UNIDROIT Principles of International Commercial Contracts Role in International Dispute Resolution

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UNIDROIT Principles of International Commercial
ContractsRole in International Dispute
Resolution
Seminar co-sponsored by the Chamber of Commerce
Santiago and the Center for Arbitration and
Mediation (CAM) Santiago, 13 June 2007 Herbert
Kronke, Secretary-General UNIDROIT h.kronke_at_unidro
it.org
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• The UNIDROIT Contract Principles play a major
  role in international dispute resolution
• More and more often
• parties refer to the UNIDROIT Contract Principles
  in their statements of claim or defence in
  support of the arguments developed therein and to
  demonstrate their conformity with internationally
  accepted standards
• Courts and arbitral tribunals refer in their
  decisions to the UNIDROIT Contract Principles in
  one way or another

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WWW.UNILEX.INFO

• UNILEX (an on-line data base accessible free of
  charge at www.unilex.info) presently reports
  149 decisions referring in one way or another to
  the UNIDROIT Contract Principles
• 112 arbitral awards (plus another 40 awards that
  will be published shortly)
• 37 court decisions
• numbers actually much higher since arbitral
  awards usually remain unpublished

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HOW COURTS ARBITRAL TRIBUNALS USE THE UNIDROIT
CONTRACT PRINCIPLES

• Courts and/or Arbitral Tribunals
• apply the UNIDROIT Contract Principles as the law
  governing the contract
• refer to the UNIDROIT Contract Principles as a
  means of interpreting and supplementing
  international uniform law
• refer to the UNIDROIT Contract Principles as a
  means of interpreting and supplementing domestic
  law

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APPLICATION OF THE UNIDROIT CONTRACT PRINCIPLES
AS THE LAW GOVERNING THE CONTRACT

• Arbitral tribunals have applied the UNIDROIT
  Contract Principles as the law governing the
  contract because
• the UNIDROIT Contract Principles had been
  expressly chosen by the parties
• the arbitral tribunal considered the UNIDROIT
  Contract Principles as an expression of general
  principles of law, the lex mercatoria or the
  like referred to in the contract
• the arbitral tribunal considered the UNIDROIT
  Contract Principles to be appropriate even in the
  absence of any choice of law clause in the
  contract

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EXAMPLES OF REPORTED DECISIONS

• Decisions applying the UNIDROIT Contract
  Principles as the law governing the contract
  because so requested by the parties

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• Award of the International Arbitration Court of
  the Chamber of Commerce and Industry of the
  Russian Federation of 20 January 1997, No. 116
• Sales contract between Russian trade
  organisation and Hong Kong company contract
  silent as to the applicable law according to
  relevant rules of private international law the
  proper law would have been the law of Hong Kong
  parties instead requested arbitral tribunal to
  apply the UNIDROIT Principles arbitral tribunal
  applied Arts. 7.3.1 and 7.3.6 on termination, and
  Art. 7.4.5 on determination of harm in case of
  replacement transaction

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• Award of the Arbitration Court of the Lausanne
  Chamber of Commerce and Industry of 17 May 2002
• Contract between a Turkish company and a
  company incorporated in the West Indies
  concerning highly sophisticated equipment
  contract contained two conflicting choice of law
  clauses one in favour of English law, the other
  in favour of Swiss law the arbitral tribunal
  suggested to the parties to agree on the
  application of the UNIDROIT Principles the
  parties agreed also in view of the fact that with
  respect to the disputed issues the solutions
  provided by the UNIDROIT Principles were found
  basically to correspond to both English and Swiss
  law the arbitral tribunal applied Arts. 1.7 on
  good faith, 2.1.16 on the duty of
  confidentiality, 4.6 on the contra proferentem
  rule, and 7.4.1, 7.4.2 and 7.4.4 on damages.

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• ICC Award of March 2000, No. 10114
• Agreement between a Chinese company and an East
  European car manufacturer for after sales service
  for vehicles delivered by the European car
  manufacturer parties agreed the law governing
  the substance of the dispute would be Chinese law
  together with the UNIDROIT Principles as an
  expression of international practices arbitral
  tribunal rejected claim for punitive damages
  because inadmissible under Chinese law and
  according to international trade practice

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• II. Decisions applying the UNIDROIT Principles as
  an expression of general principles of law, the
  lex mercatoria or the like, referred to by in
  the contract

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• ICC (First Partial) Award of June 1995, No. 7110
• Series of contracts between an English company
  and a government agency of a Middle Eastern
  country for the supply of equipment some of the
  contract referred to settlement according to
  laws and rules of natural justice arbitral
  tribunal held that parties intended to exclude
  the application of any domestic law and to have
  their contracts governed by general principles
  and rules which, though not enshrined in any
  specific national legal system, are specially
  adapted to the needs of international
  transactions and enjoy wide international
  consensus the arbitral tribunal concluded that
  such general rules and principles enjoying wide
  international consensus are primarily
  reflected by the UNIDROIT Principles.

