Drafting and Negotiating International Commercial Contracts: A Practical Guide, with ICC Model Contracts [3 ed.] 9284204100, 9789284204106

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International Commercial Contracts A practical guide, with ICC model contracts

This invaluable guide clarifies the issues surrounding international contracts and will help lawyers and business people avoid the most common pitfalls. It provides practical examples and a comprehensive view of the principles that govern cross-border contracts, so that you can situate the various issues in their right context and take the most appropriate decisions. Further, this volume offers insights into the basic requirements of a well-drafted contract and analyses in depth the negotiating process. It concludes with an incisive commentary on the model contracts developed by the International Chamber of Commerce (ICC), Incoterms 2010® and the 2016 Unidroit Principles. This resource is an invaluable tool for practitioners and students who wish to understand and prepare for the main issues they will face when dealing with international contracts.

Drafting and Negotiating International Commercial Contracts

With the increasing globalization of markets, more and more businesses draft cross-border contracts on a regular basis. However, international contracts are much more complex than domestic ones.

THIRD EDITION

Drafting and Negotiating

THIRD EDITION

Drafting and Negotiating International Commercial Contracts A practical guide, with ICC model contracts

ICC Publication: 788E ISBN: 978-92-842-0410-6 ICC Store www.storeiccwbo.org

by Fabio Bortolotti

Drafting and Negotiating International Commercial Contracts A practical guide, with ICC model contracts

by Fabio Bortolotti

Drafting and Negotiating International Commercial Contracts Third Edition. Printed September 2017. © 2017 International Chamber of Commerce All rights reserved. ICC holds all copyright and other intellectual property rights in this work. No part of this work may be reproduced, distributed, transmitted, translated or adapted in any form or by any means, except as permitted by law, without the written permission of ICC. Permission can be requested from ICC through [email protected] ICC Services Publications Department 33-43 avenue du Président Wilson 75116 Paris France ICC Publication No. 788E ISBN: 978-92-842-0467-0

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Contents

FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 CHAPTER 1

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.1 SCOPE OF THIS BOOK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.1.1 The addressees: traders and non-specialized lawyers. . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.1.2 Issues not covered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 INTERNATIONAL AND DOMESTIC CONTRACTS: MAIN DIFFERENCES . . . . . . . . . . . . . . . . . 12 1.3 THE BASIC ISSUES: APPLICABLE LAW AND JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.3.1 Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.3.2 Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.3.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.4 THE CENTRAL ROLE OF THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.4.1 The various aspects of party autonomy (contractual freedom). . . . . . . . . . . . . . . . . . 14 1.4.2 The parties’ contractual freedom is not unlimited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.5 THE ROLE OF THE LAWYER DEALING WITH INTERNATIONAL CONTRACTS. . . . . . . . . . . . 15 1.6 MAIN ORGANIZATIONS ACTIVE IN INTERNATIONAL COMMERCIAL LAW. . . . . . . . . . . . . . . 16 1.6.1 The United Nations Commission on International Trade Law (UNCITRAL). . . . . . . . . 16 1.6.2 The International Chamber of Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.6.3 The International Institute for the Unification of Private Law (UNIDROIT) . . . . . . . . . 17 1.6.4 The Hague Conference on Private International Law . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1.6.5 Other organizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1.7 THE STRUCTURE OF THIS BOOK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.8 THE PRESENTATION METHOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 CHAPTER 2

THE APPLICABLE LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.1 THE NEED TO DISTINGUISH BETWEEN APPLICABLE LAW AND JURISDICTION . . . . . . . . . 20 2.2 THE IMPORTANCE OF DETERMINING THE APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . 21 2.3 TWO ALTERNATIVES: TRADITIONAL APPROACH V LEX MERCATORIA. . . . . . . . . . . . . . . . . 23 2.4 THE RULES OF PRIVATE INTERNATIONAL LAW (CONFLICTS OF LAW) . . . . . . . . . . . . . . . . 24 2.4.1 The problems arising from the lack of uniformity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.4.2 The Rome Convention of 1980 and the Rome I Regulation (593/2008). . . . . . . . . . . 25 2.4.3 Private international law rules and international arbitration . . . . . . . . . . . . . . . . . . . . . 26 2.5 THE LAW APPLICABLE IN THE ABSENCE OF A CHOICE BY THE PARTIES. . . . . . . . . . . . . . 27 2.5.1 Which criteria will be used for the determination of the applicable law? . . . . . . . . . . 28 2.5.2 The criteria contained in the Rome Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.5.3 The criteria contained in Rome I Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.5.4 The main problem for business: lack of predictability. . . . . . . . . . . . . . . . . . . . . . . . . . 31

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 3

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2.6 THE CHOICE OF THE GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.6.1 The principle of freedom of choice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.6.2 Cases where the freedom of choice is limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.6.3 Special problems: exclusion of mandatory rules; dépeçage. . . . . . . . . . . . . . . . . . . . . . 33 2.6.4 How to draft the choice of law clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.7 THE EFFECTIVENESS OF THE CHOICE OF THE GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 35 2.7.1 “Simply” mandatory rules and “internationally” mandatory rules. . . . . . . . . . . . . . . . . 36 2.7.2 National laws implementing European directives: the Ingmar case. . . . . . . . . . . . . . . 37 2.7.3 Application of internationally mandatory rules by courts (and arbitrators) . . . . . . . . 38 2.8 THE DIRECT APPLICATION OF TRANSNATIONAL RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.8.1 The theory of lex mercatoria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.8.2 The UNIDROIT Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.8.3 The combination of lex mercatoria and UNIDROIT Principles. . . . . . . . . . . . . . . . . . . 48 2.9 THE OPTIONS FOR THE CHOICE OF THE GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.9.1 Choice of the law of its own country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 2.9.2 Choice of the law of the other party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 2.9.3 Choice of the law of a third country. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 2.9.4 Lex mercatoria and similar solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.9.5 No choice at all. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 CHAPTER 3

THE METHODS FOR SOLVING DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.1 THE IMPORTANCE OF DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.2 THE MAIN OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.2.1 The choice between arbitration or ordinary jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . 59 3.2.2 Mediation and ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.2.3 The ICC Mediation rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 CHAPTER 4

INTERNATIONAL ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.1 THE LEGAL FRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2 THE NEW YORK CONVENTION OF 1958 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2.1 The fundamental principles of the Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2.2 The arbitrability issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 4.2.3 Problems arising in connection with public policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 4.3 DIFFERENT TYPES OF ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.3.1 The distinction between ad hoc and institutional arbitration. . . . . . . . . . . . . . . . . . . . 72 4.3.2 Arbitration under the UNCITRAL Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.3.3 Institutional arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4.4 ICC ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4.4.1 The ICC International Court of Arbitration and the Secretariat . . . . . . . . . . . . . . . . . . 75 4.4.2 The ICC arbitration rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4.4.3 The costs of ICC arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4.5 DRAFTING THE ARBITRATION CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 4.5.1 The formal requirement of the arbitration clause: agreement in writing. . . . . . . . . . . 82 4.5.2 The essential elements of an arbitration clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.5.3 Some typical errors frequently found in arbitration clauses. . . . . . . . . . . . . . . . . . . . . 88 4.5.4 The optional elements of the arbitration clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 4 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS CHAPTER 5

LITIGATION BEFORE ORDINARY (NATIONAL) COURTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 5.1 INTERNATIONAL CONTRACTS AND NATIONAL JURISDICTIONS. . . . . . . . . . . . . . . . . . . . . . 93 5.2 THE DOMESTIC RULES ON JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 5.3 THE RULES APPLICABLE IN THE EUROPEAN AREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 5.3.1 The rules on international jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 5.3.2 Choice of jurisdiction clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.3.3 The rules regarding lis pendens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.4 THE HAGUE CONVENTION OF 2005 ON CHOICE OF COURT AGREEMENTS . . . . . . . . . . . 102 5.4.1 Scope of application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 5.4.2 Exclusive choice of court agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 5.4.3 Recognition and enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 5.4.4 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 5.5 STRATEGIES FOR THE APPROPRIATE CHOICE OF JURISDICTION. . . . . . . . . . . . . . . . . . . . 105 5.5.1 Choice of forum in favour of its own courts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 5.5.2 Exclusive and non-exclusive jurisdiction clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.5.3 Drafting choice of forum clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.5.4 Formal requirements of jurisdiction clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 5.5.5 Effectiveness of the choice of forum clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 CHAPTER 6

DRAFTING, NEGOTIATING AND CONCLUDING INTERNATIONAL CONTRACTS . . . . . . . . 110 6.1 WHY NEGOTIATE AND DRAFT A CONTRACT?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 6.1.1 The trend towards self-sufficient contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 6.1.2 Oral and written contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 6.1.3 Letters of intent and similar documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 6.2 PREPARING FOR THE NEGOTIATION OF AN INTERNATIONAL CONTRACT. . . . . . . . . . . . 116 6.2.1 Identifying the legal framework where the contract is to be situated . . . . . . . . . . . . 116 6.2.2 Establishing a draft in view of the negotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 6.3 THE NEGOTIATION STAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 6.3.1 The approach to negotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 6.3.2 The ICC Principles to facilitate commercial negotiation . . . . . . . . . . . . . . . . . . . . . . . 119 6.3.3 The role of the lawyer in the course of negotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . 119 6.3.4 The recourse to local lawyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 6.3.5 Responsibility of the parties during negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 6.3.6 Agreeing upon special rules for negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 6.4 DRAFTING THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6.4.1 The trend towards common drafting standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6.4.2 The basic requirements of a well-drafted contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 6.4.3 Drafting techniques commonly used in international contracts. . . . . . . . . . . . . . . . . 124 6.4.4 The language of the contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 6.5 CLAUSES FREQUENTLY USED IN INTERNATIONAL CONTRACTS . . . . . . . . . . . . . . . . . . . . 126 6.5.1 Force majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 6.5.2 Hardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 6.5.3 Penalty/liquidated damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 6.5.4 Requirement of written form for modifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 6.5.5 Partial nullity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 5

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 6.5.6 Non-waiver clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 6.5.7 Clauses excluding liability for consequential damages. . . . . . . . . . . . . . . . . . . . . . . . 139 6.6 CONCLUDING THE CONTRACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 6.6.1 The domestic rules of formation of contracts and resulting problems . . . . . . . . . . . 140 6.6.2 Rules on the formation of contracts in the CISG and UNIDROIT Principles. . . . . . . . 142 6.6.3 Conclusion of contracts and general conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 6.6.4 Effectiveness of clauses contained in general conditions. . . . . . . . . . . . . . . . . . . . . . 148 6.6.5 Clauses governing the entry into force of the contract. . . . . . . . . . . . . . . . . . . . . . . . 149 CHAPTER 7

THE ICC MODEL FORMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7.1 THE ICC MODEL CONTRACTS IN GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7.1.1 The various model forms published by ICC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 7.1.2 General characteristics of the ICC models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 7.2 AN OVERVIEW OF THE MODEL FORMS NOT INCLUDED IN THIS BOOK . . . . . . . . . . . . . . 160 7.3 CONTRACTS OF SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 7.3.1 The UN Convention on the International Sale of Goods (CISG). . . . . . . . . . . . . . . . . 168 7.3.2 Incoterms® 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 7.3.3 The ICC Model International Sale Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 7.3.4 Model Form | ICC International Sale Contract (Manufactured Goods). . . . . . . . . . . . 185 Model Form | International Sale Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 7.4 AGENCY AND DISTRIBUTORSHIP AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 7.4.1 Organizing distribution of products abroad. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 7.4.2 Contracts with commercial agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 7.4.3 The ICC Model Commercial Agency Contract (long form). . . . . . . . . . . . . . . . . . . . . 203 7.4.4 Text of the ICC Model Commercial Agency Contract (long form). . . . . . . . . . . . . . . 209 7.4.5 The ICC Model Commercial Agency Contract (short form) . . . . . . . . . . . . . . . . . . . . 225 7.4.6 Text of the ICC Model Commercial Agency Contract (short form) . . . . . . . . . . . . . . 226 7.4.7 The ICC Model Distributorship Contract (long form). . . . . . . . . . . . . . . . . . . . . . . . . . 231 7.4.8 Model Form of International Sole Distributorship Contract . . . . . . . . . . . . . . . . . . . . 236 7.4.9 The ICC Model Distributorship Contract (short form). . . . . . . . . . . . . . . . . . . . . . . . . 252 7.4.10 Text of the ICC Model Distributorship Contract (short form). . . . . . . . . . . . . . . . . . . 254 APPENDIX I

REGULATION (EC) NO 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL OF 17 JUNE 2008 ON THE LAW APPLICABLE TO CONTRACTUAL OBLIGATIONS (ROME I). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 APPENDIX II

UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 2016. . . . . . . . 273 APPENDIX III

INCOTERMS® 2010 WALLCHART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 APPENDIX IV

ICC FORCE MAJEURE AND HARDSHIP CLAUSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 APPENDIX V

ICC ARBITRATION AND MEDIATION RULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

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DEVELOPING NEUTRAL LEGAL STANDARDS FOR ­INTERNATIONAL CONTRACTS A-NATIONAL RULES AS THE APPLICABLE LAW IN INTERNATIONAL COMMERCIAL

CONTRACTS WITH PARTICULAR REFERENCE TO THE ICC MODEL CONTRACTS. . . . . . . 342

APPENDIX VII

ICC PRINCIPLES TO FACILITATE ­COMMERCIAL NEGOTIATION . . . . . . . . . . . . . . . . . . . . . . . 363 ABOUT THE AUTHOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 ICC PUBLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 ABOUT THE INTERNATIONAL CHAMBER OF COMMERCE (ICC). . . . . . . . . . . . . . . . . . . . . . 370

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FOREWORD

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It was already my privilege to write the foreword of the second edition of Fabio Bortolotti’s now traditional book on Drafting and Negotiating International Contracts. Doing it, I understand why Heraclites was pointing out that “There is nothing permanent except change.” This book remains the same as the one published in 2013 and, paradoxically, any owner of the later needs it. Indeed, although the fundamentals of drafting and negotiating of international contracts are permanent, their legal environment has evolved since the second edition. This is the case of the ICC Model Forms of contracts which, as in the previous editions, are presented in the longer chapter of the book. In this regard, the author’s comments on the 2017 ICC Model Commercial Agency Contract (short form) and on the 2016 ICC Model Distributorship Contract (long form) are, among many others, of particular interest. The brand new model Consortium Agreement, of 2016, draws as well the attention. With his huge experience of advising clients and teaching students, Fabio Bortolotti walks the readers through the various ICC Model Forms of contract, in a way that helps businessmen and lawyers with little experience of international legal problems to draft safe contracts. However, if this book would just do that, it would be like teaching sailing without providing information as to the currents of the sea and the strengths of the wind. As in the previous editions of his book, the author explains the framework within which the contracts are concluded, performed and eventually come to an end. This framework is not static which makes the acquisition of this new edition indispensable. A well-deserved importance is given to the problems relating to the law applicable to the contract and to the resolution of conflicts. The author rightly stresses the danger of not indicating in the contract which law applies to it and recalls that according to the statistics of the years 2011-2015 published by ICC, a choice of law clause had been agreed by the parties in the great majority of cases. Yet, he explains that the choice of a national law is not necessarily the better choice and that a reference to a-national rules may be more appropriate in a significant number of situations. The UNIDROIT Principles have an increasing role in this respect and are giving a new youth to the recourse to the lex mercatoria. The publication by UNIDROIT in 2013 of model clauses for the use of the Principles in international commercial contracts will contribute to it. New developments on the limits of the parties’ autonomy when choosing the applicable are very welcomed. I am not thinking so much of the issue of the intervention of overarching mandatory provisions of laws different from the law applicable to the contract as such, which is a classical one, although not sufficiently adressed by the parties when drafting and performing their contracts. The information provided in this book on the determination of the rules which may be considered as international mandatory rules, in the light of the asseessment of the European Court of Justice are particularly valuable. Concerning the resolutions of conflict, the reader will find indications on the new arbitration institutions which have appeared recently and on their model clauses, as well as a precise analysis of the innovations introduced in the 2017 version of the ICC Rules of Arbitration. The expedited procedure now applicable where the amount in dispute does not exceed US$ 2 million may change the face of international arbitration in a near future as it is an excellent answer to the criticisms to the length of arbitration proceedings. I would not be surprised if the limit of US$ 2 million would be increased soon and, why not, if after some years the expedited procedure would become the rule and the present procedure the exception. The examples of the precious information provided to businessmen and practising lawyers by this 3rd edition could cover pages and pages: the main feature of the ICC

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Mediation Rules, new case law on the written requirement of the arbitration clause, the effectiveness of choice of forum clauses, Internet operations such as Internet Sales, etc… I must stop the enumeration and let the reader discover all the benefits you will draw from this book in a day to day practise. None of those who know Fabio Bortolotti will be surprised by the qualities of this book. For years, businessmen and lawyers have been guided by his deep knowledge of the practice of international contracts. As Chair of the ICC Commission on Commercial Law and Practice and an active member of the Council of the ICC Institute of World Business Law, his talent benefits the worlwide business community. This book is a further expression of such talent.

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Yves Derains Chair, ICC Institute of World Business Law

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Chapter 1

INTRODUCTION

1.1 Scope of this Book With the increasing globalization of markets, cross-border contracts are becoming a common practice for most traders (as well as for the lawyers assisting them). At the same time, however, international contracts are still considered to be a difficult and mysterious subject.

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This is especially true for business people, to whom the basic notions of contract law, and particularly those concerning cross-border contracts, are unknown; but also for lawyers who do not have specific experience in cross-border transactions, who may find it difficult to deal with a number of rather sophisticated issues which normally do not arise when dealing with domestic matters. Examples are the choice of the applicable law, the choice of jurisdiction and/or international arbitration, the use of more “international” drafting techniques, etc. The main purpose of this book is to give the reader a comprehensive view of the principles that govern cross-border contracts, so that he can situate the various issues in their right context and take the most appropriate decisions, possibly with the assistance of a lawyer having specific experience in the field of international contracts. 1.1.1 The addressees:

traders and non-specialized lawyers

This book will describe the basic principles of the law of international contracts so that non-specialists (traders or domestic lawyers without expertise in international contract law) can gather a better understanding of the problems they are facing in such a context. In fact, one of the main difficulties for those who deal with international contracts, without having specific legal expertise in this field, is the lack of information about the rules and principles that govern cross-border contracts. Without the knowledge of a number of basic principles of international trade law, it is very difficult to understand what is going on when certain legal issues are raised and, consequently, to decide which actions should be taken. This is particularly true for traders, who can avoid a number of pitfalls if they have learned to understand some major issues in international contract law. A few examples can be helpful to support the above view. Example 1-1 – Reacting to a claim brought before a foreign court Mr François Dubois, a French manufacturer of painted tiles, is notified by a Polish customer of a claim before the courts of Warsaw for defectiveness of the goods and pretended damages suffered by the purchaser. The exporter contacts a lawyer from the buyer’s country who advises him to defend himself before the court in the customer’s country. In the course of the proceedings difficulties arise. The seller knows that the alleged defects are not his responsibility, but language and communication problems make it difficult to prove his case before the court. When the court decides against the seller and awards damages to the purchaser, Mr Dubois discovers that he could have objected to the jurisdiction of the Warsaw court and that he lost that possibility by defending himself before this court without raising the exception. Comment: It is rather common that a local lawyer — not specialized in international trade law — will not consider raising the question of a possible lack of jurisdiction of his country’s courts. If Mr Dubois had known that under the EU jurisdiction rules

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(Regulation No. 1215/2012, infra, § 5.2.1), one must, in principle, claim before the defendant’s courts and that exceptions to this principle are limited, he could have insisted on this point with the local lawyer, or could have requested the advice of an expert.

The above example shows how a better understanding of the basic principles of jurisdiction in the EU would have given the exporter a chance to avoid a wrong decision. Of course, the businessman will not be in a condition to verify (without the advice of a lawyer) if the jurisdiction of the foreign court can actually be avoided in the specific case, and whether this would be the most appropriate solution. But if he knows that this is a critical issue, he will be aware that the strategy proposed by the local lawyer should be verified by an expert. Example 1-2 – Excluding the indemnity due to a foreign agent

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A foreign principal made clear, before appointing an agent in Germany, that he did not want to pay an indemnity when the contract terminated. The German agent convinced the principal to put a clause in the contract stating that German law would govern the relationship, and agreed at the same time in the contract that no compensation would be due in case of termination. The parties signed the contract on the assumption that no goodwill compensation would be due at contract termination. When the case was brought to arbitration, the arbitrator decided that, since German law was applicable, and since under German law the termination indemnity cannot be excluded contractually, the goodwill compensation was due. (ICC arbitration case No. 8161/95).1 Comment: If the principal had been aware that one cannot exclude the application of mandatory rules of the law that governs the contract (infra, § 2.6.3.1), and that consequently the clause excluding the right to indemnity would be ineffective, he could have looked for a different solution or, if this were impossible, he could have considered the indemnity in the calculation of his costs when negotiating the contract.

This second example shows how important it is for those who negotiate cross-border deals to understand the basic principles of the law of international contracts. Of course, this knowledge will not be sufficient when looking for an alternative solution, for which the assistance of a specialized lawyer will be required. But here too, the businessman will be in a far better position if he has some general ideas about the possible alternatives such as the choice of another law or a change of the economic balance (for instance by reducing the commission), although he will need to verify this with the assistance of an expert. It can therefore be concluded that it is essential, especially for the non-lawyer who negotiates international contracts, to understand, even if only in general terms, the basic legal principles which apply in such a context. This will allow him to avoid clearly wrong decisions and will help him identify dubious situations where he will need to seek additional advice. 1.1.2 Issues

not covered

This book deals with the legal aspects of negotiating and drafting international commercial contracts and related matters (such as jurisdiction and arbitration). It does not cover other aspects of the law of international trade, such as the commercial relations between states (GATT, WTO, anti-dumping, etc.), rules regarding transport of goods, international financing, foreign investments, etc. For a more comprehensive view of the various issues relating to export trade, see ICC Guide to Export-Import Basics, ICC Publication 641.

1.2 International and Domestic Contracts: Main Differences In the case of contracts between companies from the same country (domestic contracts) the rules governing the contract are those contained in the national law of 1. Published in ICA Bull., 2001, No. 1, 86-88.

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the parties and the courts having jurisdiction in case of a dispute will be those of that country. But when the contract is “international”, the situation becomes much more complicated. Which law will apply to the contract? The domestic law of one of the parties? The law of another country? International conventions? Trade usages? Transnational rules of law not belonging to a domestic legal system? Moreover, in case of a dispute, which court will have jurisdiction? The courts of the seat of the claimant? Or those of the defendant? Or an arbitral tribunal? These and other problems, which do not arise (or are less critical) in a domestic context, are typical of the issues which must be dealt with in cross-border contracts. While in domestic trade there is a clear legal framework applicable to the contract, in international trade the rules to be applied will be different from case to case, according to the laws that have a connection to the specific case.

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Thus, the absence of a uniform and foreseeable legal framework makes the negotiation of international contracts considerably more complicated: when drafting a crossborder contract, a variety of alternatives must be taken into account which need not be considered within a purely domestic framework. Of course, the problem of dealing with these issues is not new; international trade has existed for centuries, and traders have always been obliged to deal with them. However, while in the past the problems had to be faced by a relatively small group of specialized undertakings involved in international trade, who had developed specific skills in the field, in recent times cross-border transactions have become the day-today business for a growing number of companies. This is particularly the case in the European Union, where goods and services circulate freely within a common market while the rules governing contracts are still contained in domestic laws that differ from country to country. This is why the law of international contracts has become more important, both for traders and their lawyers.

1.3 The Basic Issues: Applicable Law and Jurisdiction As noted, the two main issues arising with respect to cross-border contracts are those regarding the applicable law and jurisdiction. These arise due to the absence of an adequate legal framework for cross-border transactions. While traders of the same country can make reference to the rules of their domestic law, known by both of them (or at least by their lawyers), and to a court system for resolving possible disputes they are familiar with, parties from different countries cannot count upon a common legal framework. There is at present no law of cross-border contracts placed above the domestic legal systems, to be applied when a contract is international, nor is there a common judicial system for international trade as an alternative to the domestic courts. All of this gives rise to an unsatisfactory situation, which the parties try to overcome through a number of devices that characterize the law of international contracts. 1.3.1 Applicable

law

In principle, international contracts are governed by the domestic rules2 (national law) of one of the countries involved.3  Such rules — normally intended to govern domestic relations — will often be inappropriate for an international transaction: they normally reflect a “local” view of the relevant legal issues which does not necessarily correspond with the way the same problem is seen in the context of international commerce. 2. The possibility of applying a-national rules instead of domestic legal systems will be examined later: see § 2.8 3. Normally, the law of one of the two parties; but also other legal systems may come into consideration, for example when the contract is to be performed in a third country or where the parties have chosen the law of a third country as the applicable law.

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 Moreover, the application of a national law — which will almost always be the law of the country of one of the parties — tends to create an unbalanced situation by giving one party the advantage of applying its own rules.  Finally, if the parties have not made an express choice of the applicable law in their contract, it may be difficult to foresee which law will actually apply, since the rules that determine which law is the proper law of the contract rarely provide clear and definite answers. 1.3.2 Jurisdiction

In case of a dispute, the parties must in principle (unless they choose international arbitration) have recourse to the domestic courts of one of the countries involved and, if the judgment must be enforced in another country, they must obtain its recognition in that country. The courts will apply rules of procedure peculiar to their own country, which will often be surprising to a foreign party; the judges will all be nationals of the country of the court, and the only admissible language will be that of this country. All of this makes litigation more difficult and onerous, particularly for the party that needs to appear before a foreign court; and if a party is able to bring the claim before its own courts, it will thereafter need to enforce the judgment before the courts of the other party’s country, which implies a double proceeding. 1.3.3 Conclusion

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The above problems would not exist if there were a special legal system for international contracts with uniform rules automatically applicable to all cross-border contracts and supra-national courts having jurisdiction over cross-border disputes and whose judgments would be effective all over the world. Although businesspeople at times wrongly assume that such a supra-national legal system exists (because they cannot believe that such a logical solution has not yet been put in place), this is unfortunately not the case. As discussed later, some important attempts have been made to overcome these problems, for example by creating uniform laws on certain international contracts,4 by facilitating the recognition and enforcement of foreign judgments5 and especially by favouring in various ways international arbitration.6 In any case, the above efforts are not sufficient, and the fact remains that the present legal framework, based on a variety of diverging domestic systems of law, does not offer an adequate environment for international contracts, and consequently obliges traders (and their legal advisors) to look for solutions that can nevertheless provide a reasonable degree of certainty and predictability.

1.4 The Central Role of the Contract If businesspeople engaged in international trade (and the lawyers assisting them) have been able to overcome, to a great extent, the difficulties described above, this is mainly because they have found a way to fill the gaps in the system through recourse to party autonomy, i.e. to the freedom to establish the rules governing their relations, a freedom recognized in most modern systems of law. In other words, in the absence of a uniform and foreseeable legal environment, parties tend to create such a framework by making an extensive use of their freedom of contract. 1.4.1 The various

aspects of party autonomy (contractual freedom)

Since the legal framework of international contracts is uncertain, parties will, as far as possible, work out contractual solutions that can increase certainty and

4. Such as, for instance, the Convention on the International Sale of Goods (Vienna 1980): infra, § 7.2.1. 5. Particularly in the European context, through the Brussels and Lugano Conventions and regulation No. 1215/2012: infra, § 5.2.1. 6. 

Infra, § 4.1.

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 INTRODUCTION

predictability by choosing the applicable law, by determining in advance the way to solve possible disputes and by defining in detail in the contract their rights and obligations.

