On the Difference, under German Law, between Choosing the UNIDROIT Principles of International Commercial Contrats in Combination with a Choice of Court Clause or in Combination with an Arbitration Clause
This article is written for students from a triple perspective, (i) the perspective of a German practitioner who has used the UNIDROIT Principles in his private international law practice since 2001 – initially once in a while and meanwhile regularly -, (ii) the perspective of a German professor of law who seeks to describe for German students the specific German legal environment for the choice of the UNIDROIT Principles in practice, and (iii) the perspective of an author who just wrote a book on the UNIDROIT Principles.1 It was a two years’ experience of daily analysis of different UNIDROIT principles, of the international restatements contained therein and of the impressive bridges which they build between different national solutions to the various aspects of international contracting. This experience has strengthened his conviction that, firstly, the UNIDROIT Principles are an excellent tool to use in the private practice of international business law, and that, secondly, ignorance of the UNIDROIT Principles is no option. In certain scenarios, it may amount to malpractice of lawyers to simply ignore their existence while businessmen may not manage cross-border matters with the necessary care if they do not even consider the functioning tool of contracting under the UNIDROIT Principles when balancing their options for cross-border contracting.2 While the latter considerations may apply worldwide, the specific German law oriented argumentation below applies mutatis mutandis in the other member states of the European Union.
Thinking about the options of choosing the UNIDROIT Principles of International Commercial Contracts (“UNIDROIT Principles”), either in combination with a choice of court clause or in combination with an arbitration clause (hereinafter B.), requires awareness about the necessity to consider the UNIDROIT Principles in the context of the choice of the applicable contractual regime (hereinafter A.).
A. The Necessity to Consider the UNIDROIT Principles of International Commercial Contracts in the Context of “Choice of Law”
Since 1994, i.e. over 20 years ago, the intergovernmental organization “International Institute for the Unification of Private Law” (“UNIDROIT”), seated in Rome, has issued four editions of the UNIDROIT Principles of International Commercial Contracts.3 With each edition, the Governing Council representing 63 Member States from all five continents4 has added rules to the previous version by adopting proposals of the Working Group for the Preparation of the UNIDROIT Principles.5 The Working Group comprised independent international experts who discuss their results with “observers” from practice6 so that “all the major legal systems and geo-political areas of the world”7 were represented in the recorded and documented discussions.8 The 4th edition 2016 contains 211 rules9 fit for use in international commercial contracts. The UNIDROIT Principles are set forth in so-called “black letter rules”. They are subject to “Official Comments” which are also developed by the Working Group and adopted by UNIDROIT.10
* Professor of Law (University of Hamburg), formerly also a lecturer of law at Bucerius Law School, Licensié and Maitrê en droit (Paris V), LL.M. (Harvard), Bar Certified Specialist of International Business Law (Germany), Fellow of the Chartered Institute of Arbitrators (London); Honorary Managing Director of the Chinese European Arbitration Centre, Founding Partner of Brödermann Jahn RA GmbH (www.german-law.com)
1 Brödermann, UNIDROIT Principles of International Commercial Contracts (Nomos and Wolters Kluwer 2018) (cited as Brödermann, UNIDROIT Principles Commentary).
2 This observation was first developed by the author in his contribution on “The UNIDROIT Principles as a Risk Management Tool”, in: UNIDROIT, in: Eppur si muove, The Age of Uniform Law – Essays in honour of Michael Joachim Bonell, to celebrate his 70th birthday, edited by UNIDROIT (2016) (cited hereafter as Brödermann, FS Bonell), p. 1283, 1301, see also Brödermann, Münchener Anwaltshandbuch, Internationales Wirtschaftsrecht, Internationales Privatrecht Teil C, § 6, no. 117. It will be further discussed at the German „International Lawyers Day“ (Internationaler Anwaltstag) in November 2018 in Berlin, organised by the international branch of the German Bar Association (Arbeitsgemeinschaft Internationales Wirtschaftsrecht of the Deutscher Anwaltsverein) which is a co-publisher of the commentary cited in note 1 (Nomos 2018).
3 See e.g. Bonell, The Law Governing International Commercial Contracts and the Actual Role of the UNIDROIT Principles, Uniform Law Review 2018, p. 15, 20 (i.e. an enlarged and adapted version of Bonell, The Law Governing International Commercial Contracts and the Actual Role of the UNIDROIT Principles, Hague Lecture 2017); Brödermann, UNIDROIT Principles of International Commercial Contracts (2018) (cited as Brödermann, UNIDROIT Principles Commentary), p. 5, Introduction no. 11.
4 See www.unidroit.org (there “about-unidroit/Membership”).
5 For an overview of the changes made in 2004, 2010 and 2016 see Introduction to the 2016 Edition pp. vii et seq.
6 Brödermann, UNIDROIT Principles Commentary (note 1), Introduction no. 11 in fine (p. 6).
7 Bonell (note 3), Uniform Law Review 2018, p. 20, referring to a “group of independent experts from all the major legal systems and geo-political areas of the world”.
8 The list of members and official observers of the Working Group is set forth in the Official Comments at p. X-XI and reproduced – with the kind permission of UNIDROIT – at Brödermann, UNIDROIT Principles (note 1), p. LXII et seq. On the operation of the Working Group see Vogenauer in Vogenauer (ed.), Commentary on the UNIDROIT Principles of International Commercial Contracts (PICC), 2nd ed. 2015 (hereinafter cited as Vogenauer/author, UNIDROIT Principles Commentary), Introduction no. 20.
