Governing law in International Contracts – Would you choose CISG or UPICC (Part 2)

Governing law in International Contracts – Would you choose CISG or UPICC (Part 2)

For much of human history, the enactment of law is the monopoly power of states. This practice preserves the sovereignty of a country, but it erects a great barrier to international trade since the legislation in each country is different which substantially raises the costs of doing business overseas. The boom of international trade in the late 20th century had prompted countries and international organisations to unify international trade laws. The United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention or CISG) and UNIDROIT Principles on International Commercial Contracts (UPICC) are the products of this process. Having knowledge on both of them can increase the power of procurement professionals in negotiating international contracts. 

In the last blog post, we have discovered the major principles in Vienna Convention. In this post, we will have a skim look at the UNIDROIT Principles.

UNIDROIT Principles of International Commercial Contracts

Interestingly, UNIDROIT Principles and Vienna Convention have the same origin. Preparation of a uniform law for the international sale of goods began in 1930 at the International Institute for the Unification of Private Law (UNIDROIT) in Rome. After the long postponement due to World War II, UNIDROIT works were submitted to a diplomatic conference in The Hague in 1964. The diplomatic conference then adopted two international conventions based on UNIDROIT’s works, one on the ¬≠international sale of goods and the other on the formation of contracts for the international sale of goods. However, the two conventions were not welcomed by the international community who insisted that these conventions were too Eurocentric.

Nonetheless, UNIDROIT early works contribute greatly to the harmonisation of private and business law. In the Introduction to the 1994 edition of UPICC, UNIDROIT states that “The objective of the UNIDROIT Principles is to establish a balanced set of rules designed for use throughout the world irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied.”

UPICC is continuously developed. Until August 2020, there are 4 editions of the Principles (1994, 2004, 2010 and 2016). The latest edition which was published in 2016 consists of 211 Articles, the same as the 2010 edition (as opposed to the 120 Articles of the 1994 edition and the 185 Articles of the 2004 edition).

UPICC Scope of Application

UPICC was made by a Working Group from UNIDROIT. The Working Group knew that there were also other instruments aiming at harmonisation of international commercial law. However, these instruments are mostly supranational legislation or international conventions or model laws, which are often ‘dead letter’ and hard to change. UPICC was intended to be a non-legislative mean of unification and harmonisation of law. Thus, it has no official binding power like Vienna Convention. UNIDROIT Governing Council acknowledges the binding effects of UPICC “In offering the UNIDROIT Principles to the international legal and business communities, the Governing Council is fully conscious of the fact that the UNIDROIT Principles, which do not involve the endorsement of Governments, are not a binding instrument and that in consequence their acceptance will depend upon their persuasive authority.”

Since it is not mandatory, UPICC is applicable to the following situations:

  • Contracting parties agree that their contracts are governed by UPICC or general principles of law or by lex mercatoria
  • Contracting parties have not chosen the governing law in their contracts
  • UPICC can be also used to interpret domestic laws and international law.

Despite of voluntary nature, UPICC has much wider application than Vienna Convention. While the latter only applies to sale transaction, the former can be applied to several types of contracts, including administrative contract, bank guarantee, consortium agreement, construction contract, memorandum of understanding, long-term supply contract, etc. You can find hundreds of disputes regarding different types of contracts which are governed by UPICC on Unilex.

Matters covered by UPICC

As aforementioned, UPICC is a complex instrument with 211 articles in 2016 edition. Again, UPICC coverage is much wider than Vienna Convention. The complexity of UPICC is comparable with a country’s civil code. What you cannot find in Vienna Convention can be found in UNIDROIT principles, include the following:

  • Authority of agent and principal
  • Battle of the forms
  • Grounds for invalidity of contract
  • Assignment of rights and transfer of obligations

Since the contents of UPICC are vast and highly legalese, we won’t tell you the details here. If you are interested, you can make a research by yourself by reading the text of UPICC and UNIDROIT official comments.

Which governing law should I choose?

After reading two articles of the series, you may have not decided yet which law should govern your next international contract. In general, CISG, UPICC and your country’s law respect the freedom of contract in international transactions, including the choice of law.

Our advice is that you should choose the law that benefits you the most. If your company has legal department who has expertise on your respective domestic law, probably you will incline to your country’s law. However, the domestic law may not bring the benefit you desire.

For example, I am a buyer from Vietnam who looks to purchase the used car from India. I found a seller who offers very good deal. The seller claims that he is collecting the cars from owners around the country and will be able to dispatch the batch soon. Then I signs a contract with him. Eventually, he fails to collect enough batch and deliver goods on time. If I have chosen Vietnam law as governing law, the contract would be void according to Article 408 of Civil Code which may impede me from collecting damages. On the other hand, if I chose UPICC, the contract would still be valid according to Article 3.1.3 and I would be able to claim for damage for seller’s non-performance.

The above example proves that international instrument may be more beneficial than the domestic law. Furthermore, selection of governing law requires the consensus from the other party. International instruments are often made with the balance of power on both parties. 

Finally, Vienna Convention and UPICC does not exclude each other. In fact, when contracting parties claim that international customs or lex mercatoria will apply to their contracts, arbitrary tribunals can quote from both Vienna Convention and UPICC. You can also use UPICC as supplement to Vienna Convention as governing law of a contract. UNIDROIT has several model contract clauses on governing law. 

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