreement is usually contained in
the main contract, but sometimes
the agreement may be inferred from
the surrounding circumstances, or it may be contained in a separate document executed prior to, contemporaneously with, or subsequent to,
the contract to which it applies (see Art. 4).
The crux of Article 7 is that, even when
the agreement is part of
the contract,
the agreement must be judged separately from
the main contract. This means that
the choice of law agreement is not affected by a claim that
the main contract is invalid, non-existent or ineffective. However, where it is alleged that
the parties did not enter into a contract,
the severability doctrine may apply only if a valid choice of law agreement is shown to exist. Its existence and validity is assessed according to
the provisions of
the Principles, notably Articles 4-6 and 9.
7.4 The Principles do not address
the law governing certain issues listed in Article 1(3). Some of these issues (in particular those dealt with in Art. 1(3)(a) concerning
the capacity of natural persons and Art. 1(3)(c) concerning companies or other collective bodies and trusts) might also bear relation to
the determination of
the validity of a choice of law agreement.
7.5 The term “severability” has a well-understood meaning in
the literature, where it is used to describe
the “survival” of
the choice of law clause if
the underlying contract is found to be invalid. It is an accepted technical term and this is
the reason why it has been chosen. In languages other than English, “severability”.
The words “separable”, “independent” “autonomous” are employed in
the literature dealing with arbitration and choice of forum clauses.
7.6 Severability of an agreement on choice of court is
the rule adopted by
the 2005 Hague Choice of Court Convention, in its Article 3(d).
The severability rule of Article 7 of
the Principles is also consistent with
the solutions adopted by many States as well as by regional and international instruments.
7.7 In arbitration,
the principle of “separability”, “independence” or “autonomy” is relied upon by courts to dismiss objection to arbitral jurisdiction asserting
the invalidity of
the contract.
The principle is widely accepted in States party to
the New York Convention, and is also expressly adopted by
the UNCITRAL Model Law (Art. 16(1)) as well as many international or institutional arbitral rules.
60
7.8 The adverb “solely” means that
the formal or material invalidity of
the main contract does not automatically lead to
the invalidity of
the choice of law agreement.
The choice of law agreement may be declared invalid only on grounds specifically affecting it.
7.9 Whether or not
the parties’ choice of
the applicable law is affected by
the invalidity of
the main contract depends on
the particular circumstances. For example, arguments that seek to impugn
the parties’ consent to
the main contract do not necessarily undermine their consent to
the choice of law agreement, unless
the circumstances are such as to demonstrate lack of consent to
both the main contract and
the choice of law agreement.
Illustration 7-3Party A and Party B conclude a contract which contains an agreement that it is governed by
the law of State X. Party A has performed
the contract. Under
the las of State X,
the contract is invalid for lack of consent. In
the circumstances of
the case,
the lack of consent cannot be said to extend to
the choice of
the law of State X. As a result, that law applies to determine
the consequences of invalidity, notably
the entitlement to restitution when
the contract has been performed, in whole or in part.
7.10 In some situations,
the parties’ choice of law agreement is affected by a defect that applies to both
the agreement and
the contract to which
the agreement applies. This is notably
the case where both
the contrat and
the choice of law agreement, even if separate, are tainted by
the same fraud or where a party lacks capacity to contract (a minor who may not enter
the contract is also prevented from entering into a choice of law agreement). It should be recalled, however, that
the Principles do not address
the law governing
the capacity of natural persons ( see Art. 1(3)).
61Illustration 7-4A contract is judged to be invalid because Party A bribed Party B or because Party A lacked capacity.
The choice of law agreement contained in
the contract, or affected by
the same defect when concluded, is also invalid.
7.11 The choice of law clause is affected when
the defect causing
the invalidity of
the main contract necessarily extends, by its very nature, to this clause. In such a situation,
the invalidity will also have consequences for other clauses, such as an agreement on choice of court or an arbitration agreement in
the same contract.
8.1 The principles provide for party autonomy and allow
the parties to choose
the law that will govern their contract. Article 8 addresses
the question of whether
the parties’ choice of
the law of a State includes that State’s rules of private international law. In some cases,
the application of
the private international law rules of another State (in this case
the chosen State) may refer back to
the law of
the forum State or to
the law of a third State. This phenomemon is known as “
renvoi”.
8.2 Article 8 begins with
the rule providing that a choice of law by
the parties is to be interpreted as excluding
the application of
the private international rules of
the chosen law.
The general rule of Article 8 avoids
the possibility of an unintentional
renvoi and thereby conforms to
the parties’ likely intentions.
8.3 Nevertheless, in keeping with
the notion of party autonomy, Article 8 allows
the parties, as an exception, to include in their choice of law
the private international law rules of
the chosen law, provided they do so
expressly.
8.4 As used in Article 8,
the phrase “rules of private international law” is confined to
the rules determining
the applicable law. It does not encompass rules of international jurisdiction, procedure or recognition of foreign judgments.
8.5 Article 8 provides that, generally,
the choice of law does not include
the private international law rules of
the chosen law unless
the parties expressly provide otherwise. This principle accords with those Hague Conventions which exclude
the possibility of
renvoi by stating that “
the term ‘law’ means
the law in force In a State
62other than its choice of law rules” (see, e.g., Art. 12 2007 Hague Protocol). Other international ior regional instruments generally also exclude
the possibility of renvoi (see Art. 17 Mexico City Convention; Art. 20 Rome I Regulation). A minor exception in favour of
renvoi exists only where
the instrument extends its operation to non-Contracting States (see Arts 4 and 17 1989 Hague Succession Convention; Art. 4(2)(b) 1978 Hague Matrimonial Property Convention).
Illustration 8-1Party A and Party B conclude a contract which states that “
the parties agree that
the law of State X will govern their contract”. This provision is interpreted as referring solely to
the substantive law of State X, to
the exclusion of its private international law rules.
8.6 Aspiring to serve as a model and to promote international uniformity in private international law,
the Principles similarly exclude
the prossibility of renvoi, except where
the parties expressly provide otherwise. This exclusion hnours
the parties’ likely intent by preventing
the application of a law different from
the parties’ expectations, and also avoids uncertainty and unpredictability. One of
the reasons parties enter into a choice of law agreement is to avoid
the uncertainty of having to determine
the applicable substantive law through
the rules of private international law. This uncertainty would not be avoided if a standard choice of law clause were to be interpreted as encompassing
the private international law of
the chosen State.