9 The Governing Council of UNIDROIT, Introduction to the 2016 Edition, in: UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016 (which contain the official comments and are therefore cited as “UNIDROIT, Official Comments”), p. viii; Bonell (note 3), Uniform Law Review 2018, p. 21.
10 Brödermann, UNIDROIT Principles (note 1), Introduction no. 14 (p. 7).
The UNIDROIT Principles are particularly shaped to govern cross-border contracts11 while national laws are essentially shaped for contracts in national contexts and rarely oriented towards “internationally accepted standards and/or the special needs of cross-border trade relationships”.12 In particularly, the UNIDROIT Principles contain many helpful “default rules”13 . They cover numerous subjects of importance in international contracts for which parties will often not have the time, budget or patience to concentrate on (e.g. foreign currency set-off – Article 8.2 UNIDROIT Principles – which national laws may not recognize14). Often, parties with different legal background – e.g. a common law background of one party and a civil law background of the other party – simply overlook possible pitfalls15 because of limited comparative legal training. They are simply not even aware of the need to overcome different positions or mind-sets16 (e.g. with regard to merger clauses17 or interpretation18 to name just a couple out of dozens of examples).
In this context, it is worth mentioning that, in the author’s experience, on various occasions, both common law practitioners (e.g. from the UK or New York) and civil law practitioners (e.g. from Germany), when forced to actually concentrate on the UNIDROIT Principles have always come to the conclusion that they feel “comfortable” with the UNIDROIT Principles.19
The UNIDROIT Principles are based on a small number of underlying concepts including freedom of contract/party autonomy, bindingness of contracts (pacta sunt servanda), openness to usages, upholding the contract if possible (favor contractus), the observance of good faith and fair dealing and avoidance of ‘unfairness’ which shall guide the settlement of issues “within the scope of these Principles but not expressly settled by them” (Article 1.6 (2)).20 As the UNIDROIT Principles exclusively focus on international business-to-business contracts, they can leave aside the protection of consumers, which is a key goal of any national legislator, especially within the European Union.21 Distinctly from German law, the distinction between performance (Chapter 6) and non-performance (Chapter 7) is not based on a degree of fault22 (e.g. light, normal or gross negligence23). Rather, each party, i.e. usually a company or (limited) partnership, is in charge of the matters undertaken in the contract as a matter of party autonomy.24 If a matter is allocated in the contract to the “sphere” of one party, that party is bound (bindingness of contract) unless a risk is allocated otherwise, in particular by an exemption clause (Art. 7.1.625 ) or force majeure (Art. 7.1.7).26 Based on the underlying concepts set forth above, the Working Group has distilled the set of 211 neutral rules, which apply unless the parties provide otherwise in the contract. Other than the observance of mandatory law (see Article 1.4 UNIDROIT Principles), the limit of contractual freedom is the observance of good faith and fair dealing which is generally expressed in Article 1.7 UNIDROIT Principles and which is expressed more specifically in a number of different rules, e.g. in Article Art. 7.1.6 UNIDROIT Principles pursuant to which an exemption clause may not provide an excessive advantage. This neutral and straightforward approach correlates with the approach in the CISG27 (therefore, it ought to be familiar to any internationally practicing lawyer in Germany because the CISG is binding treaty law in Germany which takes priority over the German national law of sales in the German Civil Code (Bürgerliches Gesetzbuch – BGB) pursuant to its Article 1 CISG, unless its applicability is explicitly excluded pursuant to Article 6 CISG.28 For businessmen and businesswomen, that approach is simple, fair and understandable. Not once has the author witnessed confusion, by clients, on this issue during more than 15 years that he is now using the UNIDROIT Principles in practice.
Over the years, the UNIDROIT Principles have been applied by many arbitral tribunals or used by state courts29 either
11 Bonell (note 3), Uniform Law Review 2018, p. 15, 20 (“a private codification or ’restatement’ of international contract law”).
12 Bonell (note 3), Uniform Law Review 2018, p. 15, 35; see also e.g. in Vogenauer/Vogenauer UNIDROIT Principles Commentary, Introduction no. 5 with further references.
13 For example, in Chapters 5 and 6 many issues for which a national law would also contain default rules (like the place or time of performance) whereby the default rules in the UNIDROIT Principles have been developed with particular regard to international transactions; see e.g. Art. 6.1.9 on currency of payment.
14 For the restrictive position of German law, see e.g. Oberlandesgericht Hamm 9 October 1998 (33 U 7-98), NJW-Rechtssprechungsreport 1999, 1736; Kammergericht Berlin 6 March 2003 – 2 U 198/01.
15 See Brödermann, The increasing importance of the UNIDROIT Principles in Europe – A Review in light of the 2005 Rome I Proposal -, Uniform Law Review 2006, 752 (with regard to small and medium size business units).
16 See e.g. the recent overview of Bonell (note 3), Uniform Law Review 2018, p. 15, 22-23 on different perspectives of civil and common law lawyers.
17 Brödermann, UNIDROIT Principles Commentary (note 1), Art. 2.1.17 note 1.
18 Bonell (note 3), Uniform Law Review 2018, p. 17 (on the difficulties of interpreting foreign state law by a judge) and Brödermann, § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 247, 249, 251; see also Brödermann, UNIDROIT Principles Commentary (note 1), Art. 4.1 notes 1-2 with further references.
