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Timestamp: 2019-04-21 00:51:43+00:00

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I am delighted to preface this publication of the Principles on Choice of Law in International Commercial Contracts (the "Hague Principles"), the first normative soft-law instrument developped and approved by the Hague Conference on Private International Law.
In addition to the 12 articles of the Hague Principles and their Preamble, this publication includes the Introduction to the Principles, which describes the general framwork, nature, purpose, structure, and scope of the Hague Principles. This publication also includes the article-by-article Commentary, an interpretative and explanatory tool for the better understanding of the Hague Principles.
At their core, the Hague Principles are designed to promote party autonomy in international commercial contracts. By acknowledging that parties to a contract may be best positioned to determine which set of legal norms is most suitable for their transaction, party autonomy enhances predictability and legal certainty - important conditions for effective cross-border trade and commerce. At the same time, the Hague Principles also set balanced boundaries to party autonomy and thus may provide a refinement of the concept where it is already accepted. In essence, the Hague Principles may be considered to be an international code of current best practice in relation to party autonomy in international commercial contracts.
Work on the Hague Principles started in 2006, when the Council on General Affairs and Policy of the Hague Conference invited the Permanent Bureau to prepare a feasibility study on the development of an instrument concerning choice of law in international contracts (a succinct overview of the development of the Hague Principles follows below at p.9). In 2009, the Council invited the Permanent Bureau to set up a Working Group, composed of experts in the fields of private international law, international commercial law and international arbitration law, with a view to developing a draft non-binding instrument on choice of law in international commercial contracts. Under the excellent chairmanship of Mr Daniel Girsberger (Switzerland), the Working GRoup met at regular intervals between 2010 and 2012 and developed the 12 articles of the future instrument. Then, in November 2012, a Special Commission meeting was held to review the draft articles. The Commission approved them and tasked the Working Group with also developing a commentary. Thanks to the efforts of several experts who took on the primary drafting of different parts of the Commentary, and to further discussions within the Working Group, work on the full "package" (Introduction, Preamble, Articles, Commentary) was completed in 2014. On 19 March 2015, the Members of the Hague Conference formally approved the Hague Principles.
The Hague Principles are not formally binding; they provide a comprehensive blueprint to guide users in the creation, reform, or interpretation of choice of law regimes at the national, regional, or international level. The Hague Principles have already proven their usefulness in eraly in 2015, when they served as a model to the legislator of Paraguay in promulgating a low on the Law Applicable to International Contracts.
The Permanent Bureau hopes that other jurisdictions will follow this pioneering initiative, reaffirming the usefulness of the Hague Principles as an inspiring international standard, which has, as a further most encouraging sign of their approval by the international legal community, received UNCITRAL's endorsement in July 2015.
The development of the Hague Principles represents a truly collective efforts. The extraordinary commitment, dedication, and sheer hard work of each member of the Working Group and of the experts who participated in the 2012 Special Commission meeting was instrumental to seeing this project come to fruition. The active participation of a select group of Observers enriched and contextualised the drafting process over the years (a list of participating experts can be found below on p.13). Above all, Mr Daniel Girsberger played a key role as the Chair of both the Working Group and the 2012 Special Commission meeting. His wise guidance throughout the years, with the assistance of Ms Marta Pertegàs as the lawyer with primary repsonsibility for this project at the Permanent Bureau, was essential to the completion of this important Hague instrument.
On behalf of the Permanent Bureau, and personally, I wish to extend my sincere and deep appreciation to all the members of the Working Group and all other experts who were involved in the development of the Hague Principles. Thanks should also go to the many colleagues and interns of the Permanent Buereau for their important contributions to this project. While they are too numerous to be listed here, they all know they belong to the growing community of "Hague Principles Ambassadors" from around the world.
I am confident that this publication will help with promoting, disseminating, and applying the Hague Principles around the world.
Upon completion of the written procedure without objection, the Principles on Choice of Law in International Commercial Contracts are formally approved on the 19 March 2015.
Members of the Working Group (certain experts had primary drafting responsibility for particuar Articles of the Commentary and this is indicated with an *below).
Mr José Antonio MORENO RODRIGUEZ, Professor, CEDEP - Centro de Estudios de Derecho, Economia y Politica, Asuncion, Paraguay; member of the International Chamber of Commerce (ICC) International Court of Arbitration.
1. This instrument sets forth general principles concerning choice of law in international commercial contracts. They affirm the principle of party autonomy with limited exceptions.
2. They may be used as a model for national, regional, supranational or international instruments.
3. They may be used to interpret, supplement and develop rules of private international law.
4. They may be applied by courts and by arbitral tribunals.
1. These Principles apply to choice of law in international contracts where each party is acting in the exercise of its trade or profession. They do no apply to consumer or employment contracts.
2. For the purpose of these Principles, a contract is international unless each party has its establishment in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen law, are connected only with that State.
the issue of whether an agent is able to bind a principal to a third party.
1. A contract is governed by the law chosen by the parties.
different laws for different parts of the contract.
3. The choice may be made or modified at any time. A choice or modification made after the contract has been concluded shall not prejudice its formal validity or the rights of third parties.
4. No connection is required between the law chosen and the parties or their transaction.
The law chosen by the parties may be rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise.
A choice of law, or any modification of a choice of law, must be made expressly or appear clearly from the provisions of the contract or the circumstances. An agreement between the parties to confer jurisdiction on a court or an arbitral tribunal to determine disputes under the contract is not in itself equivalent to a choice of law.
A choice of law is not subject to any requirement as to form unless otherwise agreed by the parties.
the prevailing terms applies; if under these laws different standard terms prevail, or if under one or both of these laws no standard terms prevail, there is no choice of law.
2. The law of the State in which a party has its establishment determines whether that party has consented to the choice of law if, under the circumstances, it would nàt be reasonable to make that determination under the law specified in paragraph I.
A choice of law cannot be contested solely on the ground that the contract to chich it applies is not valid.
A choice of law does not refer to rules of private international of the law chosen by the parties unless the parties expressly provide otherwise.
2. Paragraph I(e) does not preclude the application of any other governing law supportinf the formal validity of the contract.
whether the obligations of the debtor have been discharged.
1. These Principles shall not prevent a court from applying overriding mandatory provisions of the law of the forum which apply irrespective of the law chosen by the parties.
2. The law of the forum determines when a court may or must apply take into account overriding mandatory provisions of another law.
3. A court may exclude application of a provision of the law chose by the parties only if and to the extent that the result of such application would be manifestly incompatible with fundamental notions of public policy (odre public) of the forum.
4. The law of the forum determines when a court may or must apply or take into account the public policy (ordre public) of a State the law of which would be applicable in the absence of a choice of law.
5. These Principles shall not prevent an arbitral tribunal from applying or taking into account public policy (ordre public), or from applying or taking into account overriding mandatory provisions of a law other than the law chosen by the parties, if the arbitral tribunal is required or entitled to do so.
If a party has more than one establishment, the relevant establisment for the purpose of these Principles is the ona which has the closest relationship to the contract at the time of its conclusion.
I.1 When parties enter into a contract that has connections with more than one State, the question of which set of legal rules governs the transactions necessarily arises. The answer to this question is obviously important to a court or a arbitral tribunal that must resolve a dispute between the parties but it is also important for the parties themselves, in planning the transactions and performing the contract, to know the set of rules that governs their obligations.
I.2 Determination of the law applicable to a contract without taking into account the expressed will of the parties to the contract can lead to unhelpful uncertainty because of differences between solutions from State to State. For this reason, among others, the concept of "party autonomy" to determine the applicable law has developped and thrived.
I.3 Party autonomy, which refers to the power of parties to a contract to choose the law that governs that contract, enhances certainty and predictability within the parties' primary contractual arrangement and recognises that parties to a contract may be in the best position to determine which set of legal principles is most suitable for their transaction. Many States have reached this conclusion and, as a result, giving effect to party autonomy is the predominant view today. However, this concept is not yet applied everywhere.
I.4 The Hague Conference on Private International Law ("the Hague Conference") believes that the advantages of party autonomy are significant and encourages the spread of this concept to States that have not yet adopted it, or have done so with significant restrictions, as well as the continued development and refinement of the concept where it is already accepted.
I.5 Accordingly, the Hague Conference has promulgated the Hague Principles on Choice of Law in International Commercial Contracts ("the Principles"). The Principles can be seen both as an illustration of how a comprehensive choice of law regime for giving effects to party autonomy may be constructed and as guide to "best practices" in establishing and refining such a regime.
I.6 The parties' choice of law must be distinguished from the terms of the parties' primary contractual arrangement ("main contract"). The main contract could be, for example, a sales contract, services contract or loan contract. Parties may either choose the applicable law in their main contract or by making a separate agreement on choice of law (hereinafter each referred to as a "choice of law agreement").
should be also distinguished from "arbitration clauses" (or agreements), that denote the parties' agreement to submit their dispute to an arbitral tribunal. While these clauses or agreements (collectively referred to as "dispute resolution agreements") are often combined in practice with choice of law agreements, they serve different purposes. The Principles deal only with choice of law agreements and not with dispute resolution resolution agreements or other matters commonly considered to be procedural issues.
I.9 As a non-binding instrument, the Principles differ from other instruments developped by the Hague Conference. While the Hague Conference does not exclude the possibility of developing a binding instrument in the future, it considers that an advisory set of non-binding principles is more appropriate at the present time in promoting the acceptance of the principle of party autonomy for choice of law in international contracts and the development of well-crafted legal regimes that apply that principle in a balanced and workable manner. As the Principles influence law reform, they should encourage continuing harmonisation among States in their treatment of this topic and, perhaps, bring about circumstances in which a binding instrument would be appropriate.
I.10 While the promulgation of non-binding principles is novel for the Hague Conference, such instruments are relatively common. Indeed, the Principles add to a growing number of a non-binding instruments of other organisations that have achieved success in developing and harmonising law. See, e.g., the influence of the UNIDROIT Principles and the PECL on the development of contract law.
I.11 The overarching aim of the Principles is to reinforce party autonomy and to ensure that the law chosen by the parties has the widest scope of application, subject to clearly defined limits (Preamble, para. I).
I.12 In order for the Principles to apply, two criteria must be satisfied. First, the contract in question must be "international". A contract is "international" within the meaning given to that term in the Principles unless the parties have their establishments in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen law, are connected only with that State (see Art. I(2)). The second criterion is that each party to the contract myst be acting in the exercise of its trade or profession (see Art I(1)). The Principles expressly exclude from their scope certain specific categories of contracts in which bargaining power of one party - a consumer or employee - is presumptively weaker (Art. I(1)).
I.13 While the aim of the Principles is to promote the acceptance of party autonomy for choice of law, the principles also provide for limitations on that autonomy. The most important limitations to party autonomy, and thus the application of the parties' chosen law, are contained in Article II addresses limitations resulting from overriding mandatory rules and public policy (ordre public). The purpose of those limitations is to ensure that, in certain circumstances, the parties' choice of law does not have the effect of excluding certain rules and policies that are of fundamental importance to States.