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• ICC Award of 28 July 2000, No. 9797
• The Andersen Worldwide Organization was a
  network of more than 140 member firms operating
  in over 75 countries and linked to each other
  through a Member Firm Interfirm Agreement. A
  dispute arose between the Consulting Business
  Unit Firms and the Auditing Business Unit Firms
  the Member Firm Interfirm Agreement contained an
  arbitration clause whereby the arbitral tribunal
  would decide in accordance with the terms of the
  Agreement taking into account general principles
  of equity the arbitral tribunal decided to
  refer to the UNIDROIT Principles as a reliable
  source of international commercial law - in
  international arbitration and applied Arts. 1.7
  on good faith, 4.1(1) and (2) on contract
  interpretation, 5.1.4 on the duty of best
  efforts, 7.3.1, 7.3.5 and 7.3.6 on contract
  termination.

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• III. Decisions applying the UNIDROIT Principles
  
• in the absence of any choice of law clause
  in
• the contract

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• ICC Award of 5 June 1996, No. 7375
• A United States seller and a Middle Eastern
  buyer entered into a contract for the supply of
  goods the contract was silent as to the
  applicable law in investigating parties intent
  arbitral tribunal found that neither party was
  prepared to accept the other's domestic law or
  any other domestic law (implied negative
  choice) and decided to apply general principles
  and rules of law applicable to international
  contractual obligations which qualify as rules of
  law and which have earned a wide acceptance and
  international consensus in the international
  business community for this purpose the
  arbitral tribunal took into account the UNIDROIT
  Principles, as far as they can be considered to
  reflect generally accepted principles and rules.

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• Award of the Arbitration Institute of the
  Stockholm Chamber of Commerce of 2001, No.
  117/1999
• Two Chinese companies and a European company
  had entered into an agreement on technology
  exchange and technical co-operation the contract
  was silent as to the applicable law according to
  the arbitral tribunal the parties had
  deliberately refrained from agreeing on the law
  governing their contract which was otherwise very
  carefully drafted the arbitral tribunal held
  that the dispute was to be decided on the basis
  of such rules of law that have found their way
  into international codifications or the like that
  enjoy a widespread recognition among countries
  involved in international trade and ultimately
  applied the UNIDROIT Principles which it
  concluded had wide recognition and set out
  principles that adequately reflect the basic
  principles of commercial relations in most if not
  all developed countries only where the UNIDROIT
  Principles did not provide a solution should
  Swedish law apply.

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• IV. Decisions referring to the UNIDROIT
• Principles to interpret or supplement
• international uniform law instruments

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• Awards of the Vienna International Arbitration
  Centre SCH 4328 and SCH 4366 of 15 June 1994
• The dispute related to a sales contract between
  an Austrian seller and a German buyer the
  contract was governed by CISG which in Art. 78
  grants the right to interest but does not state
  the applicable rate the arbitral tribunal filled
  this gap by referring to Art. 7.4.9(2) of the
  UNIDROIT Principles according to which the
  applicable rate of interest is the average bank
  short term lending rate to prime borrowers
  prevailing at the place for payment for the
  currency of payment the arbitral tribunal
  justified its decision on the ground that Art.
  7.4.9(2) was an expression of the general
  principle of full compensation which was also a
  general principle underlying CISG.

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• Supreme Economic Court of the Republic of Belarus
  of 20 May 2003, No. 7-5/2003 and No. 8-5/2003
• A sales contract between a U.S. trading company
  and a state-owned enterprise of Belarus was
  governed by CISG the Supreme Court granted the
  U.S. company the right to the payment of the
  agreed price plus interest according to Art. 78
  CISG with no further explanation the Supreme
  Court stated that the rate of such interest is
  determined pursuant to Art. 7.4.9 of the UNIDROIT
  Principles, i.e. the average bank short-term
  lending rate to prime borrowers prevailing for
  the currency of payment at the place for payment
  or where no such rate exists at that place, the
  same rate in the state of the currency of
  payment.