The idea underlying
the rule in Article 8 accords with those Hague Conventions that grant (limited) party autonomy (see Arts 7, 8 and 12 2007 Hague Protocol; Arts 5, 6 and 17 1989 Hague Succession Convention; Arts 7 and 15 1986 Hague Sales Convention; Arts 3-5 1978 Hague Matrimonial Property Convention).
8.7 The rule of Article 8 does not prevent
the parties from choosing an international, supranational or regional uniform law instrument, such as
the CISG, to govern a contract that falls outside
the territorial or substantive scope of
the instrument (Arts 1(1)(a) and (b), 2 and 3 CISG) (see Commentary on Art. 3).
The territorial or substantive scope of such instruments is indeed to be distinguished from
the private international law rules of
the chosen law in
the sense of
the rule of Article 8.
8.8 On
the other hand, if an instrument or non-State law (see Art. 3) that has been chosen by
the parties contains a reference to
the law of a certain place or to
the lex fori, this reference should be followed.
63Illustration 8-2Party A and Party B conclude a contract that contains
the following clause: “This contract shall be governed by
the UNIDROIT Principles of International Commercial Contracts.” According to
the UNIDROIT Principles,
the interest rate in case of failure to pay money is, under certain circumstances,
the applicable rate fixed by
the law of
the State of
the currency of payment (Art. 7.4.9(2) UNIDROIT Principles). Pursuant to this reference,
the law of
the State of
the currency of payment is to be applied.
8.9 Notwithstanding
the general rule of interpretation described above, Article 8 provides that
the parties may expressly choose a law including its private international law rules. This provision is consistent with party autonomy because it honours
the parties’ express agreement to indirectly choose
the applicable substantive law via private international law rules. This principle, established in arbitration (see Art. 28(1) UNCITRAL Model Law), has also been extended to court proceedings. It deviates from
the existing Hague Convention and other instruments that allow (limited) party autonomy without granting
the possibility of including
the private international law rules (see paras 8.5 and 8.6).
Illustration 8-3A contract provides that “it shall be governed by
the law of State X, including its private international law rules”. In such a case,
the applicable substantive law will be determined under
the private international law rules of State X.
9.1 The purpose of Article 9 is to describe
the scope of
the law chosen by
the parties. Its structure is
the following. First, it lays down
the general rule that
the law chosen by
the parties governs
all aspects of their contractual relationship. Secondly, it includes
a non-exhaustive list of issues governed by such law. And thirdly, it makes clear that States may add connecting factors supporting
the formal validity of
the contract.
649.2 Article 9 is based on
the principle that, unless
the parties agree otherwise,
the law chosen shall govern
all aspects of the contract.
The contract should be governed by
the law chosen by
the parties from its formation until its end. This approach ensures legal certainty, and uniformity of results and, in doing so, reduces
the incentive for
forum shopping:
the law applicable to any aspect of
the contractual relationship will be
the law chosen by
the parties, irrespective of
the court or arbitral tribunal that decides
the dispute.
9.3 Naturally,
the reference to “all aspects” does not prevent
the parties from choosing different laws for different parts of
the contract, in accordance with Article 2(2)(b), or even from choosing a law only for one or more of
the aspects listed in Article 9(1), for example,
the interpretation of
the contract.
9.4 Article 9(1) includes a list of seven issues governed by
the law chosen by
the parties.
The terms “…including but not limited to…” indicate that
the list is illustrative rather than exhaustive.
The reason for mentioning those seven particular issues is twofold. First,
the list includes many of
the most important aspects of any contract. This is
the case, for example, for issues (a) and (b): interpretation, and rights and obligations arising from
the contract. Second,
the list clarifies that, in applying
the Principles, certain issues are to be characterized as contractual and thus they will be governed by
the chosen law rather than another law, such as
the lex fori or
the lex loci damni. This is
the case, for example, for prescription and limitation periods (see Art. 9(1)(d)),
the burden of proof and legal presumptions (see Art. 9(1)(f)) and pre-contractual liability (see Art. 9(1)(g)). This ensures a uniform characterization of these issues and, accordingly, promotes uniformity of results.
9.5 The issues mentioned in Article 9(1)(a),
interpretation, and Article 9(1)(b),
rights and obligations arising from the contract, are probably
the most relevant in practice and constitute
the core of
the issues governed by
the law chosen by
the parties.
The chosen law determines what meaning is to be attributed to
the words and terms used in
the contract. Where
the meaning of a word in a contract is ambiguous,
the meaning must be ascertained using
the canons of interpretation and constructions of
the law chosen by
the parties. That law also determines
the parties’ rights and obligations, especially when they are not explicitly defined by
the contract. Because
the Principles apply only to contracts,
the concept of
rights and obligations should be understood as referring to contractual
rights and obligations, and not to be non-contractual issues that may occur or arise between
the contracting parties (but see para. 9.12).
9.6 Article 9(1)(c) refers to
the performance and the consequences of non-performance,
including the assessment of damages. The law chosen by
the parties governs
the conditions for
the fulfillment of
the obligations resulting from that law or from
the contract, for example,
the standard of diligence,
the place and time of performance or
the extent to which
the obligation can be performed by a person other than
the party liable (see M. Guiliano and P. Largarde, “Report on
the Convention on
the Law applicable to Contractual Obligations”, [1980) OJ C282, p. 32 (“Guiliano-Lagarde Report”)).
The chose law also governs
the consequences of a total or partial failure to perform those obligations, including
the excuses for non-performance, and
the assessment of damages.
659.7 The reference to
the consequences of non-performance, including
the assessment of damages is a reference to
the substantive rules, i.e., those aspects are included to
the extent that they are governed by substantive law rules and lie within
the powers conferred upon
the court by
the lex fori or
lex arbitri (see Explanatory Report to th 1986 Hague Sales Convention, pp. 42-43; Guiliano-Lagarde Report, p. 32). Thus, questions such as
the remedies for non-performance, for example, compensation and
the determination of its amount, specific performance, restitution, reduction for failure to mitigate a loss or
the validity of penalty clauses, are subject to
the law chosen by
the parties.