The main aspects of party autonomy relevant for international contracts are the following:  the parties can choose the domestic law (or, in certain cases, a system of “a-national” rules) governing their contract;  the parties can decide which institution (arbitral tribunal or state court) will deal with possible disputes arising between them;  the parties can determine the specific contents (clauses) of their contracts and so establish a set of rules appropriate to their needs. Through these means, the parties can overcome many of the obstacles arising from the absence of a uniform and global legal environment: they will try to submit the contract to a system of law acceptable to both of them; they will negotiate “neutral” solutions for solving possible disputes; they will work out contracts that reflect the standards used by business in the global market more than those typical of a specific country. 1.4.2 The parties’

contractual freedom is not unlimited

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However, the parties’ freedom of contract is not absolute. In all legal systems there are mandatory rules that limit the parties’ autonomy in order to prevent the exercise of their contractual freedom from conflicting with other interests at stake. As discussed in detail later, a choice of law which would deprive a party of the protection granted by its domestic law may, under certain circumstances, be ineffective;7 or it may be that the jurisdiction of a given court cannot be lawfully excluded through the choice of other courts; or that certain contractual provisions agreed by the parties are not effective because they conflict with mandatory rules of the applicable law. Among the main issues one must consider when negotiating and drafting international contracts are precisely those regarding the use of party autonomy and its limits, which implies the need to: (1) identify

the sphere within which party autonomy can be effectively exercised in the specific case when choosing the applicable law or jurisdiction and when determining the contents of the contract, and

(2) identify

the contractual solutions appropriate for the best protection of the interests of each party.

The first issue is concerned with the main points dealt with in this book, i.e. the extent of the parties’ freedom:  to choose the applicable law (see Chapter 2);  to determine the jurisdiction of national courts or arbitration (see Chapters 3-5); and  to identify the various limits that parties encounter when determining the contents of their contract.8 The second issue, i.e. the identification of the most appropriate contractual solutions, which combines legal and “business” considerations, will be examined in the context of the various types of contracts (Chapter 7).

1.5 The Role of the Lawyer Dealing with International Contracts As noted before, in the context of international contracts the focus is placed mainly on contractual solutions (e.g. choice of law and jurisdiction, setting up of clauses regulating the various substantial issues) to be decided and worked out by the parties 7. See, infra, § 2.7 where the issues regarding the effectiveness of a possible choice of the applicable law will be examined in detail. 8. This issue is not dealt with exhaustively in this book (since it would require a study of all legal systems worldwide in order to check which mandatory rules limit the parties’ autonomy). I will only indicate, with respect to a number of contracts frequently used in international trade, some typical trends in domestic laws which can interfere with the parties’ autonomy: see Chapter 7.

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(and their lawyers). This implies that the lawyer dealing with international contracts must be prepared to play a role that is not the usual one (at least not in jurisdictions where lawyers act mainly as litigators).9 While the traditional lawyer (and particularly the lawyer specialized in litigation) is used to dealing with pre-defined situations (the facts giving rise to a dispute), and his task is mainly to search for rules and arguments which can solve the dispute to the advantage of the party he is representing, the lawyer who has to draft and negotiate a contract (particularly an international contract) has a more creative function. His main role is to propose and work out contractual solutions that can suit the interest of the party he represents and which, at the same time, must be effective under the laws that may apply to the contract. This has two important consequences. First, the task of the “contract lawyer” is to create legal rules (by working out contractual clauses) rather than to develop arguments in support of a certain legal thesis. In other words, the “contract lawyer” has to draft his own rules instead of arguing about existing rules (as the “litigation lawyer” normally does). This implies recourse to techniques — the drafting of contractual provisions — that are less developed in countries where lawyers mainly deal with litigation.

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Second, drafting contract clauses necessarily involves the need to consider the commercial implications of a given solution, as well as the legal ones. A clause in a contract cannot be considered to be good or bad from a strictly legal point of view without considering, at the same time, its commercial implications. And often the best possible clause will be a compromise between the requirements of legal safety and commercial feasibility. But this necessarily implies that the lawyer cannot do a good job without understanding the commercial background, and that he needs to work in close cooperation with those who have to take the business decisions. All of this has led lawyers dealing with international contracts to develop a different attitude towards their clients (or the company they work for, if they are in-house lawyers). They are far more interested in understanding the commercial framework of the contract and cooperating closely with the persons responsible for the business decisions in order to work out contractual solutions that address, as much as possible, the business needs of their clients. And when the solution required by the management conflicts with legal rules, the lawyer — who should be involved from the very beginning — will not limit himself to saying that the proposed solution is unlawful, but will try to find out if there are alternative options whereby the same result (or a similar result) can be obtained without breaching the law.

1.6 Main Organizations Active in International Commercial Law Before approaching the specific issues regarding the negotiation and drafting of cross-border contracts, it may be useful to conclude this introductory chapter by giving a short overview of some of the main institutions active in the field of international commercial law. Considering the subject matter of this book, I will concentrate on the organizations that play a significant role in establishing legal rules applicable to international contracts. 1.6.1 The United

Nations Commission on International Trade Law (UNCITRAL)

The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly of the United Nations in 1966. The Secretariat of UNCITRAL is in Vienna, Austria, www.UNCITRAL.org. The main purpose of UNCITRAL is to reduce and remove obstacles to international trade resulting from disparities in national laws by furthering the progressive harmonization and unification of the law of international trade. UNCITRAL has played a substantial role in preparing the United Nations Convention on Contracts for the International Sale of Goods – CISG (Vienna 1980), the Convention on 9. In countries where the main role of the lawyer was to appear before the courts, the situation is also changing, and the activity of advising parties in negotiating contracts has become more important.

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 INTRODUCTION

the Limitation Period in the International Sale of Goods (New York, 1974) and the United Nations Convention on the Carriage of Goods by Sea, 1978 (the “Hamburg Rules”). UNCITRAL has also been actively involved in the field of arbitration and conciliation. In 1976, it approved the UNCITRAL Arbitration Rules, a set of rules frequently used in the context of ad hoc arbitration. A new, revised version, has been published in 2010. In 1980 UNCITRAL established a set of conciliation rules for parties wishing to settle their commercial disputes amicably. Another important achievement in this field is the UNCITRAL Model Law on International Commercial Arbitration, designed to assist states in reforming and modernizing their laws on arbitral procedure to take into account the particular features and needs of international commercial arbitration. The Model Law has been enacted into law by a large number of countries. UNCITRAL is also promoting the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. UNCITRAL’s other fields of activity include public procurement and infrastructure development, construction contracts, international payments, electronic commerce and cross-border insolvency. UNCITRAL has also established a system for collecting court decisions and arbitral awards relating to the conventions and model laws it has worked out thus facilitating the circulation of case law regarding international uniform rules. 1.6.2 The International

Chamber of Commerce

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The International Chamber of Commerce (www.iccwbo.org), founded in 1919, is the principal organization representing the interests of business worldwide. ICC plays an important role in establishing rules and standards for international trade. These rules, which have no binding force as such, have nevertheless become international standards due to their wide acceptance by the business world. They include, for example, the following:  Incoterms® 2010, a set of international trade definitions (FOB, CIF, CCP, etc.) which have become the standard in international trade, used all around the world;10  The ICC Uniform Customs and Practice for Documentary Credits (UCP 600), the rules generally applied by banks dealing with documentary credits;  The ICC Force Majeure Clause 2003 and the ICC Hardship Clause 2003. ICC has also drawn up and published several model contracts for use in international trade, some of which can be found in Chapter 7. ICC also offers dispute resolution services through the International Court of Arbitration (www.iccarbitration.org), the leading organization in the field of international commercial arbitration (see § 4.2.4). 1.6.3 The International

Institute for the Unification of Private Law (UNIDROIT)

The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization with its seat in Rome. Its purpose is to study needs and methods for modernizing, harmonizing and coordinating private and commercial law between states. UNIDROIT has drawn up several international conventions establishing uniform laws of great importance for the law of international contracts, for example:  The 1964 Hague Conventions on the International Sale of Goods and on the Formation of Contracts of Sale.These two conventions have been the basis for the United Nations Convention on the International Sales of Goods, which has replaced them.  The 1988 UNIDROIT Convention on International Financial Leasing (Ottawa).  The 1988 UNIDROIT Convention on International Factoring (Ottawa). 10.

Infra, Chapter 7.

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A very important achievement of UNIDROIT is the set of Principles on International Commercial Contracts (UNIDROIT Principles), a “restatement” of the law on contracts, which is becoming a powerful instrument for the development of international commercial law, as we will see hereafter (infra, § 2.8.2). 1.6.4 The Hague

Conference on Private International Law

The Hague Conference on Private International Law is an intergovernmental organization whose purpose is to work for the progressive unification of the rules of private international law. Its principal activity is to draft multilateral conventions in the different fields of private international law. The Hague Conference has adopted several conventions in the field of private international law. Among those of particular interest for international contracts, the following should be mentioned:  The Convention of June 1955 on the Law Applicable to International Sales of Goods;  The Convention of 14 March 1978 on the Law Applicable to Agency;

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 The Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters. On 30 June 2005, the Hague Conference adopted the Convention on Choice of Court Agreements which, if ratified by many countries, is likely to become an instrument of substantial importance for facilitating international trade.The aim of the convention (which will be examined in more detail in § 5.2.3) is to make exclusive choice of forum agreements as effective as possible and to warrant recognition and enforcement of judgments made by the courts agreed upon by the parties. At present the Convention has been ratified by the EU, Mexico and Singapore. The Hague Conference has approved on 19 March 2015 the “Hague Principles on the Choice of Law in International Commercial Contracts”, a non-binding instrument aiming at promoting the acceptance of the principle of party autonomy for choice of law in international contracts. Ar present the Hague Conference is working on a Convention on the Recognition and Enforcement of Foreign Judgments, which would have a wider scope than the 2005 Convention on Choice of Court Agreements.11 1.6.5 Other

organizations

Finally, there are other organizations less involved in establishing rules governing international contracts, though some of them may be more important in their scope than those examined above. 1.6.5.1 The

World Trade Organization (WTO)

The World Trade Organization (WTO), established in Geneva (www.wto.org), administers the WTO trade agreements. The main agreement reached under the WTO regarding international contracts is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which establishes minimum levels of protection that each government has to accord the intellectual property of fellow WTO members. 1.6.5.2 The

World Intellectual Property Organization (WIPO)

The World Intellectual Property Organization (WIPO), with headquarters in Geneva (www.wipo.int), is a specialized agency of the United Nations dedicated to promoting the use and protection of intellectual property rights. It administers the principal international conventions on intellectual property. 1.6.5.3 The

United Nations Conference on Trade and Development (UNCTAD)

The United Nations Conference on Trade and Development (UNCTAD) promotes the development-friendly integration of developing countries into the world economy in the fields of investment, finance, technology, enterprise development and sustainable development. 11. See: HCCH, Explanatory Note providing Background on the Proposed Draft Text of a Convention on the Recognition and Enforcement of Foreign Judgments, April 2016.

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International Trade Centre (ITC)

The International Trade Centre (ITC), Geneva, (www.intracen.org) is the technical cooperation agency of the United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO) for operational, enterpriseoriented aspects of trade development. ITC has drafted a model contract for the international commercial sale of perishable goods and a contractual joint venture model agreement.

1.7 The Structure of this Book Following this short introduction, this book will first deal with two fundamental issues, which must be known and understood before approaching the negotiation of an international contract: the law applicable to the contract (Chapter 2) and the methods for resolving disputes between parties from different countries: arbitration (Chapter 4) and national courts (Chapter 5). Thereafter, it will examine how international contracts are negotiated, the drafting techniques and clauses frequently used and problems related to the conclusion of the contract (Chapter 6). Chapter 7 highlights the basic issues arising from some kinds of contracts frequently used in international trade and presents the most frequently used ICC model contracts (sales, agency, distributorship).

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Finally, you will find the text of a number of documents that may be useful for those who draft international contracts at the end of this publication.

1.8 The Presentation Method In writing this book, I have tried to make it as easy as possible to approach the rather complex issues that arise in the context of international contracts. One of the most useful means of clarifying complicated issues is to start with a practical illlustration. Examples based on situations that currently arise in international trade make it possible, on the one hand, to show the real importance of the legal issues being considered, and on the other to better understand them. Examples are easier to read and to remember if they refer to a specific situation, i.e. the contract between the German company Schulze AG and its French distributor, Mr Leblanc. The reference to specific countries can also be important where the solution of the problem depends on the legal situation existing in these countries. For instance, it may be relevant that both countries have ratified an international convention that is to be applied in a particular case, or that one of the countries has special rules that have consequences in that case. Of course, there are several examples where one of the parties is not behaving correctly, a situation rather common in international (and domestic) trade. These are cases where a dispute will arise and where the legal issues will become more important. When choosing the countries where “correct” parties and, respectively, the “less correct” parties are located, I have tried to distribute “good” and “bad” traders internationally, without privileging any country. This reflects the common experience that “correct” as well as “less correct” traders can be found everywhere.

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Chapter 2

THE APPLICABLE LAW

2.1 The Need to Distinguish Between Applicable Law and Jurisdiction Before taking up the problems of applicable law, we must deal with a preliminary question of paramount importance, that is, the need to clearly distinguish between the issues regarding the applicable law and those concerning jurisdiction. At first sight it may seem surprising that one should underline such an obvious point. However, we prefer to insist on this point, since traders (and, sometimes, even lawyers) tend to confuse these two issues, which must be kept clearly separated if one wants to deal correctly with an international contract. Actually, the distinction is very simple.  The issue of applicable law implies an answer to the question: which substantial rules govern the contract?

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 The issue of jurisdiction concerns quite a different problem, namely knowing who will decide possible disputes. Applicable law

Which rules govern the contract?

Jurisdiction

Who is to decide possible disputes?

Nevertheless, many business people are convinced that when they choose the jurisdiction (by submitting possible disputes to the courts of a certain country) they are at the same time choosing the substantive law of that country as the applicable law and, vice versa, that by choosing the applicable law they are also determining the jurisdiction of the courts of the country whose law they have chosen. These assumptions are mainly due to the fact that non-lawyers simply do not see the difference between these two issues. An interesting example of total confusion between the issues of jurisdiction and applicable law is demonstrated by in the arbitration clause set out in the following example. Clause 2-1 — A pathological arbitration clause 12.

COMPETENT JURISDICTION

12.1

This contract, as well as all its provisions, will be governed in all respects by the “INTERNATIONAL CHAMBER OF COMMERCE” or in its absence by a neutral legislation defined by mutual agreement of the parties, but in no case by the Tribunals of Justice of the respective countries of the contracting parties.

12.2

All the interpretations required for this contract as well as any disputes that may arise between the contracting parties, will be submitted to the Judges and Tribunals of the Courts defined in clause 12.1, which implies that the parties renounce other jurisdictions, if existing.

Comment: The above clause is a clear example of confusion between applicable law and jurisdiction. The first part of the clause, by referring to a “neutral legislation”, apparently implies a choice of the applicable law (although the indication of the International Chamber of Commerce in this context makes little sense), but thereafter it is said that the contract should in no case be governed by the “Tribunals of Justice of the respective countries of the contracting parties”, which is a clear reference to the issue of jurisdiction. A clause of this type is very dangerous because it is almost impossible to foresee (at least until a decision by a court or by an arbitral tribunal has been taken) if the clause will be considered valid, and in case of affirmative answer, what the clause actually means. 20 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

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In the actual case (ICC arbitration case No. 10.422 published in Journal du droit international, 2003, 1142 et seq.), the defendant contended that the clause was not an arbitration clause but only an invalid choice of law clause (since the law of the ICC, chosen by the parties, does not exist), and consequently argued that the arbitrator had no jurisdiction. The sole arbitrator upheld the clause and came to the conclusion that the parties wanted a neutral legislation to be applied by arbitrators appointed under the ICC arbitration rules but, of course, a better clause would have avoided a lot of discussion. Another common mistake is to believe that the two issues coincide, in the sense that by choosing the jurisdiction of the courts of a given country one automatically also chooses the law of such country as the law governing the contract. However, this assumption is also definitely wrong. The courts chosen by the parties will apply the law chosen by the parties (which may or may not be their law) and, if no such choice has been made, they will determine the applicable law according to their conflict of law rules which may (or may not) entail the application of their law.

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Thus, the final result may, in some cases, be that the court applies its own law1 (courts tend to prefer, where possible, to apply rules they are familiar with), but the fact remains that the choice of jurisdiction as such does not imply a choice of law. There are, of course, close links between the issues of applicable law and jurisdiction. So, as we will see, by choosing the jurisdiction of the courts of a given country one chooses the system of private international law of that country (since national courts always apply their own conflict of law rules). Another relevant issue is that the court chosen will in principle be bound to respect the internationally mandatory rules of its own legal system (infra, § 2.7.3). However, all of this only confirms the need not to confuse the two issues, because only by keeping them apart is it possible to understand and to correctly apply the principles regarding the applicable law and, respectively, jurisdiction.

2.2 The Importance of Determining the Applicable Law Many traders think that the above issue is a merely theoretical problem of little practical relevance. The important thing, they believe, is to draft and conclude wellwritten contracts which will resolve all, or almost all, of the problems that may arise. This attitude is mainly due to the following reasons:  There is a widespread assumption that the rules concerning applicable law (conflict of law rules, rules of private international law, according to the terminology prevailing respectively in the common law and civil law countries) are too complicated and that it is consequently useless to deal with them.2  Many non-lawyers look at the contract as if it were a self-sufficient set of clauses, without realizing that it must be put into a context of legal rules and that such rules may have a substantial impact on the contents of their agreement. The first reason (sometimes also put forward by lawyers, unfortunately) is no more than an excuse for not dealing with matters one is not familiar with. As we will show in this chapter, conflict of law issues are not more complicated than other issues; they simply need to be explained and understood in the right way. As to the second reason, it is essential to bear in mind that the contract must be placed in the context of the governing law, which may substantially affect its contents, by filling possible gaps and/or by influencing the effectiveness of certain provisions. 1. It is sometimes argued that, by choosing the courts of a given country, the parties make an implied choice of law in favour of the legislation of such country. This type of argument is favoured by judges who strongly believe in the superiority of their legal system. However, this approach is not in line with the most recent tendencies in private international law, which tend to give a narrow interpretation of the implied choice of law. See infra, § 2.4.2. 2. This attitude may be explained by the fact that until a few years ago it was normal for most lawyers to be exclusively involved in domestic matters and thus to consider only their own legal system. However, this situation has substantially changed in recent years due to the growing trend towards globalization.

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A few practical examples may show how important the issue of the applicable law may be from a practical point of view. Example 2-1 – Agent’s indemnity under two different laws A German exporter wishes to appoint a French company as its agent for the territory of France. A detailed contract is negotiated, but when it comes to the issue of the applicable law, a difficulty arises because the French agent requests that the contract be submitted to French law, while the German principal would prefer German law. The German principal decides that no time should be wasted with purely legal matters and the parties decide not to deal at all with the issue of applicable law. After three years, the German principal decides to discontinue the manufacture of the goods the French company was promoting and consequently terminates the agency agreement. The French agent requests a goodwill indemnity equal to two years of commission according to French law (which is applicable in the absence of choice: see infra, § 2.5.2). When the German principal consults a lawyer, he is told that if German law had been applicable, the principal would have paid no indemnity at all.

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In fact, under French law, goodwill compensation has no maximum limit, and is normally determined by the courts on the basis of two years of commission, such indemnity being due by the mere fact that the agent loses commissions he would have earned if the contract had continued. Under German law, the goodwill indemnity cannot exceed one year of commission and is only due if the agent has developed a customer base which the principal can benefit from after the end of the contract. This implies that no indemnity at all is due in the exceptional case where the principal discontinues the activity (because he can take no advantage of the goodwill developed by the agent). The final result is that, depending upon the applicable law, the principal will have to pay a goodwill indemnity of two years or no indemnity at all. If the German principal had insisted on the choice of German law, he would have avoided the indemnity (or, in the context of a “normal” termination, not due to discontinuance of the activity, he would have paid an indemnity calculated according to the German rules, within the maximum amount of one year’s commission). Example 2-2 – Penalty or liquidated damages? A French manufacturer purchases production equipment from a US manufacturer. Since he absolutely needs the equipment within a certain date, in order to fulfil deliveries already agreed with his customers, the parties agree that in case of delayed delivery of the equipment the supplier will pay a penalty of 10% of the price of the equipment for each week of delay. There is no agreement on the applicable law. If US law (or, to be more precise, the law of the state of the US supplier) applies,3 it is very likely that the penalty clause will be considered null and void, since under US law only liquidated damages are admitted (see infra, § 6.5.3). Under French law the clause would be valid, although the courts would be entitled to reduce the penalty if it were considered excessive.

In this case, the same clause is valid if the law of the purchaser applies, but is not valid if the law of the seller applies. Consequently, a responsible negotiator should draft the clause only after having determined (possibly by a choice of law clause) which law is to apply. Once it is certain which law is to apply, the parties can draft a clause that complies with the applicable law (e.g. a clause on liquidated damages, not exceeding the likely damage the buyer may suffer if US law is to apply) and so avoid the risk of having agreed upon a clause that would be ineffective. These two examples show how substantial the issue of applicable law is. 3. Actually the contract of sale would be governed by the UN Convention on the International Sale of Goods (CISG: infra, § 7.3.1) ratified by both countries. However, the issue of penalty is not covered by the CISG and consequently reference is to be made to the applicable domestic law.

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Even when the parties give the utmost attention to drafting a detailed contract, its actual contents will (also) depend upon the applicable law, because the contractual rules must be coordinated with the rules of the law which governs the contract. This is why, in case of a dispute, the first question for the lawyer is to know under which law he should verify the validity and effectiveness of the various clauses, and which law he should consider when looking for rules that must fill the gaps left by the parties. In other words, the actual meaning of an international contract, even if drafted with the greatest attention, depends on the applicable law, which will tell us, on the one hand, if certain clauses are admissible or not, and on the other, how issues left open by the parties (a situation impossible to avoid) will be regulated. This does not exclude that there may be situations where the best option is to avoid raising the problem of the applicable law (see infra, § 2.9.5). However, where this extreme solution appears to be inevitable, the parties should at least be conscious of the risk it involves and try to minimize it, for instance by examining in advance which law is likely to apply in the absence of choice.

2.3 Two Alternatives: Traditional Approach v Lex Mercatoria In order to determine the law applicable to an international contract, two kinds of approach can be taken. view is based on the assumption that the applicable law must be a national (domestic) law system. In this context, the problem is mainly to decide which domestic law is to apply. The answer to this question will be found in the rules of private international law (conflicts of law rules) that tell us which law must be applied in the specific case if the parties have made no choice (and, if a choice has been made, to what extent the choice is effective).

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1. The traditional

2. An alternative

approach (which is actually only possible — at least at present — if disputes have to be decided by arbitration) is based on the assumption that it is more appropriate to apply general principles of law recognized as applicable to international trade (the so-called lex mercatoria), than a national law. According to this theory, a transnational set of rules and principles of international contracts responding to the needs and practices of business in international trade, said to be gradually emerging from commercial practice, can be applied instead of a national legal system, which, by its nature, is inappropriate for cross-border contracts. Based on this theory, arbitrators in several cases have applied “general rules and principles regarding international commercial contractual obligations enjoying a wide international consensus”4 or “general principles and rules of law applicable to international contractual obligations”,5 instead of a national law.

At the outset, it should be said that the recourse to lex mercatoria is rather exceptional and that the traditional conflicts of law approach is still used in the large majority of cases. So, from case law on international commercial agreements decided by national courts, it appears that the courts almost always apply the rules of a domestic legal system, determined on the basis of their rules of private international law. But international arbitrators, who have a more “open” approach towards “a-national” or “trans-national” rules, also tend, in most cases, to refer to the rules of national legal systems. This will be of course the case when the parties have expressly chosen to apply a specific domestic law, which is by far the most common situation. Thus, if we look at the Dispute Resolution Statisics of the years 2011-2015 published by the ICC, it appears that a choice of law clause had been agreed by the parties in about 84 to 90% of the cases, but only in 1 to 3% of these reference was made to a-national rules (a category including not only lex mercatoria and general principles of law, but also EU law and CISG). 4. ICC award in case No. 7110/95, in ICC ICArb. Bull., 2/1999, p. 40 et seq., p. 53. 5. Partial award in the case ICC No. 7375 of 5 June 1996, The Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v Westinghouse Electric Corporation, in Mealey’s International Arbitration Report, vol. 11, 12/1996, A-1 et seq., p. A-42.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Contracts including a choice-of-law clause

Choice of a-national rules

Choice of state law

2011

84%

2%

82%

2012

88%

3%

85%

2013

90%

3%

87%

2014

84%

2%

82%

2015

85%

1%

84%

But also when the parties made no express choice of the applicable law, the common approach by arbitrators will be to identify the applicable domestic law on the basis of the conflicts of law rules, except when it appears that the parties do not want the law of the respective countries to apply,6 or when the parties agree in the course of the arbitration to have recourse to an a-national solution, like the UNIDROIT Principles.7 In any case, although recourse to lex mercatoria is still rather exceptional, we can see in recent years a growing number of cases in which this choice is made by the parties, especially with reference to the UNIDROIT Principles.8

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As we will see later (infra, § 2.8.3 and 2.9.4) this alternative tool, which has the advantage of submitting the contract to rules that may, in certain cases, be more appropriate than those of domestic law systems, can be successfully used, especially in the context of international arbitration, provided appropriate precautions are taken in order to warrant the existence of a sufficiently precise legal framework. We will first examine the problems of applicable law in the traditional framework of private international law (infra, § 2.3-2.6) and thereafter look into the theory of lex mercatoria (§ 2.7). At the end of this chapter, we will analyze the solutions among which the parties can choose when deciding the issue of the applicable law.

2.4 The Rules of Private International Law (Conflicts of Law) All national legal systems have rules regarding the determination of the law applicable to issues that are not merely domestic. These rules (called “rules of private international law” or “conflict of law rules”)9 make it possible to apply to “international” matters the domestic law that appears to be more appropriate to govern these situations. Of course, the rules of private international law cover a much wider range of issues than those relating to contracts (such as family relations, wills and succession, etc.). In this context, however, we will only consider the rules relating to obligations, which are of interest for the purposes of this book. 2.4.1 The problems

arising from the lack of uniformity

The conflict of law rules are part of the domestic law system of each country, which implies that they may be different (and actually are different in most cases) from one country to another. Therefore, when a national court has to decide a case that has connections with other countries (like a contract between a national and a foreign party), it will look at its own conflict of law rules to determine the law it should apply. Of course, the variety of conflict of law rules may create uncertainty and give contradictory results. If courts of different countries apply different conflict of law rules to the same situation, they may come to different conclusions. For example, if one 6. See, for instance, ICC case § 8.261, in www.info.unilex; ICC case § 9.797, Andersen Consulting Business Unit Member Firms v Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in ICC ICArb. Bull., 2001/2, p. 88 et seq.; ICC case 10422, in JDI, 2003, pp. 1142-1150. 7. See, for instance, ICC case § 8331, in www.info.unilex (UNIDROIT Principles agreed in the terms of reference); ICC case § 12889, in www.info.unilex (UNIDROIT Principles agreed upon proposal by the arbitrator). 8. See Bortolotti, The UNIDROIT Principles and their application in the context of international arbitration, in Liber Amicorum, Mélanges en l’honneur de Serge Lazareff, 2011. 9. Normally the term “private international law” covers the issues relating to the applicable law. However, certain countries follow a wider approach whereby this term also applies to international jurisdiction and recognition of foreign judgments.

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country has a rule which says that the law of the place of conclusion of the contract shall apply, while in another country reference is made to the law of the place of performance of the contract, the final results may be quite different, as shown in the example below. Example 2-3 – Conflicting rules of private international law A Danish exporter enters into a contract of sale with a Thai purchaser. The contract, which contains no choice of law clause, is signed in Bangkok. When a dispute arises, the lawyers of the parties ask themselves under which law they should evaluate the respective positions of the parties. Since Thailand is not a party to the Vienna Convention on international sales (while Denmark has ratified it), CISG is not automatically applicable (see, infra, § 7.3.1.1). It must therefore be ascertained which law is applicable under the respective conflict of law rules of the two countries. Under Thai private international law (Conflicts of Law Act of 1938, Article 13), reference should be made to the place of conclusion of the contract: thus Thai law should apply. Under Danish private international law (Rome Convention), the law of the party that effects the characteristic performance (in this case, the seller) must apply.

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This means that, if the dispute is brought before Thai courts, these should apply Thai law, while in case of a dispute brought before Danish courts, Danish law (in the present case, the CISG) would be applicable.