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• V. Decisions referring to the UNIDROIT Principles
  
• to interpret or supplement domestic law

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• ICC Award of 4 September 1996 No. 8540
• A U.S. supplier of telecommunications systems
  and a Middle Eastern manufacturer of
  telecommunications cables entered into a pre-bid
  agreement whereby the parties undertook to
  negotiate in good faith for the supply of cables
  in the event that the U.S. suppliers bid to
  become prime contractor for a telecommunications
  expansion project succeeded the U.S. supplier
  secured the entire contract but after a series of
  fruitless negotiations terminated the preliminary
  agreement on the ground that the parties were
  unable to conclude the contemplated final
  agreements the Middle Eastern manufacturer
  objected that the U.S. supplier had failed to
  negotiate in good faith and claimed damages for
  the breach of the pre-bid agreement the arbitral
  tribunal applied the law of the State of New York
  but, having found that under the law of the State
  of New York it was controversial whether an
  agreement to negotiate in good faith was
  enforceable, referred to Arts. 1.1, 1.3, 1.7 and
  2.1.15 of the UNIDROIT Principles to demonstrate
  that the solution it ultimately adopted, i.e.
  that the pre-bid agreement was enforceable, was
  in conformity with internationally accepted
  standards.

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• Federal Court of Australia, 30 June 1997, No. 558
  (Hughes Aircraft Systems International v
  Airservices Australia)
• The dispute concerned a bidding procedure,
  which had arisen between a Californian company
  and an Australian governmental agency after the
  latter awarded the contract to another bidder
  according to the claimant, the defendant had
  failed to conduct the tender evaluation fairly
  and in a manner that would have ensured equal
  opportunity to both bidders in considering
  whether such a duty was implied by law in
  pre-award contract contexts, the Federal Court of
  Australia, after stating that Australian judicial
  and scholarly opinion differed sharply on this
  matter, concluded in the affirmative in support
  of its ruling, the Court stated that a general
  duty of good faith and fair dealing was not only
  recognised in a number of foreign jurisdictions
  but had also been propounded as a fundamental
  principle to be honoured in international
  commercial contracts and expressly referred to
  Art. 1.7 of the UNIDROIT Principles.

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• Award of an ad hoc arbitration (date and place
  unknown)
• A U.S. oil company entered into a contract with
  the Government of a State formerly belonging to
  the Soviet Union, according to which the U.S.
  company was to construct a power station, in
  return for which it would be granted a long-term
  contract for the supply of electricity to
  customers in that State at prices fixed in such a
  way that a return from the investment could be
  expected later the energy supply system in the
  State in question was fundamentally changed by
  law, making it impossible for the power station
  set up by the U.S. company to supply energy at
  profitable prices the contract contained a
  choice of law clause in favour of the domestic
  law of the State in question however, the
  Arbitral Tribunal found that this domestic law
  had not yet been fully developed following the
  changeover to a market economy and contained a
  number of lacunae and ambiguities having a
  bearing on the dispute consequently, the
  Arbitral Tribunal found that the domestic law of
  that State should be supplemented by taking into
  consideration particularly Arts 6.2.2-6.2.3 on
  hardship and 7.1.7 on force majeure of the
  UNIDROIT Principles.

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FUTURE PROSPECTS

• The more comprehensive the UNIDROIT Contract
  Principles, the wider their application in
  international dispute resolution
• Hypothetical case
• Foreign investor X enters into a BOT agreement
  with the Government of country Y whereby X builds
  power plants in country Y in exchange for
  long-term purchase guarantees from Ys State
  power distributor after the completion of the
  power plants a newly established Government in
  country X claims that the BOT agreement is
  invalid and void ab initio due to bribery
  benefiting senior officials of the former
  Government provided that the alleged facts can
  be proven, the question arises as to whether X is
  entitled to restitution of all or part of its
  investment.
• No clear answer to be found in the current
  edition of the UNIDROIT Contract Principles
  situation different once a new chapter on
  unwinding of failed contracts is added

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ADVICE TO CONTRACT DRAFTSMEN, JUDGES AND
ARBITRATORS

• Analyse thoroughly, argue the case for inserting
  reference to the UPICC openly, draft carefully
• Do not take parties by surprise (the Argentine
  Chile case)
• Do not be overly innovative (the Danish
  ship-building contract)