UNIDROIT Principles of International Commercial Contracts (PICC)

by Jan Kleinheisterkamp

1. Conception

The UNIDROIT Principles of International Commercial Contracts (PICC) are the most successful attempt, so far, to codify transnational rules on the law of international commercial contracts. The ongoing work is being conducted under the auspices of UNIDROIT and has been said to reflect the tradition of the lex mercatoria and to follow the spirit of the US restatements at a global level. Its roots can be traced back to Ernst Rabel’s comparative work for UNIDROIT on the international sale of goods in 1935, which eventually led to the Hague Conventions and Uniform Laws of 1964. In 1968 UNIDROIT launched the idea of a non-binding code that would go beyond the sale of goods and that would reflect the general principles derived from the contract laws of different countries so as to constitute a kind of general part of a uniform international commercial code.

Work started in 1970 under the leadership of René David (France), Tudor Popescu (Romania) and Clive M Schmitthoff (England). This committee elaborated drafts for uniform rules on the formation of contracts (based on the 1964 Uniform Law) and on the interpretation of contracts, which were partially taken over by UNCITRAL and incorporated into the 1980 Vienna Sales Convention (CISG). In 1980, a much larger working group was created under the chairmanship of the committee’s former secretary, Michael Joachim Bonell. In the ensuing 14 years, the Working Group drafted a body of rules which covered legal issues ranging from the commencement of negotiations to the remedies for non-performance. The first version of the PICC, which was published by UNIDROIT in 1994, consisted of 119 articles and the corresponding official comments. The reactions to the first edition were perceived as very positive and encouraging, and a new working group was thus nominated in 1997, which in 2004 presented a significantly expanded second version of the PICC. In its formal approval of the 2004 version, the Governing Council of UNIDROIT recommended that the work on the PICC be expanded into a continuing project. The third edition of the PICC was presented in May 2011 and shows the efforts of trying to fine-tune the existing principles.

It is worth mentioning that the PICC Working Group not only kept a very attentive eye on the CISG, but also worked in close cooperation with the Principles of European Contract Law (PECL) project. Numerous members of the PICC working group were also members of the PECL commission, such as Bonell, Ole Lando, Ulrich Drobnig, Arthur S Hartkamp, Dennis Tallon and (since 2005) also Reinhard Zimmermann.

2. Method

As regards the working method for the elaboration of uniform international rules, it was clear from the outset that the starting point would be a comparison of numerous national legal systems, including their legislation, case law and academic literature. As far as it was possible to find corresponding national solutions for specific contractual problems, this allowed the reformulation of general principles reflecting a ‘common core’ of international contract law. In that respect the PICC are, similar to the US restatements, not a primary source of law, but a secondary source that makes internationally accepted principles of contract law accessible in a systematic manner.

It was clear from the outset that in many instances it would not be possible to find the necessary congruence between the national solutions. Accordingly, the PICC intend primarily ‘to provide a satisfactory set of rules for those relationships that come about, by definition, across national frontiers, whereas the traditional national laws are essentially based on the requirements of normal internal relationships; ... [consequently] the code should not attempt chiefly to reconcile the latter, but rather to lay down the principles and solutions which seem to be best adapted to the special requirements of international trade’ (UNIDROIT 1979 Study L-Doc 15 p 8). In line with this logic, many provisions of the PICC do not reformulate general principles that are already broadly accepted, but instead have to be understood as propositions for what should be considered the best solutions for specific problems of contract law which, by proving convincing and becoming accepted in practice, could grow into new general principles.

The official comments on the black letter rules of the PICC contain some reference to the CISG where its provisions have been adopted, but there are no references to national legal provisions that have formed the basis of the comparative study. This silence has been justified by the fear of undermining the autonomous and uniform interpretation required by Art 1.6(1) PICC. The result is, however, that it is frequently unclear whether individual provisions actually reflect existing general principles or whether they propose new solutions. Comparative law remains therefore an indispensable tool for the practical application of the PICC, especially in view of the − as yet − very sparse (and sometimes rather poorly reasoned) decisions by courts and tribunals published on <www.unilex.info>. The scholarly analysis of comparing and contrasting the provisions of the PICC with the rich experience of national contract laws and international instruments is essential for rendering the PICC more readily accessible and comprehensible and, thus, operational for practice. Putting them back into the comparative context allows the PICC to be interpreted and criticized in such a way as to give them the degree of robustness and certainty upon which—being merely a soft law instrument—their legitimacy and persuasive authority depends to a large extent.

