International Society of Primerus Law Firms

Analysis of the Unidroit Principles of International Commercial Contracts (2010)*

By Mwangi Karume
Njoroge Regeru & Company
Nairobi, Kenya

A.    INTRODUCTION

International trade has increased over recent decades necessitating the need for a common understanding on the rights and obligations of the parties to an international transaction. Common trade usages and practices may be adopted by the parties but serious controversies may nonetheless arise owing to different national laws. Accordingly, a uniform commercial law or set of principles is required to eliminate or reduce such controversies.

In 1994, the International Institute for the Unification of Private Law (UNIDROIT), an independent intergovernmental organization based in Rome, formulated the UNIDROIT Principles (the “Principles”) in an effort to harmonize and coordinate private commercial law between States that have acceded to the UNIDROIT statute[1].

The Principles play a vital role in international commerce due to the fact that they provide an alternative choice of law in instances where parties cannot agree on a specific choice of law. They also provide for adjudication of a dispute relating to a contract which is governed by the general principles of law as well as adjudication of a dispute in which the rules of “Conflict of Laws” point to a State whose law is obscure.

B.    APPLICABILITY AND INTERPRETATION OF THE PRINCIPLES 

The Principles apply to contracts which expressly provide for their applicability or contracts in which parties have not chosen any governing law.

Such contracts should however have an international element in order for the Principles to apply; they should be international contracts. It is worth noting that the Principles provide a broad interpretation to the concept of ‘international contracts’ such that contracts which have no international element whatsoever are not regarded as international contracts. In CJSC Obolon vs. Dania Handel A/S (2011) the Kyiv Commercial Court of Appeal in Ukraine held that the Principles did not apply in the contract between the Claimant and Respondent because the two were both Ukrainian nationals.

However, in Bottling Companies vs. Pepsi Cola Panamericana (1997), the Supreme Court of Venezuela held that the Arbitration Clause in a contract, which stipulated that the arbitration seat would in New York, was valid even though the parties were two Venezuelan companies. This was rationalised on the basis that one of the companies to the dispute was in fact a subsidiary of a United States entity.

With regard to interpretation of the Principles, due regard should be had to their international character and their purpose. Accordingly, where a certain issue is not expressly provided for, it is settled in accordance with its underlying general principles.

C.    ANALYSIS OF THE PRINCIPLES

In a nut shell, the Principles provide for general principles of contracts including their formation, validity, interpretation and termination.

They also cater for assignment of rights, transfer of obligations and the law on agency. Moreover, there are certain provisions that are mandatory for parties to an international contract despite their exclusion in the contract.

Below is a summary of the afore-mentioned content:

1.     General Provisions and Mandatory Rules

The Principles echo the general principle of “freedom to contract” through each and every provision. This freedom is however limited in instances where there is lack of competition such as where a party is bound to transact with a specific party (usually a public body) for public interest purposes.

The Principles further acknowledge trade customs and practices which they embody in certain mandatory rules. As the term suggests, the rules are imperative in any international contract and parties should not derogate from the same.

Such mandatory rules include the rules on: good faith and fair dealing; fraud, threat, gross disparity and illegality; price determination, payment for non-performance and modification of limitation periods.

a)    Good Faith and Fair Dealing

Good faith and fair dealing is imperative in any contract; its importance can simply not be overstated. For instance, parties to a contract are not bound to reach an agreement after negotiations and consequently, a party cannot be held liable due to failure to reach an agreement.

However, it would be in bad faith if one party actively took part in negotiations without an intention to ever reach an agreement. In such an instance, such a party is liable for the loss incurred by the other party.

b)    Fraud, Threat, Gross Disparity  and Illegality in Contract

Where the above-noted factors come into play, the Principles acknowledge that the aggrieved party has a right of avoidance of the contract. There are however exceptions to the principle such as where there is a waiver of the right of avoidance or where the party entitled to avoid the contract confirms the same after the period of time for giving notice of avoidance has become effective.

c)    Price Determination and Payment for Non- Performance

In instances where one party is to determine the price, the Principles stipulate that such price should be reasonable notwithstanding any contrary term in the contract.