The above example shows how different conflict of law rules can entail contradictory results. In such a case, each court would have applied its own law. However, if the two elements considered above are inverted and the seller is from Thailand and the contract has been signed in Denmark, the opposite result will follow: the Thai courts should apply Danish law (as the law of the place of conclusion), while the Danish courts should refer to Thai law (this being the law of the seller’s domicile). In order to bring some order to this chaotic situation, attempts have been made to unify the rules of private international law. Some conventions unifying private international law in the field of contracts:  Hague Convention of 15 June 1955 on the law applicable to international sales of goods.10  Hague Convention of 14 March 1978 on the law applicable to agency.11 In any case, one of the most successful attempts to unify private international law in the field of contracts has been achieved within the European Union through the Rome Convention of 1980 and the Rome 1 Regulation, which will be examined in the following paragraph. 2.4.2 The Rome

Convention of 1980 and the Rome I Regulation (593/2008)

One of the most successful initiatives in the field of harmonization of private international law is the Rome Convention of 198012 which has been replaced as of 18 December 2009 by the Rome I Regulation (Regulation 593/2008) at present in force in all Member States of the European Union except Denmark where the Rome Convention is still in force. Considering the wide geographic coverage of the Rome Convention and the Rome I Regulation, we will pay special attention to their rules. As regards other systems of private international law, it is impossible to consider them here. Consequently, the situation of a particular country outside the EU should be examined on a case-bycase basis.

10. Presently in force in Belgium, Denmark, Finland, France, Italy, Niger, Norway, Sweden and Switzerland. A new convention of 22 December 1986, which intended to replace the 1955 convention is not yet in force. 11. Presently in force in Argentina, France, the Netherlands and Portugal. 12. “Convention on the Law Applicable to Contractual Obligations” (Rome 19 June 1980).

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Since the Rome I Regulation applies to contracts entered into after 17 December 2009, the Rome Convention of 1980 may still apply in several cases. We will therefore deal in parallel with the Rome Convention and with the Rome I Regulation. The Rome I Regulation only refers to contractual obligations: concerning noncontractual obligations a specific regulation — Rome II — was enacted in 2007.13 2.4.3 Private

international law rules and international arbitration

When a dispute is brought before a national court, there is no doubt that such court must apply its own conflict of law rules. Therefore, when a court must determine the proper law of the contract, it will base its decision on its own system of private international law. If the dispute is submitted to arbitration, the answer is less simple. Unlike state courts, arbitrators are not bound to a lex fori: they need not apply private international rules of a given country, and they consequently have a much wider flexibility when deciding the applicable law. On this assumption, the principle has been developed that the arbitrators can choose the system of private international law they wish to apply in order to determine the applicable law. For example, Article 28 (2) of the UNCITRAL Model Law on Arbitration says that: Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.

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But recent developments go even further and tend to grant the arbitrators an even wider freedom of choice. So, Article 21(1) of the Rules of Arbitration of the International Chamber of Commerce provides as follows: The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.

This means that the arbitrators have a much greater freedom than national courts when it comes to determining the applicable law in the absence of a choice by the parties. Since this can be an advantage (or disadvantage) according to the circumstances, this should be carefully considered when establishing the contractual strategies regarding the applicable law (see, infra, § 2.9). Of course, it is difficult to foresee how arbitrators will proceed in a particular case. In most cases arbitrators determine the applicable (domestic) law on the basis of principles of private international law that appear to be widely used in international trade. In this context, connecting criteria such as the characteristic performance and the place of performance will be frequently used. However, in using their wide discretion, arbitrators will often tend to prefer the law they consider to be more appropriate for solving the dispute in question, which need not necessarily be a domestic law. An example of this approach can be found in the following case, decided by an arbitral tribunal under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce:14 It seems obvious to the Tribunal that the parties in this case deliberately refrained from agreeing on the applicable law to the 1980 Agreement, which otherwise bears the mark of a well prepared and qualified approach to contract drafting. It may well be that either or both of the parties had hopes or expectations on the application of a law, in case of a dispute between them, with which they would feel comfortable. But there is no indication that they at the time contemplated the actual effects of any particular law on hypothetical instances of breaches under the contract; nor have any such effects so far been presented by the parties in the arbitration. In the Tribunal’s view, it is reasonable to assume that the contracting parties expected that the eventual law chosen to be applicable would protect their interest in a way that any normal business man 13. Regulation No. 864/2007 of 11 July 2007. 14. Arbitral award § 117/1999, in www.unilex.info.

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would consider adequate and reasonable, given the nature of the contract and any breach thereof, and without any surprises that cou1d result from the application of domestic laws of which they had no deeper knowledge. This leads the Tribunal to conclude that the issues in dispute between the parties should primarily be based not on the law of any particular jurisdiction, but on such rules of law that have found their way into international codifications or suchlike that enjoy a widespread recognition among countries involved in international trade. Apart from international conventions such as the Convention on International Sales of Goods (CISG) and other conventions that are not directly applicable on a licence agreement, the only codification that can be considered to have this status is the UNIDROIT Principles of International Commercial Contracts.

If we consider that this type of approach tends to be followed in recent years by many international arbitrators, parties may consider the option to leave the decision on the applicable law to the arbitral tribunal.15

2.5 The Law Applicable in the Absence of a Choice by the Parties As we will see later (§ 2.6), in most cases it is advisable to choose the applicable law in the contract itself, through a specific clause to this effect (infra, § 2.6.4).

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However, this does not always happen in practice: contracts without a clause on the applicable law are rather common. Sometimes this is simply due to the fact that the parties ignore the problem; but in many cases the reason is that no agreement could be reached on this issue and the parties consequently preferred to leave the matter open. As long as the contractual relation proceeds smoothly, the parties can live very well without knowing which law governs the contract. But when a discussion arises about their respective rights and obligations, the need will arise to identify the applicable law in order to be able to evaluate, from a legal point of view, to what extent the respective claims of the parties are founded. In some cases the answer can be found in the contract itself. But even where this occurs, it may be necessary to check if the contract clauses conform to the law, and this can be done only after having ascertained which law governs the contract. In other words, when conflicts arise between the parties and lawyers begin to be involved, the issue of the applicable law will inevitably become crucial. If this issue has not been resolved contractually through a choice of law clause, it will be necessary to make reference to the rules of private international law that apply in the specific case. If it is clear that the courts of a given country have jurisdiction (e.g. because of a choice of forum clause), the conflict of law rules of that country will apply. If the jurisdiction issue is open, one will need to examine the problem under the private international law rules of the courts that might come into consideration in case of dispute. And if arbitration is foreseen, one must expect that the arbitrators will have wide discretion on the issue, which of course makes it difficult to make a forecast. Once it is established which system of conflict of law rules applies, one should in principle be able determine the applicable law on the basis of such rules. In practice, this will not always be the case, because often the rules of private international law do not give clear and definite answers. Consequently, several private international law systems leave a wide discretion to the courts in order to enable them to apply the solution which appears to be the most appropriate in the specific case. When this approach is followed, the possibilities of predicting the outcome will be very limited, and it will be almost impossible for the parties to establish in advance (i.e. before a judgment by the competent court) which law is to be applied.

15. In fact, experienced international arbitrators will normally try to take into account the reasonable expectations of the parties when determining the applicable law.

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criteria will be used for the determination of the applicable law?

It is impossible to answer this question in general terms, since it depends on each specific system of private international law. As we have seen, the criteria used in the various laws are manifold: some systems make reference to the place of conclusion of the contract;16 others refer to the law of the country which has the closest connection to the contract; some conflict of law systems consider the place of performance of the contract;17 others refer to the residence or domicile of the party that effects the characteristic performance.18 Moreover, some private international law systems, in addition to general rules, provide special provisions for particular types of contracts. Considering the variety of solutions implemented in the various systems of private international law, it would make little sense here to try to recount a general overview of the various criteria used. On the contrary, such an approach is possible and useful with respect to the EU Rules (1980 Rome Convention and Rome I Regulation), considering their wide geographical coverage and the fact that they represent one of the most modern instruments. This is why we will examine in more detail the main rules of the Rome Convention and the Rome I Regulation in the following paragraphs. 2.5.2 The criteria

contained in the Rome Convention

The Rome Convention sets out in Article 4 the criteria for determining the applicable law in the absence of a choice by the parties.

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Article 4 of the Rome Convention — Applicable law in the absence of choice 1.

To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a separable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

2.

Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or “uncorporate”, its central administration. However, if the contract is entered into in the course of that party’s trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

According to Article 4(1), the contract is governed by the law of the country with which it is most closely connected. However, this general rule has little significance, since it does not say when a close connection actually exists. The really important criterion is contained in Article 4(2), according to which the closest connection is presumed to exist with the country of residence of the party that effects the characteristic performance of the contract.19 This means that for each type of contract one has to look at which party effects the characteristic performance of that contract, it being understood that when a party does something in exchange for money, the non-monetary obligation will be considered to be the characteristic performance. Once it is established which of the 16. See, for example: Yemen (Article 24 of the Civil Code of 29 March 1992); Thailand (Conflicts of Law Act of 1938). 17. See, for instance, Turkey, Mexico. 18. This solution, which was adopted by the Rome Convention of 1980 and which is still included in the Rome I Regulation as subsidiary rule (see next paragraph), can also be found in the law of some countries outside the European Union, such as Moldova and Tunisia. 19. We will not deal here with the special criteria which are foreseen for rights in immovable property and carriage of goods in paragraphs 3 and 4 of Article 4.

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parties effects the characteristic performance, it will be easy to determine the applicable law, which will be the law of the country where such party has its residence or domicile. The advantage of this criterion is that one can know in advance, with respect to many types of contracts, which law is to be applied. This means, for example, that in a contract of sale the characteristic performance is that of the seller; in a commercial agency agreement that of the agent. Consequently the governing law will be that of the country where the seller or the agent is domiciled. However, the criterion of the characteristic performance does not always offer a clear answer. This happens, for example, with respect to contracts where both parties perform a non-monetary obligation (like a barter, for instance). When this situation arises, one must revert to the general rule (closest connection) which makes the final result rather unpredictable.

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A special case is that of distributorship agreements (infra, § 7.4.7.), where court decisions have been contradictory. If one looks at the activity of the distributor as reseller on the market for which he is responsible, the characteristic performance will be that of distributing the supplier’s goods and consequently the law of the distributor’s habitual residence will apply.20 But if one focuses on the sale-purchase relationship between the supplier and the distributor, it is the supplier who effects the characteristic performance, and thus his law should be applied in the absence of a choice by the parties.21 Another contract for which it is difficult to determine the closest connnection is the master franchising agreement, whereby the master franchisor grants the master franchisee the right to establish a network of subfranchisees. While it is normally accepted that within a franchise agreement it is the franchisor who effects the characteristic performance (by granting certain IP rights and providing certain services to the franchisee), in the case of master franchising the master franchisee as well agrees to perform an activity of substantial importance (the development of a network). It should finally be noted that, according to paragraph 5 of Article 4, the characteristic performance criterion must be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country. This rule leaves space for unpredictable results and thus reduces certainty, but may at the same time be a useful tool in order to deal with situations where the characteristic performance rule would conduct to unreasonable results. This may be for instance the case where, in the context of a dispute, closely connected contracts would be submitted to different laws. 2.5.3 The criteria

contained in Rome I Regulation

While the Rome Convention provided a general rule for determining the applicable law in the absence of a choice by the parties (i.e. that of the habitual residence of the party effecting the characteristic performance of the contract), the Rome I Regulation now lists a number of specific rules for different contracts. Article 4 of the Rome I Regulation — Applicable law in the absence of choice 1.

To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows:

(a)

a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence;

20. See for instance, Oberlandesgericht Koblenz, 16 January 1992, in RIW, 1992, p. 1019; Oberlandesgericht Düsseldorf, 11 July 1996, in IPRax, 1996, p. 449, where a distinction is made between the frame agreement (governed by the law of the residence of the distributor, who effects the characteristic performance) and the individual contracts of sale (governed by the Vienna Convention – CISG). 21. See, for example: Corte di Cassazione (Italy) 11 June 2001, § 7860, Otto Kogler v Eurogames srl, in Riv. dir. int. priv. proc., 2002, p. 157; Cour de Cassation (France) 15 May 2001, Optelec c. soc. Midtronics BV, in Rev. crit. DIP, 2002, p. 86 ss.; Corte di Cassazione (Italy) 20 September 2004, § 18.902, Kling & Freitag GmbH v Società Reference Laboratory srl, in Riv. dir. int. priv. proc., 2005, 443.

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a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence;

(c)

a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated; ….

(e)

a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence;

(f)

a distribution contract shall be governed by the law of the country where the distributor has his habitual residence.

2.

Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.

Instead of departing from the general criterion (the closest connection), together with the criterion of the characteristic performance, Rome I Regulation provides:  first, several specific criteria for a number of contracts (sale, provision of services, franchising, distribution, etc.);  thereafter, if the above criteria are not applicable, the criterion of the residence of the party which is to effect the characteristic performance;

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 and, finally, if none of the above criteria can give an answer, the criterion of the law of the country having the closest connection to the contract. This solution should in principle give more foreseeability, especially for the types of contracts expressly mentioned. However, there is still space for uncertainty. Thus, for example, it is not clear which contracts fall under the broad definition of “provision of services”. No doubt that this notion will cover an agency contract, or a contract for the provision of professional services. But the situation would be doubtful for the provision of a bank guarantee or the supply on a turnkey basis of a production line.22 Finally, as regards licensing contracts, it has been expressly excluded (although with respect to Regulation 44/2001, now 1215/2012) that these can be qualified as contracts for the provision of services.23 On the contrary, the problem regarding the law applicable to distribution contracts should have been clarified through the express reference contained in Article 4(1)(f) of Rome I Regulation. Although the notion of “distribution contract” is not defined in the Regulation, the Court of Justice has given some indications in this respect in the context of Regulation 44/2001 (now Regulation 1215/2012), stating in particular that the contract with a reseller containing specific terms concerning the distribution by the distributor of goods supplied by the grantor is to be qualified as a distribution agreement, which must be considered as a contract for the supply of services for the purpose of article 5(1)(b) of Regulation 44/2001).24 Finally, there are many contracts which do not fall under the list contained in Article 4(1), such as licensing agreements, joint ventures and other cooperation agreements. With respect to these contracts reference will be made to the criterion of the characteristic performance and where this does not give an answer to the more general one of the closest connection.

22. Where we may find the sale of equipment together with the provision of various services (erection, commissioning, technical assistance) and transfer of IP rights. 23. European Court of Justice, 23 April 2009, C-533/07, Falco Privatstiftung v Weller-Linhorst, in ECR 2009, I-03327, where it is said that « … The second indent of Article 5(1)(b) of Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and enforcement of judgments in civil and commercial matters, is to be interpreted to the effect that a contract under which the owner of an intellectual property right grants its contractual partner the right to use that right in return for remuneration is not a contract for the provision of services within the meaning of that provision». 24. European Court of Justice, 19 December 2013, C-9/12, Corman Collins SA v La Maison du Whisky SA. See also, European Court of Justice, 14 July 2016, C-196/15, Granarolo SpA v Ambrosi Emmi France SA.

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problem for business: lack of predictability

The above description of the criteria for determining the applicable law in the absence of a choice by the parties shows that the final result may not always be clearly predictable. First, under different conflict of law rules the criteria may be different, and thus the results may change from case to case, depending on the jurisdiction in which the case is brought (since, as we have seen before, each court will apply its own rules of private international law). Second, even when uniform rules exist (as under the Rome Convention and the Rome I Regulation), these rules leave wide discretion to the courts. This is due to the fact that many legislators wish to give the courts the freedom to select the legal system they consider to be the most appropriate in the specific case. However, although this approach may have the advantage of warranting a “better” solution in the actual case, it has the substantial disadvantage of being far less predictable, which makes it inappropriate for business people who need to know in advance (and not at the end of a procedure in court) which rules govern their contract. We can therefore conclude that, if parties wish to be absolutely sure about the applicable law, they should expressly agree upon this issue through a choice of law clause. We will examine this solution in more detail in the following paragraphs.

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2.6 The Choice of the Governing Law We will now discuss the problems related to the choice of the applicable law and particularly those concerning the effectiveness of this choice with respect to mandatory rules of the legal system that would otherwise be applicable. This is, as we will see later, the main and most complicated issue that must be dealt with in this context. 2.6.1 The principle

of freedom of choice

In principle, almost all legal systems (with some important exceptions, like for instance Brazil and Saudi Arabia) allow the parties to choose the law to be applied to an international contract. This means that, as a general rule, it is possible to choose a law other than the law that would apply in the absence of choice (e.g. the law of the purchaser’s country instead of the law of the seller’s country, or the law of the principal instead of the law of the agent).25 This is clearly expressed in Article 3(1), of the Rome 1 Regulation. Article 3 or Rome I Regulation - Freedom of choice 1.

A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

Under the Rome 1 Regulation, the law chosen need not have a connection to the contract, i.e. the parties may choose the law of a third country not having any particular link to the contract.26 In principle, the choice of the applicable law implies that the parties must comply with the mandatory rules of the domestic law that governs their contract.27

25. These two examples are based on the assumption that the criteria contained in Article 4(1) of the Rome I Regulation would apply in the absence of express choice. 26. Some systems of private international law, on the contrary, require a substantial relationship to the chosen state: see, for example, for the USA, § 187 of the Restatement (Second) of Conflict of Laws. 27. Unless such law considers certain rules as non-mandatory when applied within an international context. In this case, however, it is the law itself which makes this choice. So, for example, § 92c (1) of the German Commercial Code makes it possible to derogate from mandatory rules on commercial agency when, according to the contract, the agent must not perform his activity within the territory of the European Community. The purpose of this provision seems to be that of giving German principals the possibility to agree upon the application of German law in contracts with agents of third countries without needing to respect the mandatory rules which protect the agent.

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Unless one follows the theory mentioned hereafter in paragraph 2.6.3.1, parties cannot exclude the application of such mandatory rules, i.e. they cannot choose only the rules they like and avoid the mandatory rules they (or the party having more negotiating power) dislike. Article 3 of the Rome I Regulation also admits the possibility of an implicit or tacit choice of the governing law, provided such choice results clearly from the contract or other circumstances, for instance when the contract shows a close connection with a given national law (e.g. by expressly mentioning provisions of that law) or when the parties base their submissions before the court on a particular domestic law.28 The above principle should be interpreted narrowly in order to avoid that the tacit choice is used by the courts as a device for applying their own law, instead of determining the applicable law under Article 4 of the Rome I Regulation. Thus, the argument that the choice of the courts of a given country implies a choice of the law of that country should in principle be rejected, unless there is evidence that the parties knowingly made this choice in order to have their dispute decided under that particular law.

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This being said, it must be considered that there is a certain trend toward considering the choice of forum as implying a choice of law. Thus, for instance, in a case regarding a contract between a German and a Japanese company, the English High Court decided that by using an English standard form and arbitration in London, the parties had made an implied choice of English law, stating in particular that: … having agreed English arbitration for the determination of disputes arising out of a well known English language form of charter-party which contains standard clauses with well known meanings in English law it is … to be inferred that the parties intended that law to apply. Having agreed a ‘neutral’ forum the reasonable inference is that they intended that forum to apply a ‘neutral’ law, namely English law and not either German of Japanese law.29

Some support to this type of approach is also given in recital 12 of the Rome I Regulation, where it is said that: … An agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated. 2.6.2 Cases

where the freedom of choice is limited

The Rome 1 Regulation, in Articles 3(3), 3(4), 6 and 8(1), lists some special situations where mandatory rules of a given legal system cannot be excluded through a choice of law. In these cases, all mandatory rules of a given legal system will continue to apply (even if not “internationally” mandatory: see infra, § 2.7.1), although the parties have submitted the contract to another law. 2.6.2.1 Purely

domestic contracts

Article 3(3) of the Rome 1 Regulation says that Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

This means that in case of purely domestic agreements, the mandatory rules of such legal system will apply in any case and that the parties cannot exclude the application of such rules by submitting the contract to a different law. 2.6.2.2 Purely

intra-EU contracts

Article 3(4) of the Rome I Regulation says that: Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law 28. See Court of Cassation (France), 6 May 1997, Soc. Hannover International et autre v M. R. Baranger et autre, in Rev. crit. DIP, 1997, p. 514 et seq. 29. English High Court, Egon Oldendorff v Libera Corporation [1996] 1 Lloyd’s Rep 380.

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other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement.

Here reference is made to mandatory provisions of EU law which have been implemented in the national legal systems. In case of a contract between parties belonging to the EU, mandatory provisions of EU law cannot be excluded through the choice of the law of a third country. An example may be helpful for a better undestanding of this rule. Example 2-4 Contract between Italian principal and French agent submitted to the law of the State of New York An Italian exporter meets at a fair in Paris a French commercial agent who would like to promote the exporter’s products in France. Since the Italian exporter concluded a few days before a contract with a US agent, the parties decide to use the same text limiting themselves to change the name of the agent and the territory. Having been told that French law grants a goodwill indemnity to agents, the Italian principal insists on the choice of the law of the state of New York and is able to convince the agent to sign.

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Since this is a purely intra-EU contract (which has no connection with non-EU countries), the choice of the law of a third country cannot exclude the application of mandatory provisions of Community law. Now, the rule of Community law which provides the agent’s right to indemnity or compensation (Article 17 of Directive 86/653) is mandatory and must therefore be applied notwithstanding the choice of New York law. However, Article 17 of the Directive cannot be applied as such (since this is a rule directed to the Member States). Consequently, if the case is brought before a court in the EU such court shall apply the rule of its own law which implemented the directive: thus, for instance, an Italian court would apply Article 1751 of the civil code, while a French court would apply Article 134-12 of the commercial code. 2.6.2.3 Certain

consumer contracts

According to Article 6 of Rome I Regulation a choice of law may not deprive the consumer of the protection afforded to him by mandatory rules of the law which would be applicable in the absence of choice, i.e. the law of the country where the consumer has his habitual residence. This situation should be of limited interest for most of the readers of this book, mainly concerned with B2B contracts, except when they decide to sell to consumers through their own website. 2.6.2.4 Individual

employment contracts

According to Article 8 of Rome I Regulation a choice of law in an employment contract shall not have the result of depriving the employee of the protection afforded to him by the mandatory rules of the law which would be applicable in the absence of choice, i.e. the law of the country where the employee habitually carries out his work. This means that, if the parties choose a different law, the mandatory rules of the law of the country where the employee works will nevertheless apply. 2.6.3 Special

problems: exclusion of mandatory rules; dépeçage

We will deal in this paragraph with two special issues that imply the recourse to rather sophisticated legal tools, which should not be used by traders without the assistance of a lawyer experienced in international contracts. Business people may therefore skip this rather “technical” paragraph, which is mainly directed at lawyers. 2.6.3.1 Exclusion

of mandatory rules of the law chosen

As noted before, where the parties submit the contract to a given law, they must as a general rule respect the mandatory provisions of such law. However, it could be argued against this well-established principle that, if the parties are free to choose the applicable law, they should also be free to exclude certain mandatory rules of that law, for instance by stating in the contract that its terms will in INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 33

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any case prevail over possible mandatory rules of the law they have chosen. Therefore, it has been argued that arbitrators should respect the choice of the parties to exclude the application of certain mandatory rules of the law selected by them (for example, when they say that this law will apply to the extent it does not conflict with the provisions of the contract).30 The above solution, consisting in choosing the applicable law and excluding at the same time certain of its mandatory rules — although theoretically possible — is unlikely to be admitted by national courts, and even by arbitrators. For example, in two cases where a commercial agency contract between an Austrian principal and a foreign agent had been submitted to Austrian law “with the exclusion of mandatory rules applicable to domestic agents”,31 the arbitrators decided that the parties could not choose Austrian law and, at the same time, exclude mandatory rules of that law on goodwill indemnity. Consequently, they applied Austrian law in its entirety.32 2.6.3.2 Dépeçage

A possible tool for overcoming the problem described in the preceding paragraph is to submit different parts of the contract to different laws. For example, in the case of the agency contract mentioned in the preceding paragraph, the parties could have submitted the part of the contract regarding termination and goodwill indemnity to the law of a country that does not contain mandatory rules protecting the agent, and all of the rest of the contract to Austrian law.

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In principle, solutions of this type are possible under systems of private international law (such as the Rome I Regulation, for instance) that allow the parties to choose different laws for different parts of the contract (the so-called “dépeçage”). This possibility may be considered in particular circumstances, but clauses of this kind should be drafted with the greatest caution and only where really necessary; splitting a contract into different parts, submitted to different laws, may give rise to contradictions and confusion. Cases in which one might consider using this kind of solution are, for example, when a part of the contract (e.g. a warranty obligation) has a close link to a particular country different from the country whose law is applicable. Another situation where dépeçage could be of some interest arises when the parties wish to avoid certain mandatory rules of a given law, by submitting only these issues to another law, as explained before. However, the use of dépeçage for the purpose of avoiding mandatory rules of the otherwise applicable law should be handled with extreme caution for several reasons: first, solutions of this kind indicate that a stronger party is trying to “bypass” mandatory rules to the disadvantage of the other party, which will put that party in a bad light in case of dispute; second, the application of different laws to the same contract (although to different parts of it) almost inevitably gives rise to contradictions and problems of interpretation (especially considering the difficulty of drawing a clear borderline between different subject matters within the same contract). Finally, it is likely that such a complicated solution may not be understood by the other party, and by the courts in case of a dispute. It is therefore preferable to have recourse to this kind of solution only in very specific cases where there is a real need for it and, in any case, to work it out with the assistance of an expert who can make sure that it is practicable. 2.6.4 How

to draft the choice of law clause

As a general rule the clause on the applicable law should be as simple as possible. A standard clause is the following: 30. See Derains, Public Policy and the Law Applicable to the Dispute in International Arbitration, in ICCA, Comparative Arbitration Practice and Public Policy in Arbitration (VIIth International Arbitration Congress, New York 6–9 May 1986), Deventer, 1987, p. 239-240 and 255. 31. The reference to domestic agents was probably due to the (wrong) assumption that Austrian rules protecting the agent were to be considered as mandatory only when the agent performed his activity in Austria. However, while such a principle exists in German law (see above, footnote 27), this was not the case in Austria. 32. Arbitral awards ICC 8251/95 (in ICA Bull., 1/2001, p. 97) and 8711/98 (in ICA Bull., 1/2001, p. 124).

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Clause 2-2 – Choice of law clause I This contract is governed by the laws of ……….. (name of the country the law of which is to apply)

Clauses which add further unnecessary elements, such as “in case of dispute …” or “with respect to the interpretation of the contract …”, should be avoided, because they may reduce the scope of the clause and offer the other party pretexts for challenging its application. For example, the other party might argue that the clause does not apply because no dispute has been brought before the competent courts, or that the issue in dispute concerns the validity of the contract, and not its interpretation and that the choice of law clause does not apply to it. It is likely that objections of this kind, based on a literal and formalistic interpretation of the clause, will be rejected by most courts. However, it is better to prevent any risk of discussion by avoiding, whenever possible, wordings of this type. Sometimes the clause specifies that the choice of law does not include the conflict of laws rules of the legal system chosen, in order to avoid the risk that the choice of law is also intended to include the conflicts of law rules of that country, which would imply that the substantial rules to be applied would be those determined according to the conflict of laws rules of the country chosen.33 An example of a clause containing this specification is the following:

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Clause 2-3 – Choice of law clause II (US style) This Agreement shall be governed and construed in all respects by and in accordance with the laws of the state of Connecticut, United States of America, without regard to application of conflict of laws principles that would require the application of any other law.

Parties may also wish to specify that their choice of law concerns only the material rules of the legal system chosen and not its rules of procedure. Such a specification will, in most cases, be superfluous, since the common practice is to interpret choice of law clauses as implying a choice of the rules concerning the substance; the procedural rules will be those of the competent court, and they may, of course, be other than those of the law governing the contract.

2.7 The Effectiveness of the Choice of the Governing Law THE BASIC PRINCIPLE As a general rule the choice of a given law implies that the parties must respect all mandatory rules of such law (and do not need to respect possible mandatory rules of other legal systems). THE EXCEPTION Only in rather special cases may mandatory rules of the law that has been excluded through such choice nevertheless remain applicable.

The freedom to choose the applicable law means that the parties can select a law they consider to be more convenient in place of the law which would otherwise be applied. However, where the law that would otherwise be applicable contains mandatory rules, is it possible to exclude the application of such rules by submitting the contract to a legal system that does not contain these rules? For instance, when a domestic law contains mandatory rules that protect a “weaker” party (licensee, commercial agent, distributor, employee), is it possible to validly derogate these rules by submitting the contract to a more flexible national law? The answer to this question is not easy. In fact, it is one of the most controversial issues in the law of international contracts. It is therefore important to devote the necessary attention to this issue, as we will do in the following paragraphs. 33. Such risk should be rather limited in Europe: see Article 20 of the Rome I Regulation, which states that “The application of the law of any country specified by this Regulation means the application of the rules of law in force in that country other than its rules of private international law, unless provided otherwise in this Regulation.”