3. Application and significance

Whether the provisions of the PICC can actually be applied to a specific case depends on the lex fori of the court or the lex arbitri of the tribunal confronted with that question. The PICC’s own intention in that regard, as stated boldly in their preamble, is irrelevant in this respect.

a) Choice of the PICC as the applicable law

The application of the PICC to a specific dispute is unproblematic when merely chosen as a set of pre-drafted clauses (comparable to the choice of the Incoterms) which are incorporated into the contract by reference. In that case they remain subject to all mandatory rules of the proper law of the contract (mandatory law). Their application as the ‘applicable law’ by way of a choice of law by the parties, however, is much more problematic, at least in state courts. Except for provision in the US state of Oregon, no conflicts of law rules allow courts to apply non-state law rules. A draft by the European Commission for the Rome I Regulation (Reg 593/ 2008) had proposed that the ‘parties may also choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community’ (COM(2005) 650 final). This proposal, however, was rejected by the Member States in the Council because of the difficulties of establishing general criteria for the official recognition of such rules as well as fears that national mandatory rules could be circumvented by such an option.

Most national arbitration laws, however, allow parties to submit their disputes to arbitration and thus to remove them from state court scrutiny due to the prohibition of substantive review (recognition and enforcement of arbitral awards). The same arbitration laws allow the parties not only to chose ‘laws’, but also ‘rules of law’ as the basis for decision, which corresponds to the generally accepted possibility of letting the arbitrators decide ex aequo et bono or upon ‘other considerations’ than law. It follows that parties can choose the PICC as applicable law if this choice is coupled with an arbitration agreement.

It has to be borne in mind, however, that the choice of the PICC does not allow the parties to circumvent national mandatory law that has a legitimate claim to apply to a dispute (Art 1.4). Furthermore, the PICC are necessarily incomplete. The model choice-of-law clause suggested in the footnote to their preamble highlights the possibility of supplementing the PICC with the choice of an embedded national law. In the absence of such a supplementing choice, an arbitral tribunal must first attempt to fill any gaps in the PICC by recourse to general principles of law (Art 1.6(1)) and thus through comparative law. If no such general principles can be found, the tribunal will have to determine the applicable national law on the basis of the conflicts provisions applicable according to the arbitration law at the seat of arbitration.

b) Application of the PICC in the absence of an explicit choice

The preamble of the PICC encourages arbitrators to apply the PICC also ‘when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like’. The implicit claim that the PICC represent general principles or even the mythical lex mercatoria is highly questionable from a theoretical point of view. This claim, however, may be a kind of self-fulfilling prophecy if and to the degree that the PICC are effectively embraced in practice due to their mostly convincing and well-balanced solutions and the legal certainty that may result from their growing application.

The preamble also invites application of the PICC ‘when the parties have not chosen any law to govern their contract’. Many national arbitration laws do not allow arbitrators such voie directe in the absence of choice but instead require the application of conflict-of-law rules. All arbitration laws do, however, allow the parties to delegate the choice to the arbitrators. Accordingly, most institutional arbitration rules contain provisions allowing the arbitrators to choose not only ‘laws’, but also ‘rules of law’ if the parties have not made a choice. It can hardly be presumed that the parties by their silence opted against the application of any state law, since their silence could be interpreted a fortiori as opting against the application of non-state law. It is, however, conceivable that in certain circumstances an arbitral tribunal could conclude that, for example, failed negotiations over the applicable law indicate that the application of some state law would unduly privilege one of the parties and that the application of the neutral and transnational rules of the PICC would therefore constitute the fairest and most appropriate solution.

c) Interpretation and supplementation of national and international law

Out of the few published arbitral awards only a small number explicitly refers to or relies on the PICC. The PICC have, however, a significant role to play in the interpretation and supplementation of international instruments, such as the CISG in particular, and national laws, as far as they are applied to international contracts. State courts have occasionally referred to the PICC in a rather eclectic manner to justify or corroborate new developments in their own laws. Arbitrators will often glance at the PICC to obtain a first rough appreciation of a case to which they have to apply unknown foreign law, or in order to reinforce their findings under such laws with reference to an internationally accepted standard. Unfortunately, this attractiveness of the PICC also entails the danger of their unconsciously or consciously being misused as a shortcut that allows an avoidance of the proper analysis—or even the prescribed solutions—under the actually applicable law, as evidenced by some awards and court decisions.

