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Deploying Robust Default Rules: International Commercial Contracts Under UNIDROIT

H ow can contracting parties simplify recurrent conflicts triggered in international contract negotiations to overcome the different legal and cultural backgrounds of the negotiating parties?

UNIDROIT Principles of International Commercial Contracts

The UNIDROIT Principles of International Commercial Contracts (“UNIDROIT Principles” or “Principles”) are a marriage of common and civil law — an international restatement of contract law. Initially developed between 1985 and 1994, the UNIDROIT Principles are negotiated compromises between the world’s major legal systems creating robust default rules for international commercial contracts.

UNIDROIT, the “International Institute for the Unification of Private Law,” was founded in 1926, when French was the dominant international language. It is the acronym of its French designation, “Institut international pour l'unification du droit privé.“  

UNIDROIT is headquartered in Rome. Its Secretary General reports to a Governing Council of 63 member states. Members include the United States, China, and multiple nations within Europe and the Middle East.

The special Working Group of UNIDROIT (“Working Group”) has expanded the focus of the UNIDROIT Principles beyond the purely sales-driven rules in the United Nations Convention on International Sales. It included experts from multiple jurisdictions over the course of several years before finalizing the draft Principles that were then submitted for discussion and voting by the Governing Council.

Since the third edition published in 2010, the Principles include pre-negotiated general rules on all major issues of contract law from formation of contract (such as agency, conditions, multi-party scenarios) and rules on assignment and contractual limitations. With the fourth edition published in 2016, special rules and official commentary were added to the section on long-term contracts.1

The UNIDROIT Principles fill the vacuum and need for a neutral contractual regime whenever (i) a counter-party isn’t in a position to impose its own jurisdiction’s law, or (ii) when it does not make practical sense to impose in a foreign jurisdiction the law of a counter-party’s head quarter’s jurisdiction (e.g., an EMEA subsidiary procuring raw materials in Asia seeking to impose the US head quarter’s state law).

What’s in it for me?

Relying on the UNIDROIT Principles can simplify a GC’s life by:

  • Reducing costs, as the need to research foreign law is avoided;
  • Mitigating risks, as the uncertainty of foreign law is clarified; and
  • Simplifying drafting, as availability of the Principles in 15 languages eliminates translation issues.

Furthermore, the UNIDROIT Principles can serve to broaden a GC’s perspective on best practices. The Principles take a more universal approach and attempt to integrate rules on typical international issues for which there is usually no time and no budget.

For example, a busy GC may not have the time or resources to investigate foreign-currency set-off rules among a host of other more critical issues that arise during negotiations. During the life of a contract, there may or may not be a specific need for such set-off.

However, do the applicable laws have rules for or against it? The UNIDROIT Principles provide a robust system of default rules without the need for lengthy research on a discreet point of law.

The adoption of the UNIDROIT Principles combines freely with industry-specific clauses and contract templates as the UNIDROIT Principles accept party autonomy.2

Are they practice proven?

The international case law database Unilex provides countless examples of arbitration awards and court decisions applying the UNIDROIT Principles. The collection of cases is edited by the chairman of the Working Group, Professor Joachim Bonell. These examples represent only the tip of the iceberg, because arbitration awards are most often private, and many court decisions are not reported.

The outside counsel co-authoring this piece has been using the UNIDROIT Principles regularly and successfully since 2001 across many industries, for both small and large companies organized in both common and civil law jurisdictions, in arbitrations and in contract drafting with the element of parties’ choice at the forefront.

For example, in an arbitration involving a breach of contract in Switzerland, there was a disagreement as to whether to apply Swiss or English substantive law. The arbitral tribunal proposed the application of the UNIDROIT Principles. The parties agreed to the tribunal’s suggestion during the arbitration.

Moreover, each of the contractual regimes, the Swiss, the English, and the UNIDROIT Principles, provides for a right to claim damages if there was a breach of contract. In the end, the evidence would become decisive — the phrasing of the test was framed differently: Was the damage “foreseeable”? Was it too remote? Was it “adequate”? The parties agreed to conduct the damage assessment under the test of the UNIDROIT Principles in Article 7.4.4, hence avoiding further legal disagreements about conflicts of law issues, as well as the expenses associated with litigating the question of which foreign law to apply.

Conclusion

The UNIDROIT Principles have proven to keep pace with the current corporate and regulatory trends and vice versa. For example, China promulgated its new contract law in 1999 to align with international standards, including the UNIDROIT Principles.

The UNIDROIT Principles can be described as a “disruptive legal framework,” functioning as smoothly as a state’s substantive law while providing time and cost efficiencies and minimizing legal risk, especially when combined with an arbitration clause. The UNIDROIT Principles should be an essential part of the general counsel’s toolkit when working, negotiating, litigating and arbitrating around the globe.3

NOTES
1 Black-letter-text and Official Commentary 2016 (issued by UNIDROIT) at www.unidroit.org.
2 Article 1.1, 1.5 UNIDROIT Principles.
3 For a practice driven commentary, see Eckart Brödermann, Unidroit Principles of International Commercial Contracts: An Article-by-Article Commentary, Wolters Kluwer and Nomos, 2018. For a more detailed commentary: Vogenauer, Stefan (ed.), Commentary on the Unidroit Principles of International Commercial Contracts, 2d ed. Oxford 2015. For detailed bibliographies of books and articles on the UNIDROIT Principles, see www.unilex.info, at “UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS” under “Bibliography,” as well as both commentaries cited above.

About the Authors

Ghada Qaisi AudiGhada Qaisi Audi is vice president of the ACC Middle East Chapter; general counsel of Seddiqi Holding LLC, a 850+ employee company headquartered in Dubai, UAE, having prior held the post of head of legal of the group’s luxury watch and jewelry division, Ahmed Seddiqi & Sons. Ghada is a US-qualified, internationally experienced GC with prior post-graduate and teaching experience at the University of Cologne, Germany. She has acted as chairperson, party-appointed arbitrator, sole-arbitrator, and counsel in several international and UAE-domestic commercial arbitrations under various institutional rules. She is a panel member of the GCC Commercial Arbitration Centre (Manama and Riyadh). Ghada has been member of the DIFC Courts’ Rules Sub-Committee since 2011. In 2018, the Seddiqi Holding Legal Department was included in the GC Powerlist Middle East Teams. He was the winner of the Business In-House Luxury Team Award at the Luxury Law Summit and Awards, London, UK.

Eckart BrödermannProf. Dr. Eckart Brödermann is founding partner of the German Primerus firm Brödermann Jahn RA GmbH in Hamburg, Germany; member of the board of ACC sponsor Primerus. Professor of law (University of Hamburg); licensié and maître en droit (University of Paris V); LL.M. (Harvard Law School); bar-certified specialist of International Business Law (Germany); fellow of the Chartered Institute of Arbitrators (London); attorney-at-law (New York, since 1983); Rechtsanwalt (Hamburg, Germany, since 1990) and arbitrator with broad arbitration experience in multiple jurisdictions including chairperson of a large CIETAC arbitration in China. From 2006-2010, Eckart has served as an official observer to the Working Group entrusted by UNIDROIT with the preparation of the UNIDROIT Principles of International Commercial Contracts.




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