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mandatory rules and “internationally” mandatory rules

If we leave aside the special situations described above in § 2.6.2, where rules of private international law limit, in general terms, the effectiveness of the choice of law with respect to certain situations (purely domestic agreements) or contracts (consumers, employees), as a general rule the choice of the applicable law implies that the mandatory rules (if any) of the law chosen will apply instead of those of the law which would apply in absence of a choice. In other words, the law chosen by the parties will replace the otherwise applicable law, even if this implies the non-application of some mandatory rules of such law. Example 2-5 – Contract with French agent submitted to German law A German principal appoints an agent in France. The contract expressly states that the contract is submitted to German law. When the contract is terminated, the French agent claims a goodwill indemnity amounting to two years of commission, calculated in accordance with French law, arguing that the French rules are mandatory. The German principal sustains that this does not matter: since German law is applicable, it is sufficient that German mandatory rules (which fix a maximum amount of one year’s commission) are respected. Comment: The German principal is right. French mandatory rules protecting the agent can be validly derogated by submitting the contract to another law: Cass. 28 December 2000, Alfin c. Allium, in La lettre de la distribution, Jan. 2001.34

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This general principle is based on the assumption that, in normal conditions, mandatory rules must be respected within the legal system they belong to. If parties opt for another legal system, they will need to respect the mandatory rules of that law, but not those of the law that has been replaced through the choice of law. However, national legislators may decide to give some of their mandatory rules a stronger position, by stating that they cannot be derogated by submitting the contract to a foreign law. These “internationally mandatory rules” (also called “overriding mandatory provisions”, “lois de police” and “norme di applicazione necessaria”) must be respected — according to the law of the country enacting them — even if the contract as a whole has been submitted to a different law. Example 2-6 – Contract with a Belgian distributor submitted to Italian law An Italian supplier appoints a Belgian distributor to market his goods in Belgium. The contract expressly states that it is governed by Italian law. When the contract is terminated, the distributor brings a claim before the courts of his country and requests payment of various indemnities due under the Belgian law of 27 July 1961 on distributorship agreements. Comment: In fact, Article 4 of this law says that if a dispute regarding termination of a distributorship agreement performed in Belgium is brought before Belgian courts, these will exclusively apply Belgian law and consequently recognize the indemnities (which would not be due under Italian law).

In the case of the above example, the mandatory rules protecting the concessionnaire are to be applied even when the contract is submitted to another law. Moreover, a Belgian court, which is bound to recognize the internationally mandatory character of such rules, must in principle apply them, even when the parties have chosen a different law. A further example of this kind can be found in Article 2(2) of the Finnish Act 417/92 on Commercial Representatives and Salesmen, which states as follows:

34. The judgment actually referred to a contract between a US principal and a French agent. In such a context the principle that the rules protecting the agent are not “internationally” mandatory would no longer apply after the Ingmar case (see infra, § 2.7.2), because the French courts must consider certain rules which implement the EU directive as internationally mandatory in relations with principals of non-EU countries. However, with regard to relations between parties of the EU (as in the above example) the Ingmar judgment should not influence the previous case law.

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Section 2(2) of the Finnish Act on Commercial Representatives and Salesmen (Law 417/1992) A provision in an Act which, under this Act, cannot be derogated by agreement to the detriment of the commercial representative, can neither be derogated to his detriment by an agreement according to which foreign law is to be applied to the legal relationship between the commercial representative and the principal if the relationship should otherwise be governed by this Act.

This means that when an agency contract with a Finnish agent (to which Finnish law would apply in the absence of choice of law: see above, § 2.5.2) is submitted to a foreign law, Finnish mandatory rules on agency will nevertheless apply. Under Finnish law these rules are considered as “internationally” mandatory. The above examples refer to mandatory rules protecting a weaker party. Another interesting field of application for “internationally” mandatory rules is that of antitrust law. In most jurisdictions it will be impossible to avoid the application of antitrust rules (and thus the nullity of contractual clauses conflicting with such rules), with respect to contracts producing effects in these jurisdiction, simply by submitting the contract to another legal system.

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An important point that must be highlighted is that in principle each national legislator is free to decide which rules to consider “simply” mandatory and which “internationally” mandatory.35 Consequently, there may be substantial differences between various legal systems: one country may consider as “internationally” mandatory certain rules that other countries qualify as “simply” mandatory. Therefore, we can conclude that it depends on the law of each country whether certain of its mandatory rules have — or do not have — an “internationally” mandatory character, i.e. if they will or will not remain applicable although the contract has been submitted to the law of another country. Consequently, when the law excluded through the choice of law clause contains mandatory rules that may be considered to be of particular importance within a legal system (such as rules protecting local traders or the public interest) it is advisable to check case by case if such rules are “internationally” mandatory and, in case they are, take the appropriate measures.36 2.7.2 National

laws implementing European directives: the Ingmar case

A special problem arises with respect to provisions of domestic law that implement European directives. This issue has been brought up, in the Ingmar case,37 with reference to the directive of 1986 on commercial agents, concerning the agent’s right to compensation (indemnity) in case of contract termination. The case examined by the European Court of Justice concerned a contract between an American principal and an English agent, which had been submitted to the laws of the state of California. With respect to the question of whether the national court should apply the law chosen by the parties (which law did not recognize a 35. However, this well-established principle has been partially put in discussion by article 9 of the Rome I Regulation which defines “overriding mandatory provisions” as provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation …”. This may imply a limitation of the discretionary power of national legislators to decide which rules can be considered as “overriding mandatory provisions”. In the Unamar case (Judgment of the European Court of Justice of 17 October 2013, C-184/12) where it was disputed whether a Belgian court could apply to an agency contract submitted to Bulgarian law the more protective provisions of Belgian law, (although both legislations implemented the EU directive 86/653 on commercial agents), the Court stated that the law chosen by the parties may be rejected in favour of the law of the forum “only if the court before which the case has been brought finds, on the basis of a detailed assessment, that, in the course of that transposition, the legislature of the State of the forum held it to be crucial, in the legal order concerned, to grant the commercial agent protection going beyond that provided by the directive, taking account in that regard of the nature and of the objective of such mandatory provisions.” This means that the Court of Justice seems to require that, in order to have the effect of prevailing over the otherwise applicable law, it is not sufficient that the national law qualifies a given rule as a rule that is to be applied whatever the law applicable to the contract, but that there must be a further condition, i.e. that it must be a provision regarded as “crucial by a country for safeguarding its public interests...” 36. See infra, § 2.9.1.2. 37. Judgment of the European Court of Justice of 9 November 2000, Ingmar GB Ltd v Eaton ­Leonard Technologies.

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compensation in favour of the agent in case of contract termination), and if the court should consequently refuse to grant the compensation due under English law (which implemented the European Directive 86/653/EEC), the Court of Justice decided as follows: Articles 17 and 18 of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, which guarantee certain rights to commercial agents after termination of agency contracts, must be applied where the commercial agent carried on his activity in a Member State although the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country.

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The actual meaning of the judgment is not very clear, considering that it is the national law implementing the directive — and not the directive as such — that governs the contract and that can consequently be applied by the national judge. When the court says that the provisions of the directive on indemnity must be applied to agents carrying out their activity in the European Community although the contract has been submitted to the law of a third country, it probably means that the national court must consider the minimum protection granted by Articles 17 and 18 of the directive as “internationally mandatory”, and that it must consequently make sure that the agent obtains a compensation/indemnity which conforms to the principles of the directive. However, it is not clear if this means that the national court should simply apply the provisions of the national law of the agent, or if it should grant the minimum protection provided by the directive (which is difficult to determine, since the directive provides two kinds of compensation between which the Member States have to choose). So, for example, in case of a contract between a Swiss principal and French agent, submitted to Swiss law, should the court apply the French mandatory rules (and thus give the agent two years’ commission, according to French case law), or should it determine a sort of “common core” of the rules of the directive on compensation/indemnity (and thus limit the amount to the maximum of one year’s commission)? If we consider Article 3(4) of Rome I Regulation(which actually refers to a different situation, see § 2.6.2.2 above)) the domestic rules of the country of the court which implement the directive should apply. It should further be mentioned that the principles stated in the Ingmar case only concern relations with countries outside the European Community. Consequently, if the problem arises within an intra-community relationship (e.g. German principal and French agent with choice of German law), the issue of whether the agent may request the higher protection awarded by French law will be exclusively a problem of French and German private international law,38 and not a problem of European law.39 When the law of the third state chosen by the parties has the same level of protection as the European directive, it is likely that the choice of such law will be fully effective. In fact, if the applicable law conforms to the provisions of the European directive on indemnity, one could say that that articles 17 and 18 are applied, although in the context of the law of a third country instead of the law of a Member State.40 2.7.3 Application

of internationally mandatory rules by courts (and arbitrators)

Where certain rules are “internationally” mandatory, there is no doubt they must be applied by the courts of the country which has enacted them. So, if a contract with a Belgian distributor is submitted to the law of another country, a Belgian court must in 38. The likely answer will be that, since the French rules on agency are not internationally mandatory (lois de police), the choice of German law is fully effective, although the German indemnity is less favourable to the agent than the French compensation. 39. In fact, it is assumed that possible differences between countries having implemented the directive are not relevant, since the agent still obtains (even under the law of the country granting a lower protection) the minimum rights guaranteed by the mandatory rules of the directive. 40. It is, however, not certain that this position would be shared by the courts of an EU Member State when applying the principles of the Ingmar case. A possible contractual solution for principals of non-EU countries (when their law substantially conforms to the directive) wishing to submit the agency contract to their own law could be that of expressly stating in the contract that in case of disputes, Articles 17 and 18 of the EU directive must, in any case, be respected.

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principle apply the mandatory provisions of Belgian law, since it is bound to respect the rule which provides that such provisions must be applied to a distributor established in Belgium, whatever the applicable law. However, the answer may not be the same when the question is brought before the court of another country. In this case, the court must decide whether it should (or should not) apply rules of a foreign law (not being the law chosen by the parties), only because the foreign law pretends that certain of its rules must be applied in any case, whatever the applicable law. In other words, the decision by a state to give certain of its rules a particular force (i.e. to make them “absolutely” mandatory), does not necessarily bind the courts of other states or arbitrators, who are outside of its jurisdiction.

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In particular, the courts of a state other than the state enacting the “internationally” mandatory rules will answer this question on the basis of their private international law rules, which may substantially differ from country to country. The traditional approach to the problem is not to take into consideration “internationally” mandatory rules of a legal system other that the law chosen by the parties (or otherwise applicable in the absence of choice). According to this view, the competent court will apply the law chosen by the parties (after having verified, under its own rules of private international law, that such choice is admissible), and will not be bound by the fact that mandatory rules of another legal system claim to be applicable whatever the governing law.41 Following this approach, the court will disregard the “internationally” mandatory character of the rules of the foreign legal system. Of course, its judgment is likely to be inconsistent with the public policy of the foreign country whose rules were disregarded, and may thus not be enforceable in that country. The other, more “modern” approach is that the courts should take foreign “internationally” mandatory rules into consideration when a strong connection exists between the contract and the legal system to which they belong. An example of this position is contained in Article 7, § 1, of the Rome Convention, which states that the courts may, in certain circumstances, give effect to internationally mandatory rules which would not otherwise be applicable. Article 7, § 1 - Rome Convention When applying under this Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract. In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

It should be noted that according to Article 22 of the Rome Convention, the contracting states may reserve the right not to apply Article 7(1). Several Member States of the European Union (e.g. Germany, Great Britain, Ireland and Portugal), have made use of this reservation, and have consequently not incorporated Article 7(1) into their legal system. A similar approach, although not based on the notion of “rules that must be applied whatever the law applicable to the contract”, can be found in the US, where section 187(2) of the Restatement (Second) of Conflict of Laws says that the law chosen by the parties will be applied unless: application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

41. This approach is likely to be followed by the courts of many countries outside of Europe.

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The Swiss Federal Code on private international law also has a rule (Article 19) under which mandatory provisions of a law other than the law designated by its rules of private international law may be taken into account. Article 19, Swiss Federal Code on Private International Law If, pursuant to Swiss legal concepts, the legitimate and manifestly preponderant interests of a party so require, a mandatory provision of a law other than that designated by this Code may be taken into account if the circumstances of the case are closely connected with that law. In deciding whether such a provision must be taken into account, its purpose is to be considered as well as whether its application would result in an adequate decision under Swiss concepts of law.

Rome I Regulation has substantially reduced the impact of the above principle, through a provision which is unclear and difficult to apply. This is probably the result of a compromise with the states which disagreed with the text of Article 7(1) of the Rome Convention and which preferred to replace it with a less effective provision.

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Article 9 of Rome I Regulation - Overriding mandatory provisions 1.

Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.

2.

Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.

3.

Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

In order to verify the difference between the two provisions (Article 7 of the Rome Convention and Article 9 of Rome I Regulation), it may be useful to refer to an example. Example 2-6 - Contract with a Belgian distributor An Italian company appoints a Belgian citizen as its exclusive distributor for Belgium. The contract expressly provides that the contract is governed by Italian law and that the courts of Milano have jurisdiction over possible disputes. After 10 years of successful collaboration, the Italian company decides to establish its own distribution company in Belgium and terminates the distribution agreement with a notice of six months, as provided in the contract. However, the distributor claims to be indemnified for a further period of 18 months, arguing that under the law of his country he would be entitled to a notice period of 24 months. It is undisputable that the contract is a “concession” contract to which (in Belgium) the protective provisions of the Belgian law of 27 July 1961 apply. At the same time, there is no doubt that the claims made by the distributor are unfounded under Italian law. Now, should the court of Milano apply Italian law or should it respect the internationally mandatory rules of Belgian law?

If we apply Article 7(1) of the Rome Convention, the above case certainly falls under such provision. In fact, under Article 7(1) the Italian court, “when applying the law of a country” (in this case Italy), may give effect to the mandatory rules of the law of another country with which the situation has a close connection (in this case Belgium) “if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract” (which is the situation under the law of 1961). This means that the Italian court “may” give effect to the Belgian law, although it has a wide discretion when deciding if it should actually do so, since the last sentence of Article 7(1) says that: 40 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

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In considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

It is difficult to foresee what decision the court of Milano might actually take (there are at present no judicial precedents on this question). The distributor will argue that he should not be deprived of a right granted by his law in any case; the supplier might sustain that there is no reason to apply a rule which gives an excessive protection (if compared with the laws of other countries) to distributors. We can therefore only conclude that the outcome would be all but certain. Let us now examine the same situation under Article 9 of the Rome I Regulation. First of all, we should ask ourselves if the Belgian law of 27 July 1961 falls under the definition of “overriding” mandatory rules contained in Article 9(1), which refers to … provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation …

The answer is uncertain, since it is doubtful whether provisions protecting a “weaker” party can be considered as crucial for safeguarding “the public interests, such as its political, social or economic organisation”of a country.42

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Thereafter one has to decide whether the overriding mandatory rule has to be performed in the country which has enacted it (which would seem to be the case in our example) and if such rule “renders the performance of the contract unlawful”. Now, in the case of example 2-6 the second condition does not appear to be met, since it is impossible to sustain that the non-observance of a provision regarding the conditions of termination renders the performance of the contract unlawful.43 We can therefore conclude that under the Rome I Regulation it is rather unlikely that internationally mandatory rules not belonging to the applicable law may be applied (except where the dispute is brought before a court of the country which enacted such rules). When the parties have chosen to submit possible disputes to arbitration, the situation is even less foreseeable.44 In some cases, arbitrators have applied internationally mandatory rules of a law other than the governing law, but in several other cases they have taken the opposite position. For example, with respect to contracts with Belgian concessionnaires submitted to a foreign law, several arbitral tribunals have decided to apply the law chosen by the parties instead of the “internationally mandatory” Belgian rules protecting the distributor.45 CONCLUSION While it is impossible to effectively derogate internationally mandatory rules through the choice of a foreign law when the dispute is to be decided by the courts of the country which has enacted such rules, there is much more space for such a derogation if possible disputes are submitted to courts not belonging to the country which enacted the “internationally mandatory rules” or to arbitration.

The extent to which a court (or an arbitral tribunal) would apply (or, on the contrary, disregard) internationally mandatory rules of a third country having a close relation to the contract is difficult to foresee, since it depends not only on the rules of private international law of the lex fori, but also on their interpretation by the courts. 42. According to Renner, in Calliess, Rome Regulations, 2nd ed. Wolters Kluwer 2015, 250 et seq., in order to give a norm overriding mandatory effect, it is necessary that the provision in question aims at furthering a broader policy objective. 43. See Hollander, Questions de droit international privé et d’arbitrage touchant à la distribution commerciale, in Le droit de la distribution, Anthemis, 2009, 271 et seq., p. 302. 44. This is mainly due to the fact that, while state courts are bound to respect the rules of private international law of their country (as lex fori), arbitrators have considerably wider freedom and will normally refer to more general principles: see also supra, § 2.4.3. 45. ICC arbitral award 6379/90 in Yearbook, XVII-1992, p. 212 ss.; ICC arbitral award 6752/91, in Yearbook, XVIII-1993, p. 54 ss. A different approach was taken in the ICC award 6500/92 (in Clunet, 1992, p. 1015) with respect to the application of the Lebanese law on distributors, where the arbitrators said that such law should, in any case, be respected.

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It is therefore very difficult to foresee which position might be taken by a court or arbitral tribunal when situations of this kind arise. As we will see later (infra, § 2.9.1.2), in these cases a possible choice of law aiming at excluding the application of such rules should be evaluated very carefully, considering all the circumstances of the actual case.

2.8 The Direct Application of Transnational Rules After having examined the traditional approach to the issue of the applicable law, we must now consider an alternative scenario, where direct reference is made to a set of rules (lex mercatoria, general principles of law, etc.) instead of domestic laws. This rather “revolutionary” approach shocks many lawyers who fear that it will result in submitting the contract to a set of too-general rules that cannot warrant a sufficient certainty and predictability, and that may leave too much latitude to the discretion of arbitrators. Although this type of criticism is based on sound grounds, it would be wrong to disregard a priori the alternatives offered by transnational rules, which can, in certain special situations, provide better solutions that the recourse to domestic laws. 2.8.1 The theory

of lex mercatoria

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According to a theory developed in the 1970s, international contracts can be ruled by an a-national system of principles and rules generally accepted in international commerce, the so-called new lex mercatoria or law merchant, which could be applied instead of national law systems. I do not intend to discuss here the theoretical foundation of lex mercatoria.46 It is sufficient to say that this theory has been successful in the sense that it is generally admitted that, provided possible disputes are brought before international arbitrators, the parties can lawfully submit their contracts to “general rules and principles regarding international commercial contractual obligations enjoying a wide international consensus”47 instead of national laws, and that such choice will be effective, i.e. the arbitrators will apply such rules, and the awards applying lex mercatoria will normally be recognized by national courts.48 2.8.1.1 Objections

to the lex mercatoria theory

Since the appearance of this theory as a possible alternative to the traditional approach based on application of a specific domestic law and determined by the rules of private international law, many lawyers (and particularly company lawyers) have shown great scepticism concerning this solution. The reasons are manifold: a (justified) fear of vague and unforeseeable principles of law; the risk of applying a strange and unproven theory; and, last but not least, the belief that national laws have always been, and therefore still are, the best means for granting legal certainty and predictability. In fact, it is true that — at least at present — the rules of the lex mercatoria are rather general principles, like the obligation to respect the contract (“sanctity of contract”: pacta sunt servanda), the obligation to perform contracts according to good faith, duty to mitigate damages, etc.,49 which may not give a sufficiently precise legal framework in case of a dispute.

46. For a general overview of the different opinions, see Berger, The Creeping Codification of the Lex Mercatoria, 1999, 32 et seq. 47. See arbitral award ICC 7110/95, in ICA Bull., 2/1999, p. 40 et seq., p. 53. 48. In most cases, where the question has been brought before national courts of the lawfulness of arbitral awards which applied the lex mercatoria instead of a domestic legal system, the courts have upheld the arbitral award. See, for instance, Tribunal de Grande Instance of Paris, 4 March 1981, Norsolor v Pabalk Tikaret, in Rev. arb., 1983, p. 469; Cass. (France), 9 December 1981, S.N.C.T. Fougerolle v Banque du Proche Orient S.A.I., in Rev. arb., 1982, p. 183. Cass. (France) 22 October 1991, Compañía Valenciana de Cementos Portland v Primary Coal Inc., in Rev. arb. 1990, p. 663; Court of Appeal (England), 24 March 1987, Deutsche Schachtbau- und Tiefbohrgesellschaft mbH c. Ras Al Khaimah National Oil, in Yearbook, XIII-1988, p. 522; US District Court, S.D. California, 7 December 1998, Ministry of Defense of the Islamic Republic of Iran v Cubic Defense Systems, in Uniform Law Review, 1999, p. 799. 49. Case law on the lex mercatoria principles, rules and standards can be found on the Center for Transnational Law (CENTRAL) database (www.tldb.net).

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However, this is not a sufficient reason for rejecting a priori the lex mercatoria approach without considering the possible advantages that this solution can bring and the means that can be used in order to overcome its major deficiencies. 2.8.1.2 Possible

advantages with respect to the application of domestic laws

As noted before, the option to submit the contract to an a-national system of rules (whatever its name: lex mercatoria, general principles, principles of natural justice, etc.) should be considered with an open mind as one of the possible alternatives that an experienced negotiator may consider. The major objection against the recourse to general principles of law is certainly that they are too general rules, offering insufficient guidance to the parties in case of a dispute. However, this problem can be overcome, at least in part, by integrating the general principles through the express incorporation of a set of rules on contracts, such as the UNIDROIT Principles, and by setting out very precise contractual rules on the specific issues of the particular contract. In doing so, it is possible to create a rather precise and foreseeable legal framework within which the contract can be placed. A common objection to this view is that national laws always offer more certainty and predictability than “a-national” rules, even if integrated with additional rules like the UNIDROIT Principles.

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In fact, this assumption, which many lawyers uncritically accept as indisputable dogma, is not always true. First, those who support the absolute superiority of domestic laws almost always have in mind their own national laws, which — of course — appear to them to be the clearest and most predictable legal framework. However, they forget that, in many cases, the outcome of a negotiation may be the application of a foreign law, the contents of which, although in theory predictable, will normally be difficult to determine. Experienced lawyers know how difficult it is to really understand a foreign law (even when it is easy to access its sources, which is not always the case). Therefore, when the outcome is to have a foreign law as the governing law of the contract, this is not necessarily the better alternative. Second, in most domestic laws several contracts commonly used in international trade (distribution agreements, licences, franchising, M&A, only to mention some examples) are not governed by specific rules, but only by principles — if any — established by the courts, which are not easy to determine. This means that for many widely used contracts, international practice can give more guidance than the rules of a national legal system. Third, in many cases the domestic rules on specific contracts are not appropriate for international relations, because they are meant to govern other types of situations. Let us imagine, for example, what can happen if a contract with an occasional intermediary engaged in international trade must comply with domestic laws on brokers (e.g. rules enacted with real estate brokers in mind). We can therefore conclude that recourse to lex mercatoria, possibly in connection with the UNIDROIT Principles (infra, § 2.8.2-2.8.3), should be considered as a possible alternative, particularly in cases where the choice of a domestic law appears to be inappropriate or difficult to agree upon. For more detailed information about the choice of a-national rules to govern the contract and in particular the model clauses provided in several ICC model contracts, see the study published by the ICC and drafted by a special task force of the CLP Commission: “Developing neutral legal standards for international contracts. A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts”, which can be found in Appendix VI, at § 8.7. 2.8.2 The UNIDROIT

Principles

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limitation periods, etc.) was published in 2004. Further additions (regarding inter alia illegality, conditions and plurality of obligors and obligees) have been made in the 2010 edition. Finally, the 2016 edition has introduced additional rules and comments on long term contracts. 2.8.2.1 General

characteristics

The comment to the preamble,50 states that the UNIDROIT Principles … represent a system of principles and rules of contract law which are common to existing national systems or best adapted to the special requirements of international commercial transactions.

The Principles deal with most legal issues of a general nature (such as formation, validity, performance, non-performance, damages, etc.) concerning contracts. By submitting a contract to the Principles, parties can establish a neutral legal framework which is, at the same time, certain and adapted to the needs of international trade. The UNIDROIT Principles rapidly established themselves as one of the most successful sets of rules used in international trade. The main reason for this success is that the Principles fill a very important gap, the importance of which was not adequately perceived before, i.e. the need for a set of uniform rules on contracts that can be applied instead of domestic rules, which differ from country to country.

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In most countries, domestic rules on contracts, and particularly those concerning the general aspects of contract law, are the outcome of a long evolution. They are often complicated, not only because of the complexity of the subject matter covered, but also because they take account of several years (if not centuries) of legal thinking, which sometimes complicates even simple things. It is therefore difficult for a lawyer who is negotiating an international contract (or who must make up his mind about a dispute relating to such a contract) to really understand a foreign country’s rules on contracts. He may, of course, find the text of these rules (if they are codified in that country, which is not always the case), and they may be translated into an accessible language, but he will in most cases be unable to assess with certainty their actual content, which may be quite different from what a first reading may suggest. Of course, he may try to overcome the problem by imposing the choice of his own law, but where this is not possible (because the other party is not willing to accept such a proposal), the alternative of founding the agreement on a set of “transnational” principles, like those of UNIDROIT, which are simple, well written, and easy to understand, will be a very attractive solution. This probably explains the enthusiasm of most company lawyers for the UNIDROIT Principles, even when they have shown a very cautious approach towards general principles, lex mercatoria, etc. Although proposed for incorporation into the individual contract, the Principles are structured as a law: they contain mandatory and non-mandatory rules, which means that those which are mandatory should prevail over the provisions of the contract when they have been incorporated by reference;51 they are construed as a selfsufficient system of rules governing the contract, and are in principle not meant to apply along with another system of rules of the same kind. This is why it is preferable, as we will see in the next paragraph, to avoid applying them within the framework of a domestic legal system. 2.8.2.2 Different

situations in which the UNIDROIT Principles may apply

The Principles are proposed to the business world mainly as a set of “private” rules that parties may incorporate by reference into their contract. The preamble52 states in the first place that: 50. UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016, Rome 2016, 3. 51. This implies however that, if they have been incorporated simply as contractual rules, having the same force of the individual provisions of the contract, they should not prevail over possible conflicting individual provisions, since it is to be assumed that the parties did not want to derogate the provisions they have expressly agreed upon by incorporating a set of additional contractual rules. On the contrary, the result could be different where the parties refer to the Principles as the applicable law, i.e. as a set of rules applicable instead of a domestic legal system, intended to “govern” the contract. 52. UNIDROIT, UNIDROIT Principles of International Commercial Contracts 2016, Rome 2016, 1.

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… they shall be applied when the parties have agreed that their contract be governed by them.

The “normal” situation in which the Principles are to be applied is, therefore, when the parties have expressly submitted their contract to them, by an express reference in the contract itself. However, the Principles may also be applied, absent a choice by the parties, to incorporate them into their contract, as part of the general principles of law within lex mercatoria.53 For example in the ICC case 711054 concerning several contracts, which made reference to “natural justice”, the arbitrators came to the conclusion that the parties intended to have their contracts governed by rules other than their respective domestic laws, and thus by general rules and principles: … which, though not necessarily enshrined in any specific national legal system, are specially adapted to the needs of international transactions like the Contracts and enjoy wide international consensus.

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And thereafter the arbitrators came to the conclusion that these rules could be found in the UNIDROIT Principles, by stating that: …this Tribunal finds that general legal rules and principles enjoying wide international consensus, applicable to international contractual obligations and relevant to the Contracts, are primarily reflected by the Principles of International Commercial Contracts adopted by UNIDROIT […]. In consequence, without prejudice to taking into account the provisions of the Contracts and relevant trade usages, this Tribunal finds that the Contracts are governed by, and shall be interpreted in accordance [with], the UNIDROIT Principles with respect to all matters falling within the scope of such principles, and for all other matters, by such other general legal rules and principles applicable to international contractual obligations enjoying wide international consensus, which would be found relevant for deciding controverted issues falling under the present arbitration.

