THE UNIDROIT PRINCIPLES OF INTERNATIONAL
COMMERCIAL CONTRACTS

The UNIDROIT Principles of International Commercial Contracts (hereinafter UNIDROIT Principles), published in 1994, represent a totally new approach to international trade law.

They are neither model clauses nor contract forms, intended as they are to cover the whole area of contract law without being conceived in terms of specific types of transactions. Nor are they cast in the form of an international convention or uniform law: they do not have any binding force as such and will be applied in practice by reason of their persuasive value only.

What then are the UNIDROIT Principles? And why did an intergovernmental agency such as the International Institute for the Unification of Private Law embark upon a project of this kind?

Why the UNIDROIT Principles?

• The present state of international trade law is far from satisfactory.

· Cross-border transactions continue to a large extent to be subject to national laws which not only may vary considerably in content, but are often ill-suited for the special needs of international trade.

· International contracts inevitably raise a problem of conflict of laws. The resulting uncertainties are only too evident: because of the different national rules of private international law, parties risk remaining uncertain as to the law applicable to the contract until the competent forum is established; and even then, depending on the conflict-of-laws-rules of the forum chosen, the same contract may well be subject to the law of State X or to the law of State Y.

It is true that in recent times States have adopted an increasing number of international conventions in the fields of both private international law and substantive law, with a view to eliminating the uncertainties arising out of the coexistence of different national legal systems.

Yet even sufficiently neutral instruments both in form and substance, such as the INCOTERMS or the Uniform Customs and Practices for Documentary Credits prepared by the International Chamber of Commerce, offer only a partial solution on account of their limited scope. In any case, all these instruments by their very nature presuppose the existence of a more general regulatory system to which reference can be made in order to settle the questions not addressed by them and to establish the conditions and limits of their validity. These private instruments are openly criticised for their "legitimacy deficit," in the sense that, even where they do succeed in becoming generally accepted within the respective trade sectors, they may come into conflict with the basic principles and values adopted by the majority of national legislators.⁵

Parties are of course free to lay down in their contract a detailed and possibly exhaustive regulation of their rights and obligations, so as to avoid to the greatest possible extent recourse to domestic law. Yet in doing so the parties often encounter insurmountable difficulties deriving from the language barriers between them and the absence of internationally uniform legal terminology on which they can rely.

Nor - as may be admitted before an arbitral tribunal - could a reference to the "lex mercatoria" as the law governing the contract constitute a valid alternative. In the absence of a sufficiently precise definition of the nature and content of the "lex mercatoria" such a choice risks producing even greater uncertainty and unpredictability.

· The UNIDROIT Principles are intended to remedy many of the deficiencies currently encountered in international trade law. In order better to understand how they may achieve this objective, one should know first what the UNIDROIT Principles actually are.

II. - Preparation and sources of inspiration of the UNIDROIT Principles

1.- Origin and preparation

The idea of preparing a sort of "restatement" of the law of international commercial contracts in general was for the first time advanced on the occasion of an international colloquium held in Rome in April 1968 in celebration of the 40th anniversary of the foundation of UNIDROIT. With express reference to the experience of the "Restatements of the law" in the United States the question was raised as to whether a similar initiative could be undertaken with success also at international level.

On the basis of preliminary studies carried out by the Secretariat, the UNIDROIT Governing Council - the Institute's highest scientific organ - decided in 1971 to include in the Work Programme of the Institute what in the original French version of the resolution was indicated as an "essai d'unification portant sur la partie générale des contrats (en vue d'une Codification progressive du droit des obligations 'ex contractu')

In 1980 was a special Working Group set up with the task of preparing the various draft chapters of the Principles. The members of the Group, which included representatives of all the major legal and socio-economic systems of the world, were leading experts in the field of contract law and international trade law. Most of the members were academics, some high ranking judges or civil servants; they all sat, however, in a personal capacity and did not express the views of their governments.,

The Working Group never considered itself exclusive and indeed constantly sought outside advice. In particular, the successive drafts were circulated among a wider group of experts from both academic and business circles world-wide.

In May 1994 the Governing Council gave its formal imprimatur to the UNIDROIT Principles and recommended their widest possible distribution in practice.