19 Observations heard from in-house counsels or e.g. lately at a panel focussing on „Common Law and Civil Law Perspective of the UNDROIT Principles“ at a conference on the Chinese „Belt and Road Initiative“ by the Chinese European Arbitration Centre (www.ceac-arbitration.com) at the occasions of its 10th anniversary in Hamburg, Germany, on 13-14 September 2018 (reference is made to statements made by Roger Barton of Barton LL.P. (New York) of Gerhard Wegen of Gleiss Lutz (Stuttgart)).
20 Bonell, An International Restatement, chapter 4, pp. 88-172; Brödermann, UNIDROIT Principles Commentary (note 1), p. 3, Introduction no. 7.
21 See ECJ case C-168/05 Elisa María Mostaza Claro v Centro Móvil Milenium SL no. 25-28; see also ECJ case C-191/15, Verein für Konsumenteninformation v Amazon EU Sàrl.
22 Vogenauer/McKendrick, UNIDROIT Principles Commentary (note 8), Introduction to Section 7.4 of the PICC no. 2 and Art. 7.4.1 no. 1.
23 See §§ 276 et seq. German Civil Code.
24 See in more detail Brödermann, UNIDROIT Principles Commentary (note 1), p. 7, Introduction no. 15.
25 See in detail Vogenauer/Schelhaas, UNIDROIT Principles Commentary (note 8), Art. 7.1.6 no. 1 et seq.; Brödermann, UNIDROIT Principles Commentary (note 1), Art. 7.1.6 no. 1 et seq.
26 See in detail Vogenauer/McKendrick, UNIDROIT Principles Commentary (note 8), Art. 7.4.1 no. 6; and in more detail Vogenauer/Pichonnaz, UNIDROIT Principles Commentary (note 8), Art. 7.1.7 no. 1 et seq.; Brödermann, UNIDROIT Principles Commentary (note 1), Art. 7.1.7 no. 1 et seq.
27 See Bonell, An International Restatement, cit. pp. 65-68.
28 See e.g. Brödermann/Rosengarten, Internationales Privat- und Prozessrecht (IPR/IZVR), 7th ed. 2015, no. 288-298.
29 See e.g. www.unilex.info; Bonell (note 3) refers to 434 decisions, p. 15, 30.
(i) because the parties have chosen the UNIDROIT Principles in their contract30 or even agreed on their application during an arbitration31, or (ii) to interpret and supplement domestic law32 using the UNIDROIT Principles as a “Global Background Law”33 to overcome national boundaries and limits of national law.34 The UNIDROIT Principles have also been integrated in multiple contracts which never led to a dispute. For example, the author’s law firm is a regular user of the UNIDROIT Principles since many years, both for clients in multiple industries in Asia, Europe and USA35 and for its own contracts.36 Recent examples from the author’s practice in 2018 include e.g. (1) a German-Indian frame contract in the textile industry on the development of software and further general cooperation between the Indian software supplier and the German employer, (2) a German-US contract on research and development in the cosmetics sector or (3) the choice of the UNIDROIT Principles in the standard terms of a US owned German company in its contracts with non-German suppliers for the purchase of materials to be used in the automotive industry. However, despite the author’s numerous examples and positive experience over more than 15 years of private practice with the UNIDROIT Principles, in relation to the total number of international contracts where the choice of the UNIDROIT Principles would make sense, their actual use in practice is still extremely low.37 This phenomenon is often due to ignorance of counsel unwilling to engage38 into rules which he or she did not study (limited exposure to the UNIDROIT Principles during law school is no reason to ignore the UNIDROIT Principles in practice). However, as set forth hereinafter, from an objective perspective, the ignorance of the UNIDROIT Principles may constitute (unnoted) malpractice.
A central task of any business lawyer is to support its clients (companies, businesswomen, businessmen) in the realization of their business goals39 in a legally compliant manner. This task includes contractual risk management.40 In this respect, the mind-set of companies has changed over the past 20 years.41 Today, compliance with the law is key.42 Companies need to organize themselves so that they are compliant with the law. For German stock corporations, the corporate law provides explicitly that they have to organize a risk management process if risks could affect the existence of the company.43 Over the years, the author has observed a number of businesses suffering serious financial trouble or even going bankrupt as a result of bad contracts (e.g. by granting unrealistic warranty periods). The legal need to act in a compliant manner and to manage risks applies also to the daily operative business.44 For example, Section 43 paras. 1-2 of the German Law on Limited Liability Companies provides:
“(1) The directors shall conduct the company’s affairs with the due care of a prudent businessman. (2) Directors who breach the duties incumbent upon them shall be jointly and severally liable to the company for any damage arising.”45
Many laws around the globe contain similar corporate duties. Thus, the company law requires from the managers of a company to act diligently (“with due care”) in order to be compliant with the company law and not to risk personal liability. The employment contracts for managing directors usually repeat that duty because managers are expected to operate in compliance with the law and applicable statutes.
Compared to national contracting, international contracts are always more complex.46 The normal operative, economic, financial and technical risks are supplemented by a number of additional risk factors like cultural and cross-border legal
30 See e.g. Brödermann, The Impact of the UNIDROIT Principles on International Contract and Arbitration Practice – the Experience of a German Lawyer, Uniform Law Review 2011, p. 589, 594 et seq.; and most recently the overview of Bonell (note 3), Uniform Law Review 2018, p. 15, 24-31.