9.8 Article 9(1)(d) refers to
the various ways of extinguishing obligations, prescription and limitations periods. The law chosen by
the parties governs all ways of extinguishing obligations, including prescription or limitation of actions by
the passage of time. Thus,
the chosen law determines
the commencement, computation and extension of prescription and limitation, and their effects, i.e., whether they provide a defence for
the debtor or they extinguish
the creditor’s rights and actions.
The law chosen by
the parties governs these issues irrespective of their legal characterization under
the lex fori. This ensures harmony or results and legal certainty (see Art. 12(g) 1986 Hague Sales Convention; Art. 12(1)(d) Rome I Regulation).
9.9 Article 9(1)€ refers to
the validity and the consequences of invalidity of the contract, regardless of whether this result is described by words such as “null”, “void”, or “invalid”.
The law chosen by
the parties determines
the formation of
the contract,
the conditions for its validity and
the grounds for avoidance. If according to that law
the contract is null or invalid,
the resulting consequences, for example,
the obligation of restitution or payment of damages, are also governed by that law. See also paragraph 5.5.
9.10 Article 9(1)(e) is closely linked to Article 7 (severability of
the choice of law clause). According to Article 7, it may be
the case that
the choice of law clause is valid, whereas
the main contract to which it applies is not valid. Article 9(1)(e) makes clear that, in such a case,
the consequences of
the nullity of
the contract are still governed by
the law chosen by
the parties.
9.11 Article 9(1)(f) refers to
the burden of proof and legal presumptions.
The Principles do not apply to evidence and procedural questions. However,
the law chosen by
the parties does apply to legal presumptions and
the burden of proof. Like other international instruments,
the Principles follow a substantive characterization of these issues, not a procedural one (see Art. 12(g) 1986 Hague Sales Convention; Art. 18(1) Rome I Regulation).Legal presumptions and rules determining
the burden of proof contribute to clarifying
the parties’ obligations and thus are inextricably linked to
the law governing
the contract. Furthermore, a uniform characterization of these issues ensures harmony of results and legal certainty. Conversely, procedural presumptions, i.e., those based on procedural elements, such as
the effect of a failure to appear in court or
the failure to deliver certain documents in
the possession of one party, are excluded from
the scope of
the chosen law.
The standard and mode of proof are also excluded.
669.12 Finally, Article 9(1)(g) refers to
pre-contractual obligations. According to
the Principles,
the law chosen by
the parties governs
the rights and obligations of
the parties during
the formation period of
the contract and
the liability that may arise therefrom, for example,
the information or undertaking given by
the parties during that period. Therefore, once a contract is concluded betwenn
the parties,
the obligation that arose out of dealings prior to its conclusion are also subject to
the law applicable to
the contract. However, even before
the contract is concluded,
the parties may choose
the law applicable to
the contractual negotiations and therefore to
the pre-contractual liability based, for example, on an unexpected breakdown of such negotiations.
9.13 Article 9(2) provides that Article 9(1)(e), which provides that
the chosen law governs
the formal validity of
the contract, does not prevent
the application of any "other governing law" that supports
the formal validity of
the contract.
The "other governing law" is determined under
the private international law rules followed in
the forum State or applied by an arbitral tribunal. Thus, Article 9(2) is motivated by, and seeks to promote,
the policy of
favor negotii, which is prevalent in most private international law codifications and conventions. This policy is reflected in choice of law rules designed to favour
the formal validity of contracts by authorising
the application of whichever one of several listed law would uphold
the contract as to form (alternative connecting factors).
The listed laws usually include
the laws of
the State of
the making of
the contract, and
the State in which
the parties were domiciled or in which they or their respective agents were present at
the conclusion of
the contract. Article 9(2) enables courts or arbitral tribunals to take advantage of these rules when
the form of
the contract is not valid under
the chosen law. Nevertheless, once
the law applicable to
the contract is determined, any change of choice of law is without prejudice to
the contract's formal validity (see Art. 2(3)). See also paragraph 5.5.
10.1 Article 10 determines
the law applicable to important issues in assignment transactions, where
the rights and duties of
the parties are defined by two (or more) contracts that are entered into by different combinations of parties, and those contracts include different choice of law agreements.
10.2 Even when party autonomy is fully effectuated by
the Principles, difficult questions arise in determining
the law applicable to particular issues in transactions such as assignments in which
the rights and dutiesof
the parties are determined by two or more related contracts thatare entered into by different combinations of parties and those contracts include different choice of law agreements. This may occur in
the67context of assignment (in which
the contract creating
the assigned obligation is governed by
the law of one State while
the contract of assignment is governed by
the law of a different State) as well as other contexts such as subrogation or delegation. Among such complex situations,
the Principles focus on assignment because assignments are important and recurring transactions in international commercial practice.
10.3 Assignments and similar complex transactions involving overlapping contracts do not present unique issues with respect to
the determination of
the law governing each of
the contracts when considered separately. There are, however, difficult issues in determining
the law governing matters that relate to
the intersection of those contracts, particularly when they are governed by different laws. After all,
the claim of an assignee against
the debtor on
the assigned contract is created by a combination of
the assigned contract and
the contract of assignment, and
the parties to those two contracts may have chosen to have them governed by different laws.
Scenario Pursuant to a contract between Debtor and Creditor (Contract 1). Creditor has a claim against Debtor for a monetary sum. Contract 1 is stated to be governed by
the law of State X and, under
the Principles, that designation of applicable law is given effect. Pursuant to a contract between Creditor and Assignee (Contract 2), Creditor has assigned its claims against Debtor under Contract 1 to Assignee. Contract 2 is stated to be governed by
the law of State Y and, under
the Principles, that designation of governing law is given effect.
The result of these two contracts, when considered together, may be to create a right of Assignee against Debtor.
10.4 In
the Scenario, Assignee was not a party to Contract 1 and did not participate in
the choice of law in
the contract. Similarly, Debtor was not a party to Contract 2 and did not participate in that contract's choice of law. Thus, it cannot be said that
the law applicable to
the relationship among
the parties created by
the confluence of
the two contracts can be determined simply by giving effect to
the choice of law by
the parties. Accordingly, it is useful to examine how choice of law operates in assignment transactions in light of
the potential for confusion as to which law governs which aspects of
the relationship among
the debtor, assignor and assignee when
the contract between
the debtor and
the creditor/assignor is governed by a law different than
the law governing
the contract between
the creditor/assignor and
the assignee.