d) The model function of the PICC

Finally, the preamble of the PICC commends them ‘as a model for national and international legislators’. Indeed, reforms of national contract law can hardly ignore the propositions contained in the PICC. Their influence on the 2002 reform of the German law of obligations in the Bürgerliches Gesetzbuch (BGB) and on the present attempts to modernize the law of obligations in the French Code civil is not as readily visible as the influence on the Dutch Burgerlijk Wetboek (BW) and on the discussions to reform Scottish private law. The PICC have been highly influential on the reform of the general part of the Spanish Commercial Code, on the new civil codes of Lithuania (2000) and Estonia (2002), on the Chinese contract law of 1999 and, to a lesser degree, on the Russian Civil Code and the Israeli Civil Code. Furthermore, the PICC have been the model for the UNIDROIT sponsored draft uniform contract act for the Organisation of the (16) francophone African States (OHADA), which has not yet been adopted.

4. Normative structure

The 185 articles of the 2004 version of the PICC are divided into 10 chapters and preceded by the aforementioned preamble. Each article is accompanied by official comments. According to their drafters, these comments are to be treated as an integral part of the PICC. In substance, however, some of the comments go considerably beyond the respective ‘black letter rule’, sometimes in order to keep the provisions as abstract and lean as possible, sometimes as a compromise solution when no consensus could be found in the working group on individual points. The comments frequently contain illustrations to clarify the practical application of the respective provisions, a goal that is not always attained.

Chapter 1 is (in the traditions of the BGB and the Uniform Commercial Code (UCC)) a general part with ‘General Provisions’, some of which are mere programmatic enunciations that guide the interpretation, such as the principles of pacta sunt servanda (Art 1.1) and good faith (Art 1.7). Among the truly operational provisions are the priority of applicable mandatory rules (Art 1.4), the rules on interpretation and supplementation of the PICC (Art 1.6), and the rules on the effectiveness of notices (Art 1.10).

Chapter 2 (section 2.1) covers the formation of contracts (contract (formation)) as well as the authority of agents (section 2.2). Among the provisions on formation, one can observe several good examples of the difficulty in formulating clear and generally acceptable rules when trying to find a compromise between the different solutions in English, US, French and German law, such as the revocability of offers (Art 2.1.4), or liability for negotiating in bad faith (Art 2.1.15). Also problematic are some provisions taken directly from US sales law which facilitate the conclusion of the contract despite remaining doubts as to its content, such as for cases of modified acceptance (Art 2.1.11) or contracts with open terms (Art 2.1.14). Provisions with particular practical relevance are those on standard contract terms, which allow for the scrutiny of the inclusion of standard terms (Art 2.1.20) but not of their content (but see Art 3.10), and provide for the knock-out rule when there is a battle of the forms (Art 2.1.22).

Chapter 3 treats the validity of contracts and has been restructured in the 2010 edition in three sections. Section 1 generally clarifies that questions of capacity are left to the applicable national laws (Art 3.1.1). National requirements of indicia of seriousness, such as the English doctrine of consideration or the French cause, or national impediments relating to initial impossibility (impossibility, initial) are clearly irrelevant if the contract is governed by the PICC (Arts 3.1.2, 3.1.3). Section 2 on grounds for avoidance is mainly dedicated to mistake, fraud and threat (duress) and the respective remedies of termination (termination of a contract) and damages. Worth noting is a provision on gross disparity which allows tribunals generally to police the content of contracts for unfairness (Art 3.2.7). Section 3 includes new provisions on illegality of contracts and possibly resulting obligations of restitution (unjustified enrichment).

Chapter 4 contains uniform rules on the interpretation of contracts and statements and other conduct of the parties. The need for such international uniform rules of interpretation is highlighted by the fact that these provisions of the PICC are those most cited in practice by far. Despite the existing differences between national rules of interpretation, Chapter 4 can be said to contain mostly provisions which actually reflect internationally accepted general principles.