I.14 The Principles provide rules only for situations in which the parties have made a choice of law (express or tacit) by agreement. The Principles do not provide rules for determining the applicable law in the absence of party choice. The reasons for this exclusion are twofold. First, the goal of the Principles is to further party autonomy rather than provide a comprehensive body of principles for determining the law applicable to international commercial contracts. Secondly, a consensus with respect to the rules that determine the applicable law in the absence of choice of is currently lacking. The limitation of the scope of the Principles does not, however, preclude the Hague Conference from developing rules at a later date for the determination of the law applicable to contracts in the absence of a choice of law agreement.
I.16 Some provisions reflect an approach that is the subject of wide, international consensus. These include the fundamental ability of the parties to choose the applicable law (Preamble, para I and Art. 2(1)) and appropriate limitations on the application of the parties' chosen law (see Art. II). It is to be expected that a State that adopts a regime that supports party autonomy would necessarily adopt rules consistent with these provisions.
I.18 Certain provisions of the Principles reflect novel solutions. One of the salient features is found in Article 3, which allows the parties to choose not only the law of a State but also "rules of law", emanating from non-State sources, within certain parameters. Historically, choice of norms or "rules of law" has typically been contemplated only in an arbitral context. Where a dispute is subject to litigation before a State court, private international law regimes have traditionally required that the parties' choice of law agreement designate a State system of law. Some regimes have allowed parties to incorporate by reference in their contract "rules of law" or trade usages. Incorporation by reference, however, is different from allowing parties to choose "rules of law" as the law applicable to their contract.
I.19 Other innovative provisions are contained in Articles 5, 6 and 8. Article 5 provides a substantive rule of private international law that no particular form is required for a choice of law agreement to be valid, unless otherwise agreed by the parties. Article 6 provides, inter alia, a solution to the vexed problem of the "battle of forms" or, more specifically, the outcome when both parties make choices of law via the exchange of "standards terms". Article 8 provides for the exclusion of renvoi but, unlike many other instruments, allows the parties to expressly agree otherwise.
For lawmakers (whether legislators or courts), the Principles constitute a model that can be used to create new, or supplement and further develop, existing rules on choice of law (Preamble, paras 2-3). Because of their non-binding nature, lawmakers at a national, regional supranational or international level can implement the Principles in whole or in part. Lawmakers also retain the possibility of making policy decisions where the Principles defer to the law of the forum (see Arts 3, 11(2) and 11(4)).
For courts and arbitral tribunals, the Principles provide guidance as to how to approach questions concerning the validity and effects of a choice of law agreement, and resolve choice of law disputes within the prevailing legal framework (Preamble, paras 3-4). The Principles may be useful, in particular, for addressing novel situations.
For parties and their legal advisors, the Principles provide guidance as to the law or "rules of law" that the parties may legitimately be able to choose, and the relevant parameters and considerations when making a choice of law, including important issues as to the validity and effects of their choice, and the drafting of an enforceable choice of law agreement.
I. 21 Users of the Principles are encouraged to read the articles in conjunction with the Preamble and Commentary. The Commentary accompanies each article and serves as an explanatory and interpretative tool. The Commentary includes many practical examples illustratinf the application of the Principles. The structure and length of each commentary and illustration varies depending on the level of detail required to understand each article. The Commentary also includes comparative references to regional, supranational, or international instruments and to drafting history, where such references assist with interpretation. Users may also wish to consult the bibliography and materials accessible on the Hague Conference website.
P.3 The objective of the Principles is to encourage the spread of party autonomy to States that have not yet adopted it, or have done so with significant restrictions, as well as the continued development and refinement of the concept where it is already accepted. Party autonomy meets the legitimate expectations of the parties in this environment and, as such, advances foreseeability and legal certainty. Certainty is enhanced, in particular, as the law to be applied in the absence of a choice of law by the parties depends on the forum in which a dispute is heard. Party autonomy enables the parties to choose a neutral law or the law they consider most approriate for the specific contract. The Principles therefore affirm the freedom of parties to an international commercial contract (see Art. 1(1)-(2)) to choose the law applicable thereto (see Art. 2-3). The Principles, however, provide limited exceptions to party autonomy in Article 11 (overriding mandatory rules and public policy).
P.4 One of the objectives of the intrument is the acceptance of its principles in present and future private international law instruments, producing a substantial degree of harmonisation of law, on a national, regional, supranational and international level, giving effect to party autonomy in choice of law in international commercial contracts.
1.1 The purpose of Article 1 is to determine the scope of application of the Principles. This scope is defined by three criteria: the Principles apply to choice of law agreements (a) in contractual matters when the contract is (ii) international (see paras 1.13-1.21) and (iii) commercial (see paras 1.5-1.12).
1.3 The Principles apply to choice of law agreements in international contracts in which each party is acting in the exercise of its trade or profession. An explicit clarification is included confirming that the Principles do not apply to consumer or employment contracts.
1.4 The scope of application of the Principles is confirmed to commercial contracts because in these contracts party autonomy is widely accepted. In 2008, "the Council invited the Permanent Bureau to continue its exploration of this topic concerning international business-to-business contracts with a view to promoting party autonomy" (Conclusions and Reommendations adopted by the Council on General Affairs and Policy of the Conference (1-3 April 2008), and in 2009, "the Council invited the Permanent Bureau to continue its work on promoting party autonomy in the field of international commercial contracts" (Conclusions and Recommendations adopted by the Council on General Affairs and Policy of the Conference (31 March-2 April 2009), p.2). The rationale is to establish and enhance party autonomy in international contracts, but only in those situationsin which both parties act in their professional capacity, and the risks of an sbuse of party autonomy are therefore minimised.
1.5 As indicated in the Preamble (para. 1), the Principles address only "commercial contracts", a term that is used, among other instuments, by the UNIDROIT Principles. Article 1(1) more precisely delineates this aspect of the scope of the Principles by (i) describing the types of contracts to which the Principles apply, and (ii) expressly excluding consumer and employment contracts.
1.6 Unlike the Preamble, however, Article 1 does not use "commercial contracts" and therefore does not formally define this term. Rather, Article 1(1) describes as falling within the scope of the Principles those contracts in which "...each party is acting in the exercise of its trade or profession". For the Principles to be applied, both (or all) parties must be acting in the course of their respective trade or profession. This formulation is inspired by the Rome I Regulation (Art. 6(1)), which defines a consumer as a natural person acting for a purpose which can be regarded as being outside his or her trade or profession. Article 1(1) is the converse, in the sense that it affirmatively describes commercial contracts as those in which each party is acting in the exercise of its trade or profession. Article 1(1) is important because it introduces an autonomous concept for determining when the Principles apply; it does not urs the term "commercial contracts", which may have different connotations in different States. For example, this formulation does not necessarily mirror the traditional distinction in some States between civil and commercial transactions and it does not follow the practice in some other States where contracts between business and consumers are considered to be "commercial".
1.8 Whether a party "...is acting in the exercise of its trade or profession" depends on the circumstances of the contract, not on the mere status of the parties. Hence, the same person may act as a trader or professional in relation to certain transactions and as a consumer in relation to others.
Party A is a practising lawyer. When Party A concludes a legal service contract with Party B, a company, Party A is acting in the exercise of his or her profession. However, when Party A concludes a rental contract for an apartment in which to spend his or her vacation. Party A is acting outside the exercise of his or her profession.
1.10 Non-commercial contracts are excluded from the scope of application of the Principles. In particular, and to avoid any doubt, Article 1(1) explicitly excludes consumer and employment contracts. This exclusion encompasses both individual and collective contracts of employment. This exclusion is justified by the fact that the substantive law of many States subjects consumen and employment contracts to special protective rules from which the parties may not derogate by contract. These rules are aimed at protecting the weaker party - consumer or employee - from an abuse of the freedeom of contract and this protection extends to private international law where it appears as an exclusion or limitation on party autonomy. However, the exclusion of consumer and employment contracts under Article 1(1) is merely illustrative of the type of non-commercial contracts to which the Principles do not apply. Other non-commercial contracts, such as a contract concluded between two consumers, are also outside the scope of application of the Principles.
1.12 Article 1(1) describes the contracts to which the Principles apply in general terms, in keeping with the nature of the instrument as a set of non-binding general principles. With regards, in particular, to consumer contracts, the Principles do not explicitly address the characterisation of the so-called "dual-purpose contracts", i.e., contracts intended for purposes that fall partially outside a party's trade or profession. Likewise, the Principles are silent with regard to the perspective from which the purpose of the contract is to be evaluated, i.e., whether it is necessary for the professional to have been aware of the purpose of the contract (see ARt. 2(a) CISG).
1.13 To fall within the scope of the Principles, the contract must qualify as an "international" contract. This requirement is consistent with the traditional understanding that private international law applies only to international cases. The definition of "internationality" varies considerably among national and international instruments (see para. 1.15).
1.14 For the purpose of the Principles, the notion of an international contract is deined in Article 1(2). Pursuant to this provision, the only contracts that are excluded as lacking internationality are those in which "each party has its establishment in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen las, are connected only with that State". This negative definition excludes only purely domestic situations, aiming to confer the broadest possible scope of interpretation to the term "international". This provision is primarily inspired by the 2005 Hague Choice of Court Convention (Art. 1(2)).
1.15 Article 1(2) of the Principles does not adopt a positive definition of internationality of the contract as found in some other instruments (see, e.g., Art. 1(a)-(b) 1986 Hague Sales Convention). Nor does Article 1(2) take a broader approach of referring to all cases involving a "conflict of laws", or a "choice between the laws of different States" whereby the parties' choice of law alone may constitute a relevant element (see, e.g., Art 3 2006 Hauge Securities Convention).
1.17 First, Article (12) refers to the establishments of the parties as a relevant element. When the parties' establishments are located in different States, the contract is international and the Principles apply. This is a simple test that facilitates the ascertainment of internationality without having to refer to other relevant factors. If a party has more than one establishment, the relevant establishment is the one that has the closest relationship to the contract at the time of its conclusion.
Party A (which has its main establishment in State X but whose establishment that has the closest connection to the contract in the sense of Article 12 is in State Y) signs a contract through its establishment in State Y with Party B, which also has its main establishment in State X and is acting through its main establishment in State X. because the parties acted through establishments located in different States (State Y for Party A and State X for PArty B), the contract is international and thus is governed by the Principles.
1.19 The ascertainment of internationality may require a careful case-by-case analysis. For example, the sale of land located in State X between parties who have their establishments in State Y satisfies the requirement of internationality of the contract because of the location of the land abroad. However, the same considerations do not apply with regard to a domestic sale of tangible goods in State X, that are produced abroad, i.e., in State Y (or several States). This is because, at all times germane to the sale, all relevant elements are located in State X. Similarly, the fact that pre-contractual negotiations took place abroad, or that a particular language is used in the contract, without more does not fulfill the requirement of internationality.
1.21 The phrase "regardless of the chosen law" in Article 1(2) means that the parties' choice of law is a not relevant for determining internationality. In other words, the parties may not establish internationality of the contract solely by selecting a foreign law, even if the choice is accompanied by a foreign choice of court or arbitral tribunal, when all the relevant objective elements are centred in one State (see Art. 1(b) 1986 Hague Sales Convention). This definition of internationality differs from that of the 2006 Hague Securities Convention (Art. 3) and the Rome I Regulation (Art. 1(1)).