10.5 Although
the Principles, in recognition of party autonomy, allow
the parties to choose
the law governing a contract, so that Contract 1 in
the Scenario is governed by
the law of State X (as chosen by
the parties to that contract) and Contract 2 is similarly governed by
the law of State Y,
the Principles' deference to party autonomy tells us little about
the law governing matters that affect
the relationship between
68parties who have not contracted with each other (such as Debtor and Assignee) and, thus, have not exercised their autonomy to choose
the law governing those matters. While Creditor and Assignee have chosen to have their contact governed by
the law of State Y, Debtor has not agreed to
the application of State Y's law. Similarly, while Debtor and Creditor have chosen to have their contract governed by
the law of State X, Assignee has not agreed to
the application of State X's law. As a result, applying either
the law of State X or
the law of State Y to
the relationship between Debtor and Assignee created by
the interaction of
the two contracts cannot be said to be merely an application of party autonomy.
10.6 Accordingly, while
the Principles generally defer to party autonomy for selection of
the law governing
the relationship between parties who have contracted with each other, rules are needed to determine which law applies when deference to
the joint choice of
the parties has no real meaning because
the parties have not contracted with each other. Article 10 provides these rules.
10.7 Article 10 is based on two principles: (i) rights and obligations as between two parties, created by a contract them, should be governed by
the law governing that contract; and (ii) a contractual obligation should continue to be governed by
the law applicable to
the contract that created
the obligation, even after
the creditor with respect to that obligation assigns its rights to a third party. Applying these two principles to
the relationship created by assignment leads to
the rules set out in Article 10(a) and (b).
10.8 First, under
the rule set out in Article 10(a),
the law chosen by
the assignor and
the assignee in
the contract of assignment governs their mutual rights and obligations arising from that contract. This is an application of
the principle that rights and obligations as between two parties, created by a contract between them, should be governed by
the law governing that contract.
Illustration 10-1Under
the facts of
the Scenario,
the contractual obligations created between Creditor and Assignee under Contract 2, and
the determination of whether as between Creditor and Assignee, Contract 2 effectively transfers Creditor's rights under Contract 1 to Assignee, are governed by
the law of State Y.
10.9 Secondly, under
the rule set out in Article 10(b)(i),
the law chosen by
the debtor and creditor in
the contract creating
the debt determines whether
the assignment can be invoked agains
the debtor. This is an application of
the principle that a contractual obligation should continue to be subject to
the law governing
the contract that created it even after
the creditor with respect to that obligation assigns its rights to a third party (see Art. 2).
69Illustration 10-2Under
the facts of
the Scenario,
the question of whether Assignee can invoke against Debtor
the assignment of Creditor's rights under Contract 1 to Assignee (including determination of
the effect of any anti-assignment clauses in Contract 1) is governed by
the law of State X.
10.10 Thirdly, under
the rule set out in Article 10(b)(ii),
the law chosen by
the debtor and creditor in
the contract creating
the debt governs
the rights of
the assignee against
the debtor that result from
the assignment. This, too, is an application of
the principle that a contractual obligation should continue to be subject to
the law governing
the contract that created it even after
the creditor with respect to that obligation assigns its rights to a third party.
Illustration 10-3Under
the facts of
the Scenario and assuming that Assignee can invoke
the assignment against Debtor,
the nature and extent of Debtor's obligation to Assignee (including determination of
the effect of any legal doctrines pursuant to which a debtor may not set up against an assignee certain defences that
the debtor may have been able to set up against its creditor) are governed by
the law of State X.
10.11 Fourthly, under
the rule set out Article 10(b)(iii),
the law chosen by
the debtor and creditor in
the contract creating
the debt governs whether
the obligations of
the debtor have been discharged. This, too, is an application of
the principle that a contractual obligation should continue to be governed by
the law governing
the contract that created it even after
the creditor with respect to that obligation assigns its rights to a third party.
Illustration 10-4Under
the facts of
the Scenario and assuming that Assignee can invoke
the assignmentagainst Debtor,
the question of whether Debtor's obligation to Assignee resulting from
the assignment has been discharged (whether by performance by Debtor or otherwise) is governed by
the law of State X.
70
10.12 The matter of
the law governing assigned obligations is addressed in
the UN Receivables Convention.
The matter is also addressed in
the Rome I Regulation and in
the UNCITRAL Secured Transactions Guide. Article 10 is consistent with these precedents.
The UN Receivables Convention (Art. 28(1)) (recommendation 216 of
the UNCITRAL Secured Transactions Guide) refers issues between
the assignor and
the assignee to
the law governing
the assignment, and defers to party autonomy for choosing that law: "The mutual rights and obligations of the assignor and the assignee arising from their agreement are governed by the law chosen by them."
The UN Receivables Convention (ARt. 29) (recommendation 217 of
the UNCITRAL Secured Transactions Guide) addresses
the law applicable to
the relationship between
the debtor on
the assigned contract and
the assignee: "The law governing the original contract determines the effectiveness of contractual limitations on assignment as between the assignee and the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor's obligations have been discharged."
10.13 Other contexts in which rights are determined by reference to two or more contracts between different sets of parties include subrogation and delegation. While Article 10 does not provide rules for determining which law governs
the various issues that may arise in those contexts,
the rules of Article 10 may be applied to those situations by analogy.
11.1 Party autonomy, as recognised by
the Principles, is not absolute. Rather, in
the Principles, as in all States that recognise party autonomy, it operates within limits. This Article sets out
the limits on
the general autonomy principle recognised in Article 2. Paragraph 11.4 to 11.32 of this Commentary describe in detail
the operation of those limits and
the policies underlying them. These are
the only limitations upon
the application of
the law chosen by
the parties within
the framework of
the Principles.