Chapter 5, in its first section, covers the general content of contracts, such as the duty of co-operation (Art 5.1.3), the distinction (taken from French law) between the duty to obtain a specific result and the duty of best efforts (Art 5.1.4) (contract for work and labour; service contracts), the determination of the quality of performance (Art 5.1.6) or price (Art 5.1.7), the right to end contracts concluded for an indefinite period (Art 5.1.8—taken from Art 6:109 PECL), as well as the (oddly placed) possibility to release a debtor (Art 5.1.9). Section 2 of Chapter 5 was only introduced in 2004 and covers contracts in favour of third parties. The 2010 edition of the PICC then included Section 3 on suspensive and resolutive conditions.

Chapter 6 contains, in its first section, default rules on how performance is to be rendered, eg by defining the time and place of performance (Arts 6.1.1 and 6.1.6), the right to refuse partial or earlier performance (Arts 6.1.3 and 6.1.5), modalities of payment (Arts 6.1.8–6.1.12), as well as the consequences of public permission requirements (Arts 6.1.14–6.1.17). Section 6.2 deserves particular attention as it introduces remedies for hardship resulting from a change of circumstance, despite the clear rejection of such a possibility in numerous national laws.

Chapter 7 consists of four sections dedicated to non-performance. Section 7.1 starts out with a definition of non-performance (Art 7.1.1) and addresses, inter alia, the non-performing party’s right to cure (Art 7.1.4) (supplementary performance), the other party’s right to withhold performance (Art 7.1.3) (right of retention), the limits of exemption clauses (Art 7.1.6) and the exemption of liability in cases of force majeure (Art 7.1.7). Section 7.2 clarifies that there is a right to performance, yet—as a concession to the common law which accepts specific performance only in very limited instances—not without reducing that right significantly by providing a number of important exceptions (Art 7.2.2). Conversely, the PICC adopt the French concept of astreintes by allowing a tribunal to order payment of ‘judicial penalties’ where there is an order to perform that is not being respected (Art 7.2.4). Similarly to the CISG, section 7.3 grants termination of a contract only when non-performance can be qualified as ‘fundamental’ (Art 7.3.1), but in that case also when such fundamental non-performance can be anticipated before the due date (Art 7.3.3). Otherwise, the contract can only be terminated if the additional period fixed by the aggrieved party has expired without effect (Art 7.1.5). Unilateral termination of the contract does not affect the right to claim damages (Art 7.3.5) and leads to the unwinding of the contract (Art 7.3.6). Section 7.4 regulates the obligation to pay damages for non-performance, including interest for delay in payment (Art 7.4.9), and allows for conventional penalties (penalty clause), to which (contrary to the French and English tradition) the aggrieved party is entitled ‘irrespective of the actual harm’ (Art 7.4.13).

New to the second edition of the PICC of 2004 are Chapter 8 on set-off; Chapter 9 on assignment, the assumption of debt (transfer of obligation) and the transfer of contracts; and Chapter 10 on limitation periods (prescription), which has been significantly influenced by the PECL. Moreover, the third edition of 2010 includes a new Chapter 11 on the plurality of debtors and creditors (solidary obligations; plurality of creditors).

5. Future

The increasing interest in, and the use of, the PICC both by academics for their research and teaching as well as by practitioners for the drafting of contracts and dispute resolution suggest that the PICC will, in the future, be a significant element at least in international arbitration. In any case, they have the potential to live up to their drafters’ expectation of becoming a general part of transnational commercial law. The official endorsement of the PICC by UNCITRAL in 2007 is yet another step in that direction.

Literature

Edward Allen Farnsworth, ‘The American Provenance of the UNIDROIT Principles’ (1998) 72 Tul L Rev 1985; Michael Joachim Bonell, An International Restatement of Contract Law: The UNIDROIT Principles of International Commercial Contracts (3rd edn, 2005); Reinhard Zimmermann, ‘The UNIDROIT Principles of International Commercial Contracts 2004 in Comparative Perspective’ (2006) 21 Tulane Euro Civ LF 1; Eleanor C Ritaine and Eva Lein (eds), The UNIDROIT Principles 2004 (2007); Stefan Vogenauer and Jan Kleinheisterkamp (eds), Commentary on the UNIDROIT Principles for International Commercial Contracts (PICC) (2009); Ralf Michaels, ‘Umdenken für die UNIDROIT-Prinzipien’ (2009) 73 RabelsZ 866.