31 An experience made twice by the author, see (1) for an example of 2001 in a Swiss arbitration: Brödermann, Die erweiterten UNIDROIT Principles 2004 – Ein willkommenes „Werkzeug“ für die Vertragsgestaltung und für Schiedsverfahren, Recht der Internationalen Wirtschaft („RIW“) (2004), p. 721, 723 et seq.; Brödermann, UNIDROIT Principles (note 1), p. 236-238 at Chapter 7: Nonperformance, Section 4: Damages, Introductory Remarks; Brödermann, UNIDROIT Principles (note 1), p. 9 at Introduction note 19.
32 Cf. Preamble of the UNIDROIT Principles, para. 6; Bonell, An International Restatement of Contract Law, 2005, p. 294 et seq.; in detail: Meyer, Uniform Law Review 2016, pp. 599-611; for two Lithuanian examples see Vogenauer/Rios, UNIDROIT Principles Commentary (note 8), Art. 2.1.15 no.10.
33 Bonell (note 3), Uniform Law Review 2018, p. 16, 38.
34 Bonell (note 3), Uniform Law Review 2018, p. 15, 16 et. seq. (with a quote from Ingeborg Schwenzer (Switzerland) on the limits of Swiss law) and p. 38.
35 Some examples have been reported in Brödermann, Uniform Law Review 2011 (note 30), p. 589, 594 et seq.
36 See Brödermann, Choice of Law and Choice of UPICC Clauses in the Shadow of the Dispute Resolution Clause, Hamburg Law Review 2016, pp. 21, 26-28; Brödermann, UNIDROIT Principles Commentary (note 1), Art. 1.4 no. 4.
37 See the critical remarks of Bonell (note 3), Uniform Law Review 2018, p. 15 (“The present state of the law governing international commercial contracts is hardly satisfactory.”) and passim.
38 The most extreme example witnessed by the author was once an Italian-German contract about the purchase of a German company in which the author represented the buyer (who had the better bargaining power under the circumstances of the case). The choice of law was an open issue until the last moment of the negotiations. In the end, the seller gave up an issue worth several thousand Euros in exchange for the buyer’s acceptance of the choice of German law and not to insist on the choice of the UNIDROIT Principles. The opposing counsel had openly confessed his unwillingness to actually read and to concentrate on them. This anecdote was first reported by the author in Brödermann, Zustandekommen von Rechtswahl-, Gerichtsstands- und Schiedsvereinbarungen. Rechtssoziologische Notizen, in: Witzleb/Ellger/Mankowski/Remien (eds.), Festschrift für Dieter Martiny zum 70. Geburtstag, 2014, p. 1045 et seq. (1061).
39 Brödermann, Hamburg Law Review 2016, p. 21, 22.
40 Brödermann, Risikomanagement in der internationalen Vertragsgestaltung in NJW, 2012, 971 et seq.
41 Brödermann, Hamburg Law Review 2016, p. 21, 31.
42 See e.g. Brödermann, The UNIDROIT Principles as a Risk Management Tool, in: UNIDROIT, in: FS Bonell (note 2), p. 1283, 1286 et seq..
43 See Section 91a German Corporate Act (Aktiengesetz) and Art. 4.1.3. – 4.1.4. of the Corporate Governance Code.
44 Brödermann (note 40), NJW 2012, 971, 973 (left column)
45 English version as available from the German Ministry of Justice at Juris GmbH Juristisches Informationssystem für die BRD at https://www.gesetze-im-internet.de/englisch_gmbhg/englisch_gmbhg.html (last visited on 1 October 2018).
46 Brödermann, (note 40) NJW 2012, 971, 974 (right column). See generally Brödermann/von Dietze, Vertragsmanagement „Vom NDA bis zur Abwicklung des Exportgeschäfts“, in: Paschke/Graf/Olbrisch (eds.), Hamburger Handbuch des Exportrechts, Part 1 Chapter 2 (2d ed. 2014), pp. 60-85.
risks.47 To act diligent in the sense of the company law requirements obliges the management of companies (and their lawyers) to apply diligence when choosing the legal frame and basis of an international contract. Thus, when deciding about a dispute resolution clause and choice of law, diligence is required. The freedom of choice of law and/or the freedom to choose existing and functioning international soft law like the UNIDROIT Principles must be considered when deciding if management acts “with the due care of a prudent businessman” as set forth, for example, in German company law as cited above. A company may have many reasons not to apply the UNIDROIT Principles, but there is no excuse to simply ignore them in the decision making process. They provide a modern tool which has emerged over the past 20 years in reaction to the needs of international contracting.48
Any company will be well organized to function under its home law. A German company will be organized to apply German law, a company based in New York will be used to apply New York law. This is usually not the case because of an analysis of that home law as being the best suited law for a given contract.49 For example, the decision of the author’s law firm to choose the UNIDROIT Principles and not German law in its contracts, is based on the decision that the UNIDROIT Principles provide the better contractual regime for cross border standard terms of business50 as compared to German law when a lawyer wishes to agree on a valid limitation of liability clause in standard terms.51
Rather, the home law is a given (and often random) fact. One may assume that the company will have used its best efforts to organize its business and its standard contracts in a way which reduces risks for the company as best as possible under the circumstances. Therefore, the choice of the home law of a company will usually be acceptable from a risk management perspective (even if it is not best suited for international contracting52). In international contracts it will not always function to impose the home law of a company on the other party53. Parties with equal bargaining power will look for a neutral solution because businessmen have the perception that it may be fairer if neither of their own laws applies but some kind of neutral law.54 It is in this kind of situations that due care requires to balance the possible choices of choosing a neutral state law of a third country against the option of the UNIDROIT Principles as a neutral set of rules or the treaty solution provided by the Convention on the International Sale of Goods “CISG.”55 It is beyond the scope of this article to discuss when to operate with the CISG, when with the UNIDROIT Principles, and when with the CISG supplemented for those issues not covered by the CISG by the UNIDROIT Principles.56 Suffice is to say that the CISG has a more narrow scope of application.57 The UNIDROIT Principles cover more subjects and are fit for use for more kinds of contracts (e.g. complex or mixed contracts).