In other cases, arbitrators have applied the UNIDROIT Principles as trade usages,55 considering them to be “the latest codification of international commercial trade usages”.56 In the following example, where a very confused clause showed nevertheless that the parties intended to avoid the application of the respective domestic laws, the arbitrator was faced with the problem of finding a neutral solution which could satisfy their expectations and decided to apply general principles of law and in particular the UNIDROIT Principles. Example 2-7 - Distribution contract submitted to the “law of the ICC” In this case (see supra, Clause 2-1), the parties agreed to submit their contract to the legislation of the ICC or in its absence to a neutral legislation. The sole arbitrator decided as follows: «Le Tribunal arbitral estime que, pour déterminer les règles de droit les plus appropriées, il faut tenir compte du fait que les parties désiraient une solution neutre. Or, à défaut d’indication expresse d’un tiers droit national, la solution la plus appropriée dans le cas où il apparaît que les parties désirent une solution neutre est d’appliquer les règles et principes généraux en matière de contrats internationaux ou lex mercatoria. Dans ce contexte on pourra se référer pour les questions touchant à la réglementation générale des contrats aux « Principes relatifs aux contrats de commerce international » de l’UNIDROIT, qui représentent — exception faite pour quelques règles très particulières (comme par exemple les articles en matière de 53. Although it may be debateable whether all of them actually conform to the general principles applicable in international trade: see infra, § 2.8.2.3. 54. Three partial awards in 1995, 1998 and 1999, published in ICA Bull. 2/1999, 40. 55. See, for instance: ICC Award 10021 of 2000, in www.unilex.info; ICC award 9479 of 1999, in ICA Bull. 2001/2, 67 et seq. 56. ICC award 10022, in ICA Bull., 2001/2, 100.

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hardship […] — un « restatement » fidèle des règles que les entreprises opérant dans le commerce international considèrent comme conformes à leurs intérêts et attentes. Ceci est reconnu par de nombreuses sentences arbitrales qui ont appliqué les Principes UNIDROIT comme expression de la lex mercatoria ou des usages du commerce international […]. Le Tribunal arbitral appliquera par conséquent les règles et principes généralement reconnus dans le commerce international (lex mercatoria) et notamment les Principes UNIDROIT, dans la mesure où ils apparaissent comme une transposition fidèle des règles reconnues comme applicables aux contrats internationaux par les commerçants engagés dans le commerce international». ICC arbitration case § 10422/2001 in Journal du droit international, 2003, p. 1142 et seq..

Let us now come back to the possible choice by the parties, which is the main issue to be considered when drafting and negotiating the contract. In principle, the parties can choose the UNIDROIT Principles as the “applicable law” intended to “govern” the contract instead of the rules on contracts contained in a domestic law system to be determined under the rules of private international law. Example 2-8 - Choice of the UNIDROIT Principles as the applicable law

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A contract between a Mexican producer and a US distributor contained an arbitration clause in which the parties referred to the UNIDROIT Principles as the governing law. The arbitral tribunal confirmed the validity of the parties’ choice, since according to Article 1445 of the Mexican Commercial Code, the arbitral tribunal shall decide according to the «rules of law» chosen by the parties. The arbitral tribunal expressly stated that the applicable «law» need not to be material Mexican law (derecho positivo mexicano) nor the material law of any jurisdiction and decided the dispute according to the UNIDROIT Principles. Arbitral award of 30 November 2006 of the Centro de Arbitraje de Mexico, in www. unilex.info.

If this “transnational” approach is chosen, it is appropriate to submit possible disputes to arbitration57 and to make an express reference to lex mercatoria or general principles of law.58 The parties may also opt for the application of the UNIDROIT Principles within the context of a given domestic law system. In this case, however, the Principles will be considered to be contractual rules that must consequently comply with possible mandatory rules of the governing law. Moreover, the coordination of the UNIDROIT Principles with the rules on contracts of the applicable law may give rise to problems. It is therefore preferable, as a general rule, to incorporate the UNIDROIT Principles within the framework of the lex mercatoria as the applicable law. However, where this is not feasible, because the other party insists that the contract should be governed by a domestic law system and there are doubts whether such domestic law actually meets the standards normally accepted in international trade, a reference to the UNIDROIT Principles within the context of a domestic law may be a reasonable compromise solution. 2.8.2.3 Precautions

to be taken when incorporating the UNIDROIT Principles

The UNIDROIT Principles have been worked out with the purpose of producing a “restatement” of the law of international commercial contracts and should therefore be in line with the standards generally accepted by business people engaged in international trade. However, this does not mean that the Principles reflect the “common core” of the various national systems. In fact, the intention of the drafters was not to choose the solutions which prevail in most legal systems, but to select those which had the most 57. Since domestic courts will normally not be willing to recognize the choice of transnational rules as the law governing the contract. 58. In order to avoid any doubt about the fact that such choice is an alternative with respect to domestic law systems. Otherwise, the risk exists that the arbitrators will also apply a domestic law, which may lead to problems of coordination with the Principles.

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persuasive value and/or appeared to be particularly well-suited for cross-border transactions. In other words, the drafters of the Principles, although taking into account the prevailing rules and practice, made a choice in favour of what they considered to be the “best” rules for cross-border contracts, particularly as concerns the need to protect parties against unfairness.59 The result of this approach is that there may be, in certain cases, a substantial gap between the UNIDROIT Principles and the rules or general principles that companies engaged in international trade would consider to be appropriate to govern their contracts. Let us take, for instance, Article 3.2.7(1) of the UNIDROIT Principles 2016 (Article 3.10 Article 3.10 before the 2010 version of the Principles) on gross disparity, according to which: … a party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to (a)

the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and

(b)

the nature and the purpose of the contract.”

This rule is certainly a “better law” than a strict application of the principle pacta sunt servanta.

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However, while the basic principle that a contract can be avoided in extreme cases — where a party has taken an unfair advantage of the other party’s dependence, economic distress or urgent need — can be considered to be generally acceptable, no businessman engaged in international trade would accept the idea that his counterpart may put forward his “improvidence, ignorance, inexperience or lack of bargaining skill” as a reason for requesting the avoidance of the contract.60 In fact, unless he is negotiating with a counterpart having an extraordinary high level of fairness, no responsible lawyer would take the risk that a counterpart may use its pretended ignorance, inexperience or lack of bargaining skill for the purpose of avoiding a contract (or even a contract clause)61 it dislikes. One may, of course, object that Article 3.2.7 requires an excessive and unfair advantage, which would normally prevent the above principle from being applied too widely. However, even admitting that an experienced arbitrator would not take too seriously the position of a businessman who claims to have made a bad deal because of his inexperience or lack of bargaining skill,62 the simple fact that the rule exists and that the counterpart can invoke it, remains a danger and makes Article 3.2.7 in its present wording unacceptable for international trade. In order to overcome this problem, it would be sufficient to exclude the words “or of its improvidence, ignorance, inexperience or lack of bargaining skill” in the last sentence of Article 3.2.7(1)(a), when incorporating the UNIDROIT Principles. Another example of rules that go beyond the solutions normally accepted in international trade are the provisions on hardship contained in Articles 6.2.1–6.2.3. These rules state that where the occurrence of events which fundamentally alter the equilibrium of the contract (and provided such events become known after the conclusion of the contract, are unforeseeable, are out of the control of the disadvantaged party and the disadvantaged party did not assume their risk), the

59. See Bonell, “Policing” the Contract Against Unfairness under the UNIDROIT Principles for International Commercial Contracts, in Dir. comm. intern., 1994, p. 251 et seq. 60.

See for example Hill, A Businessman’s View of the UNIDROIT Principles, in Journ. Int’l Arb., 1996, 163, 165-166.

61. Which is, of course, far more dangerous, since it gives the counterpart the possibility of requesting the avoidance of the part of the contract it dislikes, while maintaining the rest of it. 62. Also on the basis of the generally recognized principle that business people must know what they do and cannot claim inexperience. In considering all of this, it is difficult to understand how the drafters of the UNIDROIT Principles could include in a set of rules made for business-to-business trade a rule that would have been more appropriate for consumer contracts.

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disadvantaged party may request renegotiation of the contract and, if renegotiation fails, resort to the court, which may terminate the contract or adapt it with a view to restoring its equilibrium. Now, this solution is much broader (in protecting the disadvantaged party) than most domestic laws existing in this field63 and does not at all correspond with contractual practice. In fact, hardship clauses are normally not drafted in general terms, but tend to limit their operation to specific situations and to provide specific solutions (which almost never imply adaptation by a third party) in case of the occurrence of hardship. The reason for this caution is obvious: traders perceive the adaptation of the contract terms by a third party to be a great danger, and are not willing, except in very exceptional circumstances, to accept such a risk. This is why the model hardship clause established by ICC64 does not provide, in case of failure of the renegotiation, for the adaptation of the contract, but only for its termination. Finally, we should mention another critical issue, i.e. the provision on “surprising terms”, contained in Article 2.1.20(1), which gives an excessive protection to the disadvantaged party, thus leaving space for possible abuses. Article 2.1.20(1) of the UNIDROIT Principles 2016

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No term contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.

If one accepts a wide interpretation of the definition of “standard terms” contained in Article 2.1.19(2)65 which would include the case where the parties negotiated some clauses of a standard contract (i.e. a contract “prepared in advance for general and repeated use by one party”), without actually discussing a number of “surprising terms”, there is a risk that the other party may thereafter contest the validity of “surprising terms” on which it did not raise objections during negotiations. Since it is not clear if courts or arbitrators may follow this wide interpretation, it is advisable to exclude the application of Article 2.1.20(1) when incorporating the UNIDROIT Principles. 2.8.2.4 Conclusions

As discussed later, the idea of submitting the contract to the UNIDROIT Principles (possibly within the lex mercatoria framework: infra, § 2.8.3) can, in certain cases, be an interesting solution. Apart from the few exceptions mentioned in the preceding paragraph, the UNIDROIT Principles represent a balanced system of carefully worded and easy to understand rules which can be recommended as an appropriate legal framework for international contracts. However, when choosing the UNIDROIT Principles as applicable rules, it is recommended to add some words to the clause that incorporates the UNIDROIT Principles by reference, in order to expressly exclude the incorporation of those specific articles which may not correspond to the expectations of parties engaged in international trade and which have been examined in the previous paragraph. The parties should also check if the limitation periods provided for in Chapter 10 of the Principles are suitable for them or if they prefer to shorten or to extend these periods. 2.8.3 The combination

of lex mercatoria and UNIDROIT Principles

For those who wish to submit their contract to transnational rules in order to avoid the problems of conflicting domestic laws, and at the same time to establish a reasonably predictable legal framework for their contract, the choice of submitting the contract to the lex mercatoria and to the UNIDROIT Principles should be seriously considered. 63. In fact, many national systems do not consider hardship at all (but only situations more close to impossibility of performance, such as force majeure or frustration), although there is a recent trend to protect the disadvantaged party in case of hardship: see for instance Article 1195 of the French Civil Code after the reform in force as of 1 October 2016.. 64. See Appendix IV of this publication under ICC Hardship Clause, § 9.6. 65. “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”.

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This kind of solution has been provided for in several ICC model contracts. The first to contain an express reference to the UNIDROIT Principles was the ICC Model International Franchising Contract (ICC Publication No. 557, now replaced by an updated model, ICC Publication No. 712) which, in Article 32 A, contained the following clause as an alternative to the choice of a domestic law provided for in Article 32 B: Clause 2-4 – ICC Franchising Model (lex mercatoria and UNIDROIT Principles) This Agreement is governed by the rules and principles of law generally recognized in international trade together with the UNIDROIT principles on International Commercial Contracts.

A more complex clause was subsequently drawn up and included in several models published in the following years.66 In the second edition of the Model Distributorship Contract, for example, the following clause is found in Article 24 as an alternative to the clause containing the choice of a specific domestic law: Clause 2-5 – ICC Distributorship Model (lex mercatoria and UNIDROIT Principles)

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Any questions relating to this Agreement which are not expressly or implicitly settled by the provisions contained in this Agreement shall be governed, in the following order: 1)

by the principles of law generally recognized in international trade as applicable to international distributorship contracts,

2)

by the relevant trade usages, and

3)

by the UNIDROIT Principles of International Commercial Contracts, with the exclusion — subject to Article 18.2. hereunder — of national laws.”

The above clause aims to create the following hierarchy of rules: first, the contract clauses; then the general principles; the trade usages and finally the UNIDROIT Principles, with the aim of clarifying that the UNIDROIT Principles will apply only to the extent they conform to the general principles (lex mercatoria) and the trade usages. The main reason for this solution is to give arbitrators the possibility of excluding the application of rules contained in the UNIDROIT Principles which they may consider not to be in accordance with the expectations of business, such as those mentioned above in § 2.8.2.3. Another possible solution is to mention expressly the Articles of the UNIDROIT Principles that should be excluded. Clause 2-6 – Choice of law: lex mercatoria and UNIDROIT Principles This contract is governed by general principles of law generally recognized in international trade (lex mercatoria) together with the UNIDROIT Principles of International Commercial Contracts 2016 (except for Articles 2.1.20, 3.2.7 and 6.2.1-6.2.3), with the exclusion of domestic laws.

Another possible option, which has been proposed in the Model Clauses for the use of the UNIDROIT Principles, published by UNIDROIT,67 consists of submitting a contract directly to the UNIDROIT Principles, as provided in the following model clause, proposed by UNIDROIT. Clause 2-7 - UNIDROIT Model Clause 1.1(a) This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010)

66. ICC Model Agency Contract, 2nd ed. (ICC Publication 644); ICC Model Distributorship Contract (sole importer-distributor), 2nd ed. (ICC Publication 646); ICC Model M&A Contract I: Share Purchase Agreement (ICC Publication 656); ICC Model Selective Distributorship Contract (ICC Publication 657); ICC Model Contract for the Turnkey Supply of an Industrial Plant (ICC Publication 653); ICC Model International Trademark Licence (ICC Publication 673); ICC Model International Transfer of Technology Contract (ICC Publication 674); ICC Model International Franchising Contract (ICC Publication 712). 67. UNIDROIT, Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, UNIDROIT, Rome, 2013.

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This clause expressly indicates the UNIDROIT Principles as the applicable law, without any reference to general principles of law or lex mercatoria. The difference with respect to the approach followed in the ICC models is that there is no reference to a system of law (be it the alternative system of the lex mercatoria or a domestic law): the UNIDROIT Principles standing alone are the applicable law. This may cause some problems if one needs to fill possible gaps. In fact, if in case of dispute issues arise which are not covered by the UNIDROIT Principles, it is likely that arbitrators will have to refer to the applicable domestic law, while under the ICC model clauses it is clear that one must refer to the general principles of law generally recognized in that particular trade.68

2.9 The Options for the Choice of the Governing Law We shall now examine, with a practical approach, the main options that the parties have with regards to the applicable law. Of course, it is not possible in this context to indicate the most appropriate solutions, since this depends on the circumstances of each particular case. This is why we will limit ourselves to setting out the general criteria that one should consider when choosing between the various options. 2.9.1 Choice

of the law of its own country

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The most obvious solution for a party negotiating an international agreement is to submit the contract to its own law (normally together with a jurisdiction clause in favour of its own courts). This is in many cases the safest and simplest solution, provided, of course, that it is accepted by the other party. This is why business people (as well as a number of lawyers) believe that the choice of a party’s own domestic law is always the preferable solution. However, this conclusion is incorrect, because each general rule has its exceptions which must be taken into consideration before making a choice. We will point out some of the situations where the “normal” choice, i.e. to submit the contract to its party’s own law, may not be appropriate. 2.9.1.1 Situations

where this choice may not be appropriate: excessively burdensome rules

When the domestic law of a party contains mandatory rules protecting the other party that are more onerous than those of the latter’s country, the first party’s choice of its own law may not be appropriate. In fact, since it is impossible in principle to exclude the application of mandatory rules of the applicable law (see above, § 2.6.3.1), the choice of such law may not be advisable, as shown in the following example. Example – Distributorship agreement between a German supplier and an Italian distributor A German supplier appoints a distributor for the Italian market. The contract — which expressly provides for the application of German law — provides a very close control over the distributor’s activity including the obligation of the latter to pass information about the names of its customers. It is expressly stated that the distributor will have no right to goodwill indemnity or similar compensation in case of termination. Comment: German law assimilates the distributor, who is bound to inform the supplier about the names of his customers to a commercial agent. Thus the distributor will be entitled to indemnity under the German rules on agency (and particularly § 89 b of the German Commercial Code), while no such indemnity is due under Italian law.

68. Another advantage of the reference to general principles and usages as provided in the ICC standard clause (Clause 2) is that the arbitrators will be led to give greater consideration to contractual practice developed within certain types of contracts, for instance when it comes to interpret clauses which have a precise meaning in that type of contract.

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Other examples are those of a Belgian supplier appointing a foreign distributor69 or a French principal appointing a foreign agent.70 The above examples show that a party should check the contents of its own law in detail before choosing it as the governing law. Of course, the above considerations do not imply that one should always make an in-depth evaluation of the convenience of one’s own law before choosing it. In many cases, the interested party will have nothing against granting its counterpart those conditions that are customary under its own law, even if they are more burdensome than those of the law of the country of the other party, if it can have the advantage of having the contract governed by rules it is familiar with. But in extreme cases, where the difference is substantial, the possibility of an alternative solution should be envisaged. 2.9.1.2 Internationally

mandatory rules of the country of the other party

Another critical situation arises where a party wishes to avoid the application of internationally mandatory rules of the law of the other party, by submitting the contract to its own law. In this case, the question is, as we have noted (§ 2.7.3), whether this choice would be effective against mandatory rules of the law of the other party, which pretend to be applied whatever the governing law chosen by the parties.

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If the issue has to be decided by the courts of the country that has enacted the internationally mandatory rules, there is little doubt that the choice of another law will be ineffective, in the sense that the mandatory rules will nevertheless be applied. If, on the contrary, the issue is brought before the courts of another jurisdiction (or before arbitrators), the outcome will be less certain, considering the wider discretion of a foreign court (or arbitrators) when deciding if the internationally mandatory rules of a law other than the applicable law should be applied. Let us come back to example 2-6 and suppose that the parties have agreed the exclusive jurisdiction of Italian courts. Example 2-10 – Contract with Belgian distributor submitted to Italian law An Italian supplier appoints a Belgian distributor to market his goods in Belgium. The contract expressly states that it is governed by Italian law and that the courts of the seat of the Italian supplier will have exclusive jurisdiction. Italian law does not foresee a goodwill indemnity for distributors, while the Belgian law of 27 July 1961 on distributorship agreements, which is internationally mandatory, provides for substantial indemnities in favour of the distributor. When the contract is terminated, the distributor makes a claim before the competent court in Italy and requests payment of the various indemnities due under the Belgian law, arguing that the court must give effect to the Belgian mandatory rules since such rules are internationally mandatory and since there is a close connection with Belgium (where the distributor whom the law in question intends to protect carries out his activity).

As we have seen above in § 2.7.3, the likelihood that the Italian court will apply the Belgian law is not high under Article 7(1) of the Rome Convention and is almost inexistent under Article 9 of Rome I Regulation. This means that, by joining choice of law and choice of forum, the Italian supplier may have some chance to escape the application of the Belgian law’s protective rules (while these rules would be applied in any case if the issue was brought before a Belgian Court, which is bound to respect the internationally mandatory character of a law of 69. Due to the high level of protection of distributors (concessionnaires) under the Belgian law of 1961 on distributorship contracts. However, Belgian courts have taken the view that the law in question does not apply to distributors carrying out their business outside Belgium: see Court of Cassation (Belgium), 6 April 2006, Nuclear Laser Medicine srl v Innogenetics SA, in RDC, 2007, p. 162 et seq., where it is said that when a distributorship contract submitted to Belgian law produces its effects exclusively outside the territory of Belgium, the mandatory rules of the law of 27 July 1961 do not apply, unless the parties have made express reference to such law. 70. Due to the two years’ termination compensation, which is higher than the indemnity foreseen in most other European domestic laws.

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that country). Consequently, the solution described in example 2-10 may be a good choice for the supplier, also bearing in mind that the distributor must claim in Italy and cannot be sure of the final result, which will put the supplier in a more favourable position when negotiating a settlement. At the same time, it should not be forgotten that if the Italian court decides it should not apply the Belgian rules which protect distributors, this decision could be unenforceable in Belgium if the refusal to apply internationally mandatory rules of Belgian law is considered to be a violation of Belgian public order.71 This would not be a problem if the only issue were a claim for indemnity made by the distributor (since the supplier need not enforce in Belgium a judgment which rejects the distributor’s claim). But if the supplier also has a counterclaim for unpaid goods (a very likely situation when a distributorship contract is terminated), the issue of having the Italian judgment recognized and enforced in Belgium might become crucial. This means that the strategy of avoiding internationally mandatory rules of the country of the other party through a joint choice of law and forum has little chance of success when it is likely that, in case of dispute, the party making this choice will need to enforce the judgment against its counterpart, as can be seen in the following example. Example 2-11 – Transfer of technology to a developing country

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A US manufacturer grants a manufacturing licence to a counterpart of a developing country. The law of the licensee’s country requires a government authorization for the payment of royalties to foreign licensors and, in any case, prohibits payment of royalties exceeding a certain rate. The rules protecting local licensees are considered to be internationally mandatory. The parties submit the licence agreement (which contains reasonable conditions, according to the standards of international trade, but does not comply with the provisions of the law of the licensee’s country) to Swiss law and international arbitration in Switzerland. After a certain period of time, the licensee stops paying the royalties, and the licensor decides to make a claim in order to get paid.

If the licence agreement respects reasonable international standards, it is likely that the arbitrators will apply Swiss law (in conformity with the choice made by the parties) without feeling bound to apply the mandatory rules of the licensee’s country.72 However, a possible award condemning the licensee to pay cannot be enforced in the latter’s country, because the local courts would refuse recognition and enforcement of an award not complying with its internationally mandatory rules as being contrary to the public policy of that country.73 In cases of this kind, it is normally preferable to accept the application of the law of the other party and to adapt the contractual clauses to such law, unless solutions can be found whereby it is not necessary to enforce a possible award in the country of the other party.74 Another aspect to be considered, when examining the possibility of excluding the application of internationally mandatory rules of the country of the other party, regards the effectiveness of the choice of forum clause. In fact some legislators 71. However, this is not necessarily the case. Particularly with respect to the Belgian Act protecting distributors, it has been argued (Hollander, ‘L’arbitrabilité des litiges relatifs aux contrats de distribution commerciale en droit belge’, in L’arbitrage et la distribution commerciale, Bruylant (Brussels), 2005) that the rules protecting the distributors, although being “d’application immédiate”, would not belong to the public policy (ordre public). This assumption contradicts the general view according to which principles expressed by rules of “immediate application” belong to the public order of the country enacting them. 72. In fact, arbitrators tend to respect internationally mandatory rules of a law other than the law chosen by the parties, mainly when such mandatory rules correspond to “international standards” and not when they express a view specific to a particular country. 73. This conclusion cannot be considered to be absolutely certain, since it depends on various circumstances that may vary from case to case. However, internationally mandatory rules of a given country are almost always the expression of principles considered in such legal system to be part of its public policy. 74. E.g. by requiring the licensee to warrant the payment of the royalties through a bank guarantee issued by a bank of a country other than that of the licensee.

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provide, when enacting internationally mandatory rules, that their courts must always retain jurisdiction with respect to the application of these rules, which can make the above strategy ineffective. Example 2-12 – Contract with a Lebanese distributor A European supplier appoints a Lebanese company as his distributor in Lebanon and other neighbouring countries. The contract is submitted to the law of the supplier’s country, and it is also provided that the courts of the supplier’s country will have exclusive jurisdiction. When the supplier terminates the contract and the distributor claims an indemnity and damages, he discovers that the choice of forum clause is ineffective in Lebanon, according to Article 5 of the decree-law § 34 of 5 August 1967.75

In the above example, the supplier might disregard a possible action by the distributor, on the assumption that a possible Lebanese court judgment would not be enforceable in his country.76 However, if he wishes to continue distributing in Lebanon, he will be forced to defend himself before the Lebanese court,77 which will apply the internationally mandatory rules of Lebanese law.

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With respect to the issue of the effectiveness of the choice of forum, one should also consider recent trends in case law against the enforceability of choice of forum clauses aiming at excluding the protection granted by internationally mandatory rules to “weaker” parties, like commercial agents. (Belgian Court of Cassation, 3 November 2011, § 593, Air Transat;78 OLG Stuttgart, 29 December 2011 and 16 January 2012;79 OLG München 17 May 2006;80 BGH, order of 5 September 2012, VII ZR 25/12, which confirms the judgment of OLG Stuttgart and rejects the request to submit the issue to the EU Court of Justice). When faced with situations of this kind, it will normally be preferable to accept that the contract will be submitted to the law of the distributor and to work out, in the context of such law (and with the advice of a local lawyer), contractual solutions which can protect the supplier’s interests in the best possible way (e.g. through clauses imposing minimum purchase requirements and entitling the supplier to terminate the distribution agreement if these targets are not attained). We can therefore conclude that the choice of a party’s own law, made with the purpose of avoiding internationally mandatory rules of the law of the other party, needs to be studied with great attention, possibly with the advice of an expert. Should the outcome be that it is impossible (or too difficult) to exclude the application of the other party’s law, one should consider the alternative of accepting that law as the governing law and seeking alternative solutions, such as changing other business parameters (e.g. charging a higher price or reducing the amount of compensation) within the context of that law. 75. Article 5 says that, “ … notwithstanding any agreement to the contrary, the courts of the place where the commercial representative exercises his activity are competent to adjudicate dispute arising from the contract of commercial representation”. Such provision is also applicable to distributors, since Article 1(2) of the decree of 1967 expressly extends the application of the law to “the merchant who sells for his account what he has bought by virtue of a contract giving him the character of an exclusive representative or distributor”. 76. This depends, of course, on the rules on jurisdiction in the supplier’s country; however, it is rather common that recognition of a judgment disregarding a choice of forum in favour of the supplier’s country may be refused. 77. Also considering that under the decree-law of 1967 a company against which a judgment based on such law has been passed will be barred from being represented in Lebanon, until it has carried out such judgment, and the former representative may request that the customs authorities refuse to clear for import the goods of such company. 78. The Court stated that no effect can be given to an arbitration clause with application of Quebec law in a contract between a Quebec principal and a Belgian agent; the dispute cannot be taken away from the Belgian judge since Quebec law affords less protection to the agent. 79. IHR 2012. A jurisdiction clause in favour of the courts of a foreign court (in the specific case the courts of the state of Virginia) combined with a choice of Virginia law , leads to the result that internationally mandatory rules protecting the German agent are not applied, is not to be enforced by the German court. 80. IPRax 2007, 322 ss. Exclusive forum-selection clause in favour of Santa Clara (California) courts and California law in contract between US principal and German agent. The court refused to enforce the jurisdiction clause because recognizing the jurisdiction of the foreign court would have prevented the application of the internationally mandatory rules on goodwill indemnity.

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of the law of the other party

Except when there are special reasons for accepting the law of the other party as the governing law (such as those dealt with at the end of § 2.9.1.2, for example), choosing the other party’s law is generally not advisable, because it puts that party in the more advantageous position of having its own law as the governing law. This is especially the case when it is difficult to become informed about the actual content of the foreign law. Therefore, one should try to avoid this solution by proposing more neutral alternatives, such as those that will be examined in the following paragraphs. When this is not possible because the other party insists on the application of its own law and is strong enough to impose its will, one may try to minimize the impact of that law, by referring at the same time to the UNIDROIT Principles. An example of this type of approach can be found in clause 4(a) of the model clauses drafted by UNIDROIT.81 Clause 2-8 – UNIDROIT model clause 4(a) This contract shall be governed by the law of [State X] interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2010).

Another solution, sometimes used with the purpose of reducing the risk of applying unforeseeable rules of an unknown foreign law is to refer possible disputes to an arbitration ex aequo et bono, i.e. to give the arbitrators the power to decide the dispute according to equity (infra, § 4.5.3.7), without their being bound to respect specific legal rules. This solution implies, however, that the arbitrators are given very wide discretion, which may significantly reduce the predictability of the final result.