1.22 The Principles do not address conflicts of laws among different territorial units within one State, for example, within Australia, Canada, Nigeria, Spain, the United Kingdom or the United States of America. Hence, the fact that one of the relevant elements is located in a different territorial unii within one State does not constitute internationality of the contract in the sense of Article 1(2). However, the Principles do not prevent lawmakers or other users from extending the scope of application of the Principles to intra-State conflits of laws.
1.23 The Principles appy to choice of law agreements for contracts. Following the approach of other international instruments, the Principles do not provide a definition of the term "contract". Nevertheless, in order to facilitate the application of the Principles, Article 1(3) excludes from their scope certain matters for which there is no wide consensus on (a) whether they qualify as contractual, or (b) whether, in any event, they should be subject to party autonomy. The list of exclusions includes six items: (i) capacity of natural persons; (ii) arbitration agreements and agreements on choice of court; (iii) companies or other collective bodies and trusts; (iv) insolvency; (v) proprietary effects of contracts; and (vi) the issue of whether an agent is able to bind a principal to a third party. This list is inspried by, among others, the 1986 Hague Sales Convention (Art. 5), the Rome I Regulation (Art. 1(2)) and the Mexico City Convention (Art. 5).
1.24 The reasons for Article 1(3) are twofold: the legal nature of the enumerated issues, and the lack of consensus on whether to characterise them as contractual issues or exclusions should not be interpreted as a policy decision against party autonomy in respect of the matters excluded. The Principles are neutral on this point and, therefore, do not preclude lawmakers or other users from extending party autonomy to some or all of the excluded matters.
on party autonomy because of the need to protect the person due to, for example, his or her age (a minor) or mental state. In some States, legal capacity is regarded as a matter of status and does not qualify as contractual. The determination of the law applicable to this question is excluded from the scope of the Principles. The exclusion means that the Principles determine neither the law governing the capacity of natural persons, not the legal or judicial mechanisms of authorisation, nor the effects of a lack of capacity on the validity of the choice of law agreement (see paras 39-40 Explanatory Report to the 1986 Hague Sales Convention).
1.26 Secondly, the Principles do not address the law governing arbitration agreements and agreements on choice of court. This exception mainly refers to the material validity of such agreements, i.e., to the contractual aspects of those jurisdictional clauses, and includes questions such as fraud, mistake, misrepresentation or duress (see also para. 126 Explanatory Report to the 2005 Hague Choice of Court Convention). In some States, these questions are considered procedural and are therefore governed by the lex fori or lex arbitri. In other States, these questions are characterised as substantive issues to be governed by the law applicable to the arbitration or choice of court agreement itself. The Principles do not take a stance among these different views. Rather, Article 1(3)(b) excludes these issues from the scope of the Principles.
1.28 The exclusion under Article 1(3)(c) encompasses the constitution and organisation of companies or other collective bodies and trusts. The excluded issues are, in general, the creation, membership, legal capacity, internal organisation, decision-making processes, dissolution and winding-up of companies and other collective bodies. The same exclusion applies to issues concerning the internal administration of trusts. In many States, these issues are subject to specific private international law rules pointing to the law of companies (in general, the law of the place of incorportation or central administration) or the law of other collective bodies or trusts.
1.29 The exclusion in Article 1(3)(c) is confined to matters involving the internal organisation and administration of companies or other collective bodies and trusts and does not extend to contracts that they conclude with third parties. The Principles also apply to commercial contracts entered into between the members of a company (shareholder agreements).
questions. In general, the Principles do not determine the law applicable to the question of how contracts are to be treated in insolvency; nor do they address the legal capacity of the insolvency administrator to enter into new contracts on behalf of the insolvent estate. The term insolvency is used here in a broad sense, encompassing liquidation, reorganisation, restructuring or administration proceedings.
1.31 Fifthly, the Principles do not address the law governing the proprietary effects of contracts. The Principles allow the parties to choose the law applicable to their contractual obligations, but they do not address the establishment and effects of rights in rem created by the contract. In other words, the Principles only determine th law governing the mutual rights and obligations of the parties, but not the law governing rights in rem. For example, in a contract for the sale of an asset, movable or immovable, tangible or intangible, the Principles apply to the seller's personal obligation to transfer and the buyer's personal obligation to pay, but not to questions such as whether the transfer actually conveys property rights without further action, or whether the buyer acquires ownership free of the rights or claims of third parties.
2.1 Article 2 establishes the parties' freedom to choose the law governing their contract. In addition, it provides that this choice may apply only part of the contract, it may be exercised at any time, and that no connection between the law chosen and the parties or their transaction is required. This Article should be read in conjunction with Article 3, which allows parties the freedom to choose "rules of law" to govern their contract.
2.3 Article 2 reflects the Principles' primary and fundamental purpose of providing for and delineating party autonomy in the designation of the law governing international commercial contracts (defined in Art. 1). Of particular importance is the fact that under the Principles the freedom of parties to choose the law or 'rules of law" to govern their contract is not dependent on the method of dispute resolution involved, whether before a court or arbitral tribunal.
2.5 Article 2(1) provides that "a contract is governed by the law chosen by the party". Under the Principles, parties are free to choose the law of any State (see para. 1.22 for different territorial units within one State). Parties may also designate "rules of law" as provided in Article 3. Article 2(1) imposes no other limitations or conditions on the selection of the chosen law.
A contract for the sale of equipement contains a provision according to which the law of State X, where the seller has its principal place of business, shall govern all aspects related to the formation and validity of the contract, the obligations of the seller and the buyer, breach of contract and damages. If a dispute arises between the parties, the courts or arbitral tribunal will give effect to the choice made by the parties and apply the law of State X.
2.6 The Principles permit partial or multiple choice of law; this is, subjecting separate parts of the contract to different laws (also known as dépeçage). Considering that such partial or multiple choice is by its very nature one of the forms of exercise of party autonomy, the Principles reserve to the parties the option to use that process. However, the use of dépeçage carries with it the risk of contradiction or inconsistency in the determination of the parties' rights and obligations.
2.7 Under Article 2(2)(a), parties may choose the law applicable to only part of the contract. When the parties make such a partial choice of law, the remainder of the contract is governed by the law otherwise applicable in the absence of choice. As noted above in paragraph 2.2, the Principles do not provide rules for identifying the applicable law in the absence of choice by the parties. Consequently, a partial choice of law under Article 2(2)(a) means that the law applicable to the remainder of the contract will be determined by the court or arbitral tribunal under the rules that are applicable in the absence in the absence of choice.
2.8 Under Article 2(2)(b), parties may also choose the law applicable to different parts of their contract with the effect that the contract will be governed by more than one chosen law.
2.9 In practice, such partial or multiple choices may concern, for example, the contract's currency denomination, special clauses relating to performance of certain obligations, such as obtaining governmental authorisations, and indemnity/liability clauses.
In a contract for the supply and installation of a special production line in States X, Y and Z, the parties have chose the law of State W to govern all aspects related to the formation and validity of the agreement. In such a case, the remainder of the contract will be governed by the law applicable in the absence of choice by the parties.
Buyer and Seller have concluded a share purchase contract regarding the control of company D (the target company). Party C, a third party, has guaranteed Buyer's payment obligations under the contract. The contract between Buyer and Seller stipulates that, for the purpose of price determination, the financial statements of the target company must conform to the law of State X, which is the place of the target company's establishment. The contract also stipulates that the rights and obligations of Buyer and Seller are governed by the law of State Y and that the personal guarantee given by Party C is governed by the law of State Z, where Buyer has its establishment. In this case, by virtue of the parties' choices, the laws of States X, Y, and Z, will govern different aspects of this contractual relationship.
In an international sales contract, the parties have expressly agreed that all aspects of the contract are to be governed by the law of State X, except that the conditions under which the seller must obtain inspection certificates will be governed by the law of the various States of final destination of the goods. In this case, as in the previous illustration, the result is that the contract will be governed by more than one law.
2.10 Party autonomy includes the parties' freedom to make or modifiy their choice of law at ay time. It is generally accepted, therefore, that the conditions for, and the effects of, a change in the choice of law are governed by party autonomy, with certain limitations with respect to the formal validity of the contract and pre-existing rights of third parties.
2.11 The Principles provide that the law chosen by the parties governs the validity of the contract (see Art. 9(1)(e)). As a result, any contractual change in the law governing the contract after its conclusion could affect the formal validity of the contract. To avoid the retroactive invalidation of the contract, Article 2(3) specifies that any change in the applicable law as a result of a choice or modification of a choice by the parties shall not prejudice a contract that was formally valid under the previously applicable law. The formulation of the rule makes it clear that it applies whether or not the law initially governing the contractwas chosen by the parties.
Party A and Party B conclude a contract and agree that it is governed by the law of State X. Party C guarantees the obligations of Party A. Subsquently, Party A and Party B modify their contract to change its governing law to the law of State Y. Under the law of State Y, Party A has greater liability to Party B than Party A would have had under the law of State X. While this modification is effective as between Party A and Party B, it may not adversely affect the rights and obligations of Party C. Those rights and obligations continue to be governed by the law of State X.
2.13 The Principles do not limit the timing of the choice or of the modification of the choice of law by the parties. As noted in the Introduction, the Principles do not generally seek to resolve what are commonly considered to be procedural issues before courts or arbitral tribunals. As a result, if the choice or modification of the choice of law occurs during the dispute resolution proceedings, the effects of the choice or modification may depend on the lex fori or the rules governing the arbitral proceedings. Similarly, the Principles are neutral regarding the issue of proof of foreign law.
Party A and Party B conclude a contract which states that it is governed by the law of State X. A dispute arises and is brought before the courts of State Y. In the course of the proceedings, both parties frame their arguments in terms of the substantive contract law of State Y. While these facts may be evidence of a tacit modification of the choice of law under Article 4, the characterisation and effect of such a change in the course of proceedings may depend on the law of State Y.
2.14 Under the Principles, party autonomy is not limited by any requirement of a connection, whether geographical or otherwise, between the chosen law and the contract or the parties. Accordingly, the parties may choose the law of a State with which the parties or their transaction bears no relation. This provision is in line with the increasing delocalisation of commercial transactions. Parties may choose a particular law because it is neutral as between the parties or because it is particularly well-developed for the type of transaction contemplation (e.g., a State law renowned for maritime transport or international banking transactions).
3.1 Arbitration statutes and arbitration rules commonly allow for the parties' choice of "rules of law" (see Art. 28(1) UNCITRAL Model Law; Art. 21(1) ICC Rules). In those instruments, the term "rules of law" is used to describe rules that do not emanate from State sources. The opportunity to choose "rules of law" has not typically been afforded to parties litigating before national courts. Article 3 broadens the scope of party autonomy in Article 2(1) by providing that the parties may designate not only State law but also "rules of law" to govern their contract, regardless of the mode of dispute resolution chosen.
3.2 Article 3 establishes certain criteria for "rules of law" that are intended to afford greater certainty as to what the parties may choose as "rules of law". The criteria refer to the admissible sources and the attributes of those "rules of law" recognised under Article 3. In addition, Article 3 recognises that the forum State retains the prerogative to disallow the choice of "rules of law"
3.4 This criterion stipulates that the "rules of law" chosen by the parties must have garnered recognition beyond a national level. In other words, the "rules of law" cannot refer to a set of rules contained in the contract itself, or to one party's standard terms and conditions, or to a set of local industry-specific terms.
apply according to its own terms (see Art. 1 CISG). In other words, the parties may designate the substantive rules of the CISG as a free-standing set of contract rules and not as a nationalised version of the CISG attached to the law of a CISG Contracting State. Following such a choice, the CISG applies as "rules of law", without consideration of any State declaration or reservations that might otherwise intervene if the CISG were applied as a ratified treaty or as part of State law. Model choice of law clauses proposing a designation of the CISGas "rules of law" are available (see, e.g., the model clause suggested by the Chinese European Arbitration Centre (CEAG)).