2- Sources of inspiration

The UNIDROIT Principles are intended to enunciate rules which are common to (most of) the existing legal systems and at the same time to select the solutions which seem best adapted to the special requirements of international trade. Consequently, whenever it was necessary to choose between conflicting rules, the criterion used was not merely arithmetical. In other words, what was decisive was not just which rule was adopted by the majority of jurisdictions, but rather which of the rules under consideration had the most persuasive value and/or appeared to be particularly well suited for cross-border transactions.

For obvious reasons it was impossible to take into account the law of every single country of the world, nor could every legal system have an equal influence on each issue at stake.

Of the national codifications or compilations of law greater attention was naturally given to the most recent ones, such as the United States Uniform Commercial Code and the Restatement (Second) of the Law of Contracts, the Algerian Civil Code of 1975, the drafts of the new Dutch Civil Code and of the new Civil Code of Québec, which finally entered into force in 1992 and 1994 respectively.

To the extent that the UNIDROIT Working Group and the so-called "Lando Commission", which in 1982 began its work for the preparation of "Principles of European Contract Law", were dealing with the same topics, they did inevitably influence each other, all the more so since a number of the experts involved, including the writer of this article, were members of both groups and the "Lando Commission" has equally drawn inspiration from legal materials outside Europe.

Although those involved in the preparation of the UNIDROIT Principles never considered their role to be that of legislators empowered to lay down entirely new rules, but understood their task to be essentially one of "re-stating" the existing international contract law, it cannot be denied that, especially within the Working Group, there were from the beginning two conflicting philosophies.

On the one side were the "traditionalists", rather reluctant to depart from long established principles, particularly if these principles formed part of their own legal system; on the other side were the "innovators", more open to recent developments, even when these developments belonged to a foreign legal system and were not yet generally accepted.

On the whole the two sides balanced each other out, so that it is somewhat difficult to ascertain the extent to which the UNIDROIT Principles are innovative rather than a reflection of traditional views.

The reason for this is to be found partly in the desire better to meet the special needs of international trade practice and partly in the necessity to take account of the different economic and political conditions existing in the world today.

III. The structure and scope of the UNIDROIT Principles

1. - Structure and formal presentation

The UNIDROIT Principles are composed of a Preamble and 119 articles divided into seven chapters, namely "General Provisions" (Chapter 1); "Formation" (Chapter 2); "Validity" (Chapter 3); "Interpretation" (Chapter 4); "Content" (Chapter 5); "Performance" (Chapter 6) and "Non-Performance" (Chapter 7). Chapter 6 has two sections dealing with "Performance in General" and "Hardship" respectively, while Chapter 7 has four sections, namely one on "Non-Performance in General", one on the "Right to Performance", one on "Termination", and one on "Damages".

In general the UNIDROIT Principles are drafted more in the style of the European codes than in the notoriously more elaborate fashion typical of common law statutes.

There are provisions, such as that which lays down the principle of freedom of contract and the one dealing with the formation of the contract, which are very concise and formulated in general terms, while others, such as the provision on the currency of payment or that on the right to cure, are on the contrary much more detailed.

The fact that the UNIDROIT Principles contain, in addition to specific rules of an operational character, general statements of principles and standards, such as those on the binding force of contract agreement, good faith or the relevance of usages, transforms the Principles into a veritable normative system: in fact, as has been pointed out, the interplay between rules and general principles is an essential feature of any normative system, and also in the case of the UNIDROIT Principles the exact meaning of the individual operational rules can only be determined by referring to the general principles and standards as laid down in the introductory chapter.

Each article is accompanied by comments and, where appropriate, by factual illustrations intended to explain the reasons for the black letter rule and the different ways in which it may operate in practice. The comments are an integral part of the UNIDROIT Principles, all the more so as sometimes they not only explain but to a certain extent even supplement the black letter rule.

The UNIDROIT Principles deliberately seek to avoid the use of terminology peculiar to any given legal system.

The international character of the Principles is also stressed by the fact that the comments to the black letter rules systematically refrain from referring to national laws in order to explain the origin and rationale of the solution retained. Only where the rule has been taken over more or less literally from the world wide accepted United Nations Convention on Contracts for the International Sale of Goods (CISG) is explicit reference made to its source.