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When no other solutions are possible and the law of the other party must be accepted (which is frequently the case when the other party is in a stronger position), it is important to obtain the necessary information about the content of the law, possibly with the assistance of a local lawyer. This will, in practice, be feasible only for contracts having a certain importance. If the amounts involved are relatively small, the recourse to a local lawyer will, in most cases, involve disproportionate costs. Finally, when discussing this issue with the other party, it is important to understand if its request to apply its own law is simply a matter of principle, or if it results from the desire to obtain certain benefits provided by that law. In the latter case, the parties may shift the discussion to this issue and seek a solution to the specific problem at a contractual level, thus bypassing the problem of the applicable law. Thus, if we take the case of the contract between an Italian supplier and a Belgian distributor (Example 2-10), and we imagine that the distributor is not willing to accept that the contract be submitted to a law other than Belgian law, because he wants to benefit from the protection of such law, a compromise solution may consist in submitting the contract to Italian law, but at the same time to agree contractually on a compromise solution (indemnity and/or long periods of notice) acceptable to both parties. 2.9.3 Choice

of the law of a third country

When finding an agreement is difficult because none of the parties is willing to accept that the contract will be submitted to the law of the other party, a possible solution may be to choose the law of a third country, for example, Swiss, Swedish, Austrian or English law. This solution, which is presently permitted in most systems of private international law,82 places both parties in a similar situation by denying each of them the advantage of having the contract governed by a legal system it is familiar with. At the same time, this choice will mean that none of the parties will really know the content of the law that governs their contract. Of course, they may inquire about the 81.

Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, Rome, UNIDROIT, 2016.

82. It should, however, be borne in mind that there are systems of private international law which require a connection between the contract and the law chosen.

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 THE APPLICABLE LAW

content of this law before signing the contract, but experience shows this will almost never occur. In most cases, the parties will base their decision on the assumption that the law of a given country is traditionally considered to be fair and reasonable, an assumption which is not necessarily well-founded when applied to a particular type of contract. An important point is that the law chosen should be easily accessible in a commonly used language. When choosing this solution it is preferable to submit possible disputes to arbitration, so that a chairman who has a good knowledge of the applicable law can be appointed. This should also be considered when choosing the law: if Swiss law is chosen, there is a great chance that the chairman of the arbitral tribunal will be Swiss; if Swedish law is chosen the chance of having a Swede as chairman is even greater, since Swedish law is less easily accessible to somebody not familiar with the Swedish language. A further critical issue to be considered arises in case of dispute, since it will be necessary to consult (and to appoint in case of litigation) lawyers of the third country whose law has been chosen. This may cause additional costs and the problem of overcoming possible lack of understanding between lawyers having a different legal background.

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2.9.4 Lex mercatoria

and similar solutions

When it is difficult to find an agreement on a domestic law acceptable to both parties, the alternative solution of submitting the contract to the lex mercatoria, general principles and the like, should be considered. This solution may be particularly appropriate when the main issues which may give rise to disputes are well specified in the contract and a possible dispute is to be submitted to experienced arbitrators having a thorough knowledge of the international practice. This result can be achieved by a clause that submits the contract to general principles of law and excludes the application of the domestic legal systems, without a need to expressly mention lex mercatoria. An interesting example of this approach can be found in the clause on applicable law contained in a contract, which has given rise to a famous arbitration case.83 Clause 2-9 – Clause on applicable law (Arthur Andersen case) The arbitrator shall decide in accordance with the terms of this Agreement and of the Articles and Bylaws of Andersen S.C. In interpreting the provisions of this Agreement, the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of Andersen, S.C., taking into account general principles of equity […].”84

It is also possible to expressly refer to the UNIDROIT Principles together with the general principles of law (or lex mercatoria), as we have seen in § 2.8.3 (and in the clauses 2-4, 2-5 and 2-6). In any case, this “transnational” solution is only possible in the context of international arbitration, since it is very unlikely that a domestic court would accept applying a-national principles of law instead of a domestic law determined according to the rules of private international law. 2.9.5 No choice

at all

The last solution to be considered consists in avoiding any choice of law. At first sight this option may seem surprising, considering that this chapter has insisted on the need to choose, whenever possible, the applicable law. 83. ICC arbitral award 9797 of 28 July 2000, Andersen Consulting Business Unit Member Firms v Arthur Andersen Business Unit Member Firms and Andersen Worldwide Société Coopérative, in Dir. comm. int., 2001, p. 211 ss., with comment by Bonell, Un arbitrato “globale” deciso sulla base dei Principi UNIDROIT. 84. On the basis of this clause, the arbitrator decided to apply “the general principles of law and the general principles of equity commonly accepted by the legal systems of most countries”, and in particular the UNIDROIT Principles as “reliable source of international commercial law in international arbitration”.

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However, there are situations where an experienced negotiator knows it is better not to raise the issue, because this would simply induce the other party to require the application of its own law. If this is the case, it may be appropriate to skip the problem and leave it open until a dispute arises and to concentrate efforts on finding a balanced solution for the resolution of possible disputes. So, if the parties agree to have future disputes decided by arbitration, and provided they will be able to choose neutral and experienced arbitrators, they may trust that the arbitrators will use their discretion (which is rather broad with regard to the determination of the applicable law: supra, § 2.4.3) to find a suitable solution, capable of providing an adequate legal framework for the solution of the dispute.

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Chapter 3

THE METHODS FOR SOLVING DISPUTES

3.1 The Importance of Dispute Resolution Business people often wonder why lawyers attach great importance to the issue of dispute resolution. If parties, dealing in good faith, establish the rules that are to govern their relationship, why should they bother about future disputes? Is this not, on the contrary, a sign of distrust which may actually endanger the good relationship between them?

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Any experienced lawyer knows that this preoccupation is unfounded: dealing from the very beginning with dispute resolution problems does not disrupt the trust between the parties; on the contrary, the setting up of a fair and balanced mechanism for dispute resolution is the best guarantee that none of the parties will be induced to breach the contract, taking advantage of the other party’s weaker position in case of dispute. In fact, when a lawyer is asked by his client to assess the effectiveness of an existing contract (particularly where the other party appears unwilling to fulfil its obligations), he will first ask himself what legal remedies his client would have in case of breach by the other party. And if he comes to the conclusion that these remedies are weak, he will advise his client to look for a compromise solution instead of trying to enforce his rights. Consequently, if it appears impossible (or unreasonably expensive) to obtain a favourable court judgment (or an arbitral award, if arbitration has been agreed upon in the contract) and/or to enforce it in the country of the other party, and the other party is unwilling to spontaneously perform its obligations, the interested party will be forced to give up its claims even if they are well-founded. Example 3-1 – Sale to a customer in a far-away country A manufacturer has sold goods for US$30,000 to a customer of a far-away country with payment on open account (60 days from invoice). After a certain time, it appears that the customer, invoking pretended defects of the goods, does not intend to pay. The contract of sale does not say anything with respect to dispute resolution. A quick inquiry as to the legal situation in the country of the customer shows that a possible judgment obtained in the supplier’s country would not be recognized in the buyer’s country and that bringing a claim in the buyer’s country would be expensive and without certainty as to the results.

In the situation described above, it is clear that whatever right the supplier may have, he will not be able to obtain payment through judicial means. In cases of this kind, no appropriate dispute resolution clause can solve the problem, and the solution must be found elsewhere, i.e. by putting the seller in a situation where he does not need to obtain payment after delivery of the goods (such as, payment in advance, documentary credit, bank guarantee), or by insuring his credit. Alternatively, the seller may decide to take the risk and to accept that there may be a number of cases where he will not be paid. However, there are also many cases where the choice made by the parties in the contract with respect to the resolution of future disputes may be decisive for the outcome of a possible controversy. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 57

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Example 3-2 – Turnkey contract A German supplier of equipment sells a production line to a company in a developing country on a turnkey basis, warranting certain performance results. At the moment of testing, it appears that the agreed parameters are not met, and the purchaser claims a huge price reduction (40%) apparently due under the contract. The supplier knows that the non-attainment of the performance is, for the most part, due to incorrect performance of the tests (use of non-conforming materials, lack of skill of the local personnel). However, his representatives on the site apparently accepted the results of the test (wrongly assuming that the buyer knew and would admit that they were not relevant due to the particular conditions of the performance test). The purchaser does not accept to carry out further tests; he insists that he is entitled to the price reduction. The seller is certain that the plant is actually capable of reaching the agreed parameters, but he knows that this is rather difficult to prove. The supplier’s technical personnel can vouch that the tests were not correct and that they accepted the results on the assumption that such acceptance was not binding. Further tests could show that the plant substantially meets the parameters, provided the purchaser fully cooperates or authorizes the supplier to perform the tests with its own technicians. The supplier must decide if he should settle by granting the requested price reduction or bring the dispute before the competent courts (or arbitrators).

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This is a typical case in which the chances of the supplier to successfully prove his reasons in case of a dispute substantially depend upon the composition of the arbitral tribunal (or court). While experienced arbitrators (or judges with practical experience in this type of business) may be easier to convince of the seller’s good reasons, judges with a more formal attitude are more likely to be impressed by the argument that the seller’s technicians actually signed the test report. Therefore, where a negotiator knows that these kinds of problems are likely to arise, he will try to agree upon an arbitration clause, possibly referring to an arbitral institution, which leaves leeway for the choice of arbitrators (see, infra, § 4.3.3.1) and maximum neutrality as to the choice of the chairman of the arbitral tribunal. Moreover, if the negotiator cannot obtain a neutral solution (e.g. because the buyer requests that the courts of his country have jurisdiction, he will take other precautions at a contractual level (e.g. he will try to increase the amount of a possible advance payment and/or reduce the amount of performance guarantees, etc.) in order to limit his risk and to counterbalance his weakness in case of a dispute. Example 3-3 – Know-how agreement Parties are negotiating a know-how agreement whereby the licensor is to grant the licensee all the technical information needed for the manufacture of certain products (not protected by patents). The licensor knows that, once he has transferred the inform­ation, the licensee will be able to manufacture the licensed products without his assistance. With respect to the payment conditions, the licensor would like to obtain a lump-sum payment at the beginning of the contract, while the licensee insists on paying royalties on the goods manufactured under licence during a period of eight years.

In a case of this kind, a prudent licensor will try to insist on the lump-sum payment, knowing how difficult it could be to receive payment for several years from a licensee who has already obtained all of the know-how. However, if the licensor is forced to accept the licensee’s request (e.g. because he knows that the licensee is unable to pay a lump sum in advance and he wants nevertheless to conclude the deal), the dispute resolution issue will become crucial. In fact, should it appear that the only means of obtaining payment from an unwilling licensee is to bring a claim before the courts, the licensor must make sure that such action is possible and likely to be effective.

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In addition, if it appears impossible to set up an appropriate and effective dispute resolution system, the licensor will have the choice between refusing the payment conditions requested by the licensee, or seeking alternative means to ensure that the licensee will actually fulfil his payment obligations (such as, for example, retaining an essential part of the know-how1 until the end of the payment period). The two examples show how important it is to consider the dispute resolution system from the very beginning of contract negotiation. Although this is not always possible in practice (due to the bad habit of postponing the dispute resolution issue to the end of the negotiation), negotiators should consider in advance what solutions they envisage for dispute resolution and consequently adapt their choices (concerning the various substantial contract issues) to the actual dispute resolution scenario. Of course, this does not imply an in-depth knowledge of how the various dispute resolution systems are to be applied in practice. A negotiator does not need to know how to manage the procedure for recognizing a court judgment abroad or how to conduct an arbitration proceeding, this being the task of lawyers specialized in litigation who will intervene at a later stage if litigation cannot be avoided. What is important for the negotiator is to know which solutions are more or less appropriate in a given context so that he can make a pertinent choice with the aim of ensuring the strongest possible position in case of dispute. In this book I will deal with the problems of dispute resolution mainly from the above perspective, i.e. I will concentrate upon the effectiveness of the various dispute resolution options in the context of contract negotiation.

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3.2 The Main Options Before examining the various issues in detail, it is necessary to consider two basic options: 1. Should possible

by arbitrators?

disputes be resolved by ordinary (domestic) courts or

mediation procedure (ADR) be introduced before bringing the dispute to court (or to arbitration)?

2. Should a

3.2.1 The choice

between arbitration or ordinary jurisdiction

The first issue to be decided is the choice between arbitration and the jurisdiction of national courts. If arbitration is chosen, the dispute will be decided by arbitrators appointed by the parties or by an arbitral institution chosen by the parties. If the ordinary jurisdiction is preferred, possible disputes will be decided by state courts having jurisdiction on the matter or chosen by the parties. If no choice has been made, the dispute can be brought before any state court having jurisdiction over the dispute.2 As we will see later, in this context an agreement is needed only for the choice of a particular court. When choosing between arbitration and ordinary jurisdiction, a number of issues that will be discussed in the following paragraphs should be taken into consideration. 3.2.1.1 Reasons

for preferring arbitration

Many people believe that the normal way of resolving disputes in cross-border contracts is arbitration, and that this is always the preferable solution. However, such a general assumption is not true. Actually, no type of dispute resolution can be considered as being the most appropriate in general terms. There are situations in which arbitration is to be preferred and others where the recourse to state courts is

1. For instance, if it can be incorporated in a component that will be supplied by the licensor, provided that similar components cannot be obtained from third parties. 2. According to the rules of procedure of the court before which the action is brought. In most cases, this will imply that the courts of the defendant will have jurisdiction: infra, § 5.2.2.1.

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more appropriate. An experienced lawyer will try to establish the likely scenario of future disputes and then try to identify the dispute resolution system that may answer, in the best possible way, the needs of his party. Of course, this inevitably leaves space for uncertainty, because one can try to imagine what is likely to happen in the future, but no one can foresee the future. However, this does not mean that one should not try to figure out a likely scenario and look for solutions that are appropriate with reference to it. As regards the choice between arbitration and ordinary (domestic) jurisdiction, we will examine in this paragraph a number of aspects which may justify the choice of arbitration, and thereafter, in § 3.2.1.2, situations in which arbitration is less appropriate. (a) Neutrality

One of the main advantages of arbitration is that it is possible to set up a “neutral” tribunal (normally two arbitrators from the respective countries and a chairman from a third country, or a sole arbitrator from a third country), while in the case of ordinary jurisdiction, the choice is between the courts of one or another country, which leaves less space for a solution that will be acceptable to both parties. (b) Qualification

of the arbitrators

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Another important advantage of arbitration is that, in selecting arbitrators, parties can choose between persons with a specific qualification and expertise in dealing with the matters in dispute, and in particular identify people who know the commercial practice and thus can better understand the substance of the dispute. So, for instance, in the case dealt with in Example 3-2, the supplier would clearly be better off if the case were submitted to qualified arbitrators instead of a domestic court. (c) Less formalistic

procedure

The procedure before arbitrators is normally simpler and less formalistic than that before ordinary courts. Moreover, in international arbitration there is a trend towards a more common approach to conducting proceedings3 that reduces the risk of a party being “surprised” by unfamiliar procedural rules. Moreover, this less formal approach often, although not always, contributes to creating an atmosphere in which it is easier for the parties to settle the dispute. (d) Confidentiality

Arbitral proceedings are confidential. Also, the arbitral award will remain confidential unless a party challenges the award and requests its enforcement before a state court. (e) Possibility

of excluding the jurisdiction of state courts

In those countries that have ratified the New York Convention of 1958, the local courts are bound to respect arbitration clauses, and consequently they will refuse jurisdiction if the parties have submitted the matter to arbitration. While in several countries a clause giving exclusive jurisdiction to the courts of the country of one of the parties will not necessarily bind the courts of the state of the other country,4 an arbitration clause will have far more chance of being effective due to the large number of countries having ratified the New York Convention. For example, a European party wishing to exclude the jurisdiction of the courts of its US counterpart, will be more successful with an arbitration clause5 than with a clause submitting possible disputes to the exclusive jurisdiction of the courts of its own country.6 3. For instance, on the very critical question of the taking of evidence, the International Bar Association has drawn up a set of rules (IBA Rules on the Taking of Evidence in International Arbitration, adopted in 2010), which try to establish a balance between different legal traditions existing in the various countries. 4. Except for the countries of the European Union and those adhering to the Lugano Convention (Switzerland, Norway, Iceland), where regulation No. 44/2001 and the Lugano Convention warrant the full effectiveness of a choice of forum clause. 5. Since a valid arbitration clause will compel the courts to refer the matter to arbitration under Article III of the New York Convention. 6. Since a clause of this type will not necessarily prevent courts in the United States from accepting jurisdiction. See, Park, International Forum Selection, Kluwer Law International, Boston/The Hague/London, 1995, p. 17 et seq.

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in countries having ratified the New York Convention

A further advantage of arbitration is that in several countries where a foreign court’s judgment would not be recognized, it is easier to obtain recognition of an arbitral award on the basis of the New York Convention, provided the conditions of the Convention are met. 3.2.1.2 Situations

where arbitration is less advisable

(a) Parties placed

in a merely “defensive” position

A party which expects that, in case of dispute, it will only have to defend itself against a possible claim from the other party, without needing to bring a claim against that party,7 will normally prefer a choice of forum clause in favour of the courts of its own country. In fact, such party will be better placed for a defence in its home country where it is more difficult for the other party to conduct a proceeding, while a more neutral solution, like arbitration, will make it easier for the other party to engage in litigation. This is particularly the case when a party fears being subjected to exorbitant and unfounded actions, as shown in the example described hereunder.

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Example 3-4 – Sale of an industrial plant in Egypt An Italian manufacturer sold to an Egyptian purchaser the equipment for the construction of a manufacturing plant to be erected in Egypt. The contract contained a clause for arbitration in Cairo under the ICC rules. The contract entered into force when signed, but difficulties arose with respect to the payment conditions, which provided an advance payment and successive payments against delivery of the equipment. Since the purchaser was unable to meet the agreed payment conditions, it proposed alternative means of payment, which, however, were refused by the supplier, and the contract was finally not carried out. The purchaser began arbitration, claiming damages for the expenses borne and for loss of profit for an amount equal to 70% of the purchase price of the equipment. Comment: When the purchaser began arbitration, the Italian seller had no other choice than to defend itself before the arbitral tribunal — since a possible award would have been easily enforceable in Italy under the New York Convention — and to bear the quite high costs the procedure implied, i.e. fees of the arbitrators, administrative expenses, fees for his counsel, etc.

The above example shows that there are situations in which an arbitration clause puts the other party in a better situation than it would have had without it. If there had been no arbitration clause, the purchaser would have been forced to claim before the Italian courts or before the Egyptian courts. In the first case, he would have been placed in a less favourable situation and, in the second case, a judgment would have been difficult to enforce in Italy. Consequently, when a party is placed in a purely defensive position, it should bear in mind that the choice of a neutral dispute resolution system, like arbitration, is not always the most appropriate solution. It should, however, be noted that the above reasoning only applies when the interested party is in a purely defensive position, i.e. when it does not fear a claim before the courts of the other country.8 When, on the contrary, a claim in the country of the other party would be dangerous (e.g. because the party in question has property or credits in the country that might be attached by the other party, or because it needs to defend its image in such country), the recourse to arbitration may nevertheless be preferred, particularly when the main preoccupation is to preclude the other party from bringing a claim before its own courts.

7. For instance, this is frequently the position of the principal in commercial agency agreements. When the contract is terminated, the principal’s main preoccupation is to defend himself against the claims the agent may have against him, rather than to make a claim against the agent. On the contrary, in the case of distribution agreements, the supplier will very often have to claim, at the end of the contract, payment for products supplied to the distributor. 8. E.g. because it has agreed upon a jurisdiction clause in favour of its own courts, which is fully opposable in the courts of the country of the other party. Or, if the jurisdiction of the courts of the other party cannot be excluded, because it has no interests to defend in that country, and it is sure that a judgment would not be recognized in its own country.

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that have not ratified the New York Convention

If the other party is from a country that has not ratified the New York Convention — or to a country that, although adhering to the Convention, does not actually respect it — the choice of arbitration would be effective in one country and not in the other, thus creating a disadvantage for the party of the country that observes the Convention. Therefore, Party A (from the country bound to respect the New York Convention) would be prevented from bringing the case before its own courts and would be unable to enforce a possible arbitral award in the country of Party B, while the latter would be free to claim before its courts and — in case of arbitration — it would be able to enforce the award in the country of Party B. Of course, the above does not mean that arbitration should always be avoided in similar contexts, but only that the various issues described above should be carefully checked on the basis of all circumstances of the case.9 (c) Non-arbitrability

of the subject matter

Even if the other party is from a country that has ratified the New York Convention, arbitration is not advisable with respect to disputes concerning matters that are non-arbitrable under the law of the interested countries. This will be the case whenever the national legislator has decided to reserve the jurisdiction on certain matters exclusively to its courts.

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Example 3-5 – Employment contract A German manufacturer appoints a marketing consultant in Italy under an employment contract submitted to German law and providing a clause whereby all future disputes must be settled by a sole arbitrator appointed under the ICC rules of arbitration. Comment: Since under Italian law employment contracts fall under the exclusive jurisdiction of labour courts (which implies non-arbitrability of the issue), the Italian employee will be able to bring a claim before the competent labour courts notwithstanding the arbitration clause.

In situations of this kind, arbitration is, in principle, not recommended because: (i) the courts

of the country where the issue cannot be subject to arbitration are entitled to disregard the arbitration clause (and thus affirm their jurisdiction, notwithstanding the arbitration clause), and

(ii) they can

refuse recognition of foreign awards dealing with such non-arbitrable subject matters.

(d) Small claims

Another situation in which arbitration may not be advisable occurs when there are claims of limited economic value where the costs of the arbitration may be out of proportion to the amount in dispute. Such a situation arises, for instance, when a producer concludes a great number of sales contracts, each involving rather limited amounts. In cases of this kind, it is normally preferable to opt for the ordinary jurisdiction, by putting a choice of forum clause in the general conditions of sale. In any case, before deciding that arbitration is not the appropriate solution, one should also consider that the costs of arbitration may induce the other party to settle the dispute amicably. Moreover, there may be good reasons to prefer arbitration, even for a small dispute, in case there are issues of principle, which may give rise to a number of successive claims. 3.2.1.3 Arbitration

and ordinary jurisdiction as alternative solutions

An important issue, which frequently gives rise to confusion, concerns the relations between arbitration and ordinary (domestic) jurisdiction. It is important to have in mind that arbitration and ordinary jurisdiction are alternative solutions. 9. For instance, there may be good reasons to trust that the other party will spontaneously fulfil the award; or there may be a possibility of enforcing the award in a third country where the other party has property.

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Except for very special cases, arbitration is a dispute resolution means to be used instead of litigation before the state courts. Nevertheless, it is not unusual to see contracts in which the parties have provided for arbitration and for the jurisdiction of ordinary (domestic) courts at the same time. In most cases, this is because parties not familiar with legal issues do not clearly understand the difference between arbitration and the jurisdiction of state courts, and consequently do not see the contradiction of having both kinds of dispute resolution in the same contract, as in the “pathological” clause of the following example. Clause 3-1 – “Pathological” arbitration clause In the event of disputes concerning any aspect of the Agreement, including Claim of breach, remedy shall first be sought by communication between parties. lf such communication fails to resolve the dispute then the parties agree in advance to have the dispute submitted to binding arbitration through The American Arbitration Association or to any other US court. The prevailing party shall be entitled to attorney’s fees and costs. The arbitration may be entered as a judgment in any court of competent jurisdiction. The arbitration shall be conducted based upon the Rules and Regulations of the International Chamber of Commerce (ICC 500).

This clause provides at the same time arbitration under the AAA rules and the jurisdiction of any other US court: when a dispute was brought before a Swiss court by one of the parties, the objection of the other party that the court had no jurisdiction because of the choice of arbitration by the parties, was rejected considering that the clause could not be qualified as a valid arbitration clause.10

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Solutions of this kind are dangerous and should be avoided. When clauses such as the above have been included in the contract, the lawyer who needs to make a claim is placed in a very difficult position. If he brings a claim under the arbitration clause, the defendant may answer that he should go to the ordinary courts and vice versa. In some cases, the arbitration clause can nevertheless be saved by interpreting the contract so as to exclude a conflict between the two clauses: e.g. by claiming that the parties intended to provide two alternative solutions between which they will have to choose before initiating the dispute; or by reducing the scope of application of the choice of forum clause so that it does not conflict with the arbitration clause. For instance, it was considered in one case that the actual purpose of a clause submitting the contract to English law and to the jurisdiction of English courts was to determine the substantial law applicable to the dispute.11 In another case, it was decided that the parties only intended to determine which court would be competent for a possible enforcement of the arbitral award.12 In any case, it is advisable to avoid situations of this kind and to make a clear choice between the two solutions. Should the need arise, in very special circumstances, to combine the two solutions in the same contract,13 parties should not draft the respective clause without having consulted a lawyer having expertise in international arbitration.

10. See Swiss Federal Tribunal, 25 October 2010. X Holding AG v Y Investments NV, in www.bger.ch. 11. High Court (UK), Queens Bench Division (Commercial Court), 18 February 1991, Paul Smith Ltd. c. H & S International Holdings Company Inc., Yearbook, XIX-1994, p. 725. 12. United States District Court, Southern District of New York, 5 February, 13 March and 20 March 1991, Montauk Oil Transportation Corp. v The Steamship Mutual Underwriting Association (Bermuda), Yearbook, XVIII-1993, p. 463. 13. E.g. because the parties want to reserve the right to choose, when the dispute arises, between arbitration and ordinary jurisdiction.

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and ADR

A possible recourse to mediation or ADR14 is another important option that may be considered. ADR (Alternative Dispute Resolution) covers a rather wide range of procedures aimed at providing an amicable settlement of a dispute. The most important of these procedures is mediation. In fact, mediation has existed since the beginning of the civilized world, particularly under the name of “conciliation”. However, in recent years, new techniques have been developed that have significantly increased its effectiveness. Nowadays, an experienced mediator can succeed in getting parties to settle a large share of the disputes in which he is asked to intervene. The role of the mediator is to help the parties find an amicable solution to their dispute. By meeting with the parties jointly and separately, he will obtain information about the underlying reasons for their differences and will attempt to guide the parties towards solutions of mutual interest.

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Mediation is substantially different from arbitration. The mediator assists the parties in settling their disputes, but has no power to decide the dispute; his proposals, if any,15 are not binding and the parties always remain free not to reach an agreement. On the contrary, an arbitrator (as well as a domestic court, of course) has the precise task of settling the case by a decision that binds the parties. Many lawyers distrust mediation because they think that it is a “weak” instrument, since the mediator does not have the power to impose a solution. However, this is incorrect: a mediator can be effective precisely because the parties know they are dealing with someone who cannot decide the dispute — he can obtain the trust of the parties and consequently obtain information about matters that the parties would not disclose to a judge or an arbitrator. If the mediation succeeds, it can be considered as an alternative to other means of dispute resolution. In fact, once a settlement is reached, the recourse to arbitration or to the courts becomes unnecessary. However, if the mediation does not succeed, parties must be able to initiate the “normal” dispute resolution procedures. This is why clauses providing for mediation should be drafted with great attention, in order to avoid their being used as a means to hinder the recourse to dispute resolution (infra, § 4.5.3.4). 3.2.3 The ICC

Mediation rules

The ICC Mediation Rules, effective as of 1 January 2014, are part of the ICC Publication 865, Arbitration Rules and Mediation Rules. According to the Mediation Guidance Notes published by ICC, … for the purpose of the ICC Mediation Rules, mediation is a flexible settlement technique, conducted privately and confidentially, in which a mediator acts as a neutral facilitator to help the parties try to arrive at a negotiated settlement of their dispute. The parties have control over both the decision to settle and the terms of any settlement agreement.”

The Mediation Rules are administered by the ICC International Centre for ADR which is a separate administrative body within ICC. The Rules provide that the prospective mediator must sign a statement of acceptance, availability, impartiality and independence. The mediation shall be conducted as agreed between the parties and the mediator. The proceedings shall be confidential. 14. Cfr. Brown, Marriot, ADR: Practice and Principles, London, 1993; De Boisseson, Thoughts on the future of ADR in Europe. A critical approach, in Arb. Int’l, 1999, p. 349 ss.; Mackie, Miles, Marsh, Commercial Disputes Resolution. An ADR Practice Guide, London, 1995. 15. Within the “facilitative” mediation, which is at present the most frequently used, the mediator does not make any proposal limiting himself to suggestions which the parties themselves have to work out.