As phrased once by a German businessman, during a coffee break at the occasion of a symposium organized at the Bucerius Law School in honor of its former President Hein Kötz, if there is a need to deviate from German law and to agree on a neutral contractual regime, why not use the results of the efforts of UNIDROIT avoiding time and money on researching national alternatives for the cross-border business?58
Against this background of practical reality and corporate law need to consider the contractual option of choosing the UNIDROIT Principles, this article will now lay out that the extent of party autonomy when determining the applicable contractual regime is different depending on whether the competent body to decide about a dispute regarding a contract is a state court in Germany (or any state court of any member of the European Union) or an arbitral tribunal.
B. The Combination of a “Choice of Law Clause” choosing the UNIDROIT Principles of International Commercial Contracts with a dispute resolution clause
The dispute resolution regime determines who decides the dispute and which rules set the frame for the decision maker to decide if, how and to what extent to accept a “Choice of Law Clause” choosing the UNIDROIT Principles.59 In Germany it makes a difference if the choice of the UNIDROIT Principles is combined with a choice of court or with an arbitration clause. For both scenarios, the article will start with a case study, interpret the choice of the UNIDROIT
47 Brödermann, (note 40) NJW 2012, 971, 973 (left column), 974 (right column).
48 See again Bonell (note 3), Uniform Law Review 2018, p. 15, 20 (“’restatement’ of international contract law”).
49 For the reasons why businessmen gravitate towards their home law Brödermann, Hamburg Law Review 2016, p. 21, 24-25.
50 Articles 2.1.19 – 2.1.21 UNIDROIT Principles, supplemented by the general clauses on respecting the boundaries of good faith and fair dealing in notably Article 1.7 and 7.1.6 UNIDROIT Principles.
51 Brödermann, Hamburg Law Review 2016, p. 21, 26-30; Brödermann, UNIDROIT Principles Commentary (note 1), Art. 1.4 no. 4.
52 Vogenauer/Vogenauer, UNIDROIT Principles Commentary (note 8), Introduction no. 5.
53 Bonell, An International Restatement, 2005, p. 12; Brödermann, § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 112 et seq. (on the impact of market power on choice of law). See also Vogenauer/Vogenauer, UNIDROIT Principles Commentary (note 8), p. 2, Introduction no. 5.
54 Brödermann, § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 95, 208 et seq. (with the emphasis at no. 227 et seq. on the impact of the “mind-set” of the dispute resolving body).
55 For a description of the wrong (historical) reasons for schematically opting out of the CISG in Germany, see Brödermann, Hamburg Law Review 2016, pp. 24-25, 35. Meanwhile several colleagues have reported at the occasion of the CEAC conference in September 2018 in Hamburg (note 19) that an insurance has covered the first known malpractice case in which a former client sued its lawyer who had advised routinely on a choice of law clause opting out of the CISG pursuant to Article 6 CISG. The company would have won its case easily under the CISG regime (not requiring the proof of fault) but lost under the applicable national law for lack of proof of negligence of the other party. Routinely opting out of the CISG without reflection and due regard to the circumstances exposed the company to a different risk profile.
56 See e.g. the choice of law option under Article 35 para. 1 lit b of the CEAC Arbitration Rules.
57 See e.g. Bonell (note 3), Uniform Law Review 2018, p. 15, 32.
58 Experience made in a discussion during a symposium in honour of professor Hein Kötz at Buccerius Law School on 14 May 2004, see Brödermann, UNIDROIT Principles Commentary (note 1), Introduction no. 3.
59 Brödermann, § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 205 and 94.
Principles clause against the legal context applicable to the chosen decision maker and then consider the (varying) legal consequences.
I. The Combination of a “Choice of Law Clause” choosing the UNIDROIT Principles of International Commercial Contracts with a Choice of Jurisdiction Clause in Germany
A case study60:
A German seller – a company from Hamburg, Germany – concludes with a Chinese buyer a complex contract providing for the purchase of a variety of goods, works and general distributing services. Under the heading „Applicable Law“, they agree that: “This contract is governed by the UNIDROIT Principles of International Commercial Contracts.” In cases of dispute, the contract provides for the jurisdiction of the state courts in Hamburg. Questions: (1) Is the choice of law clause effective? (2) Does it have any effect? (3) Did the parties validly agree on the application of the UNIDROIT Principles?
1. Interpretation of the “Choice of the UNIDROIT Principles Clause”
The validity of any choice of law clause needs to be determined from the perspective of the competent body who will resolve the dispute.61 In the case scenario set forth above, the parties have used their freedom to determine the competent court. Article 25 of the European regulation called Brussels Ia Regulation62 recognizes the choice of court clause in favor of the courts of Hamburg. Pursuant to Article 288 para. 2 of the EU Treaty63 , the rules on jurisdiction in that European Brussels Ia Regulation take priority in Germany, a Member State of the European Union, over the rules on jurisdiction contained in the German law of civil procedure (Zivilprozessordnung). Thus, in case of a dispute, it is a German court which will refer to the private international law as applied in Hamburg, Germany, to determine the outcome of the first question.