Moreover, payment to an aggrieved party due to non-performance of the other should be of a reasonable amount in relation to the harm occasioned.

d)    Limitation Periods

The Principles further stipulate that the general and maximum limitation period for international commercial contracts is three (3) years and ten (10) years respectively. Such periods may however be modified by the parties on account of the parties’ freedom to contract. However, such modification should neither shorten the general limitation period to less than one (1) year nor the maximum limitation period to less than four (4) years. It should also not extend the maximum period to more than fifteen (15) years.

2.     Form of Contract 

The Principles provide that an international contract may take any form. Consequently, contracts may be evidenced in any way unless national law or international instruments impose specific restrictions as to the form of contract or to individual terms. In Kenya for instance, the Law of Contract Act Cap23, requires all contracts for the disposition of land to be in writing.

3.     Validity of a Contract

Interestingly, the Principles do not take into account all the grounds of validity of a contract which would customarily be considered in either common or civil law jurisdictions such as capacity, consideration and cause. In that regard, a contract is concluded, modified or terminated under the Principles by mere agreement of the parties, without any further requirement. It is worth noting that the Principles downplay the practical importance of consideration since obligations are often met by both parties and as such a mere agreement to conclude, modify or terminate a contract suffices for such conclusion, modification or termination.

Based on the foregoing, the Principles take into account initial impossibility, avoidance and illegality in addressing a contract’s validity. With regard to initial impossibility, it is imperative that such impossibility is equated to impossibility occurring after conclusion of the contract. A contract is therefore valid even if the subject matter has perished at the time of making the contract.

On the other hand, a party may avoid the contract on grounds of mistake, fraud, threat or gross disparity whereas where there is illegality, a party is entitled to reasonable remedies under the contract.

4.     Interpretation of a Contract 

Where a contract is found to be valid, the immediate issue to address would be interpretation of the terms and conditions. The Principles thus provide that in interpreting a contract, the common intention of the parties should be considered and where such intention is not clear, the interpretation of the said contract should be subjected to the reasonable man’s test. The said test stipulates that the contract should be interpreted according to a construction a reasonable person, of the same kind as the parties, would give to it in the same circumstances.

The Principles further provide that a contract should be interpreted as a whole rather than in part so as to give effect to all terms of the contract. Where the terms are unclear, such terms should be construed against the party who benefits from them (the contra preferentem rule)

Certain issues should also be addressed in interpreting the contract. Such issues include merger clauses and battle of the forms:

a)    Merger Clauses

Where a contract provides for a merger clause, the Principles stipulate that prior agreements cannot contradict the contract. Accordingly, prior agreements can only be used to interpret the contract. The position was taken in Svenska Petroleum Exploration AB, Government of the Republic of Lithuania, AB Geonafta [2005] whereby the High Court of Justice (Queen’s Bench Division) noted that the Articles 6.193 to 6.195 of the Lithuanian Civil Code resembled Articles 4.1 – 4.6 of the UNIDROIT Principles with respect to interpretation of contracts. The Court thus considered the pre-contractual negotiations of the parties to determine whether they had intended Lithuania to waive sovereign immunity and to be bound by the arbitration clause of the contract.

The Court held that due to previous drafts of the agreement, which contained terms waiving sovereign immunity for Lithuania and subjecting it to arbitration, Lithuania had waived its sovereign immunity and had agreed to settle disputes through arbitration.

b)    Battle of Forms

The battle of forms occurs where there are two executed standard agreements between the parties such as where there is a purchase order and a supply agreement. In such a situation, the question that arises is thus: which agreement supersedes the other?

The last shot doctrine may be used to solve such as an issue in which case the last set of standard terms agreed upon apply.  However, where there are conflicting standard terms and the parties refer to such terms more or less automatically or they are unaware of the conflicting terms, the Principles bring about the knock – out doctrine which stipulates that the contract is concluded on the basis of the agreed terms and common standard terms. The knock-out doctrine may however be excluded if notice is issued to the other party of the insistence of the first party’s standard terms.

5.     Assignment of Rights, Transfer of Obligations and Assignment of Contracts

a)    Assignment of Rights

Where a party wishes to assign its right under an international contract, such a right can be assigned by an agreement between it and the assignee without notice to the obligor (the other party to the contract). However, notice is required in instances of assignment of an obligation which is of a personal character. Accordingly, until the obligor receives a notice of appointment, it is discharged by paying the assignor. Conversely, after receipt of the said notice, the obligor is only discharged by paying the assignee.