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Before the ICC mediation proceedings can take place, the parties must agree to submit their dispute to the Rules. Where there is an agreement between the parties to refer their dispute to the Rules, any party or parties wishing to commence mediation pursuant to the Rules shall file a written Request for Mediation (the “Request”) with the Centre. In the absence of an agreement to refer their disputes to the ICC mediation, any party may propose the mediation by sending a request to the Centre, and the mediation proceedings will commence if the other party agrees. This last option is important, because it gives a party the opportunity to attempt to convince the other party to participate in mediation proceedings, even in the absence of a previous agreement. ICC suggests four types of mediation clauses that may be included by the parties in their contracts. The first clause simply provides that the parties may try to settle any dispute that may arise from their contract by having recourse to the ADR rules. Clause A – Option to use the ICC Mediation Rules

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The parties may at any time, without prejudice to any other proceedings, seek to settle any dispute arising out of or in connection with the present contract in accordance with the ICC Mediation Rules.

This clause leaves the parties free to agree if they wish to engage in the Mediation Procedure according to the ICC Mediation Rules. From a strictly legal point of view, the clause has little meaning, since it imposes no obligation upon the parties. However, it may have a psychological impact upon the parties in the sense that if one of them proposes to refer the dispute to ADR, it will be more difficult for the other party to refuse a procedure that has been mentioned in the contract. Under the second clause, parties are obliged to consider submitting the dispute to the ADR Rules. Clause B – Obligation to consider the ICC Mediation Rules In the event of any dispute arising out of or in connection with the present contract, the parties agree in the first instance to discuss and consider referring the dispute to the ICC Mediation Rules.

This clause still leaves the parties free not to proceed to Mediation under the ICC Rules, but requires them to discuss the possibility of referring the dispute to Mediation before taking such decision. Considering that in many cases parties refuse Mediation because they are not sufficiently informed about its advantages, this clause may be a useful tool for increasing the likelihood of an amicable settlement without imposing an obligation to this effect. The third clause provides for a real obligation to submit possible disputes to the ICC Mediation procedure. It is designed to ensure that when a dispute arises, the parties will attempt to settle the dispute using proceedings under the Rules. The clause also makes it clear that the parties do not need to conclude the proceedings under the ICC Mediation Rules, or wait for an agreed period of time, before commencing arbitration proceedings. Clause C - Obligation to refer dispute to ICC Mediation Rules while permitting parallel arbitration proceedings if required (x)

In the event of any dispute arising out of or in connection with the present contract, the parties shall first refer the dispute to proceedings under the ICC Mediation Rules. The commencement of proceedings under the ICC Mediation Rules shall not prevent any party from commencing arbitration in accordance with sub-clause y below.

(y)

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

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Finally, the fourth clause is identical to the third, except that it provides for ICC arbitration in case the dispute has not been resolved within 45 days after the filing of the request for ADR. Clause D - Obligation to refer dispute to the ICC Mediation Rules, followed by arbitration if required

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In the event of any dispute arising out of or in connection with the present contract, the parties shall first refer the dispute to proceedings under the ICC Mediation Rules. If the dispute has not been settled pursuant to the said Rules within [45] days following the filing of a Request for Mediation or within such other period as the parties may agree in writing, such dispute shall thereafter be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules of Arbitration.

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Chapter 4

INTERNATIONAL ARBITRATION

4.1 The Legal Framework From the period following World War I1 and partly thanks to ICC, which promoted the first international conventions in this field, substantial efforts have been made to gradually establish a secure legal framework for international arbitration in order to provide the business world with a powerful tool for settling cross-border disputes. In this context, the New York Convention of 1958 (hereafter “New York Convention”), which will be examined in the next paragraph, is the main instrument for ensuring that arbitration can be used safely and effectively in international trade.

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Another very important convention is the Washington Convention of 18 March 1965 on international investment disputes. This Convention, promoted by the World Bank, has set up an international arbitration system managed by the International Centre for the Settlement of Investment Disputes (ICSID), with the aim of facilitating the resolution of international investment disputes and thereby promoting foreign investment. Other international conventions in the field of arbitration having a regional character are:  The European (Geneva) Convention of 21 April 1961, which was intended to facilitate arbitration between Eastern and Western Europe, mainly by establishing additional rules intended to supplement the New York Convention.  The Inter-American Convention on International Commercial Arbitration (Panama Convention of 1975), rather similar to the New York Convention, which provides for the reciprocal enforcement of arbitral awards between the member states. In addition to the international conventions, the domestic laws of the various countries also play a substantial role, particularly with respect to the possible annulment or setting aside of arbitral awards (infra, § 4.5.4.1). The national laws on arbitration, some of which provide special rules for international arbitration submitted to their law, may differ substantially from country to country.2 The model law drafted by UNCITRAL3 is an important instrument favouring the harmonization of domestic legislations in this field, which constitutes at present the standard for a modern legislation on international commercial arbitration.

4.2 The New York Convention of 1958 The New York Convention of 1958, ratified by more than 130 states, is the main instrument for facilitating the resolution of cross-border disputes through arbitration. The text of the Convention, together with the list of the states that have ratified it, can be found in the Appendices, § 8.2. 4.2.1 The fundamental

principles of the Convention

By ratifying the New York Convention, a state mainly undertakes the two following obligations:

1. With the Geneva Protocol of 1923 and the Geneva Convention of 1927. 2. These laws can be found, together with national reports, in ICCA, International Handbook on Commercial Arbitration. 3. The Model Law was adopted in 1985 and amended in 2006.

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arbitration agreements, i.e. agreements in writing4 to submit existing future disputes to arbitration, which implies the obligation for its courts to refuse jurisdiction if a claim is made before them notwithstanding the arbitration clause;

(b) to recognize

and enforce foreign arbitral awards that comply with the conditions set out in Article V of the Convention.

The two basic principles 

If the parties have chosen arbitration, the courts must recognize their choice and refuse jurisdiction.



Foreign arbitral awards must be recognized if the uniform conditions of the Convention are met.

This means that, when dealing with the counterpart of a country that has ratified the New York Convention, one may reasonably assume that:  the arbitration clause will have the effect of precluding a possible action by the other party before its courts, and  a possible arbitration award can be enforced in that country if the minimum requirements set out in Article V of the Convention are fulfilled.

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The first point is very important when a party wishes to make sure it will not need to defend itself before the courts of the country of the other party. Where the country in question is a signatory of the New York Convention, a valid arbitration clause will prevent the other party from bringing an action before its courts or, if such action is brought, it will be easy to challenge the jurisdiction of the local court. As to the second point, it is important to underline that the reasons that may justify the refusal to recognize and enforce a foreign award under the New York Convention are rather strict. On one side, there are a number of requirements principally concerning the observance of procedural rules5 (which will normally have been respected if the arbitration has been conducted by experienced arbitrators) and, on the other hand, situations in which the subject matter of the dispute is non-arbitrable or the recognition of the award would be contrary to public policy of the country where recognition is sought. This means that, except for the above situations, which are rather exceptional (see infra, §§ 4.2.2 and 4.2.3), there should be no particular obstacles to the recognition of arbitral awards in countries having ratified the New York Convention. It should be emphasized, however, that not all countries having adhered to the New York Convention fully respect its provisions. Therefore, in some countries the provisions of the New York Convention may be partially ineffective because of the inadequacy of the law implementing them, or because of a restrictive attitude taken by the courts when applying the Convention or the law implementing the Convention. This is why it is advisable, particularly with respect to countries that have only recently accepted international arbitration, to verify to what extent the principles of the Convention are actually observed by local courts. 4.2.2 The arbitrability

issue

A subject that needs to be examined with the greatest attention (also with respect to countries showing a positive approach towards arbitration) is whether the local law considers certain matters as non-arbitrable, i.e. as not capable of being settled through arbitration. Since the New York Convention does not limit the discretion of the states to decide that certain matters cannot be subjected to arbitration, it is important to accurately verify this, particularly when possible disputes may involve issues that can give rise to problems of arbitrability.

4. The formal requirement of the written form will be examined in more detail when dealing with the arbitration clause: infra, 4.5.1. 5. For example, if the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings, or was otherwise unable to present his case, or if the award deals with a difference not contemplated by or not falling within the terms of the arbitration clause or the composition of the arbitral authority, or the arbitral procedure was not in accordance with the agreement of the parties.

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When the subject matter of the dispute is non-arbitrable in a given country, the recourse to arbitration will be ineffective as regards two substantial issues:  the arbitration clause will not preclude the courts of that country from exercising jurisdiction over possible claims,6 and  an award dealing with the non-arbitrable matter will not be recognized by the courts of that country.7

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The decision by a national legislator to reserve certain matters exclusively to its own courts and so to exclude their arbitrability normally has a close link to public policy. When certain issues involve fundamental principles of the legal system, or the “most basic notions of morality and justice”,8 the legislator may decide that any disputes concerning these matters must be dealt with exclusively by its own courts, in order to make sure that “private judges” chosen by the parties, such as arbitrators, are given no opportunity to take decisions which might violate public policy. When this extreme position is taken, even an arbitration award that complies with the public policy principles will be ineffective, merely because it has dealt with a matter that cannot be subject to arbitration. Such an approach, which a priori denies the arbitrators the possibility of deciding in compliance with public policy, is justified for matters such as family law, for which it is reasonable that the jurisdiction should be reserved to the ordinary courts. However, as regards business law, it is normally preferable that the protection of public policy does not go so far as to exclude arbitrability of the subject matter. In fact, in most cases the fact that the courts may refuse recognition of (or may set aside) an award contrary to the public policy of their country should be sufficient to warrant the respect of public policy rules, without going so far as to prevent arbitrators from making any decision on a certain subject matter, including a decision that conforms with the public policy of that country. Many examples of domestic rules excluding arbitrability concern situations in which the national legislator wants to protect weaker parties (commercial agents, distributors, licensees) against foreign principals or suppliers: see, for example, the Belgian law of 1961 on distributorship agreements as well as the laws of several countries of Central America on agents-distributors of foreign companies. Another reason for reserving certain disputes to the courts of a country is their closeness to labour law. So, for example, under Italian law not only employees, but also self-employed agents acting as individuals (i.e. not companies) will be entitled to bring possible disputes before the labour courts, which have an exclusive jurisdiction that cannot be excluded by submitting the dispute to arbitration. A further issue that may give rise to problems is competition (antitrust). Rules on competition are part of public policy and could, in principle, justify non-arbitrability of disputes involving such rules. However, although this approach has been followed in the past, at present the general trend is to consider such issues arbitrable.9 This “open” approach must be approved: if the possibility of an antitrust infringement were sufficient to make a dispute non-arbitrable, the functioning of international arbitration 6. Art. II (1) New York Convention, which provides that “each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them […] concerning a subject matter capable of settlement”. The clause does not say according to which law the arbitrability is to be judged. The prevailing opinion is that one should refer to the lex fori (i.e. the courts will decide on the basis of their own law if the matter is arbitrable). However, a different view has been taken by some Belgian courts with respect to the rules protecting distributors, which have decided that the arbitrability should be judged under the law governing the contract (lex causae). This position, however, was rejected by the Belgian Court of Cassation in the case Colvi v Interdica of 15 October 2004. 7. See Article V (2) (a), of the New York Convention, whereunder the court may refuse enforcement of a foreign award when the subject matter of the difference is not capable of settlement by arbitration under the law of the country where enforcement is sought. 8. According to the definition commonly used in the US: see, for instance, United States District Court, Southern District of New York, 9 October 2002, Sarbank Group v Oracle Corp., Y ­ earbook XXVIII -2003, 1043, 1052. 9. Thus, the Supreme Court of the United States decided in the Mitsubishi case (Mitsubishi Motors Corporation v Soler Chrysler Plymouth Inc, 473 U.S. 614) to consider antitrust matters as arbitrable, reversing the traditional view which reserved this type of issue to the courts of the United States. A similar approach has been taken with respect to the competition rules of the European Union: although there are no judgments of the European Court of Justice dealing with this matter, the judgments regarding the possible setting aside of arbitral awards which do not respect Article 81 of the Treaty are based on the assumption that arbitrators may deal with competition matters, provided they respect the rules in question. (See, in particular, the judgment of 1 June 1999, C-126/97, Eco Swiss v Benetton, in ECR 1999, 3055).

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would be severely endangered. It is definitely preferable to permit arbitration involving antitrust issues, considering that state courts, in any case, have the right to review the contents of the arbitral award for compliance with the antitrust rules (infra, § 4.2.3). Another critical issue is intellectual property, due to the fact that in many countries disputes about the existence of validity of patents or other industrial property rights are reserved to the courts. Nevertheless, the general trend is to consider as arbitrable issues concerning contracts dealing with these rights (such as licence agreements), except when they concern the existence or validity of the intellectual property right as such. Finally, one should mention the issue of corruption (or illicit commissions), where the question of arbitrability has also been discussed. In a famous arbitral award10 of 1963, the Swedish judge, Gunnar Lagergren, acting as sole arbitrator, declined jurisdiction with respect to a contract involving payment of commissions that clearly had the purpose of bribing government officials, stating in particular that:

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Although these commissions were not to be used exclusively for bribes, a very substantial part of them must have been intended for such use. Whether one is taking the point of view of good government or that of commercial ethics, it is impossible to close one’s eyes to the probable destination of amounts of this magnitude, and to the destructive effect thereof on the business pattern with consequent impairment of industrial progress. Such corruption is an international evil; it is contrary to good morals and to an international public policy common to the community of nations… Thus, jurisdiction must be denied in this case. It follows from the foregoing, that in concluding that I have no jurisdiction, guidance has been sought from general principles denying arbitrators to entertain disputes of this nature rather than from any national rules on arbitrability. Parties who ally themselves in an enterprise of the present nature must realize that they have forfeited any right to ask for the assistance of the machinery of justice (national courts or arbitral tribunals) in settling their disputes.

This solution, although it may have been justified in this specific case, appears to be too extreme, considering that not all commission payments are made for illicit purposes and that it is consequently preferable to give the arbitrators the opportunity to deal with the case and to declare the nullity of the contract when it is found to be contrary to public policy. This position corresponds to the currently prevailing trend whereby the right of the intermediary to obtain the agreed commission is recognized, unless there is evidence of the illicit purpose of such payment. As we have seen, there are several situations that may involve problems of arbitrability. Since this depends mainly upon the national law of the countries involved, it may be advisable to check before agreeing upon an arbitration clause when dealing with issues of the kind described above, whether the subject matter of possible future disputes is arbitrable according to the laws of the countries involved. When this is the case, it is normally recommended to choose a different means for resolving future disputes. Example 4-1 – Contract with an Italian agent A Hungarian principal appoints Mr Paolo Rossi as his commercial agent for Italy. An arbitration clause submits possible disputes to arbitration under the rules of the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry. When disagreements arise about the interpretation of certain clauses (particularly with respect to the agent’s exclusivity), Mr Rossi terminates the contract, invoking a substantial breach by the principal, and requests a goodwill indemnity and compensation of damages before the labour court (Tribunale del lavoro) of his domicile. The principal objects that the dispute should be decided by arbitration according to the contract, but the labour court nevertheless affirms its jurisdiction.

The above case is an interesting example of a situation in which the recourse to arbitration is not appropriate. Since in Italy agency contracts with individuals (although

10. ICC case 1110 of 15 January 1963, in Yearbook, XXI-1996, p. 47 ss.

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the agent is a “self-employed” intermediary) are submitted to the exclusive jurisdiction of labour courts, which makes the dispute non-arbitrable, the arbitral clause is ineffective and the jurisdiction of the labour courts cannot be excluded. If the Hungarian principal wanted to make sure that a possible dispute would not be decided by the courts of the agent’s country, his choice of arbitration was the wrong one. Had he chosen the jurisdiction of Hungarian courts, such choice would have been valid because regulation No. 1215/2012, — which admits in Article 25 the validity of choice of forum clauses, — prevails over domestic rules providing for exclusive jurisdiction (infra, § 5.2.2.3). 4.2.3 Problems

arising in connection with public policy

As noted in the previous paragraph, when a state desires to ensure respect of principles inherent in its public policy, it may choose the extreme solution of reserving exclusively to its courts any dispute with regard to issues involving such principles, i.e. it may consider the respective issues to be non-arbitrable. In this case, parties should, in principle, refrain from choosing arbitration. When the issues that may give rise to dispute involve questions relating to public policy, without, however, affecting their arbitrability, the situation is less critical. In fact, only when the arbitrators fail to respect the public policy rules, there is a risk that: (a) the award

will be challenged before the courts of the place where the award is rendered, according to the procedural rules of such jurisdiction (annulment, setting aside, etc.); and enforcement of the award will be refused under Article V, (2) (b) of the New York Convention.11

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(b) recognition

In this context, one should first consider that the notion of public policy, which should in any case be interpreted narrowly,12 is not the same in all jurisdictions. Rules considered to be part of public policy in one country may not be similarly considered in other countries. This is particularly the case with respect to rules protecting “weaker” parties, such as agents, distributors, licensees, etc. However, there are also principles that are said to belong to a “transnational public policy”, such as the prohibition of corruption or the commerce of drugs, which would be considered to be against public policy whatever the applicable law. While in the first case, where the contractual rules agreed by the parties conflict with the public policy of one country, but are not contrary to the public policy of other countries, it is possible to “bypass” the public policy rules through a choice of law and arbitration outside the country concerned,13 in the second case there will normally be no space for such a solution. For example, in two cases where the parties submitted a contract with a Belgian distributor to the law of the supplier’s country, the arbitrators upheld this choice, although this implied a refusal to apply the public policy rules of the distributor’s country.14 In fact, the protection of distributors through the use of significant termination indemnities is not a generally recognized public policy principle but, on the contrary, a particularity of Belgian law.

11. Article V (2): “Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: […] (b) the recognition or enforcement of the award would be contrary to the public policy of that country.” 12. See for example, US Court of Appeal, Fifth Cir., 23 March 2004, Karaha Bodas Co. v Perusahaan Pertambangan Minyak Dan Gas, in Yearbook XXIX-2004, 1291: “The public policy defense is to be construed narrowly to be applied only where enforcement would violate the forum state’s most basic notions of morality and justice”; Federal Supreme Court (Switzerland), 8 December 2003, A SA v B Co Ltd, in Yearbook XXIX-2004, 840: “there is a violation of public policy where the recognition or enforcement of a foreign decision is intolerably at odds with the Swiss concept of justice”; Supreme Court (Austria), 26 January 2005, in Yearbook XXX-2005, 428: “the relevant standard for the autonomous public policy review of the foreign arbitral award by the court of the enforcement state, Austria, is whether the arbitral award is irreconcilable with the fundamental principles of the Austrian legal system …”. 13. Provided the award need not be recognized and enforced in the country in question. 14. ICC award 6379/90 in Yearbook, XVII-1992, 212 et seq.; ICC award 6752/91, in Yearbook, XVIII-1993, 54 et seq.

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On the contrary, in cases implying the violation of antitrust rules15 or payment of illicit commissions, it is to be expected that arbitrators will consider the agreement null and void. For instance, the prohibition of corruption is generally recognized all around the world, unless it appears that the intermediary was paid for a lawful promotional activity (or that there is no evidence that the commission was paid for illicit purposes).

4.3 Different Types of Arbitration When the recourse to arbitration appears suitable, the problem arises as to which type of arbitration to choose. A first option is to make a choice between ad hoc and administered arbitration, and the compromise solution of an ad hoc arbitration under pre-established rules. Where parties opt for institutional (administered) arbitration, they must choose the institution that will be most appropriate in the specific case. These aspects will be examined in detail in the next paragraphs. 4.3.1 The distinction

between ad hoc and institutional arbitration

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When choosing arbitration as an alternative to the jurisdiction of ordinary state courts, parties can autonomously set out the rules governing the arbitration in the respective clause (ad hoc arbitration) or refer to an existing arbitral institution and to its rules. In the first case, the parties will need to directly agree upon a number of issues: how to appoint the arbitrators; how to overcome possible obstacles (e.g. where a party refuses to appoint its arbitrator or it is impossible to agree on a chairman of the arbitral tribunal); what rules to apply to the procedure; possible time limits for rendering the award, etc. In the second case, the parties will submit the arbitration to an institution specialized in managing arbitration procedures and refer to the rules established by such institution. Ad hoc arbitration has the advantage of leaving the maximum flexibility to the parties, which can adapt the arbitration to their specific needs. However, in this case, the arbitration clause should be drafted by a lawyer having specific experience in international arbitration. The recourse to institutional arbitration avoids the above problems, provided the parties choose a highly qualified institution. The two main advantages of institutional arbitration are the following: First, it provides a comprehensive and proven set of arbitration rules, tested over time, especially if the institution has a long-standing tradition, which will answer most questions that may arise during the procedure. Second, it warrants a specialized assistance to the parties during the various stages of the arbitral procedure. The arbitral institution will assist the parties in setting up the arbitral tribunal and will monitor the procedure (e.g. by making sure that the arbitrators respect reasonable delays). In some cases, the institution may even make suggestions as to the contents of the award in order to prevent shortcomings that might weaken its effectiveness. Another important issue is that arbitral institutions normally have pre-established criteria for determining the costs of arbitration. Although the respective rules leave substantial margins of flexibility to the institution, they make it possible to make a rough evaluation of the possible cost of the arbitration. Moreover, the institution will take care of the respective payments by requesting advance payments to the parties. 4.3.2 Arbitration

under the UNCITRAL Rules

A possible compromise solution between ad hoc and institutional arbitration is to submit the arbitration to the UNCITRAL Arbitration Rules. 15. Thus, the Swiss Federal Court (judgment of 28 April 1992, G.S.A c. v S.p.A., in IPRax, 1994, 459 et seq.) annulled an award where the arbitrators refused to consider the applicability of European antitrust rules in a contract between parties belonging to Member States of the European Union.

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These rules, adopted in 1976, revised in 2010, establish a procedural framework for international arbitrations acceptable all over the world. If one chooses this solution, there will be no institution managing the arbitration, which will fully depend upon the parties’ initiative, but there will be a set of rules governing most of the problems likely to arise during the proceedings. In order to solve possible problems arising before or during the arbitration (e.g. if a party does not designate its arbitrator, or the parties cannot agree on the chairman), the Rules provide for an appointing authority, which can be designated by the parties in the arbitration clause. In the absence of such choice any party may request the Secretary-General of the Permanent Court of Arbitration to designate the appointing authority. UNCITRAL recommends the following clause for arbitration under the UNCITRAL rules: Clause 4-1 – UNCITRAL Model Arbitration Clause Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules. Note. Parties should consider adding: (a) The appointing authority shall be [name of institution or person]; (b) The number of arbitrators shall be [one or three]; (c) The place of arbitration shall be [town and country]; (d) The language to be used in the arbitral proceedings shall be .

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4.3.3 Institutional

arbitration

As noted before, the recourse to institutional arbitration is the best choice for parties lacking specialized expertise in international arbitration, which is essential when it comes to drafting an ad hoc arbitration clause. However, once the decision is taken in favour of institutional arbitration, the problem arises of how to select the most appropriate institution. 4.3.3.1 Criteria

for the choice of the institution

As a general rule, arbitral institutions with a long-lasting tradition in administering international arbitration should be preferred. These institutions will have worked out appropriate rules and will be able to appoint experienced and highly qualified arbitrators when the parties are unable to agree. As regards the choice of the arbitrators, institutions that leave a wide discretion to the parties should be preferred. All internationally accepted institutions provide that the parties may choose their arbitrators. Concerning the choice of the chairman of the arbitration tribunal (or the sole arbitrator if only one arbitrator is to be appointed), it is also preferable that the parties be given the opportunity to agree upon the name. For example, the ICC rules of arbitration provide that the chairman (or sole arbitrator) be appointed by the institution, but if the parties wish to make such choice jointly, ICC will accept such a request. Some (mainly local) arbitral institutions provide that arbitrators should be chosen from pre-established lists. Such a limitation may be a disadvantage, especially when all or most arbitrators of the list belong to the same country. It is therefore recommended not to accept a local institution (particularly from the country of the other party) before having accurately checked this point. Since most arbitration institutions can be found on the internet, it is normally possible to verify the respective rules in advance. Another important question is the language. Some arbitral institutions require the use of the language of the country where the institution is established, unless otherwise agreed. This may put the foreign party in a difficult situation if the other party insists on the use of its own language. Presenting a case through interpreters may, in fact, be a substantial handicap. Often, counterparts use the argument of cost in order to support the choice of a local, less expensive arbitral institution. This argument is not always well founded. In many INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 73

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cases, the real reason is that the party making such a proposal wishes to have the arbitration managed by an institution which it is closer to (and which may consequently be less neutral). As regards the cost, it is true that a highly qualified international arbitral institution will normally have higher costs than a local institution, but it should be noted that a high-level international institution will normally warrant a quality of service and a qualification of the arbitrators appointed, a quality that may not always be guaranteed by less prestigious local organizations. We can therefore conclude that, when choosing the arbitral institution, parties should, in principle, avoid institutions that are too close to the other party and prefer truly international institutions, or institutions which, although linked to a given country, are traditionally referred to for international arbitrations. In fact, an arbitral institution that is closer to one of the parties may put that party in a more advantageous situation when a conflict arises, e.g. when appointing the chairman of the arbitral tribunal if the parties cannot agree on a name, or when deciding upon the challenge of an arbitrator, simply because a local institution will better understand the position of a national than that of a foreigner. Of course, this does not exclude that a “local” arbitral institution may also satisfy the requirements of neutrality and quality of service, but this should be carefully verified in advance. 4.3.3.2 Institutions

dealing with international arbitration

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Among the institutions most commonly referred to in international trade are the following: the ICC International Court of Arbitration (www.iccwbo.org), described in more detail in § 4.4 hereafter. The American Arbitration Association (AAA), through its International Centre for Dispute Resolution (ICDR), has established a set of rules for international dispute resolution, the International Dispute Resolution Procedures, which comprise the International Mediation Rules and the International Arbitration Rules, with amendments in force from 1 June 2014, and which are published on the AAA website, www.adr.org. The London Court of International Arbitration (LCIA), which has established the London Court of International Arbitration (LCIA) Arbitration Rules (2014), in force from 1 October 2014, which can be found on the website, www.lcia.org. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC Institute). Its arbitration rules, Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, as well as the Rules for Expedited Arbitration, in force as from 1 January 2010, are published on the website, www.sccinstitute.com. The Vienna International Arbitral Centre. Its Rules of Arbitration (Vienna Rules) in the version in force from 1 July 2013, can be found on the website, www.viac.eu. The Swiss Chambers’ Arbitration Institution (SCAI), established by the Chambers of Commerce of Basel, Bern, Geneva, Lausanne, Lugano, Neuchâtel and Zürich, which offers means of dispute under the Swiss Rules of International Arbitration 2012 /(Swiss Rules 2012), which can be found on the website www.swissarbitration.org. The Singapore International Arbitration Centre (SIAC). The SIAC rules 2016, in force from 1 August 2016, can be found on the website www.siac.org.sg. The Hong Kong International Arbitration Centre (HKIAC). Its 2013 Administered Arbitration rules, in force from 1 November 2013, can be found on the website www.hkiac.org. The China International Economic and Trade Arbitration Commission. Its revised arbitration rules, revised on November 4, 2014, in force as of January 1, 2015, can be found on the CIETAC website, www.cietac.org. The Cairo Regional Centre for International Commercial Arbitration (CRCICA). Its Arbitration Rules, as in force from 1 March 2011, can be found on the website www.crcica.org.eg.

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4.4 ICC Arbitration ICC arbitration is the most widely used arbitration in international trade. Since its creation in 1923, ICC has dealt with more than 20,000 arbitrations, involving parties and arbitrators from some 180 countries. In the year 2015 more than 800 arbitration requests from 133 countries and independent territories worldwide have been filed with the ICC Court. Although the institution is based in Paris, ICC arbitration is truly international. ICC arbitrations take place all around the world16 and involve arbitrators of different nationalities.17 4.4.1 The ICC

International Court of Arbitration and the Secretariat

ICC arbitration is managed under the control of the ICC International Court of Arbitration, a body composed of members from 80 countries and every continent. The ICC Court is responsible inter alia for appointing and confirming arbitrators, deciding upon arbitrators’ challenges, scrutinizing and approving the arbitral awards, and fixing the arbitrators’ fees. The Secretariat of the ICC Court, located at the ICC headquarters in Paris, with a staff of lawyers of different nationalities and divided into nine teams, (seven based in Paris and two based respectively in Hong Kong and New York), closely follows all pending cases and assists the Court in monitoring the arbitration process during all of its stages, from the initial request to the final award.