3.6 Another source of "rules of law" that would satisfy this first criterion may come from non-binding instruments formulated by established international bodies. One example is UNIDROIT, an inter-governmental organisation responsible solely to its Member States, which operates on the basis of consensus. The UNIDROIT Principles are an example of "rules of law" that are "generally accepted on an international level". Moreover, the UNIDROIT Principles expressly provide that parties may designate them to govern their contract and suggest choice of law clauses to that end (see the footnote to the UNIDROIT Principles' Preamble and the Model Clause for the Use of the UNIDROIT Principles of International Commercial Contracts).
3.12 The third attribute - that the set of "rules of law" be generally accepted as balanced - is justified by: (i) the assumption underlying party autonomy in commercial contracts according to which parties have relatively equal bargaining power; and (ii) the fact that the presumption that State laws are balanced is not necessarily transferrable to "rules of law". This requirement would likely preclude the choice of a set ofrules that benefit one side of transactions in a particular regional or global industry.
3.14 As noted in paragragh 3.1, arbitration statutes and arbitration rules commonly allow for the contractual choice of "rules of law". However, national laws have not allowed the same choice in disputes brought before courts. The Principles recognise this in Article 3 by deferring to the law of the forum if that law confines the parties' freedom to a choice of State la.
3.15 Where parties have designated "rules of law" to govern their contract, there may be matters which these "rules of law" do not cover. For example, the UNIDROIT Principles' provisions on the authority of agents do not deal with the relationship between principal and agent (see, e.g., Art. 2.2.1 UNIDROIT Principles); similarly the CISG in Article 4 states that it does not regulate the validity of contracts for the sale of goods except as otherwise expressly provided in that Convention. While these instrumentsmay address gap-filling (see, e.g., Art. 7(2) CISG and Art. 1.6. UNIDROIT Principles), the Principles do not provide gap-filling rules. Parties designating "rules of law" to govern their contract should therefore be mindful of the potential need for gap-filling and may wish to address it in their choice of law. The following illustrations may be used as a point of reference.
A choice of law agreement provides that: "This contract shall be governed by the United Nations Convention on Contracts for the International Sale of Goods (CCISG) without regard to the provisions of any national law, except povisions of the law of State X which apply to those matters or governed by the CISG."
A choice of law agreement provides that: "This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts and, with respect to issues not covered by those principles, by the law of State X."
4.1 Article 4 states the different ways in which a choice of law in the sense of Article 2(1) can be made. By limiting tacit choice of law to situations in which the choice appears clearly, Article 4 promotes predictability of results by lessening the likelihood of disputes as to whether there has been a choice of law.
4.2 Article 4 provides that the parties may choose a law to govern their contract either expressly or tacitly. Article 4 is in line with similar provisions in other instruments (see Art. 7 Mexico City Convention; Art. 3 Rome I Regulation). The parties may also expressly or tacitly choose "rules of law" as provided in Article 3.
4.3 The parties may expressly choose a law to govern their contract. An express choice of law agreement may be made before, at the same time as, or after the conclusion of the main contract (see Art. 2(3)). The term "main contract" refers to the contract for which the choice of law is made. Choice of law agreements are usually included as an express clause in the maint contract. The use of particular words or phrases is not necessary. Phrases such as the contract is "governed by" or "subject to" a particular law meet the requirement of an express choice. While Article 4 allows a tacit choice, the parties are advised to identify explicitly the law governing the contract.
Party A und Party B conclude a contract. The choice of law agreement provides that: "This contract shall be governed by the law of State X." This is sufficient to constitute a choice of law by the parties. Therefore, as stated in Article 2, the law of state W governs the contract.
Party A and Party B conclude a contract. The choice of law agreement provides that: "This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts." The UNIDROIT Principles therefore govern the contract, unless, as stated in Article 3, the law of the forum provides otherwise.
4.4 An express choice can also be made by reference to some external factor, for instance the place of establishment of one the parties.
Seller and Buyer conclude a contract of sale. The choice of law agreement provides that: "This contract shall be governed by the law of the State of th establishment of the seller." Seller has its establishment in State X at the time of the conclusion of the contract. The law of State X at the time of the conclusion of the contract. The law of State X therefore governs the contract.
4.6 A choice of law may also be made tacitly. To qualify as an effective choice of law under Article 4, the choice must be a real one although not expressly stated in the contract. There must be a real intention of both parties that a certain law shall be applicable. A presumed intention imputed to the parties does not suffice.
4.7 A tacit choice of law must appear clearly from the provisions of the contract or the circumstances. One has to take into account both the terms of the contract and the circumstances of the case. However, either the provisions of the contract or the circumstances of the case may conclusively indicate a tacit choice of law.
4.8 A choice of law is found to appear clearly from the provisions of the contract only when the inference drawn from those provisions, that the parties intended to choose a certain law, is strong. There is no fixed list of criteria that determines the circumstances under which such an inference is strong enough to satisfy the standard that a tacit choice must "appear clearly"; rather, the determination is made on a case-by-case basis.
4.9 A widely accepted example of a tacit choice that appears clearly from the provisions of the contract arises in the context of the use of a standard form by the parties. Where the contract is in a standard form which is generally used in the contract of a particular system of law, this may indicate that the parties intended the contract to be governed by that law, even though there is no express statement to this effect.
Party A and Party B conclude a marine insurance contract in the form of a Lloyd's policy of marine insurance. Because this contract form is based on English law, its use by the parties may indicate that the parties intend to subject the contract to English law.
4.10 The same is true when the contract contains terminology characteristic of a particular legal system or reference to national provisions that make it clear that the parties were thinking in terms of, an intended to subject their contract to, that law.
Party A and Party B conclude a contract that uses the legal language characteristic of the law of State X. This may indicate that the parties intend their obligations to be determined according to the law of State X.
4.11 The choice of law applicable to a contract and the choice of a forum for dispute resolution should be distinguished. According to the second sentence of Article 4, an agreement between the parties to confer jurisdiction on a court to determine disputes under the contract (a choice of court agreement) is not in itself equivalent to a choice of law (see Art. 7(2) Mexico City Convention). For example, the parties may have chosen a particular forum because of its neutralityor experience. The fact that the chosen court, under the applicable private international law rules, may apply a foreign law also demonstrates the distinction between choice of law and choice of court. Nevertheless, a choice of court agreement between the parties to confer jurisdiction on a court may be one of the factors to be taken into account in determining whether the parties intended the contract to be governed by the law of that forum.
Party A and Party B conclude a contract and include a choice of court agreement designating the courts of State X. In the absence of other relevant provisions in the contract or particular circumstances suggesting otherwise, this will be insufficient to indicate a tacit choice of the law of State X.
4.12 While ther are important differences between choice of court clauses and arbitration clauses, Article 4 adopts a unified general rule as to whether a choice of forum or arbitral tribunal necessarily entails a choice of law. An agreement between the parties to confer jurisdiction on a specified arbitral tribunal to resolve disputes under the contract is not the same as a choice of law. Acoording to the sencond sentence of Article 4, the choice of such an arbitral tribunal is also not a sufficient indicator, in itself, of the parties’ tacit choice of law. The parties may have chosen a tribunal because of its neutrality or expertise. The tribunal may also apply a foreign law pursuant to applicable rules of private international law or the chosen arbitration rules. However, an arbitration agreement that refers disputes to a clearly specified seat may be one of the factors in determining the existence of a tacit choice of law.
Party A and Party B conclude a contract under which they agree that all disputes arising out of, on in connection with, the contract are to be submitted exclusively to arbitration in State X under the rules of the ABC Chamber of Commerce. In the absence of other relevant provisions in the contract or particular circumstances suggesting otherwise, this will be insufficient to indicate a tacit choice of the law of State X.
4.13 The particular circumstances of the case may indicate the intention of the parties in respect of a choice of law. The conduct of the parties and other factors surrounding the conclusion of the contract may be particularly relevant. This principle may also apply in the context of related contracts.
In the course of their previous dealings, Party A and Party B have consistently made an express choice of the law of State X to govern their contract. If the circumstances do not indicate that they intended to change that practice in the current contract, a court or arbitral tribunal could conclude from these circumstances that the parties clearly intended to have the current contract governed by the law of State X even though such an express choice does not appear in that particular contract.
4.14 A tacit choice of law must appear clearly from the provisions of the contract or the circumstances. This means that the choice must be evident as a result of the existence of strong indications for such a choice.
Party A and Party B conclude a contract drafted in the language of a certain State. The contract, however, does not use legal terminology characteristic of that State’s legal system. In the absence of other circumstances, the use of the particular language would not be sufficient to establish a tacit choice of law.
4.15 The Principles do not take a position as to procedural issues, in particular, the taking of evidence and the standard and mode of proving a tacit choice of law (but see Art. 9(1)(f) on the burden or onus of proof).
4.17 If the parties’ intention are neither expressed explicitly nor appear clearly from the provisions of the contract or from the particular circumstances of the case, there is no choice of law agreement. In such a case, the Principles do not determine the law governing the contract.
5.1 The purpose of Article 5 is to determine the formal validity of a choice of law. Article 5 is motivated by a policy of upholding the parties’ intention unimpeded by formalistic requirements (see Preamble, para.1).
5.2 A choice of law need not comply with any formal requirements; for instance, it does not need to be in writing, drafted in a particular language or attested by witnesses. The same applies to a modification of a choice of law (see Art. 2(3)). Article 5 applies to both an express and a tacit choice of law (see Art. 4).
Party A and Party B conclude a contract and agree orally that the law of State X will govern the contract. The choice of the law of State X is formally valid.
Party A and Party B conclude an oral contract without expressly agreeing on the applicable law. However, a tacit choice of the law of State X appears clearly from the terms of the oral contract or the surrounding circumstances. The choice of the law of State X is formally valid.
Party A (established in State W) and Party B (established in State X) conclude a contract and agree that it is governed by the law of State Y. The contract is drafted in the official language of State Z and no witnesses are present at its conclusion. The choice of the law of State Y is formally valid.
5.3 Unlike other provisions of the Principles, Article 5 is not a conflict of laws rules (which refers to a national legal system) but, rather, a substantive rule of private international law. This rule can be justified on several grounds. First, the principle of party autonomy indicates that, in order to facilitate international trade, a choice of law by the parties should not be restricted by formal requirements. Secondly, most legal systems do not prescribe any specific form for the majority of international commercial contracts, including choice of law provisions (see Art. 11 CISG; Art 1(2) (first sentence) UNIDROIT Principles and Art. 3.1.2 UNIDROIT Principles). Thirdly, many private international law codifications employ comprehensive result-oriented alternative connecting factors in respect of the formal validity of a contract (including choice of law provisions), based on an underlying policy of favouring the validity of contracts (favor negotii) (see, e.g., Art. 13 Mexico City Convention; Art. 11(1) Rome I Regulation).