2. - Scope of application

In the Preamble to the UNIDROIT Principles it is stated that they "set forth general rules for international commercial contracts".

There are two basic reasons for limiting the scope of the UNIDROIT Principles to "international" contracts only.

First of all, it is when a given transaction presents factual links with more than one State that conflicts between the respective national laws may arise, and this not only in the absence of any international legislation, but also where the applicable uniform laws are obscure as to their precise meaning or present true gaps.

Secondly, given the considerable differences which continue to exist between the various countries or regions as regards their economic and political structure and development, the legal regimes of purely domestic contracts still vary considerably from country to country. On the contrary, with respect to international transactions States, also in view of the necessity to ensure that their own nationals have the same opportunities enjoyed by their foreign competitors, are in general less determined to impose their own law and more prepared to grant contracting parties the widest possible autonomy in regulating their relationships.

As to the restriction to "commercial" contracts, this is not intended to take over the distinction traditionally made in some legal systems between "civil" and "commercial" parties and/or transactions, i.e. to make the application of the UNIDROIT Principles dependent on whether the parties have the formal status of "merchants" ("commerçants"; "Kaufleute"), or whether the contracts in question are objectively of a commercial nature ("actes de commerce"; "Handelsgesch˛fte"). The idea is rather that of excluding from the scope of the UNIDROIT Principles the so-called "consumer transactions", i.e. transactions involving a party which is not acting in the course of its trade or profession.

As to the criteria for the determination of the "international" character of contracts, it is well-known that there is a great variety of ways in which it may be defined.

The UNIDROIT Principles do not expressly opt for any of these criteria. The assumption, however, is that the concept of "international" contracts should be given the broadest possible interpretation, so as ultimately to exclude only those cases where no international element at all is involved, i.e. where all the relevant elements of the contract in question are connected with only one country.

IV. The basic ideas underlying the UNIDROIT Principles

In the Introduction it is stated that "the objective of the UNIDROIT Principles is to establish a balanced set of rules designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied The UNIDROIT Principles are sufficiently flexible to take account of the constantly changing circumstances brought about by the technological and economic developments affecting cross border trade practice", while at the same time "they attempt to ensure fairness in international commercial relations¹

V. The different uses of the UNIDROIT Principles in practice

1. - Model for legislators

In view of their intrinsic merits the UNIDROIT Principles may in the first place serve as a “model” to both national and international legislators for the elaboration or drafting of new legislation in the field of general contract law or with respect to special types of transactions. In fact, several countries have recently chosen them as one of the sources of inspiration for the reform of domestic legislation. Suffice it to mention the new Civil Code of the Russian Federation or the new Chinese Contract Law⁵⁵ or similar projects underway in Argentina, Cambogia, Czech Republic, Estonia, Indonesia, Israel, Lithuania and Tunisia, or among the 15 member States of the recently established Organization for the Harmonization of Business Law in Africa. Yet references to individual provisions of the UNIDROIT Principles may be found also in the Final Report of the Commission for the Revision of the German Law of Obligations, in the Explanatory Reports to the most recent draft for the revision of Article 2 of the Uniform Commmercial Code, concerning sales contracts, or in the rules on interpretation of legal acts recently proposed by the Scottish Law Commission. Furthermore, specific provisions of the UNIDROIT Principles have been chosen as the basis for a tentative draft code prepared by a member of the New Zealand Law Commission and intended to lay down the basic principles of the New Zealand law of contracts.

2. - Guide for drafting contracts

The UNIDROIT Principles may moreover serve as a guide for the drafting of international commercial contracts.

Parties to such contracts by definition belong to different countries and may therefore find it difficult to communicate with each other on the basis of a terminology which is taken from a specific national legal system, the full implications of which at least one of them might not immediately appreciate. By using the terms and expressions adopted in the UNIDROIT Principles, the parties would be in a position to agree, for the purpose of the negotiation and drafting of their contract, on a neutral terminology - a sort of international lingua franca - with its own uniform definition. This will be all the easier since the UNIDROIT Principles are available in virtually all the principal languages of the world. Further, and even more importantly, the UNIDROIT Principles may have a "pedagogical" function, in that they may assist the parties in identifying the main legal issues involved in the different types of contracts concerned and in suggesting possible solutions.