11.2 While Article 11 consists of five paragraphs, it embodies one basic point - party autonomy to select
the governing law can be limited, in
the exceptional circumstances identified in
the Article, when
the effect of its use would be to contravense certain fundamental norms. Article 11 sets out
the contours of that point by identifying
the two situations in which a forum may, consistent with
the71Principles, decline to give full effect to
the law chosen by
the parties. First, notwithstanding
the law chosen by
the parties,
the forum may apply or take into account "overriding mandatory provisions" of law. Second,
the forum may decline to apply
the law chosen by
the parties to
the extent that
the result would be "manifestly incompatible with fundamental notions of public policy (
ordre public)". Of course, in order to apply those limits, one must know which State's overriding mandatory provisions of law or fundamental notions of public policy (
ordre public) are to be taken into account. While
the Principles primarily look to
the law of
the forum for those limits, they also povide rules under which
the forum may look to
the law of a different State.
11.3 These twin tasks - delineating
the limits on party autonomy and identifying
the State whose law provides
the reference point for these limits - are accomplished in Article 11 as follows: paragraphs (1) and (2) address overriding mandatory provisions of law, with paragraph (1) establishing
the basic power of
the forum to apply its overriding mandatory provisions and paragraph (2) indicating
the circumstances in which
the forum may apply or take into account mandatory provisions of another State; paragraphs (3) and (4) address fundamental notions of public policy (ordre public), with paragraph (3) establishing
the basic power of
the forum to exclude application of
the chosen law if it contravenes
the forum's fundamental notions of public policy and paragraph (4) indicating
the circumstances in which
the forum may take into account
the fundamental notions of public policy of another State; and paragraph (5) addresses application of these principles by arbitral tribunals.
11.4 These limitations apply only with regard to rules and policies that are of fundamental importance within
the legal systems in which they operate (see paras. 11.15 and 11.23). Indeed, if
the limitations are not circumscribed in this manner,
the principle of party autonomy would be undermined.
11.5 The law of
the forum plays a central role in Article 11. It is by reference to
the law of
the forum that a court will determine whether a provision or policy of that law displays
the characteristics necessary to constitute an "overriding mandatory provision" or whether a public policy is of a sufficiently fundamental nature as to be capable under
the Principles of overriding
the law chosen by
the parties (see Art. 11(1) and (3); see paras AA.1 and 11.22). It is also
the private international law of
the forum which determines whether and, if so to what extent, a court will apply or take into account
the overriding mandatory law or
the public policy of another State (see Art. 11(2) and (4); see paras 11.20 and 11.28). On
the other hand,
the overriding mandatory character or public policy of another law is determined according to that law and not
the law of
the forum.
11.6 The categories of limitation recognised by Article 11 qualify
the applicable law to a certain extent, but they do not invalidate
the parties' choice. In
the case of overriding mandatory provisions,
the applicability of
the chosen law is supplemented or displaced by
the application of
the mandatory provision of another law. In
the case of public policy,
the applicability of
the chosen law is limited only to
the extent that its application is manifestly incompatible with fundamental notions of public policy (ordre public). Unless, therefore, its non-application is necessary to give effect to
the overriding mandatory provision or public policy,
the chosen law will be applied, as provided eslewhere in
the Principles.
7211.7 Article 11(5) stands apart from
the rest of
the Article. As
the Commentary on
the provision (see paras 11.29-11.31) makes clear, it recognises that arbitral tribunals and noational courts operate in different contexts in their treatment of overribing mandatory rules and public policy. Article 11(5) provides, therefore, for an arbitral tribunal to take into account public policy or overriding mandatory provisions of a law other than that chosen by
the parties, if it is entitled or required to so. Indeed, that possibility is an important contral mechanism which protects
the integrity of arbitration as a dispute resolution mechanism.
11.8 Rules that provide for
the application by a court or arbitral tibunal of overriding mandatory provisions or public policy (whether of
the forum or of another law) to qualify
the law that would otherwise apply in a particular case are of fundamental importance in private international law. Those rules provide an essential"safety valve" without which national lawmakers might be reluctant to allow
the application of
the chosen law or "rules of law" (
Case concerning the Application of the Convention of 1902 governing the Guardianship of Infants (Netherlands v. Sweden), Judgment of 28 November 1958: ICJ Reports 1958, p.55).
11.9 In
the present context, although
the qualifications in Article 11 do restrict
the application of party autonomy. By acknowledgingand defining
the exceptional circumstances in which a national court or arbitral tribunal may legitimately override
the parties' choice in
the exercise of
the power conferred on them by Article 2(1),
the provisions described in
the following paragraphs serve as important contral mechanisms, which should serve to reinforce
the confidence that a legal system reposes in
the parties by allowing them that choice. Without provisions of this kind, which portect
the integrity of a legal system and
the society that it represents,
the freedom of
the parties to choose
the law applicable to a contract might not be accepted at all and, if recognised, would be at risk of being undermined or negated on insubstantial or spurious grounds.
11.10 Article 11 permits
the application, on an exceptional basis, of two categories of restrictions on
the application of
the law chosen by
the parties: overriding mandotry provisions and public policy (
ordre public). These two categories are commonly dealt with in separate provisions in national and international instruments, including all of
the Hague Conference's Conventions dealing with choice of law issues over
the past 50 years (see, e.g., Arts 16-17 1978 Hauge Agency Convention; Arts 17-18 1986 Hagues Sales Convention; Art. 11 2006 Hague Securities Convention).
7311.11 There is no doubt that
the categories overriding mandatory provisions and public policy are "closely connected". They may be considered to share
the same doctrinal basis and, in effect, to be two sides of
the same coin. Nevertheless, their separate treatment in
the Principles has
the advantage, in particular, of not only consistency with
the majority of existing international instruments but also of allowing a clear distinction to be drawn between (a) situations in which application of
the chosen law is displaced because a specific, positive rule of
the lex fori or another legal system takes priority and is applied instead (application of an overriding mandatory provision), and (b) situations in which application of
the chosen law is blocked because its application of
the chosen law is blocked because its application in a particular case is repugnant to
the fundamental policies of
the forum or another legal system whose law would apply to
the contract absent
the parties' choice (application of
ordre public).
11.12 In order to give due weight to
the principle of party autonomy, any limit on
the application of
the law chosen by
the parties must be justifiable, clearly defined and no wider than necessary to serve
the objective pursued. In line with this restrictive approach,
the Principles emphasise
the exceptional character of public policy and overriding mandatory provisions.