5.4 The fact that the Principles are designed only for commercial contracts (Preamble, para. 1; Art 1(1)) obviates the need to subject the choice of law to any formal requirements or other similar restrictions for the protection of presumptively weaker parties, such as consumers or employees.
5.5 Article 5 concerns only the formal validity of a choice of law. The remainder of the contract (the main contract) must comply with the formal requirements of at least one law whose application is authorized by the applicable private international law rule (see Art. 9(2)). On the other hand, the law chosen by the parties also governs the formal (as well as the substantive) validity of the main contract (see Art. 9(1€). The examples below attempt to illustrate the relationship between Articles 5, 9(1)€ and 9(2) and the applicable binding rules of private international law in respect of the formal validity of a contract.
Party A and Party B conclude a contract which states that it is governed by the law of State X. The main contract is formally valid in terms of the law of State X. The contract is formally valid.
Party A and Party B conclude a contract. A tacit choice of the law of State X appears clearly on the basis of certain provisions in the contract or the circumstances of the case. The main contract would be formally valid in terms of the law of State X. The contract is formally valid.
Party A and Party B conclude a contract, including a choice of the law of State X. The contract is formally invalid in terms of the law of State X. The contract will nonetheless be formally valid if it complies with the requirements in respect of formal validity of any one of the other laws whose application is authorized by the applicable rule of private international law.
Party A and Party B conclude a contract which states that it is governed by the law of State X. The main contract is formally invalid if it does not comply with the requirements as to form in terms of the law of State X and also does not comply with the formal requirements of any of the other laws whose application is authorized by the applicable rule of private international law.
5.6 The principle in Article 5 – no formal requirements for a choice of law – is consistent with Article 7, which provides that a choice of law may not be contested solely on the ground that the contract to which it applies is not valid.
5.7 Article 2(3) provides that a choice of law or a modification made after the contract has been concluded shall not prejudice the formal validity of the contract..
Article 6 Agreement on the choice of law and battle of forms.
6.1 Article 6 addresses the question of which law determines whether the parties have agreed on the applicable law. Paragraph 1 differentiates between two situations: those in which the parties have used “standard terms” designating different applicable laws (see Art. 6(1)(b)); and all other situations (see Art. 6(1)(a)). Paragraph 2 introduces an exception applicable in principle to both situations.
6.2 Article 6(1)(a) follows a private international law rule that is well established in international, supranational or regional instruments, such as in the Rome I Regulation (Art. 10(1)) and the Mexico city Convention (Art. 12(1)).
6.3 Article 6(1)(b) introduces a new sub-rule that implements the rule of Article 6(1)(a) by identifying the purportedly agreed law in situations in which the parties have used standard terms designating different applicable laws. The new sub-rule promotes much needed legal certainty by providing a clear solution to a recurring problem that legislators have left unaddressed and courts have been unable to resolve in a consistent and predictable manner. The provision seeks to maximize party autonomy while, at the same time, avoiding needless complexities.
6.5 In line with other international and regional instruments, Article 6-1)(a) provides that the law purportedly chosen by the parties determines whether they have reached an agreement on the applicable law. If that law confirms the existence of a choice of law, then the law applies to the main contract, unless the opposing party can show a lack of agreement under the limited exception of Article 6(2) (see paras 6.28-6.29).
6.6 Article 6 avoids the use of the phrase “existence and material validity of the choice of law”, which is used in some codifications. These technical terms may have different meanings from one State to another, and may encourage wider grounds of challenge to the chosen law, thereby jeopardizing the legal certainty that the Principles seek to provide. Instead, Article 6 uses the non-technical term “agreement”, which is intended to encompass all issues as to whether the parties have effectively made a choice of law.
6.8 In international contract negotiations, parties that enter into a number of similar contracts frequently prepare standard forms or general conditions for use in those contracts. According to a widely accepted definition provided in the PECL (Art. 2:209, para. 3), “general conditions of contract are terms which have been formulated in advance for an indefinite number of contracts of a certain nature, and which not have been individually negotiated between the parties”. According to the UNIDROIT Principles (Art. 2.1.19, para 2), “standard terms are provisions which are prepared in advance for general and repeated use by one party and which are actually used without negotiation with the other party”. One common method for parties to negotiate transactions is by the exchange of documents containing transaction-specific terms as well as pre-formulated standard form containing their respective standard terms.
6.9 In international contracts, the parties often include choice of law clauses in their standard forms. The Principles do not require a particular form for the parties’ agreement on choice of the applicable law (see Arts 4 and 5). Hence, the choice of law can very well be made in standard forms. If both parties designate the same law in their standard terms, or if only one party uses a choice of lwa clause, Article 6(1)(&) applies and the designated law determines whether there was indeed an “agreement” with respect to the applicable law. If, under this law, an agreement on the applicable law is established (see paras 6.5-6.7), the chosen law then governs the main contract as the applicable law.
6.10 However, the terms in the standard forms used by one party often differ from the terms used by the other. The scenario of conflicting standard forms is commonly referred to as the “battle of forms”. At the substantive law level, the rules applies in national jurisdictions to resolve the battle of forms mostly fall within one of the four following categories: (1) the “first-shot rule”, according to which the forms first used between the parties prevail; (2) the “last-shot rule”, according to which the forms last used between the parties prevail; (3) the “knock-out rule”, according to which both standard forms are disregarded; and (4) hybrid solutions that combine elements of the above solutions.
6.11 The standard forms used by parties to international contracts frequently contain conflicting choice of law clauses. In such cases, one of the rules described in paragraph 6.10 must be applied to resolve the inconsistency with respect to the choice of law clause. If the standard forms used by the parties contain choice of law clauses designating different laws, a difficult question arises as to which law should be applied to resolve the resulting “battle of forms”. The existing international, supranational or regional instruments and most national private international law statutes have not yet addressed the question of the law applicable in situations involving conflicting choice of law clauses in standard forms. Commentators are divided as to which l should govern, and different solutions, some of considerable complexity, have been suggested. The courts often avoid the issue, circumvent it, or simply apply the lex fori. Consequently, parties to international contracts both using their standard forms are unable to reliable predict which law will ultimately govern their contract, which will usually become important when a dispute arises.
6.12 If the standard forms of each party contain a choice of law clause, but those clauses designate different laws, resolution of the conflict is challenging inasmuch as those laws may resolve the battle of the forms in different ways. This challenge, and its solution, are addressed in Article 6(1)(b). Article 6(1)(b) stets forth a novel rule that is intended to produce clear and predictable solutions to this complex problem. The following scenarios illustrate these solutions in various situations.
6.13 The first scenario involves situations in which both of the laws designated by the parties provide a last-shot rule for solving the battle of forms.
Party A makes an offer and refers to its standard terms, which contain a clause designating the law of State X as the law applicable to the contract. Party B expresses acceptance of the offer and refers to its own standard terms, which designate the law of State Y as the applicable law. With respect to battle of forms scenarios, the domestic laws of State X and of State Y both provide that the standard terms last referred to prevail (last-shot rule).
the standard terms last referred to prevail, including the choice of law clause in these terms. Because both laws designated by the parties solve the battle of forms in favour of the same standard terms, the apparent conflict is in fact a false conflict. Pursuant to Article 6(1)(b), 1st part, the choice of law clause in the standard terms last referred to (i.e., the choice of the law of State Y) is deemed to have been agreed upon.
6.15 The same solution applies if both parties designate in their standard terms the laws of States that follow the first-shot rule. In Scenario 1, this mean that the law of State X would be deemed to have agreed upon.
Party A, the offeror, designates in its standard terms the law of State X, and Party B, the offeree, designates the law of State Y. One of the designated laws follows the first-shot rule, while the other law follows the last-shot rule.
6.17 Scenario presents a true conflict situation because the parties have designated different laws which resolve the battle of forms differently. This scenario falls within the scope of Article 6(1)(b), 2nd part: “if the parties have used standard terms designating two different laws and […] if under these laws different standard terms prevails, […) there is no choice of law”. This means that, in Scenario 2, the choice of law clauses in both standard terms are to be disregarded and that the applicable law is to be identified through the application of the rules that apply in the absence of contractual choice. Thus, Article 6(1)(b), 2nd part, establishes a knock-out rule at the private international law level.
Party A designates in its standard terms the law of State X, while Party B designates the law of State Y. State X follows a knock-out rule, while State Y follows a different rule, such as the first-shot rule, or the last-shot rule.
6.19 This case also presents a true conflict which falls within the scope of Article 6(1)(b): “ the parties have used standard terms designating different laws and under one or both of these laws no standard terms prevail”. Because at least one of the designated laws applies a knock-out rule, “no standard terms prevail”, and thus both standard terms must be disregarded. The outcome then is that “there is no choice ox law”. As with Scenario 2, the applicable law is to be identified through the use of the rules that apply in the absence of contractual choice – rules which are not provided by the Principles.
6.20 At the substantive law level, some systems apply one rule to battle of forms scenarios under some circumstances and another rule under different circumstances. In cases involving those systems, the determination of with standard terms “prevail” under Article 6(1)(b) must be based on the relevant circumstances not in general but in the specific case under examination.
6.22 Some systems have not taken yet a position with respect to conflicting standard terms. In a case involving at least one of those systems, it will be impossible to establish whether “under both of [the designated] laws” either (a) “the same standard terms prevail”, or (b) “different standard terms prevail” (see Art. 6(1)(b)). This case should be treated as one in which “no standard terms prevail”, and consequently as a case in which “there is no choice of law” (see Art. 6(1)(b), in fine).
6.23 Contracts for the sale of goods are a particularly frequent type of international contract that involves the exchange of standards terms. With respect to such contracts, the CISG may enter into consideration. The CISG is in force in more than 80 States worldwide. Given the practical importance of the CISG, it seems appropriate to comment on the relationship between the Principles and the CISG. The interpretations of the CISG in this Commentary do not purport to be exclusive or authoritative interpretations of the CISG by the Hague Conference or its Members.
Party A to a transborder sales contract designates in its standard terms the law of State X, which is a CISG Contracting State, as the law applicable to the contract. Party B designates in its standard terms the law of State Y, which is also a CISG Contracting State, but explicitly excludes the CISG. The general contract law of State Y follows a knock-out rule. The case is brought before a court in a CISG Contracting State.
6.25 If the conditions for the application of the CISG under its Article 1 et seq. are met, the court in a CISG Contracting State will be treaty-bound to apply the CISG. However, according to Article 6 of the CISG, the parties may exclude its application. If the parties enter into a choice of law agreement excluding the CISG, the CISG will not apply.
6.26 Article 7 of the Principles adopts the principle of severability, according to which the choice of law agreement is a separate contract that is distinguished from the main contract (e.g., the sales contract). This means that in Scenario 4, the Principles govern the choice of the law agreement, whereas the CISG governs the sales contract (i.e., the main contract).
6.27 Under the Principles, the battle of forms concerning the choice of law agreement in Scenario 4 falls within the scope of Article 6(1)(b). The reason is that: (a) Party A’s standard terms designated the law of State X, including the CISG, and Article 19 of the CISG (as interpreted by judicial practice and academic option) provides either the last-shot or the knock-out rule; and (b) Party B’s standard terms excluded the CISG and designated the law of State Y, which provides (in its general contract law) a knock-out rule. In this situation, under one (or, depending on the interpretation of the CISG, both) of the designated laws the knock-out rule applies and “no standard terms prevail”, thus leading to the conclusion that “there is no choice of law”. Consequently, under the Principles, the choice of law clauses in both Party A and Party B’s standard terms, as well as the exclusion of the CISG in Party B’s standard terms, could be disregarded. The choice of law clauses in the parties’ standard terms would thus not apply, and the sales contract in Scenario 4 would be governed by the CISG.