Since 17 December 2009, the private international law of contracts to be applied by a German court in Hamburg – just like by any state courts within any Member States of the European Union – is the European regulation called Rome I Regulation64 which applies directly pursuant to Article 288 para. 2 of the EU Treaty. Article 3 para. 1 of the Rome I Regulation provides: “A contract shall be governed by the law chosen by the parties.” This provision is interpreted (autonomously as a matter of European law) as permitting only the choice of state law. This follows in particular from the legislative history of the regulation. While the European Commission’s draft of the Rome I Regulation did explicitly specify that “[t]he parties may also choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community”65 ,this option was deleted because of strong objections from conservative Bars notably in Germany and France.66 As a consequence, party autonomy is restricted to the choice of state law.
As the UNIDROIT Principles are no state law, the “choice of law clause” in the contract does not keep what it promises by its (wrong) heading. By referring to soft law – i.e. the UNIDROIT Principles -, it does not meet the strict requirements for a “choice of law” in the sense of Article 3 para. 1 of the Rome I Regulation. The answer to question 1 is therefore that the Choice of the UNIDROIT Principles clause is no valid choice of law clause.
Therefore, the Hamburg court will need to determine the applicable law pursuant to Article 4 of the Rome I Regulation which applies in cases where the contract do not contain a choice of law. By “subsuming” the facts of the case to the conditions of Article 4 of the Rome I Regulation (a German seller with its seat in Hamburg, a Chinese buyer, a complex contract providing for the purchase of a variety of works and services), the court will find that German law is applicable to the contract. Under the facts of the case, none of the straightforward rules for simple contracts in Article 4 para. 1 lit (a) through (h) Rome I Regulation applies. Rather, the contract contains multiple elements such as sale (lit. a) and services (lit. b). As the elements of the contract would be thus covered by more than one of the scenarios (a) to (h) of paragraph 1 Rome I Regulation, the contract is governed pursuant to Article 4 para. 2 Rome I Regulation by the law of the country where the party required to effect the characteristic performance of the contract (i.e. providing goods, works and services) has its habitual residence. In the case, the German party provides the characteristic scope of work. Therefore, the law applicable at the “habitual residence of the seller” applies pursuant to Article 4 para. 2 Rome I Regulation. In the case of companies, the “habitual residence” is the seat of that company (Article 19 Rome I Regulation) which is in Germany.
German law is therefore applicable. It will thus determine the answers to questions 2 and 3 which seek to inquire if the clause, although invalid for the purposes of choice of law, still has any effect leading to the application of the UNIDROIT Principles.
Pursuant to Article 12 I lit. a Rome I Regulation, the national law determined as applicable by the rules of the Rome I Regulation is also “in charge” for the interpretation of the contract. Thus, the rules in the German civil code apply to interpret the clause on the choice of the UNIDROIT
60 Based on case no. 31a in Brödermann/Rosengarten, IPR/IZVR 8th edition 2018 (to be released soon), no. 311.
61 Brödermann/Rosengarten, IPR/IZVR (note 28), no. 63; § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 204 et seq.
62 Regulation No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, OJ L 351, 20.12.2012, pp. 1–32.
63 Consolidated version of the Treaty on the Functioning of the European Union (TFEU), OJ C 326, 26.10.2012, p. 47–390, Art. 288(2).
64 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), OJ L 177, 4.7.2008, pp. 6–16.
65 Art. 3 (2) first sentence of the Proposal on Conflicts of Laws regarding Contractual Obligations (Rome I)” of 15 December 2005, COM (2005) 650 final (including an Explanatory Memorandum and the text of the Proposal itself).
66 Brödermann, Hamburg Law Review 2016, p. 29, no. 31.
Principles. Section 157 German Civil Code stipulates for the interpretation of contracts: “Contracts are to be interpreted as required by good faith, taking customary practice into consideration”.67 This provision is supplemented by and read together with Section 133 of the German Civil Code68 on the interpretation of declarations. It reads: “When a declaration of intent is interpreted, it is necessary to ascertain the true intention rather than adhering to the literal meaning of the declaration.”69 Thus, the wording of the clause provides the starting point for the interpretation, but the true intention of the parties needs to be determined. In the clause at hand, the wording is eloquent: “This contract is governed by the UNIDROIT Principles of International Commercial Contracts.” The word “governed”, used by two non-native English speaking parties, demonstrates sufficiently clearly the joint intention of the parties to apply the UNIDROIT Principles to the interpretation of their contract. Only the heading of the clause (“Choice of Law”) is technically wrong because Article 3 para. 1 Rome I Regulation admits only the choice of state law.
As a result, the clause points in the wrong direction because, in the clause itself, the parties are not expressing any intention with regard to a state law which is a requirement to a true “choice of law” in the sense of Article 3 para. 1 Rome I Regulation. Pursuant to an old principle with roots in Roman law, such wrong heading is not decisive for the interpretation of the clause (falsa demonstratio non nocet70). The word “law” was used by the two non-native English speaking parties. It can be interpreted in a broader and less “technical” sense. The parties meant to determine the applicable contractual regime in such a way that it includes the soft law as contained in the UNIDROIT Principles.