As to the actual use of the Principles as a guide for drafting international contracts, obviously it is hard to provide precise data in this regard. In the context of a first inquiry launched in September 1996 with a view to collecting information on the different ways in which the UNIDROIT Principles are being used in practice, 59% of the replies indicated that the Principles were used in contract negotiations to overcome language barriers, as a checklist of issues to be addressed and/or as a model for contract provisions, more than half specifying that this occurred on more than one occasion.

3. - Choice by the parties as the law governing their contract

In the Preamble to the UNIDROIT Principles it is stated that "they shall be applied when the parties have agreed that their contract shall be governed by them."

The reasons why the parties might be induced to choose the UNIDROIT Principles as the rules governing their contract are, above all, the difficulty to agree on the application of the domestic law of one of them and the inconveniences which inevitably also follow the choice of a "neutral" law of a third country.

Since the UNIDROIT Principles, at least at this stage, do not represent a complete body of contract law, let alone a fully developed and self-sufficient legal system, it is advisable that parties who wish to choose them as the lex contractus also indicate a domestic law applicable to questions not covered by the Principles.

4. - Application in judicial proceedings

Since the UNIDROIT Principles offer a coherent system of rules tailored to the needs of international commercial transactions, a particularly important test of their success is the role they play as a legal basis for the settlement of disputes.

Again, the first practical experiences are extremely promising. Not only are the UNIDROIT Principles being increasingly invoked in support of arguments developed in the individual statements of claim or defence, but they are likewise more and more frequently referred to in one way or another in the arbitral awards and court decisions themselves.

(a) The UNIDROIT Principles as a means of interpreting the applicable domestic law

“if the own awards and decisions eighteen refer to the UNIDROIT Principles to demonstrate that a particular solution provided by the applicable domestic law conforms to internationally accepted standards.

Yet there are even three State court decisions in which the UNIDROIT Principles have been referred to in order to interpret or supplement the otherwise applicable domestic law.

One is the decision of the Federal Court of Australia of 30 June 1997

The second decision is that of the Court of Appeal of Grenoble of 24 January 1996.

The third decision is that of the Tribunal of Zwolle (Netherlands) of 5 March 1997.

b,) The UNIDROIT Principles as a means of interpreting international uniform law

In another group of decisions and awards the UNIDROIT Principles have been used to interpret or supplement international uniform law conventions.

(c) The UNIDROIT Principles as the law governing the contract

No less than seventeen arbitral awards refer to the UNIDROIT Principles as the rules applicable to the substance of the dispute.

VI. Future perspectives

1.- Towards a second enlarged edition of the UNIDROIT Principles

It is in the very nature of any form of restatement of the law, be it at a national or an international level, that it is an ongoing exercise.

As has been observed with respect to the various Restatements of law in the United States,

"there will never be a time when the work is done and its results labeled

'A Complete Restatement of the Law'. The work of restating the law is rather like that of adapting a building to the ever-changing needs of those who dwell therein. Such a task, by the very definition of its object, is continuous."

It was for this very reason that the Governing Council of UNIDROIT, just three years after the publication of the first edition of the UNIDROIT Principles deemed it appropriate to resume work with a view to the preparation of a second enlarged edition of the UNIDROIT Principles and for this purpose set up a new Working Group.

In the second edition of the UNIDROIT Principles emphasis will be placed on new topics for inclusion. On the basis of a first study carried out by the Secretariat the Governing Council recommended a number of topics for further consideration by the Working Group.¹

As was the case in the preparation of the first edition of the UNIDROIT Principles, the Working Group appointed among its members a Rapporteur for each new topic to be included in the second edition with the task of preparing preliminary draft provisions with comments.

2.- A reporting system for case law on the UNIDROIT Principles

As is the case of any other legal instrument, particularly if of an international nature, in order fully to appreciate the meaning and impact of the UNIDROIT Principles in practice, it is essential to know how they are being interpreted and applied by judges and arbitrators.