Arnav Sanjay Mathur * & Tejas Vijay Raghav**
Introduction
The world of international trade and commerce has become increasingly globalized and transnational in nature. Consequently, the dispute resolution mechanisms employed in this sphere must also transcend the boundaries of individual legal systems and offer a truly transnational approach. This article explores the potential of the UNIDROIT Principles of International Commercial Contracts, 2016 (“UPICC”) to serve as the definitive “governing law” in international arbitration, which has emerged as the preeminent method of resolving cross-border disputes.
The article begins by setting the stage, examining the rise of international arbitration and its symbiotic relationship with the lex mercatoria, or the “law of the merchants.” It discusses how the growing trend of de-localization in arbitration, wherein the process and the award are detached from the seat of arbitration, has created an ideal environment for the development of a transnational dispute resolution system. The article then provides a detailed introduction to the UPICC, demonstrating its unique characteristics that make it the most suitable candidate to serve as the new lex mercatoria. The UPICC’s objectivity, neutrality, and international character, coupled with its flexibility in adapting to evolving commercial practices, position it as a robust and comprehensive framework for governing international commercial transactions.
Next, the article examines the use of the UPICC in international arbitration thus far, documenting its widespread application as an interpretive tool and supplement to domestic law. However, the article argues that the UPICC’s potential as the governing law in international arbitration has not been fully realized, and it makes a case for increasing the frequency of its use in this capacity.
The article concludes by proposing a model dispute resolution clause that would enable parties to choose the UPICC as the governing law of their agreement, complemented by international commercial law principles and the law of a specific state. This suggestion serves as a starting point for further discussion and exploration of the UPICC’s role in shaping the future of transnational commercial dispute resolution.
Setting The Stage – De-Localized Arbitration And The Need For A New Lex Mercatoria
In today’s globalized world, marked by the rapid expansion of international trade, international arbitration has become the foremost method for resolving cross-border commercial disputes. It offers parties a neutral, flexible, efficient, and effective mechanism that remains as independent as possible from national legal systems.[i] Moreover, its ability to deliver well-reasoned and high-quality decisions has cemented its status as the preferred dispute resolution method for the international business community.
This ascendancy of international arbitration runs parallel to the evolution of the lex mercatoria, one of the most significant developments in transnational law and commerce. Originally a collection of rules tailored for international commercial contexts, the lex mercatoria and international arbitration share a “symbiotic” relationship. Arbitration provided an ideal platform for its growth, enabling arbitral tribunals to apply dynamic, evolving rules that eventually contributed to the emergence of a private international commercial law.
As the lex mercatoria aligned with the expanding practice of international arbitration, it evolved into an independent and self-standing legal regime. By leveraging arbitration’s capacity to deliver transnational justice, the lex mercatoria has made strides in both application and interpretation. This progress has even prompted arguments that the lex mercatoria in and of itself can serve as a standalone dispute resolution mechanism, with arbitrators empowered to “create” innovative legal solutions.
Globalization has not only impacted commerce but also reshaped entire legal domains, particularly those with transnational subject matter. In response, numerous efforts to harmonize and unify legal systems have been undertaken, especially within international commercial arbitration.[ii] One notable development in this regard is the shift toward delocalized arbitration. It stems from the idea that if cross-border commercial transactions are witnessing greater complexity and the possible involvement of several jurisdictions, it is not an entirely radical idea to allow parties to such transactions to settle their disputes in accordance to laws that are specifically designed for transnational contexts. It also protects arbitration from the limitations and peculiarities of national legal systems, positioning it as a “floating” mechanism unencumbered by any one jurisdiction’s rules.
Delocalized arbitration, therefore, functions as a self-regulatory system – detaching either the arbitral procedure, the award, or both, from the seat of arbitration. The primary rationale is that parties choose the arbitration venue based solely on convenience, not due to a preference for a particular national legal system. This global backdrop creates ideal conditions for a truly transnational dispute resolution system. Here, international commercial arbitration, especially in its delocalized form, serves as the optimal procedural mechanism, while the lex mercatoria stands out as the ideal substantive framework.
In this context, the foremost articulation of the lex mercatoria is found in the UPICC. Designed to capture universally accepted principles of contract law, the UPICC carries inherent persuasive value worldwide, making it exceptionally well-suited for cross-border commercial transactions. Its coherence and consistency even elevate it to a “plus” version of the lex mercatoria.