This interpretation is also covered by the Rome I Regulation. While it does not permit the choice of soft law as a true choice of law, it does permit the “incorporation” of soft law pursuant to its recital no. 13 which reads: “This Regulation does not preclude parties from incorporating by reference into their contract a non-State body of law or an international convention.” In light of the intention of the parties that the UNIDROIT Principles shall “govern” the contract, the “Choice of Law”-clause must therefore be interpreted as such a mere “incorporation” of the UNIDROIT Principles into the contract as permitted by the Rome Regulation.71
2. Legal Consequences of the “Choice of the UNIDROIT Principles Clause” in the context of a choice of court clause choosing the competence of a German court
As an “incorporated” part of the contract, the UNIDROIT Principles must be read as a part of the contract. For any issue which is not stipulated otherwise in the contract itself, the default rules of the UNIDROIT Principles apply, both for the interpretation72 and the supplementation of the contract73. Also, the few limits to contractual freedom such as the observance of good faith and fair dealing (Article 1.7 UNIDROIT Principles) apply as referenced already above at A.
However, if and to the extent the application of the contract as interpreted pursuant to the UNIDROIT Principles would lead to a result that violates German mandatory law, such mandatory national German law, the applicable lex contractus, takes priority74. The UNIDROIT Principles themselves point in their Article 1.4 in the same direction: “Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law.” In practice, there are only few legal issues where German mandatory law would interfere with the agreed regime of the contract as stipulated, interpreted and supplemented by the UNIDROIT Principles. In commercial agency contracts, the mandatory provision of Section 89b German Commercial Code on compensation of the agent in case of termination of the contract would apply regardless of the stipulation in the contract. In the case discussed here, any clause violating the strict German law on standard terms in Section 305 et seq. German Civil Code would be void. While a concrete contractual provision might pass the general test of good faith and fair dealing in Article 1.7 UNIDROIT Principles, it might nonetheless be treated as void by the German judge who has to apply all mandatory law in force at the place of the competent German court including the German tight law on standard terms in Section 305 et seq. German Civil Code as applied by German courts. For example, when interpreting standard terms, the German courts are likely to go beyond the regime for standard clauses in the UNIDROIT Principles and apply the mandatory dispositive consumer-friendly provisions of the German Civil Code even in business-to-business standard terms as a leitmotif to determine their validity.75 That can become troublesome from a business perspective (“B2B”), when, for example, entire global industries act distinctly from concepts developed by the German legislator for the protection of consumers in a national context (“B2C”). As a
67 See § 157 German Civil Code as published by the German Federal Ministry of Justice and Consumer Protection at https://www.gesetze-im-internet.de/bgb/__157.html (visited on 11/13/2018).
68 See e.g. Prütting/Wegen/Weinreich/Ahrens, BGB Kommentar (13th ed. 2018) (hereinafter cited as “PWW/author”), § 133 BGB no. 2; PWW/Brinkmann § 157 BGB no. 1.
69 See note 68.
70 Brödermann, UNIDROIT Principles Commentary (note 1), p. XLVIII.
71 This result was first argued in Brödermann, Uniform Law Review 2011 (note 30), 589, 596; PWW/Brödermann/Wegen (note 69), IPR-Anh. I, no. 4; Vogenauer/Michaels, UNIDROIT Principles Commentary (note 8), Preamble I no. 34;See also implicitly Brödermann, § 6 IPR MünchAnwaltshandb. IntWirtschR (note 2) no. 269 and 382-383.
72 See Art. 4.2 et seq. UNIDROIT Principles.
73 See notably the default rules in Chapters 5 and 6 of the UNIDROIT Principles as well as Art. 4.8 UNIDROIT Principles.
74 See also Brödermann, Hamburg Law Review 2016, p. 21, 40 pointing at Article 9 para. 1 Rome I Regulation (a reference which is, however, not needed in the case study discussed here because the mandatory law is part of the lex contractus).
75 Müller, AGB-Kontrolle auf dem Prüfstand in IWRZ 2018, p. 154; Brödermann, Hamburg Law Review 2016, p. 21, 27 (“In a B2B context, pursuant to §§ 310. 307 subpara. 2 No. 1 BGB, a limitation of liability in standard terms and conditions may not lead to a deviation of the core obligations or the core structure of the statutory law”, with further references to § 307 subpara. 2 No. 2 BGB).
result, combining the choice of the UNIDROIT Principles with a choice of court clause functions as long as there are no standard terms involved (as measured against the tight and extensive requirements of German national law76).
II. The Combination of a „Choice of Law Clause“ choosing the UNIDROIT Principles of International Commercial Contracts with an Arbitration Clause providing for Arbitration in Germany
A case study (variation):
In the same case as discussed at B.I.1., the clause on „Applicable Law“ referring to the UNIDROIT Principles is combined with an arbitration clause providing for arbitration in Hamburg, Germany (as Germany’s largest trading city, Hamburg has a long tradition in arbitration and actually serves as home to over 15 arbitration institutions77). Again, the question is if the choice of law clause is effective. Did the parties validly agree on the application of the UNIDROIT Principles?
1. Interpretation of the “Choice of the UNIDROIT Principles Clause” in the context of an arbitration clause
In this variation to the case study, the deciding body whose perspective determines the interpretation is an arbitration tribunal seating in Germany (or a Hamburg court in charge of deciding if the arbitration clause is valid78). Germany’s arbitration law is contained in the 10th Book of the German Code of Civil Procedure (Sections 1025 – 1066) and based on the UNCITRAL Model Law of arbitration. Its Section 1051 contains the international contract law (private international law) on the determination of the applicable contractual regime.