11.13 Article 11 distinguishes between
the role of overriding mandatory provisions and public policy in court proceedings (see Art. 11(1)-(4)) and their role in proceedings before an arbitral tribunal (see Art. 11(5)). In relation to court proceedings, Article 11 also distinguishes between
the effect of rules and policies of
the forum (see Art. 11(1) and (3)) and that of rules and policies of legal systems other than of
the forum or that chosen by
the parties (see Art. 11(2) and (4)).
11.14 Article 11 does not address
the application of mandatory provisions and public policy of
the law chosen by
the parties. That is because a choice of law within Article 2 carries with it (subject only to
the limits set out in
the present Article)
the application of
the whole of
the chosen substantive law, whether or not falling within one or other of these two categories. Article 2 permits
the parties to choose
the law applicable to only part of a contract (i.e., to some provisions, but not others) and to choose different laws to govern different parts (see para. 2.9). It does not, however, allow
the parties to "pick and choose" within
the applicable substantive law so as to exclude
the application of certain rules, while applying others. For example,
the Principles would not enable
the parties to choose all of
the law of State X, except for a particular (mandatory) statute governing unfair contract terms. For
the most part, therefore, it will be a
matter for
the chosen law to determine whether a particular legal provision is one from which
the parties are free to depart by
the terms of their contract or is one which has mandatory effect.
11.15 Article 11(1) provides that
the law chosen by
the parties may be qualified by
the overriding mandatory provisions of
the law of
the forum. Such overriding mandatory provisions continue to have effect notwithstanding
the parties' choice of a different law, and will prevail in
the event that they are irreconcilable with provisions of
the chosen law.
7411.16 The Principles do not define
the term "overriding mandatory provisions" (compare Art. 9(1) Rome I Regulation).
The term, found in several regional and national instruments, is generally understood to refer to provisions of law (in Art. 11(1),
the law of
the forum) that must, according to their proper construction, be applied to
the determination of a dispute between contracting parties irrespective of
the law chosen to govern
the contract. They are
mandatory provisions in
the sense that it is not open to
the parties to derogate from them by
the terms of their contract or otherwise. They are
overriding provisions in
the sense that a court must apply them even if
the parties have chosen a law other than that of
the forum to govern their contractual relationship.
The presence of these two characteristics serves to emphasise
the importance of
the provision within
the relevant legal system, and to narrow
the category of provisions to which
the Principles will apply. Overriding mandatory provisions are likely to be limited to those that are regarded as important for safeguarding
the public interests of
the forum (see Art. 9(1) Rome I Regulation).
11.17 It is not necessary that an overriding mandatory provisions should take a particular form (i.e., it need not be aprovision of a constitutional instrument or statute), or that its overriding, mandatory character should be expressly stated. In every case,
the law of
the forum must be applied to determine (a) whether a particular provision is capable of having
the effects described, and (b) whether, having regard to its terms (including its territorial application) and any relevant surrounding circumstances, it actually has those effects in
the case in question. Nevertheless,
the exceptional nature of
the Article 11 qualifications to party autonomy should caution against
the conclusion that a particular provision is an overriding mandatory provision in
the absence of words or other indications to that effect.
Illustration 11-1A statutory provision of State Z such as
the following (Art. X) would bring
the substantive provision to which it refers (for example, Art. Y on unfair contract terms) within
the scope of Article 11(1) of
the Principles:
Article X
(1)
Article Y applies notwithstanding any agreement or waiver to the contrary.
(2)
Article Y applies nothwithstanding any provision which designates or purports to designate the law of a State other than Z.
75Illustration 11-2Party A und Party B conclude a contract under which Party A is appointed Party B's commercial agent in State X.
The contract states that it is governed by
the law of State Y. Upon termination of
the contract, Party A sues Party B in State X, claiming compensation under
the law of State X. A statute of State X regulating commercial agency arrangements provides for an indemnity upon
the termination of
the agency contract and also includes a provision to
the effect that "the parties may not derogate from the indemnity provisions to the detriment of the commercial agent before the agency contract expires".
The court in State X may (or may not) interpret those words as justifying
the conclusion that
the indemnity provisions provides by
the statute are overrinding mandatory rules, displacing
the otherwise relevant rules of
the chosen law of State Y regarding indemnity. In order to reach that conclusion,
the court must be satisfied not only that
the provision, if it applies, is one from which
the parties are not free to derogate but also that
the provision must be applied notwithstanding that
the parties have chosen
the law of State Y to govern their relationship.
11.18 The impact of
the Article 11(1) is also limited in
the following way: it controls
the application of
the chosen law
only to the extent that such application is incompatible with
the concurrent application to
the parties' relationship of
the relevant overriding mandatory provision and
the chosen law. Importantly,
the conclusion that
the chosen law is, in one or more respects, incompatible with an overriding mandatory provision of
the law of
the forum does not invalidate
the partes' choice or, save to
the extent of any incompatibility, negate
the consequences of that choice under Articles 2 and following.
The chosen law must be applied to
the greatest possible extent consistently with
the overriding mandatory provision.
11.19 Whereas Article 11(1) is concerned with
the application of overriding mandatory provisions of
the law of
the forum, Article 11(2) deals with
the possible application of
the overriding mandatory provisions "of another law", i.e.,
the law of a State other than that of
the forum or of
the law chosen by
the parties. In contrast with Article 11(4) (see para. 11.28), which refers only to
the law applicable to a contract in
the absence of choice, Article 11(2) does not limit
the connections which may be deployed to identify a State whose overriding mandatory provisions will or may be applied. Consequently, that State may be
the State whose law would have been applicable in
the absence of a choice of law agreement or a State with another connection.
The definition of
the category of overriding mandatory provisions, and
the relationship between those provisions and provisions of
the chosen law, are to be understood in
the same way as for Article 11(1) (see paras 11.14-11.17).
76 Illustration 11-3Party A and Party B conclude a contract for
the rental by Party B of a commercial goods vehicle, knowing that it is to be used to smuggle historical artifacts from State Y to State X.