It is important to note that this argument does not suggest the UPICC has been absent from international arbitration; Rather, it calls for its more frequent use as the governing law. The following section will detail the essential characteristics that qualify the UPICC as the ideal legal instrument for the new lex mercatoria, and the subsequent section will illustrate how its role as governing law remains underappreciated in international arbitration.
Introduction To UPICC – The Ideal Candidate For The New Lex Mercatoria
The UPICC represents a pioneering effort to unify private law through innovative non-legislative means, departing from conventional approaches reliant on binding conventions and model laws. Unlike traditional legislative methods, the UPICC aimed to establish a comprehensive framework of principles applicable globally, irrespective of specific legal traditions or economic conditions. The objective was not to impose binding laws or model statutes but to create a balanced set of rules designed for universal application. UPICC enhances global trade as firstly, they offer a non-binding framework tailored for international transactions, providing a “neutral” set of rules not tied to any specific legal tradition. This adaptability fosters smoother cross-border dealings by balancing common law and civil law principles. Secondly, the UPICC addresses the unique needs of international trade, offering rules better suited to its complexities. Unlike domestic contract laws, they are crafted specifically for global transactions, accommodating diverse legal systems. Lastly, the UPICC are multilingual, ensuring accessibility to parties from different linguistic backgrounds. Available in various languages, they promote clearer communication and agreement among parties involved in international contracts.[iii]
The development of the UPICC involved a meticulous drafting process undertaken by a diverse working group comprising leading experts in comparative law and international trade law. These experts were appointed in their individual capacities, ensuring a broad and inclusive perspective. Emphasis was placed on synthesizing principles from both civil law and common law traditions to accommodate the diverse legal systems prevalent across different jurisdictions. The drafters drew upon a wide range of sources, including recent codifications and compilations of law, such as the Uniform Commercial Code and the Restatement (Second) of the Law of Contracts. Additionally, international instruments like the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) and non-legislative instruments by professional bodies or trade associations provided valuable insights into contemporary legal practices and trends.
The UPICC emerged as a novel product of international commercial law, aiming to lay down general principles of contract law in a coherent code-like form. Its scope of application, as outlined in the preamble, encompasses situations where parties have agreed to be governed by the Principles or by general principles of law, lex mercatoria, or similar legal frameworks. The Principles are characterized by their flexibility to adapt to evolving technological and economic developments affecting cross-border transactions, while also striving to ensure fairness in international commercial relations.
In conclusion to this section, it can be observed that the UPICC is a hallmark legal instrument in terms of objectivity, neutrality, and bearing an international character. These very characteristics of the UPICC, in turn, render it the legal instrument that can offer the most to international arbitration, since the latter prides itself on neutrality and enforceability on a truly global scale.
International Arbitration & UPICC – The Journey So Far
As a soft law instrument, the UPICC promotes efficiency, reduces risks, and contributes to the delivery of justice in arbitration proceedings. They offer a flexible framework that arbitrators frequently rely on to address complex legal issues arising in cross-border disputes. The UPICC’s widespread use as an interpretive tool in arbitration is evidenced by a substantial number of arbitral awards that have invoked these principles, precisely 233 reported cases. Arbitral tribunals, whether operating under institutional rules or in ad hoc proceedings, have consistently applied the UPICC to supplement or interpret domestic law, particularly in cases involving contracts with connections to multiple legal systems. This approach enables arbitrators to navigate issues and ensure that decisions reflect international standards and best practices.
The UPICC also aids in interpreting trade usages and customary practices in international commerce, as demonstrated in an Ad Hoc arbitration seated in Rome. Arbitral tribunals may consider the UPICC as part of the applicable trade usages, especially when contractual provisions or domestic laws lack clarity or are ill-suited for cross-border transactions. By referencing the UPICC, arbitrators can validate decisions reached under domestic law and ensure that outcomes align with transnational norms and principles.
The UPICC’s application in international arbitration extends to various areas of contract law, including rules of interpretation, good faith, price determinability, quantification of losses, mitigation of damages, and hardship. Lastly, it may be noted that arbitral tribunals often draw upon the UPICC to address these issues, leveraging their comprehensive and balanced approach to contract law to reach equitable and enforceable decisions.