On the other hand, assignment of a right to a non-monetary performance is only valid if such assignment does not render the obligation significantly burdensome. The Principles actually provide that where the obligor incurs additional costs due to an assignment, such costs should be borne by the assignor or assignee.

The said Principles also consider assignment of a future right at the time of the agreement provided that such a right can be identified when it comes into existence.

It should be noted that parties may expressly restrict assignment of rights be it of a monetary or non-monetary nature.  The Principles thus provide that where a contract restricts an assignment of a right to payment of a monetary sum, such assignment is effective but the assignor is liable to the obligor for breach of contract. In contrast, where a contract restricts the assignment of a right to performance other than payment of a monetary sum, the assignment is ineffective unless the assignee acted in good faith and had no notice of the restriction. Consequently, the assignor is liable to the obligor for breach of contract.

b)    Transfer of Obligations

Transfer of obligations may either be by an agreement between the original obligor and a new obligor or between the obligee and a new obligor. The obligee may discharge the original obligor or retain it in case the new obligor does not perform its obligations properly.

c)    Assignment of Contracts

Unlike assignment of rights, the Principles stipulate that an assignment of a contract requires the consent of the other party.  The other party may in turn discharge the assignor or retain the assignor as an obligor in case the assignee does not perform properly. Otherwise the assignor and assignee are jointly and severally liable.

d)    Plurality of Obligors and of Obligees

              i)         Plurality of Obligors

Plurality of obligors occurs where several obligors are bound by the same obligation towards an obligee. Accordingly, the obligations are joint and several when each obligor is bound for the whole obligation whereas when each obligor is bound only by its share, the obligations are separate.

            ii)         Plurality of Obligees

This occurs where several obligees can claim performance of the same obligation from an obligor. Accordingly, the claims are separate when each obligee can only claim its share whereas the claims are joint and several when each obligee can claim the whole performance or when all obligees have to claim performance together.

It should be noted that full performance of an obligation in favour of one of the joint and several obligees discharges the obligor towards the other obligees.

6.     Agency

The law on agency is aptly provided for by the Principles with regard to the formation of an agency relationship, the authority conferred and the liability on each party. Accordingly, the Principles provide that an agency contract may be formed either expressly or impliedly or even through automated contracting by the use of electronic data interchange.

With regard to the authority of agents, the Principles provide that agents have the authority to perform all acts necessary to achieve the purposes for which the authority was granted. The authority conferred is hence general authority rather than specific authority.

The Principles further acknowledge that the agency relationship is tripartite, that is, between the principal, agent and third party. Where the agency is disclosed, a legal relationship is created between the principal and the third party. Accordingly, upon breach of the contract, the principal is directly liable. However, where an agent undertakes to become a party to the contract, with the consent of the principal, a direct relationship is created between the third party and the agent. Consequently, the agent is held liable upon breach of the contract.

The agent is also held liable where an agency relationship is undisclosed or where he or she exceeds his or her authority.

7.     Termination of a Contract

Termination of a contract under the Principles may occur due to non-performance by one party or due to an anticipatory breach.

Termination may also occur upon issue of a notice of termination by one party to the other. Once a contract is terminated, each party is released from its obligations. However, such termination does not preclude a claim for damages for non-performance neither does it affect any provision in the contract for settlement of disputes.

D.   CONCLUSION

Cross-border trading is as natural to humanity as eating, laughing and crying (Perillo J, 1994). The Principles provide a uniform framework for international commercial contracts thus reducing disputes related thereto. The Principles are however of a persuasive value and they do not override mandatory rules of domestic law. Moreover, the Principles are in certain aspects unique because certain contract law rules in common law and civil law jurisdictions are not necessarily considered in the Principles.


*This paper was prepared as part of the writer’s Panel Discussion Notes during a conference organized by Primerus EMEA Institute (www.primerus.com) jointly with the Association of Corporate Counsel, Europe (AAC Europe) and supported by UNIDROIT. The theme of the conference was “UNIDROIT Principles of International Commercial Contracts” which was held on 14th July, 2016 in Hamburg, Germany.

[1]Currently, only sixty three (63) States in the world have acceded to the UNIDROIT statute, four (4) of which are African states namely: Egypt, Nigeria, South Africa and Tunisia

 


The general information contained herein is intended for informational purposes only. It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.

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