The contract states that it is governed by
the law of State Z. Under
the cultural objects law of State Y,
the export of historical artifacts without a licence is a criminal offence and all contracts whose purpose is to facilitate smuggling are illegal and unenforceable. Party A fails provide
the vehicle, and Party B sues Party A in State X. Assuming
the the contract is valid and enforceable under
the law chosen by
the parties (i.e.,
the law of State Z),
the private international law of State X will determine whether and, if so, to what extent overridning mandatory provisions of
the law of State Y are to be applied or taken into account. If, under
the law of State X,
the overriding mandatory provisions of
the law of State Y ought to be applied or taken into account,
the law of State Y must then be considered to determine whether
the provisions of
the cultural objects law have
the status of overriding mandatory provisions for this purpose.
11.20 Certain international instruments, such as
the 1978 Hague Agency Convention and
the Rome Convention, contain provisions allowing
the courts to give effect, on a discretionary basis and subject to certain conditions, to
the overriding mandatory provisions of another law. Other instruments, such as
the Rome I Regulation, Article 9(3), contain more narrowly defined principles. Current State practice and opinion as to
the utility of provisions of this kind, however, diverges widely. Article 11(2) seeks to accomodate this diversify within
the Principles by delegating to
the private international law of
the forum
the question of whether and under which circumstances overriding mandatory provisions of another law may or must be applied or taken into account. A similar solution is found in Article 11(2) of
the Mexico City Convention.
11.21 Given
the central role that
the law of
the forum plays in Article 11(1) and 11(2) (see para. 11.4), that law must be applied to resolve any apparent conflict between an overriding mandatory provision of
the law of
the forum and an applicable overriding mandatory provisionof another State.
11.22 Article 11(2) does not preclude
the application of provisions of
the chosen law that permit or require a court to take account of
the law of a third State as a circumstance relevant to their application on
the facts of a particular case (e.g., a rule of contract law suspending or terminating performance which has become illegal under
the law of
the place of chosen performance).
77
11.23 Under Article 11(3), application of a provision of
the chosen law may be excluded only if
the result of such application is manifestly incompatible with fundamental notions of public policy (
ordre public) of
the forum. Three requirements must be met in order for Article 11(3) to apply: first, there must be a policy of
the forum State of sufficient importance to justify its application to
the case in question ("fundamental notions of public policy" or "
ordre public"); secondly,
the chosen law must be obviously inconsistent with that policy ("manifestly incompatible"); thirdly,
the manifest incompatibility must arise in
the application of
the chosen law to
the dispute before
the court. These requirements reflect
the leitmotiv of
the Principles, i.e., facilitatin party autonomy as much as possible, and serve to control
the use of public policy arguments to deny
the efficacy of
the chosen law.
11.24 As to
the first requirement,
the use of
the cords "fundamental notions of public policy" and
the internationally accepted expression "
ordre public" emphasise that Article 11(3) is concerned with policies of
the legal system of
the forum (in whatever form) that are so important that they extend to contracts of an international character, notwithstanding that
the parties are empowered to choose (and have, in
the case in question, chosen) another law to govern those contracts. Accordingly,
the category is much narrower than
the concept of "public policy" as it may apply to domestic contracts. It is, of course, not sufficient that
the chosen law adopts an approach different from that of
the law of
the forum. It is necessary that
the application of
the chosen law would violate a fundamental policy of
the forum of
the kind described.
11.25 As to
the second requirement,
the words "manifestly incompatible" (used, e.g., in Art. 17 1978 Hague Agency Convention and in Art. 21 Rome I Regulation) serve to emphasise that any doubt as to whether application of
the chosen law would be incompatible with
the forum's fundamental policies must be resolved in favour of
the application of
the former.
11.26 Article 11(3) emphasises
the third requirement, namely, that it is
the result of
applying the chosen law in a particular case rather than
the chosen law in
the abstract that must be assessed for compliance with public policy.
The court in not, however, restricted to considering
the outcome of
the dispute between
the parties, but may have regard to wider considerations of public interest. For example, a court may refuse on public policy grounds to enforce a contract, valid under
the law chosen by
the parties, based on a finding that
the choice was designed to evade sanctions imposed by a United Nations Security Council resolution, even if non-enforcement would benefit financially a person targeted by those sanctions and even if
the other party was not party to
the evasion.
78Illustration 11-4 Party A, a professional gambler resident in State X, visits Party B's casino in State Y. During
the visit,
the parties conclude a wagering contract governed by
the law of State Y. Party A fails to pay and Party B sues Party A in State X. Wagering contracts are considered to be against public policy in State X, but are legal, binding and enforceable under
the law of State Y. Whether or not
the court in State X will refuse to apply
the rules upholding encorceability of
the contract under
the law chosen by
the parties will depend on whether or not (i)
the public policy of State X is regarded as a fundamental policy of that State which extends to all wagering contracs, even those concluded outside
the State with a non-resident party (Party B) and stipulated to be subject to a law that does not prohibit such contracts; and (ii) whether
the enforcement of
the contract in Party B's favour would be manifestly incompatible with that policy.
11.27 The law chosen by
the parties may only be excluded "to the extent" that its application would be incompatible with
the forum's public policy. Thus, as in
the case of overriding mandatory provisions,
the existence of an incompatibility of this kind does not deprive
the parties' choice of law of any affect. Instead,
the chosen law must be applied to
the greatest possible extent consistently with
the public policy of
the forum. Such application may produce an outcome that is both coherent and consistent with
the forum's public policy. If, however,
the non-application of a provision of
the chosen law produces an outcome that is incomplete or incoherent,
the law of
the forum should normally be applied to identify any gap-filling rule. It is, however, possible that
the parties may themselves have provided for
the consequences of a conflict with
the public policy of
the forum and, if they have done this and their choice can be given effect consistently with public policy, that expression of their autonomy should prevail.
Illustration 11-5 Party A sues Party B in
the courts of State X for breach of contract. Party A seeks compensatory and punitive damages in accordance with
the law of State Y chosen by
the parties to govern
the contract and any disputes to which it gives rise. Under
the law of State X, it is considered a fundamental principle of law that punitive damages are not available in relation to contractual claims. Under Article 11(3),
the court in State X could exclude
the application of
the law of State Y with respect to
the punitive damages claim, but
the law of State Y must still be applied to determine Party A's claim for compensatory damages.