Distinctly from Article 3 para. 2 of the Rome I regulation, Section 1051 of the German Code of Civil Procedure permits parties to choose not only a state law as lex contractus but also “rules of law”. When enacting Section 1051 of the German Code of Civil Procedure on “choice of law”, the German legislator was thus much more permissive than the European legislator shaping Article 3 para. 2 of the Rome I regulation. It gave more room to party autonomy and thereby more freedom to maneuver to the companies desirous to determine the applicable regime for their international contract. The rule in Section 1051 of the German Code of Civil Procedure is based on Article 28 of the UNCITRAL Model Law on Arbitration79 . The considerations below apply thus not only to German law but also to all other nations with an arbitration law that is based on the UNCITRAL Model Law on Arbitration.
Pursuant to the doctrine of severability of the arbitration clause from the main contract80 , the arbitration clause – a distinct contract – will be interpreted in light of the provision in Section 1051 of the German Code of Civil Procedure. As it includes the possibility of choosing rules of law (soft law) as a subcategory to “choice of law”, the heading “choice of law” in the clause may be interpreted in a broad sense including the choice of soft law like the UNIDROIT Principles. In these circumstances, the clause leads directly to the applicability of the UNIDROIT Principles as the contractual regime of the contract, without any detour via an interpretation pursuant to German state law as in the scenario discussed at B.I.1. above.
As to the details, it needs to be further distinguished. In case of an ad hoc arbitration, Section 1051 of the German Code of Civil Procedure provides directly the source of law permitting to choose rules of law like the UNIDROIT Principles of International Commercial Contracts.
In case that the parties have agreed on arbitration under the rules of a specific arbitration organization like the International Chamber of Commerce (ICC), the German Arbitration Institution (DIS) or the Chinese European Arbitration Center (CEAC), the arbitration rules of the specific arbitration organization usually contain more specific provisions on the choice of law, also permitting the choice of rules of law like the UNIDROIT Principles of International Commercial Contracts.81
2. Legal Consequences of the “Choice of the UNIDROIT Principles Clause” in the context of an arbitration clause providing for arbitration in Germany
Pursuant to Section 1051 of the German Code of Civil Procedure, the UNIDROIT Principles thus provide directly the contractual legal regime. The text of the contract will thus be supplemented by the regime of the UNIDROIT Principles including, like in the solution discussed at B.I, the numerous default rules contained in the UNIDROIT Principles (subject to regulations in the contract which have priority except for the rare situations where the UNIDROIT Principles require a correction, e.g. Art. 7.1.6 UNIDROIT Principles). Contrary to the solution discussed at B.I. German law does not automatically step in on top. Its application is more restricted. It will only step in if it is “internationally mandatory” law. This understanding is expressed in the Official Comments to the UNIDROIT Principles82. An example for such “internationally mandatory” law is the law on anti-corruption83 or on the compensation of agents in case of termination in Section 89b German Commercial Code. In contrast, the German law on standard terms (which was applicable when the choice of the UNIDROIT Principles clause was combined with a choice of court clause providing for the competence of German courts) is generally not perceived as “internationally
76 Section 305 b German Civil Code, see v. Westphalen, AGB-Recht im ersten Halbjahr 2018 in NJW 2018, p. 2238 et seq.
77 J. Trappe, Schiedsgerichtsbarkeit, in: J. Albers (ed.), Recht und Juristen in Hamburg, Köln 1994, p.141 et seq; Brödermann/Rosengarten, IPR/IZVR (note 28), no. 740.
78 See Section 1032 German Code of Civil Procedure.
79 UNCITRAL Model Law on International Commercial Arbitration, 1985.
80 See Born, International Commercial Arbitration, Vol. I, 2nd edition 2014, p. 350.
81 Article 21 ICC Rules (2017), Article 24.1 DIS-Rules (2018), Article 35 CEAC-Rules (2012).
82 Official Comments, Art. 1.4, pp. 11-12.
83 Brödermann, UNIDROIT Principles Commentary (note 1), Art. 1.4, no. 3.
mandatory” law requiring application independently of the applicable legal regime.84 As the UNIDROIT Principles do contain a regime on standard terms in Articles 2.19 through 2.1.21 (which is supplemented by the general rules, e.g. on fair dealing and good faith in Article 1.7 UNIDROIT Principles), the chosen rules of the UNIDROIT Principles apply which are much more appropriate (and easier to handle) for an international business-to-business contract.85 In these circumstances, there is no basis to apply the tight standards of German national law on standard terms.
Thus, the scope of applicable mandatory law is more restrictive when a choice of UNIDROIT Principles clause is combined with an arbitration clause providing for arbitration in Germany as compared with the scenario discussed above at B.I. where the choice of UNIDROIT Principles clause was combined with a choice of court clause providing for the competence of German courts.
C. Summary and Evaluation
Corporate law or business judgment often require to consider (and to agree on) neutral rules of law like the UNIDROIT Principles of International Commercial Contracts as compared to any given state of law. It is possible to integrate the UNIDROIT Principles in international contracts both into scenarios were they are combined with a jurisdiction clause and in scenarios were they are combined with an arbitration clause. Only the latter approach integrating arbitration brings full effect to the UNIDROIT Principles. In contrast, the combination of a choice of UNIDROIT Principles clause with a choice of court clause functions only well if the contract is individually negotiated as defined according to the tight (and over-arching) German law on standard terms86.
84 Pfeiffer, Die Abwahl des deutschen AGB-Rechts in Inlandsfällen bei Vereinbarung eines Schiedsverfahrens in NJW 2012, p.1169 with further references; see Brödermann, UNIDROIT Principles Commentary (note 1), Art. 1.4, no. 4.
85 Brödermann, UNIDROIT Principles Commentary (note 1), Art. 2.1.19, no. 4.
86 See above note 76.