6.28 It is widely accepted that, in certain circumstances, the determination of whether a party has consented to a choice of law should not be made on the basis of the purportedly chosen law as provided in Article 6(1) (see Art. 10(2) Rome 1 Regulation). To this end, Article 6(2) introduces an exception clause. It applies subject to two concurrent conditions; first, “under the circumstances, it would not be reasonable to make that determination under the law specified in paragraph 1”; and, second, no valid agreement on the choice of law can be established under the law of the State in which party invoking this provision has its establishment (e.g., for reasons of duress or fraud or the consequences of silence in the process of contract formation).
Party A, established in State X, sends an offer to Party B, established in State Y. The offer contains a choice of law clause designating the law of State X. Under the law of State X, silence of the offeree is regarded as acceptance. Under the law of the State Y, silence does not constitute acceptance. Party B may invoke the law of State Y in order to establish that it did not consent to the choice of law. The court or arbitral tribunal will apply the law of State Y if it concludes that “under the circumstances”, it would “not be reasonable” to decide B’s consent to the choice of law agreement under the law of State X.
Party A, established in State X, sends to Party B, established in State Y, an offer to enter into a contract; the proposed contract designates the law of State X as the applicable law. Party B communicates acceptance of that offer under circumstances of economic duress. Such economic duress does not vitiate consent under the law of State X. Under the law of State Y, however, such economic duress would render ineffective Party B’s consent to the choice of law. Party B may invoke the law of State Y in order to establish lack of consent. The court or arbitral tribunal will apply the law of State Y if it concludes that under the circumstances, it would “not be reasonable” to decide the issue of B’s consent to the choice of law under the law of State X.
6.29 Article 6(2) is an exception from Article 6(1)(a). It should apply only very rarely in cases falling within the scope of Article 6(1)(b), 2nd part, because In those situations the Principles apply a knock-out rule and thus “there is no choice of law”.
A contract is judged to be invalid on the grounds of mistake under the law of State X. The validity of a choice of law agreement remains unaffected unless the same mistake affects the choice of law agreement.
Party A and Party B conclude containing a choice of the law of State X. Party A claims performance under the contract. Party B takes the position that the contract should be regarded as a major transaction and should therefore have been subject to shareholder approval at a shareholders’ meeting which had not taken place. Party B asserts that the contract is therefore invalid, this does not automatically invalidate the parties’ choice of law agreement. The validity of the choice of law agreement should be raised and considered separately.
7.4 The Principles do not address the law governing certain issues listed in Article 1(3). Some of these issues (in particular those dealt with in Art. 1(3)(a) concerning the capacity of natural persons and Art. 1(3)(c) concerning companies or other collective bodies and trusts) might also bear relation to the determination of the validity of a choice of law agreement.
7.5 The term “severability” has a well-understood meaning in the literature, where it is used to describe the “survival” of the choice of law clause if the underlying contract is found to be invalid. It is an accepted technical term and this is the reason why it has been chosen. In languages other than English, “severability”. The words “separable”, “independent” “autonomous” are employed in the literature dealing with arbitration and choice of forum clauses.
7.6 Severability of an agreement on choice of court is the rule adopted by the 2005 Hague Choice of Court Convention, in its Article 3(d). The severability rule of Article 7 of the Principles is also consistent with the solutions adopted by many States as well as by regional and international instruments.
7.7 In arbitration, the principle of “separability”, “independence” or “autonomy” is relied upon by courts to dismiss objection to arbitral jurisdiction asserting the invalidity of the contract. The principle is widely accepted in States party to the New York Convention, and is also expressly adopted by the UNCITRAL Model Law (Art. 16(1)) as well as many international or institutional arbitral rules.
Party A and Party B conclude a contract which contains an agreement that it is governed by the law of State X. Party A has performed the contract. Under the las of State X, the contract is invalid for lack of consent. In the circumstances of the case, the lack of consent cannot be said to extend to the choice of the law of State X. As a result, that law applies to determine the consequences of invalidity, notably the entitlement to restitution when the contract has been performed, in whole or in part.
7.10 In some situations, the parties’ choice of law agreement is affected by a defect that applies to both the agreement and the contract to which the agreement applies. This is notably the case where both the contrat and the choice of law agreement, even if separate, are tainted by the same fraud or where a party lacks capacity to contract (a minor who may not enter the contract is also prevented from entering into a choice of law agreement). It should be recalled, however, that the Principles do not address the law governing the capacity of natural persons ( see Art. 1(3)).
A contract is judged to be invalid because Party A bribed Party B or because Party A lacked capacity. The choice of law agreement contained in the contract, or affected by the same defect when concluded, is also invalid.
8.1 The principles provide for party autonomy and allow the parties to choose the law that will govern their contract. Article 8 addresses the question of whether the parties’ choice of the law of a State includes that State’s rules of private international law. In some cases, the application of the private international law rules of another State (in this case the chosen State) may refer back to the law of the forum State or to the law of a third State. This phenomemon is known as “renvoi”.
other than its choice of law rules” (see, e.g., Art. 12 2007 Hague Protocol). Other international ior regional instruments generally also exclude the possibility of renvoi (see Art. 17 Mexico City Convention; Art. 20 Rome I Regulation). A minor exception in favour of renvoi exists only where the instrument extends its operation to non-Contracting States (see Arts 4 and 17 1989 Hague Succession Convention; Art. 4(2)(b) 1978 Hague Matrimonial Property Convention).
Party A and Party B conclude a contract which states that “the parties agree that the law of State X will govern their contract”. This provision is interpreted as referring solely to the substantive law of State X, to the exclusion of its private international law rules.
8.6 Aspiring to serve as a model and to promote international uniformity in private international law, the Principles similarly exclude the prossibility of renvoi, except where the parties expressly provide otherwise. This exclusion hnours the parties’ likely intent by preventing the application of a law different from the parties’ expectations, and also avoids uncertainty and unpredictability. One of the reasons parties enter into a choice of law agreement is to avoid the uncertainty of having to determine the applicable substantive law through the rules of private international law. This uncertainty would not be avoided if a standard choice of law clause were to be interpreted as encompassing the private international law of the chosen State. The idea underlying the rule in Article 8 accords with those Hague Conventions that grant (limited) party autonomy (see Arts 7, 8 and 12 2007 Hague Protocol; Arts 5, 6 and 17 1989 Hague Succession Convention; Arts 7 and 15 1986 Hague Sales Convention; Arts 3-5 1978 Hague Matrimonial Property Convention).
8.7 The rule of Article 8 does not prevent the parties from choosing an international, supranational or regional uniform law instrument, such as the CISG, to govern a contract that falls outside the territorial or substantive scope of the instrument (Arts 1(1)(a) and (b), 2 and 3 CISG) (see Commentary on Art. 3). The territorial or substantive scope of such instruments is indeed to be distinguished from the private international law rules of the chosen law in the sense of the rule of Article 8.
Party A and Party B conclude a contract that contains the following clause: “This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts.” According to the UNIDROIT Principles, the interest rate in case of failure to pay money is, under certain circumstances, the applicable rate fixed by the law of the State of the currency of payment (Art. 7.4.9(2) UNIDROIT Principles). Pursuant to this reference, the law of the State of the currency of payment is to be applied.
8.9 Notwithstanding the general rule of interpretation described above, Article 8 provides that the parties may expressly choose a law including its private international law rules. This provision is consistent with party autonomy because it honours the parties’ express agreement to indirectly choose the applicable substantive law via private international law rules. This principle, established in arbitration (see Art. 28(1) UNCITRAL Model Law), has also been extended to court proceedings. It deviates from the existing Hague Convention and other instruments that allow (limited) party autonomy without granting the possibility of including the private international law rules (see paras 8.5 and 8.6).
A contract provides that “it shall be governed by the law of State X, including its private international law rules”. In such a case, the applicable substantive law will be determined under the private international law rules of State X.
9.3 Naturally, the reference to “all aspects” does not prevent the parties from choosing different laws for different parts of the contract, in accordance with Article 2(2)(b), or even from choosing a law only for one or more of the aspects listed in Article 9(1), for example, the interpretation of the contract.
9.4 Article 9(1) includes a list of seven issues governed by the law chosen by the parties. The terms “…including but not limited to…” indicate that the list is illustrative rather than exhaustive. The reason for mentioning those seven particular issues is twofold. First, the list includes many of the most important aspects of any contract. This is the case, for example, for issues (a) and (b): interpretation, and rights and obligations arising from the contract. Second, the list clarifies that, in applying the Principles, certain issues are to be characterized as contractual and thus they will be governed by the chosen law rather than another law, such as the lex fori or the lex loci damni. This is the case, for example, for prescription and limitation periods (see Art. 9(1)(d)), the burden of proof and legal presumptions (see Art. 9(1)(f)) and pre-contractual liability (see Art. 9(1)(g)). This ensures a uniform characterization of these issues and, accordingly, promotes uniformity of results.
9.5 The issues mentioned in Article 9(1)(a), interpretation, and Article 9(1)(b), rights and obligations arising from the contract, are probably the most relevant in practice and constitute the core of the issues governed by the law chosen by the parties. The chosen law determines what meaning is to be attributed to the words and terms used in the contract. Where the meaning of a word in a contract is ambiguous, the meaning must be ascertained using the canons of interpretation and constructions of the law chosen by the parties. That law also determines the parties’ rights and obligations, especially when they are not explicitly defined by the contract. Because the Principles apply only to contracts, the concept of rights and obligations should be understood as referring to contractual rights and obligations, and not to be non-contractual issues that may occur or arise between the contracting parties (but see para. 9.12).
9.6 Article 9(1)(c) refers to the performance and the consequences of non-performance, including the assessment of damages. The law chosen by the parties governs the conditions for the fulfillment of the obligations resulting from that law or from the contract, for example, the standard of diligence, the place and time of performance or the extent to which the obligation can be performed by a person other than the party liable (see M. Guiliano and P. Largarde, “Report on the Convention on the Law applicable to Contractual Obligations”, [1980) OJ C282, p. 32 (“Guiliano-Lagarde Report”)). The chose law also governs the consequences of a total or partial failure to perform those obligations, including the excuses for non-performance, and the assessment of damages.
9.7 The reference to the consequences of non-performance, including the assessment of damages is a reference to the substantive rules, i.e., those aspects are included to the extent that they are governed by substantive law rules and lie within the powers conferred upon the court by the lex fori or lex arbitri (see Explanatory Report to th 1986 Hague Sales Convention, pp. 42-43; Guiliano-Lagarde Report, p. 32). Thus, questions such as the remedies for non-performance, for example, compensation and the determination of its amount, specific performance, restitution, reduction for failure to mitigate a loss or the validity of penalty clauses, are subject to the law chosen by the parties.