79
11.28 Article 11(4) recognises that in certain legal systems,
the State whose public policy serves as a limitation to
the chosen law is not, or not only,
the forum State but also
the State whose law would have been applicable in
the absence of choice.
11.29 Article 11(4), like Article 11(2), defers to
the law of
the forum, including its rules of private international law, to determine
the role (if any) to be played by
the public policy (
ordre public) of a State other than
the forum or
the State whose law is chosen by
the parties. Article 11(4) operates independently of Article 11(2). Accordingly,
the forum State's private international law rules may require or permit reference to
the overriding mandatory provisions of another State's law, but not that State's public policy, or vice versa. Unlike Article 11(2), however, Article 11(4) permits reference only to
the law by
the parties, as determined by
the forum's own private international law rules. Subject to any further restrcitions imposed by
the law of
the forum,
the category of public policy (
ordre public) to which reference may be made and
the limits on its application are to be understood as being subject to
the same requirements and restrictions as
the exclusionary principle in Article 11(3) (see para. 11.26)
Illustration 11-6Bank, incorporated in State Y but acting through a branch in State X, and Borrower (a small business owner), resident in State X, enter into a commercial loan agreement, expressed to be governed by
the law of State Z. When Bank refuses to advance funds to Borrower, Borrower sues Bank in
the courts of State Y. Under
the contract laws of State Y and State Z, Bank is entitled to rely on a condition in
the agreement to reufse to advance funds to a borrower which it considers to be in financial difficulty. However, under
the public policy of State X, which has been held by its courts to apply to all contracts with a significant connection to that State, that condition would not be upheld on
the ground that it constituted an unfair abuses by Bank of
the economic imbalance between
the parties.
The law of State Y, including its rules of private international law, will determine (1) whether
the public policy of
the State whose law would have governed
the contract byt for
the parties' choice may or must be applied and, if so, under what conditions, and (2) if so, whether, in
the absence of a choice of
the law of State Z,
the contract between
the parties would have been governed by
the law of State X. Subject to this point,
the law of State Z (as chosen by
the parties) will apply to
the contract.
80
11.30 Article 11(5) reflects
the different state of affairs facing arbitral tribunals as opposed to State courts in relation to mandatory rules and public policy. Arbitral tribunals, unlike courts, do not operate as part of
the judicial infrastructure of a single legal system, and are subject to a range of legal influences. Moreover,
the Principles, by their very nature as a non-binding instrument, do not (and cannot) grant an arbitral tribunal and authority beyond that which it already has pursuant to its mandate and cannot predict
the exact circumstances in which an arbitral tribuanl will be constituted and called upon to reach a decision.
11.31 Consequently, Article 11(5) does not confer any additional powers on arbitral tribunals and does not purport to give those tribunals an unlimited and unfettered discretion to depart from
the law chosen by
the parties. Quite to
the contrary,
the Principles recognise that an arbitral tribunal might be required to take into account public policy or overriding mandatory provisions of another law, and must otherwise be satisfied that it is entitled to do so.
The wording of
the Article requires
the tribunal to consider
the legal framework within which its decision-making processes are conducted, having regard (in particular) to
the agreement of
the parties,
the designated or deemed seat of
the arbitration, any institutional rules applicable to
the arbitration, and
the potentially controlling influence of State court applying local arbitration legislation.
11.32 For example, arbitral tribunals may be subject to an express duty to endeavour to render an "enforceable award" (see, e.g., Art. 41 ICC Rules and Art. 32.2 LCIA Rules; see also Art. 34(2) UNCITRAL Arbitration Rules requirring that
the award be "final and binding"). It is a controversial question whether a duty of this kind requires
the tribunal to have regard to
the overriding mandatory provisions and policies of
the seat, however identified, or of
the places where enforcement of any award would be likely to take place. Article 11(5) does not express any view on this controversy. It does, however, emphasise that (at least in
the first instance) it is for
the tribunal to form a view as to
the existence and scope of
the duties imposed on it (and
the powers granted to it), and to apply or take into account
the provisions or policies of a law other than that chosen by
the parties to govern their contract only if it considers that it is under a legal obligation, or is otherwise entitled, to do so.
12.1 Article 12 determines
the relevant establishment of a party for
the purpose of ascertaining internationality under Articles 1(2) and 6(2), in circumstances where a party has more than one establishment. Article 12 points to
the establishment that has
the closest relationship to
the contract at
the time of its conclusion.
81
12.2 In determining
the relevant establishment in
the case of multiple business locations, Article 12 has primarily followed
the model of
the CISG (Art. 10(a)). For
the purpose of
the Principles,
the main establishment or a subordinate establishment other than
the central administration of
the party is considered to be sufficiently meaningful to determine
the internationality of
the contract under Article 1(2), or
the governing
the consent to
the choice of law under Article 6(2).
12.3 For
the sake of legal certainty, Article 12 uses
the term "establishment" rather than "place of business".
The Principles do not provide a definition of establishment, but, in broad terms, an establishment means a business location in which
the party has more than a fleeting presence. It encompasses a centre of administration or management, headquarters, principal and secondary places of business, a branch, an agency and any other consent and continuous business location.
The physical presence of
the party, with a minimum degree of economic organisation and permanence in time, is required to constitute an estblishment. Hence,
the statutory seat of a company without more does not fall within
the notion of establishment. Similarly, a party that has its main establishment in State X and directs its business activities to State Y solely via
the Internet is not deemed to have an establishment in State Y.
12.4 Because
the Principles apply only to international contracts in which each party is acting in
the exercise of its trade or profession (see. Art. 1(1)), Article 12 does not use
the expression "habitual residence" to include natural persons acting within their private sphere, especially consumers and employees. Thus, in
the case of a natural person engaging in a trade or business,
the relevant establishment is determined in
the same way as it is determined for a company.
12.5 Pursuant to Article 12,
the location of a company's establishment is determined as of
the time of
the conclusion of
the contract (see Art. 19(3) Rome I Regulation). Thus, in most cases,
the relevant establishment will be determined by looking at
the centre of operations through which
the contract was negotiated and concluded. This respects
the legitimate expectations of
the parties and provides legal certainty.