Making The Case For UPICC As “Governing Law” In International Arbitration
From the foregoing section, it is evident that while the UPICC has found significant application in the realm of international commercial arbitration, serving as valuable interpretive tools and supplements to domestic law, its potential as ‘the governing law’ of a dispute has been unappreciated. In this regard, this section is concerned with answering two crucial questions. The first question deals with whether the parties in an international commercial arbitration proceeding can exercise their autonomy to choose the UPICC, as opposed to national legislation, to form the governing law. The second and subsequent question concerns itself with the distinct advantages that parties can avail by choosing the UPICC as the governing law or what factors would motivate parties to choose the UPICC over a national legislation.
Coming to the first question of enforceability and validity of UPICC and lex mercatoria, long before UPICC, arbitral tribunals have not only have they recognized the parties’ reference to non-state sources of law i.e. lex mercatoria, they also have actually based awards on rules and principles that do not emanate from a particular national system of “law.”
A few examples from the plethora of international jurisprudence are analysed below.
In Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd., the House of Lords dealt with issues arising out of an arbitration agreement that expressly incorporated not only domestic law but also general principles of international trade law. In doing so, the court’s reasoning reinforces the point that even before instruments such as the UPICC were developed, arbitral tribunals and courts were already prepared to give effect to dispute‐resolution mechanisms based on non‐state legal sources, often reflecting a lex mercatoria approach.[iv]
The French Cour de Cassation in Societe Fougerolle v. Banque du Proche Orient, upheld the arbitral tribunal’s sovereign interpretation of contractual clauses invoking non-state principles—specifically, by affirming that the tribunal had the exclusive power to interpret Article 2 of the agreement without overstepping its mandate, thereby validating the reliance on lex mercatoria.[v]
The Swedish Supreme Court, in Götaverken Arendal Aktiebolag v. General National Maritime Transport Company, held that the arbitral award, grounded in non-state legal principles, was enforceable and binding. It dismissed the appellant’s contention that opposition proceedings in France should suspend enforcement, showing that awards based on lex mercatoria are recognized and upheld regardless of challenges under domestic law.[vi]
Further, modern arbitration statutes, influenced by the UNCITRAL Model Law, often provide that parties may choose the “rules of law” to govern the substance of their dispute, rather than being limited to the application of a particular national law. This terminology has been interpreted to allow for the selection of non-national bodies of law, such as the UPICC, as the applicable rules. The widespread adoption of this “rules of law” approach in major commercial arbitration hubs reflects the growing acceptance of the lex mercatoria as a legitimate choice of law in international arbitration, empowering parties to select transnational principles and standards to govern their contractual relationships.
In an ICC case, an arbitral tribunal applied the UPICC to supplement the parties’ agreement, which had initially referred to the law of Iran but was later modified to include “general principles of international law.” When the award was challenged in a U.S. court, the court rejected the argument that using the UPICC exceeded the scope of the arbitration. Importantly, the court recognized the UPICC as reflecting “general principles of international law” and upheld the tribunal’s reliance on this transnational legal framework as authorized by the parties. This decision affirmed that parties in international commercial disputes can legitimately choose to have the UPICC govern their contractual relationship. Therefore, arbitrators will undoubtedly acknowledge a choice of the UPICC by the parties as the law governing the transaction.
Moving forward to the second question, the desirability of UPICC governing law can hardly be overstated. As a neutral, non-state legal framework, the lex mercatoria provides a level playing field for parties from diverse legal and cultural backgrounds, preventing the perceived biases that may arise from the application of a specific national law. The flexibility and adaptability of UPICC allow it to evolve alongside the changing practices and needs of international commerce, ensuring that disputes are resolved in a manner that is attuned to the realities of cross-border transactions. Moreover, the specialized expertise of arbitrators well-versed in UPICC enhances the quality and effectiveness of dispute resolution, contributing to greater predictability and legal certainty for parties engaging in international trade.
Conclusions & Suggestions For The Future
The world of international commerce and international arbitrations are witness to a perfect storm of circumstances that warrant the UPICC to take on a more increased and active role. Increased globalization in commerce and commercial law, along with the progress of arbitration in the direction of de-localization have created a pressing need for a new lex mercatoria, and the UPICC is the ideal candidate to address such a need. While the UPICC is no stranger to the world of international arbitration, the stage is all set for it to become the star of the show.