9.8 Article 9(1)(d) refers to the various ways of extinguishing obligations, prescription and limitations periods. The law chosen by the parties governs all ways of extinguishing obligations, including prescription or limitation of actions by the passage of time. Thus, the chosen law determines the commencement, computation and extension of prescription and limitation, and their effects, i.e., whether they provide a defence for the debtor or they extinguish the creditor’s rights and actions. The law chosen by the parties governs these issues irrespective of their legal characterization under the lex fori. This ensures harmony or results and legal certainty (see Art. 12(g) 1986 Hague Sales Convention; Art. 12(1)(d) Rome I Regulation).
9.9 Article 9(1)€ refers to the validity and the consequences of invalidity of the contract, regardless of whether this result is described by words such as “null”, “void”, or “invalid”. The law chosen by the parties determines the formation of the contract, the conditions for its validity and the grounds for avoidance. If according to that law the contract is null or invalid, the resulting consequences, for example, the obligation of restitution or payment of damages, are also governed by that law. See also paragraph 5.5.
9.10 Article 9(1)(e) is closely linked to Article 7 (severability of the choice of law clause). According to Article 7, it may be the case that the choice of law clause is valid, whereas the main contract to which it applies is not valid. Article 9(1)(e) makes clear that, in such a case, the consequences of the nullity of the contract are still governed by the law chosen by the parties.
9.11 Article 9(1)(f) refers to the burden of proof and legal presumptions. The Principles do not apply to evidence and procedural questions. However, the law chosen by the parties does apply to legal presumptions and the burden of proof. Like other international instruments, the Principles follow a substantive characterization of these issues, not a procedural one (see Art. 12(g) 1986 Hague Sales Convention; Art. 18(1) Rome I Regulation).Legal presumptions and rules determining the burden of proof contribute to clarifying the parties’ obligations and thus are inextricably linked to the law governing the contract. Furthermore, a uniform characterization of these issues ensures harmony of results and legal certainty. Conversely, procedural presumptions, i.e., those based on procedural elements, such as the effect of a failure to appear in court or the failure to deliver certain documents in the possession of one party, are excluded from the scope of the chosen law. The standard and mode of proof are also excluded.
9.12 Finally, Article 9(1)(g) refers to pre-contractual obligations. According to the Principles, the law chosen by the parties governs the rights and obligations of the parties during the formation period of the contract and the liability that may arise therefrom, for example, the information or undertaking given by the parties during that period. Therefore, once a contract is concluded betwenn the parties, the obligation that arose out of dealings prior to its conclusion are also subject to the law applicable to the contract. However, even before the contract is concluded, the parties may choose the law applicable to the contractual negotiations and therefore to the pre-contractual liability based, for example, on an unexpected breakdown of such negotiations.
9.13 Article 9(2) provides that Article 9(1)(e), which provides that the chosen law governs the formal validity of the contract, does not prevent the application of any "other governing law" that supports the formal validity of the contract. The "other governing law" is determined under the private international law rules followed in the forum State or applied by an arbitral tribunal. Thus, Article 9(2) is motivated by, and seeks to promote, the policy of favor negotii, which is prevalent in most private international law codifications and conventions. This policy is reflected in choice of law rules designed to favour the formal validity of contracts by authorising the application of whichever one of several listed law would uphold the contract as to form (alternative connecting factors). The listed laws usually include the laws of the State of the making of the contract, and the State in which the parties were domiciled or in which they or their respective agents were present at the conclusion of the contract. Article 9(2) enables courts or arbitral tribunals to take advantage of these rules when the form of the contract is not valid under the chosen law. Nevertheless, once the law applicable to the contract is determined, any change of choice of law is without prejudice to the contract's formal validity (see Art. 2(3)). See also paragraph 5.5.
context of assignment (in which the contract creating the assigned obligation is governed by the law of one State while the contract of assignment is governed by the law of a different State) as well as other contexts such as subrogation or delegation. Among such complex situations, the Principles focus on assignment because assignments are important and recurring transactions in international commercial practice.
Pursuant to a contract between Debtor and Creditor (Contract 1). Creditor has a claim against Debtor for a monetary sum. Contract 1 is stated to be governed by the law of State X and, under the Principles, that designation of applicable law is given effect. Pursuant to a contract between Creditor and Assignee (Contract 2), Creditor has assigned its claims against Debtor under Contract 1 to Assignee. Contract 2 is stated to be governed by the law of State Y and, under the Principles, that designation of governing law is given effect. The result of these two contracts, when considered together, may be to create a right of Assignee against Debtor.
10.4 In the Scenario, Assignee was not a party to Contract 1 and did not participate in the choice of law in the contract. Similarly, Debtor was not a party to Contract 2 and did not participate in that contract's choice of law. Thus, it cannot be said that the law applicable to the relationship among the parties created by the confluence of the two contracts can be determined simply by giving effect to the choice of law by the parties. Accordingly, it is useful to examine how choice of law operates in assignment transactions in light of the potential for confusion as to which law governs which aspects of the relationship among the debtor, assignor and assignee when the contract between the debtor and the creditor/assignor is governed by a law different than the law governing the contract between the creditor/assignor and the assignee.
parties who have not contracted with each other (such as Debtor and Assignee) and, thus, have not exercised their autonomy to choose the law governing those matters. While Creditor and Assignee have chosen to have their contact governed by the law of State Y, Debtor has not agreed to the application of State Y's law. Similarly, while Debtor and Creditor have chosen to have their contract governed by the law of State X, Assignee has not agreed to the application of State X's law. As a result, applying either the law of State X or the law of State Y to the relationship between Debtor and Assignee created by the interaction of the two contracts cannot be said to be merely an application of party autonomy.
10.7 Article 10 is based on two principles: (i) rights and obligations as between two parties, created by a contract them, should be governed by the law governing that contract; and (ii) a contractual obligation should continue to be governed by the law applicable to the contract that created the obligation, even after the creditor with respect to that obligation assigns its rights to a third party. Applying these two principles to the relationship created by assignment leads to the rules set out in Article 10(a) and (b).
10.8 First, under the rule set out in Article 10(a), the law chosen by the assignor and the assignee in the contract of assignment governs their mutual rights and obligations arising from that contract. This is an application of the principle that rights and obligations as between two parties, created by a contract between them, should be governed by the law governing that contract.
Under the facts of the Scenario, the contractual obligations created between Creditor and Assignee under Contract 2, and the determination of whether as between Creditor and Assignee, Contract 2 effectively transfers Creditor's rights under Contract 1 to Assignee, are governed by the law of State Y.
10.9 Secondly, under the rule set out in Article 10(b)(i), the law chosen by the debtor and creditor in the contract creating the debt determines whether the assignment can be invoked agains the debtor. This is an application of the principle that a contractual obligation should continue to be subject to the law governing the contract that created it even after the creditor with respect to that obligation assigns its rights to a third party (see Art. 2).
Under the facts of the Scenario, the question of whether Assignee can invoke against Debtor the assignment of Creditor's rights under Contract 1 to Assignee (including determination of the effect of any anti-assignment clauses in Contract 1) is governed by the law of State X.
10.10 Thirdly, under the rule set out in Article 10(b)(ii), the law chosen by the debtor and creditor in the contract creating the debt governs the rights of the assignee against the debtor that result from the assignment. This, too, is an application of the principle that a contractual obligation should continue to be subject to the law governing the contract that created it even after the creditor with respect to that obligation assigns its rights to a third party.
Under the facts of the Scenario and assuming that Assignee can invoke the assignment against Debtor, the nature and extent of Debtor's obligation to Assignee (including determination of the effect of any legal doctrines pursuant to which a debtor may not set up against an assignee certain defences that the debtor may have been able to set up against its creditor) are governed by the law of State X.
10.11 Fourthly, under the rule set out Article 10(b)(iii), the law chosen by the debtor and creditor in the contract creating the debt governs whether the obligations of the debtor have been discharged. This, too, is an application of the principle that a contractual obligation should continue to be governed by the law governing the contract that created it even after the creditor with respect to that obligation assigns its rights to a third party.
Under the facts of the Scenario and assuming that Assignee can invoke the assignmentagainst Debtor, the question of whether Debtor's obligation to Assignee resulting from the assignment has been discharged (whether by performance by Debtor or otherwise) is governed by the law of State X.
10.12 The matter of the law governing assigned obligations is addressed in the UN Receivables Convention. The matter is also addressed in the Rome I Regulation and in the UNCITRAL Secured Transactions Guide. Article 10 is consistent with these precedents. The UN Receivables Convention (Art. 28(1)) (recommendation 216 of the UNCITRAL Secured Transactions Guide) refers issues between the assignor and the assignee to the law governing the assignment, and defers to party autonomy for choosing that law: "The mutual rights and obligations of the assignor and the assignee arising from their agreement are governed by the law chosen by them." The UN Receivables Convention (ARt. 29) (recommendation 217 of the UNCITRAL Secured Transactions Guide) addresses the law applicable to the relationship between the debtor on the assigned contract and the assignee: "The law governing the original contract determines the effectiveness of contractual limitations on assignment as between the assignee and the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor's obligations have been discharged."
11.1 Party autonomy, as recognised by the Principles, is not absolute. Rather, in the Principles, as in all States that recognise party autonomy, it operates within limits. This Article sets out the limits on the general autonomy principle recognised in Article 2. Paragraph 11.4 to 11.32 of this Commentary describe in detail the operation of those limits and the policies underlying them. These are the only limitations upon the application of the law chosen by the parties within the framework of the Principles.
Principles, decline to give full effect to the law chosen by the parties. First, notwithstanding the law chosen by the parties, the forum may apply or take into account "overriding mandatory provisions" of law. Second, the forum may decline to apply the law chosen by the parties to the extent that the result would be "manifestly incompatible with fundamental notions of public policy (ordre public)". Of course, in order to apply those limits, one must know which State's overriding mandatory provisions of law or fundamental notions of public policy (ordre public) are to be taken into account. While the Principles primarily look to the law of the forum for those limits, they also povide rules under which the forum may look to the law of a different State.
11.3 These twin tasks - delineating the limits on party autonomy and identifying the State whose law provides the reference point for these limits - are accomplished in Article 11 as follows: paragraphs (1) and (2) address overriding mandatory provisions of law, with paragraph (1) establishing the basic power of the forum to apply its overriding mandatory provisions and paragraph (2) indicating the circumstances in which the forum may apply or take into account mandatory provisions of another State; paragraphs (3) and (4) address fundamental notions of public policy (ordre public), with paragraph (3) establishing the basic power of the forum to exclude application of the chosen law if it contravenes the forum's fundamental notions of public policy and paragraph (4) indicating the circumstances in which the forum may take into account the fundamental notions of public policy of another State; and paragraph (5) addresses application of these principles by arbitral tribunals.
11.4 These limitations apply only with regard to rules and policies that are of fundamental importance within the legal systems in which they operate (see paras. 11.15 and 11.23). Indeed, if the limitations are not circumscribed in this manner, the principle of party autonomy would be undermined.
11.5 The law of the forum plays a central role in Article 11. It is by reference to the law of the forum that a court will determine whether a provision or policy of that law displays the characteristics necessary to constitute an "overriding mandatory provision" or whether a public policy is of a sufficiently fundamental nature as to be capable under the Principles of overriding the law chosen by the parties (see Art. 11(1) and (3); see paras AA.1 and 11.22). It is also the private international law of the forum which determines whether and, if so to what extent, a court will apply or take into account the overriding mandatory law or the public policy of another State (see Art. 11(2) and (4); see paras 11.20 and 11.28). On the other hand, the overriding mandatory character or public policy of another law is determined according to that law and not the law of the forum.
11.6 The categories of limitation recognised by Article 11 qualify the applicable law to a certain extent, but they do not invalidate the parties' choice. In the case of overriding mandatory provisions, the applicability of the chosen law is supplemented or displaced by the application of the mandatory provision of another law. In the case of public policy, the applicability of the chosen law is limited only to the extent that its application is manifestly incompatible with fundamental notions of public policy (ordre public). Unless, therefore, its non-application is necessary to give effect to the overriding mandatory provision or public policy, the chosen law will be applied, as provided eslewhere in the Principles.
11.7 Article 11(5) stands apart from the rest of the Article. As the Commentary on the provision (see paras 11.29-11.31) makes clear, it recognises that arbitral tribunals and noational courts operate in different contexts in their treatment of overribing mandatory rules and public policy. Article 11(5) provides, therefore, for an arbitral tribunal to take into account public policy or overriding mandatory provisions of a law other than that chosen by the parties, if it is entitled or required to so. Indeed, that possibility is an important contral mechanism which protects the integrity of arbitration as a dispute resolution mechanism.
11.8 Rules that provide for the application by a court or arbitral tibunal of overriding mandatory provisions or public policy (whether of the forum or of another law) to qualify the law that would otherwise apply in a particular case are of fundamental importance in private international law. Those rules provide an essential"safety valve" without which national lawmakers might be reluctant to allow the application of the chosen law or "rules of law" (Case concerning the Application of the Convention of 1902 governing the Guardianship of Infants (Netherlands v. Sweden), Judgment of 28 November 1958: ICJ Reports 1958, p.55).
11.9 In the present context, although the qualifications in Article 11 do restrict the application of party autonomy. By acknowledgingand defining the exceptional circumstances in which a national court or arbitral tribunal may legitimately override the parties' choice in the exercise of the power conferred on them by Article 2(1), the provisions described in the following paragraphs serve as important contral mechanisms, which should serve to reinforce the confidence that a legal system reposes in the parties by allowing them that choice. Without provisions of this kind, which portect the integrity of a legal system and the society that it represents, the freedom of the parties to choose the law applicable to a contract might not be accepted at all and, if recognised, would be at risk of being undermined or negated on insubstantial or spurious grounds.
11.10 Article 11 permits the application, on an exceptional basis, of two categories of restrictions on the application of the law chosen by the parties: overriding mandotry provisions and public policy (ordre public). These two categories are commonly dealt with in separate provisions in national and international instruments, including all of the Hague Conference's Conventions dealing with choice of law issues over the past 50 years (see, e.g., Arts 16-17 1978 Hauge Agency Convention; Arts 17-18 1986 Hagues Sales Convention; Art. 11 2006 Hague Securities Convention).
11.11 There is no doubt that the categories overriding mandatory provisions and public policy are "closely connected". They may be considered to share the same doctrinal basis and, in effect, to be two sides of the same coin. Nevertheless, their separate treatment in the Principles has the advantage, in particular, of not only consistency with the majority of existing international instruments but also of allowing a clear distinction to be drawn between (a) situations in which application of the chosen law is displaced because a specific, positive rule of the lex fori or another legal system takes priority and is applied instead (application of an overriding mandatory provision), and (b) situations in which application of the chosen law is blocked because its application of the chosen law is blocked because its application in a particular case is repugnant to the fundamental policies of the forum or another legal system whose law would apply to the contract absent the parties' choice (application of ordre public).
11.13 Article 11 distinguishes between the role of overriding mandatory provisions and public policy in court proceedings (see Art. 11(1)-(4)) and their role in proceedings before an arbitral tribunal (see Art. 11(5)). In relation to court proceedings, Article 11 also distinguishes between the effect of rules and policies of the forum (see Art. 11(1) and (3)) and that of rules and policies of legal systems other than of the forum or that chosen by the parties (see Art. 11(2) and (4)).
11.14 Article 11 does not address the application of mandatory provisions and public policy of the law chosen by the parties. That is because a choice of law within Article 2 carries with it (subject only to the limits set out in the present Article) the application of the whole of the chosen substantive law, whether or not falling within one or other of these two categories. Article 2 permits the parties to choose the law applicable to only part of a contract (i.e., to some provisions, but not others) and to choose different laws to govern different parts (see para. 2.9). It does not, however, allow the parties to "pick and choose" within the applicable substantive law so as to exclude the application of certain rules, while applying others. For example, the Principles would not enable the parties to choose all of the law of State X, except for a particular (mandatory) statute governing unfair contract terms. For the most part, therefore, it will be a matter for the chosen law to determine whether a particular legal provision is one from which the parties are free to depart by the terms of their contract or is one which has mandatory effect.
11.16 The Principles do not define the term "overriding mandatory provisions" (compare Art. 9(1) Rome I Regulation). The term, found in several regional and national instruments, is generally understood to refer to provisions of law (in Art. 11(1), the law of the forum) that must, according to their proper construction, be applied to the determination of a dispute between contracting parties irrespective of the law chosen to govern the contract. They are mandatory provisions in the sense that it is not open to the parties to derogate from them by the terms of their contract or otherwise. They are overriding provisions in the sense that a court must apply them even if the parties have chosen a law other than that of the forum to govern their contractual relationship. The presence of these two characteristics serves to emphasise the importance of the provision within the relevant legal system, and to narrow the category of provisions to which the Principles will apply. Overriding mandatory provisions are likely to be limited to those that are regarded as important for safeguarding the public interests of the forum (see Art. 9(1) Rome I Regulation).
11.17 It is not necessary that an overriding mandatory provisions should take a particular form (i.e., it need not be aprovision of a constitutional instrument or statute), or that its overriding, mandatory character should be expressly stated. In every case, the law of the forum must be applied to determine (a) whether a particular provision is capable of having the effects described, and (b) whether, having regard to its terms (including its territorial application) and any relevant surrounding circumstances, it actually has those effects in the case in question. Nevertheless, the exceptional nature of the Article 11 qualifications to party autonomy should caution against the conclusion that a particular provision is an overriding mandatory provision in the absence of words or other indications to that effect.
Article Y applies notwithstanding any agreement or waiver to the contrary.
Article Y applies nothwithstanding any provision which designates or purports to designate the law of a State other than Z.
Party A und Party B conclude a contract under which Party A is appointed Party B's commercial agent in State X. The contract states that it is governed by the law of State Y. Upon termination of the contract, Party A sues Party B in State X, claiming compensation under the law of State X. A statute of State X regulating commercial agency arrangements provides for an indemnity upon the termination of the agency contract and also includes a provision to the effect that "the parties may not derogate from the indemnity provisions to the detriment of the commercial agent before the agency contract expires". The court in State X may (or may not) interpret those words as justifying the conclusion that the indemnity provisions provides by the statute are overrinding mandatory rules, displacing the otherwise relevant rules of the chosen law of State Y regarding indemnity. In order to reach that conclusion, the court must be satisfied not only that the provision, if it applies, is one from which the parties are not free to derogate but also that the provision must be applied notwithstanding that the parties have chosen the law of State Y to govern their relationship.
11.18 The impact of the Article 11(1) is also limited in the following way: it controls the application of the chosen law only to the extent that such application is incompatible with the concurrent application to the parties' relationship of the relevant overriding mandatory provision and the chosen law. Importantly, the conclusion that the chosen law is, in one or more respects, incompatible with an overriding mandatory provision of the law of the forum does not invalidate the partes' choice or, save to the extent of any incompatibility, negate the consequences of that choice under Articles 2 and following. The chosen law must be applied to the greatest possible extent consistently with the overriding mandatory provision.
11.19 Whereas Article 11(1) is concerned with the application of overriding mandatory provisions of the law of the forum, Article 11(2) deals with the possible application of the overriding mandatory provisions "of another law", i.e., the law of a State other than that of the forum or of the law chosen by the parties. In contrast with Article 11(4) (see para. 11.28), which refers only to the law applicable to a contract in the absence of choice, Article 11(2) does not limit the connections which may be deployed to identify a State whose overriding mandatory provisions will or may be applied. Consequently, that State may be the State whose law would have been applicable in the absence of a choice of law agreement or a State with another connection. The definition of the category of overriding mandatory provisions, and the relationship between those provisions and provisions of the chosen law, are to be understood in the same way as for Article 11(1) (see paras 11.14-11.17).
Party A and Party B conclude a contract for the rental by Party B of a commercial goods vehicle, knowing that it is to be used to smuggle historical artifacts from State Y to State X. The contract states that it is governed by the law of State Z. Under the cultural objects law of State Y, the export of historical artifacts without a licence is a criminal offence and all contracts whose purpose is to facilitate smuggling are illegal and unenforceable. Party A fails provide the vehicle, and Party B sues Party A in State X. Assuming the the contract is valid and enforceable under the law chosen by the parties (i.e., the law of State Z), the private international law of State X will determine whether and, if so, to what extent overridning mandatory provisions of the law of State Y are to be applied or taken into account. If, under the law of State X, the overriding mandatory provisions of the law of State Y ought to be applied or taken into account, the law of State Y must then be considered to determine whether the provisions of the cultural objects law have the status of overriding mandatory provisions for this purpose.
11.20 Certain international instruments, such as the 1978 Hague Agency Convention and the Rome Convention, contain provisions allowing the courts to give effect, on a discretionary basis and subject to certain conditions, to the overriding mandatory provisions of another law. Other instruments, such as the Rome I Regulation, Article 9(3), contain more narrowly defined principles. Current State practice and opinion as to the utility of provisions of this kind, however, diverges widely. Article 11(2) seeks to accomodate this diversify within the Principles by delegating to the private international law of the forum the question of whether and under which circumstances overriding mandatory provisions of another law may or must be applied or taken into account. A similar solution is found in Article 11(2) of the Mexico City Convention.
11.21 Given the central role that the law of the forum plays in Article 11(1) and 11(2) (see para. 11.4), that law must be applied to resolve any apparent conflict between an overriding mandatory provision of the law of the forum and an applicable overriding mandatory provisionof another State.

References: Art. 2
 Art. 1
 Art. 2
 ARt. 2
 Art. 1
 Art 3
 Art. 1
 Art. 1
 Art. 9
 Art. 28
 Art. 21
 Art. 1
 Art. 2
 Art. 7
 Art. 1
 Art. 7
 Art. 3
 Art. 2
 Art. 7
 Art. 9
 Art. 2
 Art. 4
 Art. 11
 Art 1
 Art. 3
 Art. 13
 Art. 11
 Art 1
 Art. 9
 Art. 9
 Art. 6
 Art. 6
 Art. 6
 Art. 6
in fine
 Art. 10
 Art. 1
 Art. 1
 Art. 1
 Art. 12
 Art. 17
 Art. 20
 Art. 4
 Art. 3
 Art. 28
 Art. 9
 Art. 9
 Art. 9
 Art. 12
 Art. 12
 Art. 12
 Art. 18
 Art. 2
 Art. 2
 Art. 11
 Art. 11
 v. 
 Art. 11
 Art. 11
 Art. 11
 Art. 11
 Art. 11
 Art. 9
 Art. 11
 Art. 9