In the interest of completing the argument in favour of UPICC being chosen as the “governing law” more frequently in international arbitrations, the authors propose the following model dispute resolution clause, which would serve as a point of discussion and ideation going forward:
“Any dispute, controversy, or claim arising out of or relating to this agreement, or the breach, termination, or validity thereof, shall be referred to and finally resolved by arbitration by the [Arbitration Institution] in accordance with its Arbitration Rules [and Procedures] then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
The seat of the arbitration shall be [Seat]. The number of arbitrators shall be [one/three]. The language of the arbitration shall be [language]. The law governing the arbitration agreement and contract shall be UNIDROIT Principles of International Commercial Contracts (2016), with respect to issues not covered by such Principles, by generally accepted principles of international commercial law, if not then by the law of [State X].”
* Arnav Sanjay Mathur is a B.A. LL.B. student at NALSAR University of Law, India and a Research Scholar at Milon K. Banerjee Centre for Arbitration Law.
**Tejas Vijay Raghav is an Associate (Dispute Resolution) at AZB & Partners, Mumbai and holds a B.A. LL.B. degree from NALSAR University of Law, India.
[i] Gary Born, Chapter 1: Overview of International Commercial Arbitration, in International commercial arbitration (3 ed. 2021).
[ii] Prominent examples of such attempts include the United Nations Convention on the Recognition and Enforcements of Foreign Arbitral Awards, 1958 (‘New York Convention’), the UNCITRAL Model Law on International Commercial Arbitration, 1985 [with amendments adopted in 2006] and the UNCITRAL Arbitration Rules [as amended in 2010].
[iii] The UPICC is available in English, French, German, Italian, Spanish, Chinese, Japanese, Korean, Portuguese, Romanian, Russian, Turkish and Ukrainian.
[iv] Clause 68 of the contract stated – “The construction, validity and performance of the contract shall in all respects be governed by and interpreted in accordance with the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals.”
Although the judgment primarily discusses issues relating to the granting of interlocutory injunctions and the staying of proceedings, the court’s overall treatment of the arbitration clause and its supportive measures demonstrates that the English legal system is prepared to enforce awards derived from such transnational frameworks. For example, the court observed that even when the parties have agreed to resolve their disputes by arbitration under a mixed regime, the domestic court’s supervisory function does not undermine the enforceability of the award:
“If the defendant does not apply for a stay, or if the circumstances are such as to bring into play the exceptions in section 1 of the Act of 1975, or if something happens at a later stage which demands the lifting of any stay... the cause of action is still potentially justiciable by the English court.”
[v] “Attendu que l'arrêt relève exactement qu'en se référant aux 'principes généraux des obligations généralement applicables dans le commerce international', les arbitres n'ont fait que se conformer à l'obligation qu'ils avaient, en vertu de l'article 8 de l'acte de mission, de définir le droit applicable à l'accord conclu…” (“Considering that the judgment precisely notes that by referring to the 'general principles of obligations generally applicable in international commerce', the arbitrators merely complied with the obligation imposed on them, under Article 8 of the mandate, to define the applicable law to the concluded agreement…)
“Attendu qu'après avoir relevé que les arbitres avaient souverainement apprécié la portée de l'article 2 de l'accord, l'arrêt retient, en rapprochant notamment les alinéas 1 et 3 de l'article 9 de l'acte de mission, que le tribunal arbitral n'avait pas exercé les pouvoirs d'aimables compositeurs en fixant une rémunération partielle selon l'importance de la partie des obligations exécutées…” (“Considering that, after having noted that the arbitrators had sovereignly assessed the scope of Article 2 of the agreement, the judgment holds, by notably comparing paragraphs 1 and 3 of Article 9 of the mandate, that the arbitral tribunal had not exceeded its discretionary powers by setting a partial remuneration according to the significance of the obligations performed…”)
[vi] “Against the above background, the now relevant arbitral award must be deemed, in the meaning set out in item 5 of the first paragraph of Section 7 of the Act on Foreign Arbitration Agreements and Arbitral awards, enforceable and binding on the parties in France already as of it having been rendered.”
“Thus, the appellant has not established that such circumstances are at hand that the arbitral award under the first paragraph of Section 7 of the Act on Foreign Arbitration Agreements and Arbitral awards is not valid in Sweden.”
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