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4.4.2 The ICC

arbitration rules

The ICC rules of arbitration have been modified several times in order to constantly adapt them to the needs of the users and to the developments of the law and practice of international arbitration. The current version, which has been updated in 2016 is in force since 1 March 2017. The 2017 Rules contain very few modifications with respect to the 2012 Rules which, on the contrary, introduced a number of important innovations with respect to the previous version of 1998. In particular, a serious attempt has been made to create the conditions for an expeditious and cost-effective conduct of the arbitration, by introducing a general duty for arbitral tribunals’ parties to control the time and cost of arbitration. Another interesting innovation of the 2012 Rules is the introduction of the emergency arbitrator who can order, in case of extreme urgency, interim or conservative measures before the arbitral tribunal is in a position to act. The main change introduced in the 2017 Rules regards the expedited procedure, a simplified “fast-track” procedure applicable where the amount in dispute does not exceed US$2 million. I will briefly examine here some aspects that may be of importance when drafting a contract and making the appropriate choices with respect to arbitration.18 4.4.2.1 Choice

and appointment of the arbitrators

One of the first things to consider concerns the number of arbitrators: Article 12(1) of the Rules says in this respect that: … the disputes shall be decided by a sole arbitrator or by three arbitrators.

When the parties have not agreed upon the number of arbitrators, Article 12(2) of the Rules provides that the Court shall appoint a sole arbitrator, save where it appears that the dispute is such as to warrant the appointment of three arbitrators. The Court will 16. Dispute Resolution Statistics published by the ICC show that in the year 2015 the seat of arbitration was located in more than 50 countries. 17. More than 75 nationalities according to 2015 ICC Dispute Resolution Statistics. 18. For a detailed examination of the 2012 Rules see, inter alia, Fry, Greenberg, Mazza, The Secretariat’s Guide to ICC Arbitration, 2012. Verbist, Schäfer, ICC Arbitration in Practice, 2nd ed. Kluwer, 2015; Grierson, van Hooft, Arbitrating under the 2012 ICC Rules, Kluwer, 2012.

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decide in favour of an arbitral tribunal of three members in consideration of the amount in dispute19 and the complexity of the case. However, if one of the parties strongly insists on three arbitrators, it is not unlikely that the Court will accept such a request. This should still be true under the 2017 Rules, except that in case the amount in dispute is less than US$2 million, the expedited procedure will automatically apply with a sole arbitrator. When a tribunal of three members is to be appointed, each party will nominate an arbitrator (“party arbitrator”), who will be confirmed by the Court, provided he meets the independence requirements required by the Rules. According to Article 12(5), the chairman is appointed by the Court,20 unless the parties have agreed upon another procedure for such appointment. The parties may agree on an alternative procedure (e.g. joint nomination by the arbitrators or by the parties) even after the Request for arbitration in which case they will have a 30 days’ time limit (which can be extended on request of the parties) for such joint nomination. This system is well balanced and effective: it leaves room to the parties while enabling the Court to prevent delaying tactics. 4.4.2.2 The

arbitrator’s independence and impartiality

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The issue of independence and impartiality of the arbitrators has acquired growing importance. While in the past, especially in certain countries, the existence of a close link between an arbitrator and the party appointing him, was considered acceptable, if not normal, the present trend is to require the strictest respect of the prerequisite of the arbitrator’s independence. Also, the ICC Rules follow this trend by stating the following: Article 11(1) and 11(2) of the ICC Rules 1

Every arbitrator must be and remain impartial and independent of the parties involved in the arbitration.

2

Before appointment or confirmation, a prospective arbitrator shall sign a statement of acceptance, availability, impartiality and independence. The prospective arbitrator shall disclose in writing to the Secretariat any facts or circumstances which might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator’s impartiality. The Secretariat shall provide such information to the parties in writing and fix a time limit for any comments from them.

The decision whether certain circumstances may call into question the arbitrator’s independence is not at all easy: interesting guidelines to this effect can be found in the “Guidelines on Conflicts of Interest in International Arbitration,” adopted by the International Bar Association (IBA) in 2014.21 It is important to underline that the obligation to disclose in advance any circumstances which may be relevant in the eyes of the parties, has in practice the effect that the prospective arbitrator will disclose even irrelevant circumstances, in order to avoid the accusation of having hidden some information. This may give the other party a pretext for objecting to the confirmation of the arbitrator, but it is up to the Court to decide if such objection is founded. 4.4.2.3 Place

of the arbitration, language, applicable rules of law

If the parties have not agreed upon the place of arbitration, the place shall be fixed by the Court. The place of arbitration is important, because the courts of the country of 19. According to the Secretariat’s Guide (§ 3-440), “Subject to all other relevant factors, it has in the past been unusual for the Court to decide in favour of three arbitrators where the amount in dispute is below US$5 million or to decide in favour of a sole arbitrator where the amount in dispute exceeds US$30 million.” 20. The normal procedure is that the Court will ask an ICC national committee from a country other than that of the parties to propose a suitable name. 21. See: Voser, Petti, “The Revised IBA Guidelines on Conflicts of Interest in International Arbitration”, in ASA bull., 2015, 6; Bertrou, De Margerie, “Obligation de révélation de l'arbitre : tentative de synthèse après la publication des nouvelles règles de l’IBA”, in Cahiers de l'Arb./Paris J. of Intl Arb. 29, 2015 (1);

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the seat will normally be competent for possible actions for annulment or setting aside of the award and may otherwise interfere in the procedure. This is why countries where courts have experience in dealing with international arbitration should, in principle, be preferred. When the place has to be fixed by the ICC Court, the latter will take into account a number of criteria, amongst which are: the legal situation of the respective country,22 the neutrality with respect to the parties and the convenience of the site. The place (seat) of the arbitration is to be distinguished from the place where hearings or meetings are actually held or where the award is deliberated. Articles 18(2) and 18(3) of the Rules expressly state that the hearings may take place in other locations and that the arbitral tribunal may deliberate at any location it considers appropriate. As regards the language of the arbitration, Article 20 of the Rules states that, in the absence of an agreement between the parties, the language or languages of the arbitration shall be determined by the Arbitral Tribunal, with due regard being given to all relevant circumstances, including the language of the contract. Parties frequently agree on this matter in the terms of reference, especially if the arbitral tribunal brings the issue to their attention. As regards the rules of law applicable to the merits of the case, Article 21(1) first confirms the principle of party autonomy by stating that: … the parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute.

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The use of the very general term, “rules of law”, means that the parties may also choose rules that are not domestic laws, such as lex mercatoria, general principles, etc. (see supra, § 2.8). The second sentence of Article 21(1) continues and says that in the absence of any such choice by the parties, the Arbitral Tribunal shall apply those rules of law which it determines to be appropriate. This means that the Arbitral Tribunal is free to directly choose the applicable law (using the so called voie directe) without the necessity to refer to any rule of private international law.23 Also, in this case, the reference to “rules of law” makes clear that the arbitrators need not refer to domestic legislations but may also, where appropriate, opt for the application of transnational rules, such as lex mercatoria, UNIDROIT Principles, etc. Arbitrators will, in most cases, apply a domestic (national) law. However, when it appears that such choice would be contrary to the expectations of the parties (e.g. when it appears that the parties wanted to exclude the application of the law of the other party), arbitrators can make good use of the flexibility offered by the ICC Rules by choosing transnational rules such as the UNIDROIT Principles. Example 4-2 – ICC arbitration case No. 1042224 In this case, a “pathological” arbitration clause (which can be found in example 2-1) clearly gave to understand that the parties wanted the contract to be governed by a neutral legislation other than the laws of the respective parties. The sole arbitrator decided, on the basis of Article 17(1) of the ICC Rules of 1988, that since the parties wanted a neutral solution and since they did not expressly design the law of a third country, the most appropriate solution was to apply rules and principles generally recognized in international trade (lex mercatoria), and, in particular, the UNIDROIT Principles, given that they appear to be a true transposition of the rules that international traders recognize as being applicable to international contracts.

22. Which should have legislation on arbitration that conforms to the international standards, and be a signatory to the New York Convention. 23. This does not exclude the possibility that arbitrators may justify their choice by showing that the rules of private international law of the countries involved give the same result. 24. Published in Journ. dr. intern., 2003, 1142 et seq.

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Finally, Article 21(2) of the Rules states that in all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages. This means that, whatever the applicable rules of law, the arbitrators must, in any case, take into due consideration the contractual rules agreed by the parties as well as the business practices of their trade. Of course, in case of conflict with mandatory rules of the applicable law, the latter will prevail, but if no such conflict arises (e.g. because the rules of the governing law are not mandatory), arbitrators should look at the contractual rules and usages before referring to the applicable rules of law. 4.4.2.4 The

arbitral proceedings and the award

The arbitration starts with a request of arbitration, addressed to the Secretariat and notified by the latter to the respondent, who must file his answer within 30 days. On the basis of the positions expressed by the parties as to the number of arbitrators, place of arbitration, etc., the procedure for the appointment of the arbitrators will commence.

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As soon as practicable, the Court shall fix the advance on costs25 in an amount likely to cover the fees and expenses of the arbitrators and the ICC administrative costs for the claims and counterclaims that have been referred to it by the parties, to be paid in equal shares by the claimant and the respondent.26 Such costs are calculated on the basis of the claims and counterclaims in accordance with the scale set out in Appendix III to the Rules. Once appointed, the first task of the arbitrators is to draft the terms of reference (except when the expedited procedure applies: infra, § 4.4.2.5), to be agreed and signed by the Arbitral Tribunal and the parties within 30 days of the date on which the file has been transmitted to the Arbitral Tribunal.27 The terms of reference, which are a unique feature of ICC arbitration, have the advantage of bringing the arbitrators and parties together at an early stage, providing them with an opportunity to identify and possibly agree upon a number of issues — such as the determination of the applicable law, the language of the proceedings and the timetable for the arbitration — and to delimit the actual scope of the arbitration and, in particular, the claims and counterclaims of the parties. After signing the terms of reference, the Arbitral Tribunal shall proceed to establish the facts of the case by asking the parties to submit written submissions, by hearing witnesses and experts, and/or by appointing experts or taking other means of evidence, according to the needs of each particular case. The ICC Rules fix a time limit of six months from the signature of the terms of reference for rendering the award. This time limit, which is, in fact, too short for most arbitrations, may be extended, and will actually be extended, where necessary, by the Court for one or more successive periods. This system makes it possible to exert a reasonable pressure on the Arbitral Tribunal with respect to the observance of the time limits. Finally, a very important characteristic of the ICC procedure is the scrutiny of the award by the Court. According to Article 27 of the Rules, the Court may in this context: … lay down modifications as to the form of the award and, without affecting the Arbitral Tribunal’s liberty of decision, may also draw its attention to points of substance.

This type of “quality control” by the Court is very important because it enhances the likelihood that the award will be enforced and that it does not contain defects that might cause its annulment. 25. The Secretary General may fix a provisional advance, upon receipt of the request, intended to cover the costs of arbitration until the terms of reference are drawn up, based on the minimum of the fees of the scale, to be paid by the claimant: see Article 37(1) of the Rules and Article 1(2) of Appendix III. 26. However, in the final award the arbitrators may decide that the costs shall be borne by one of the parties or that they should be apportioned otherwise. 27. Article 23(2) of the 2017 Rules. In the 2012 Rules the term was two months. It is to be seen if the reduction of this term will have the effect of speeding up the approval of the terms of reference, since getting to an agreement between the parties may require lengthy discussions.

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expedited procedure

Under the Expedited Procedure Rules, contained in Appendix VI to the Arbitration Rules) the ICC Court will normally appoint a sole arbitrator, irrespective of any contrary term of the arbitration agreement. If parties wish that future disputes should in any case be decided by a panel of three arbitrators, they should expressly provide this in the arbitration clause and at the same time expressly exclude the expedited procedure provisions. This will of course not prevent them to opt for the expedited procedure when the dispute arises. The sole arbitrator must convene the management conference no later than 15 days after the date on which the file was transmitted to him and the award must be made in six months from the case management conference, with extensions granted only in limited and justified circumstances. Under the Expedited Procedure Rules there will be no terms of reference and the tribunal will have discretion to decide a number of important issues, after consulting the parties, such as to decide the dispute solely on the basis of the documents submitted by the parties, with no hearing and no examination of witnesses.28 The quality control on awards — performed by the ICC Court and its Secretariat through the scrutiny of the award — will however be maintained at its long-established highest level. Finally, a scale providing for reduced fees will apply under the Expedited Procedure Rules (infra § 4.4.3).

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4.4.3 The costs

of ICC arbitration

One of the advantages of ICC arbitration is that the costs are fixed by the arbitral institution according to pre-established criteria contained in the scale of costs and fees of Appendix III of the Rules. The costs of ICC arbitration are composed of two main parts: the administrative expenses of the institution and the fees of the arbitrators. Both sums are calculated as a percentage of the amount in dispute, at decreasing rates according to different brackets. This means that the higher the amount in dispute, the lower the actual impact of the cost of arbitration. The amount in dispute is the aggregate amount of all claims and counterclaims submitted in arbitration. Therefore, if we consider an amount in dispute of US$100,000, and assuming that a sole arbitrator will be appointed, the total cost (administrative expenses + arbitrator fee) will be between US$10,090 and US$21,159, making an average of US$15,825. And in case of expedited procedure (which should be the normal solution for such an amount, unless the parties have expressly excluded such procedure) the cost will be between US$9,225 and US$18,400 with an average of US$13,813. In case of an amount in dispute of US$1 million, the total amount would be between US$37,962 and US$87,465 for a sole arbitrator and between US$67,216 and US$215,725 for an arbitral tribunal of three members. Such amounts may be readjusted during the proceedings. The following figures show some examples of minimum and maximum costs for the aggregate amount of the administrative charges and the arbitrators’ fees. The average between these two figures provides a very rough indication of the likely advance fixed by the Court, but the actual amount will depend upon the particular situation of each case. The initial amount may be readjusted later according to possible changes in the claims and/or other reasons justifying it.

28. A possible decision by the sole arbitrator to decide the dispute on documents only, without hearing and examination of witnesses, may be inappropriate in complex cases, even when the amount in dispute is below US$2 million. If parties wish to make sure that they can in any case pretend a hearing for the examination of the parties and witnesses, they should expressly exclude the expedited procedure in the arbitration clause.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Calculation of ICC arbitration costs based on the scale of costs and fees (US$) Sole arbitrator

Tribunal of three arbitrators

Amount

Min

Max

Average

Min

Max

Average

100,000 1,000,000 5,000,000 30,000,000

10,090 37,962 77,782 130,482

21,559 87,465 186,915 313,115

15,825 62,714 132,349 221,799

18,740 67,216 143,316 236,416

53,147 215,725 307,016 510,366

35,944 141,471 225,166 373,391

ICC arbitration costs for sole arbitrator in an expedited procedure (US$) Amount

Min

Max

Average

100,000

9,225

18,400

13,813

1,000,000

35,037

74,639

54,838

5,000,000

71,229

158,535

114,882

30,000,000

119,089

265,995

192,542

If we compare the two schedules above, we can notice a slight reduction of costs for the expedited procedure.

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It is in any case important to consider the cost issue before commencing an arbitration or when deciding how to react to a claim, especially when determining the amount of the claim (or counterclaim), since this will affect the cost of the arbitration. As we have seen before, the advance payment fixed by the Court must be paid in equal parts by both parties. If one party refuses to pay, the other party can pay the advance owed by the other party or make available a bank guarantee for the unpaid amount. If the defendant refuses to pay his part, invoking that he cannot be forced to pay the expenses of a frivolous and unfounded claim, the claimant can nevertheless continue the proceedings, trusting that he will recover the costs with the award. An important issue is the possibility of asking the Court to fix separate advances on costs for the claims and the counterclaims, provided by Article 30(2) of the rules. When the Court accepts to set separate advances, each party has to pay the advance on costs corresponding to its claim, and the claim of the defaulting party may be withdrawn. In normal situations, this solution will not be suitable, because the sum of the two advance payments will be higher than one advance for the whole amount due to the regressive nature of the scales of costs. However, this provision may be very useful when a party needs to defend against the excessive claims of the other party. Example 4-3 – Excessive counterclaim by purchaser A Czech seller supplies products to an Italian purchaser, who does not pay them, invoking alleged (but unproven) defects. The seller, after having invited the purchaser to pay several times, starts an ICC arbitration for the unpaid amount of US$100,000 under the expedited procedure. The purchaser then makes a counterclaim for US$1 million, invoking damages he claims to have suffered as a consequence of the defects. If ICC determines the advance payment on the basis of the value of the dispute (US$100,000 + US$1 million = US$1.1 million), the average amount (administrative expenses + fee of a sole arbitrator + likely expenses) could be about US$60,000, while the advance payment based on the amount of the claim (US$100,000) could be about US$14,000. Based on this consideration, the seller can ask ICC to fix separate advance payments. If the ICC Court accepts to do so, the seller will make an advance payment of US$14,000 (which is in any case less than 50% of US$65,000), and the purchaser will be forced to pay an amount close to US$65,000. If the purchaser does not pay, the arbitration can go on for the seller’s claim only. If no separate advance payments are fixed, the seller will also be obliged to pay the purchaser’s part (if the latter refuses to pay), if he wants to continue the arbitration. 80 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

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The above example shows how important it can be to follow the right strategy in this respect. The following example shows what may happen in the opposite case, when the defendant needs to react to an excessive request by the claimant. Example 4-4 – Unfounded and excessive claim A French supplier appoints a distributor in Egypt, which makes a yearly turnover of about US$400,000. The contract provides for ICC arbitration by an arbitration tribunal of three members. A dispute arises about an alleged breach by the supplier of the distributor’s exclusivity, the supplier having sold certain products, which it said did not fall under the distribution contract, to one of the distributor’s competitors. As a result, the distributor refuses to pay the products that are still to be paid (worth approximately US$300,000) and starts arbitration, claiming damages for US$5 million. The defendant answers that the claim for damages is unfounded because he did not breach the agreement, and that the amount claimed is, in any case, excessive, and then brings a counterclaim for the unpaid goods for US$300,000.

In this case, it would certainly be more advantageous for the defendant to have the advance payments separated, since the advance payment on the claim of US$300,000 would be much lower than 50% of the advance payment calculated on the whole amount (US$5 million + US$300,000).

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4.5 Drafting the Arbitration Clause Before drafting the arbitration clause, the parties should make a final evaluation of the various issues to be considered when choosing arbitration: arbitrability of the subject matter of possible disputes in the relevant countries; enforceability of a possible award in the interested countries; neutrality and quality of the arbitral institution considered; possible costs of the arbitration, etc. Once the above decision has been taken, such choice must be incorporated in an arbitral clause which must be clear, simple and, above all, effective. The easiest way to draft a good arbitration clause is to copy a standard clause proposed by well-established arbitral institutions, without making additions or modifications, except for those proposed in the standard clause itself. See, hereunder, some standard clauses recommended by arbitration institutions. Standard arbitration clauses: ICC, Swiss rules, ICDR, LCIA, SIAC ICC: All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. Swiss rules: Any dispute, controversy or claim arising out of, or in relation to, this contract, including the validity, invalidity, breach, or termination thereof, shall be resolved by arbitration in accordance with the Swiss Rules of International Arbitration of the Swiss Chambers’ Arbitration Institution in force on the date on which the Notice of Arbitration is submitted in accordance with these Rules. The number of arbitrators shall be (“one”, “three”, “one or three”); The seat of the arbitration shall be  (name of city in Switzerland, unless the parties agree on a city in another country); The arbitral proceedings shall be conducted in … (insert desired language). ICDR: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. LCIA: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three]. The seat, or legal place, of arbitration shall be [City and/or Country].

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The language to be used in the arbitral proceedings shall be [ ]. The governing law of the contract shall be the substantive law of [ ]. SIAC: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration administered by the Singapore International Arbitration Centre (“SIAC”) in accordance with the Arbitration Rules of the Singapore International Arbitration Centre ("SIAC Rules") for the time being in force, which rules are deemed to be incorporated by reference in this clause. The seat of the arbitration shall be [Singapore].* The Tribunal shall consist of ** arbitrator(s). The language of the arbitration shall be . APPLICABLE LAW Parties should also include an applicable law clause. The following is recommended: This contract is governed by the laws of .*** * Parties should specify the seat of arbitration of their choice. If the parties wish to select an alternative seat to Singapore, please replace “[Singapore]” with the city and country of choice (e.g., “[City, Country]”). ** State an odd number. Either state one, or state three. *** State the country or jurisdiction

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In practice, this indication is not always followed. Arbitration clauses contained in commercial contracts are very often of dubious quality (and validity). This is due to several reasons. First, many contracts are drafted, without the assistance of a lawyer, by businessmen who have no idea of what arbitration is, and who simply copy a clause from another contract. This means that a “bad” clause will circulate from contract to contract and sometimes become worse through additions made by inexperienced users.29 Second, even when a lawyer is involved in drafting the contract, the issue of dispute resolution is almost always considered at the very end of the negotiations, when all the “commercial” issues have been agreed. In such a context, there is often no time for an in-depth evaluation of the various options. If there is already a global agreement with an arbitration clause that could be improved, it will often be difficult for the lawyer to convince his client to insist on changing it. 4.5.1 The formal

requirement of the arbitration clause: agreement in writing

In most legal systems, the arbitration agreement must be agreed in writing. This requirement is expressly foreseen in Article II of the New York Convention. Article II - New York Convention 1.

Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

2.

The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

The requirement of the written form is of paramount importance because, in principle, if the arbitration clause has not been agreed in writing, the jurisdiction of the courts will not be excluded and, moreover, an award based on such clause may not be recognized by the courts, although the respect of the written form is not expressly mentioned between the conditions which justify the refusal of recognition under

29. A good example is a clause referring to a non-existent “International Chamber of Commerce of Geneva” that was frequently found in international contracts some years ago.

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Article V of the New York Convention.30 It should in any case be considered that, according to prevailing case law, a party cannot avail itself of the alleged nullity of the arbitration agreement in the recognition stage, if it did not invoke it during the arbitration proceedings.31 4.5.1.1 Towards

a reconsideration of the form requirement

In recent years, the requirement of the written form, and in particular the strict definition of the New York Convention which excludes agreements in writing accepted orally or tacitly, has been put in discussion, arguing that it is less justified in the actual commercial environment, where the prevailing rule is that commercial contracts do not require the written form. Thus, it has been stated, for instance, that: There is no justification to submit arbitration agreements to stricter form requirements than other contractual provisions. Arbitration is no longer considered a dangerous waiver of substantial rights. In fact the selection of arbitration is not an exclusion of the national forum but rather the natural forum for international disputes. Form requirements do not necessarily promote legal certainty; they are often the source of additional disputes.32

This concern has been taken into account in the UNCITRAL Model Law which provides two definitions of the arbitration agreement: a first one requiring the written form, but with a less strict approach, which includes agreements in writing agreed orally or tacitly; a second one which does not require the written form.

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UNCITRAL Model law (as amended in 2006) – Article 7 (Option I) (1)

“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(2)

The arbitration agreement shall be in writing.

(3)

An arbitration agreement is in writing if its content is recorded in any form, whether
or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means.

This definition, which has been adopted by several national legislations is wider than the definition of the New York Convention, which does not include the rather common situation of arbitration clauses in general conditions, accepted by conduct (infra, § 4.5.1.2). UNCITRAL Model law (as amended in 2006) – Article 7 (Option II) “Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

This approach has been followed by some jurisdictions (e.g. France, Sweden, New Zealand); most other jurisdictions have maintained the written form requirement, although in some cases with less demanding formal requirements. 4.5.1.2 The

form requirement under the New York Convention

Article II of the New York Convention contains very strict requirements as to the written form of the arbitration agreement: it must be a clause or agreement signed by the parties or contained in an exchange of letters or telegrams. 30. See, for instance, Corte di Cassazione (Italy) 18 June 1991, § 6857, Eastern Mediterranean Maritime Ltd. v Cereal Toscana, in Riv. dir. int. priv. proc., 1993, 190 et seq..; Oberlandesgericht Frankfurt am Main, 26 June 2006, in Yearbook XXXII-2007, 351; Superior Tribunal de Justiça (Brazil) 17 December 2008, Indutech SpA v Algocentro Armazéns Gerais Ltda, in Yearbook, XXXIV-2009, 242. Some courts have decided, on the contrary, that the absence of the written form does not prevent recognition of the award under Article V of the Convention: Corte di Cassazione (Italy), 15 July 1994, § 6337, Conceria G. De Maio & F. s.n.c. v Ditta EMAG AG, in Riv. arb., 1995, 449. 31. See. for instance: U.S. District Court, District of New York, 25 November 2004, Oltchim SA v Velco Chemicals Inc., in Yearbook, XXXI-2006, 992.; Court of Cassation (France), 6 May 2003, SOPIP c. société Aresbank, in Rev. arb., 2004, 314; Tribunal Supremo (Spain), 28 March 2000, Kil Management A/S c. J. García Carríon SA, in Yearbook, XXXII-2007, p. 518 ss.; Oberlandesgericht Köln, 21 February 2014, in Yearbook, XL-2015, 425. 32. Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, Kluwer Law Intl The Hague/London/New York, 2003, 132.

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The first alternative of Article II (2) requires that the contract including the arbitration clause or the separate arbitration agreement bear the signature of the parties.33 This is the simplest situation when the existence of a written agreement to arbitrate results from one document. However, many international contracts are concluded through an exchange of messages. This is why the New York Convention expressly includes the possibility that the arbitral clause be contained in an exchange of letters or telegrams, which need not be signed by the parties. It is normally admitted that Article II also includes other means of communication, such as telex and telefax, but there have been some doubts regarding e-mails.34 When the arbitration clause is agreed through an exchange of letters, there must be a written proposal and an acceptance, which must also be in writing. The acceptance need not expressly mention the arbitration clause; an unconditional acceptance of a contract proposal containing the arbitration clause is considered to be sufficient.35 On the contrary, according to Article II of the New York Convention, a tacit acceptance of the document containing the arbitration clause is not sufficient. Example 4-5 - Tacit acceptance of the contract containing the arbitration clause Two parties entered into a sales contract through a broker. The broker sent an order confirmation to the buyer, and thereafter the seller sent the buyer two copies of the sales contract, one of which was to be signed and returned. The buyer did not sign or return a copy of the sales contract, but the contract was thereafter performed.

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The sales contract referred to a standard contract that contained a clause for arbitration before the Chamber of Arbitration of Paris. A dispute arose thereafter and an award in favour of the seller was rendered by the Chamber of Arbitration of Paris. When the seller sought enforcement of the award in the buyer’s country, enforcement was refused holding that there was no arbitration agreement in writing.

The case described in the example was decided by the Spanish Supreme Court.36 Since the buyer never sent a written acceptance of the proposed contract, it cannot be said that the arbitral clause was accepted in writing (although the contract of sale was concluded tacitly, since the parties performed it). A further problem is whether the written document should show the intent to accept the proposal containing the arbitration clause, as can be seen in the following case. Example 4-6 - Acceptance of the contract through invoices mentioning the numbers of the orders An American purchaser, Bobbie Brooks Inc., ordered goods from an Italian seller, Lanificio Walter Banci. The orders contained an arbitration clause in favour of the American Arbitration Association. The seller sent the goods together with the respective invoices, which mentioned the numbers of the orders sent37 by the buyer.

33. If the clause is contained in a contract, it is, of course, sufficient that the contract be signed: a specific signature under the arbitration clause is not necessary. 34. See for instance, Hålgoland Court of Appeal, 16 August 1999, in Yearbook XXVII – 2002, 519, where e-mails were not considered to meet the requirement of the written form. On 7 July 2006, UNCITRAL issued a recommendation that Art. II (2) of the New York Convention be applied recognizing that the circumstances described therein (i.e. exchange of letters and telegraphs) are not exhaustive. (Recommendation regarding the interpretation of Article II, Paragraph 2, and Article VII, Paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, adopted by the United Nations Commission on International Trade Law on 7 July 2006 at its 39th session.) 35. However, the courts may not always follow this obvious principle: see, for instance, Cass. (Italy), 10 March 2000, Krauss Maffei v Bristol Myers Squibb, in Yearbook XXVI-2001, 816 et seq. where it is said that “… an arbitral clause is not valid when it is contained, as in the present case, only in the documents drawn up and signed by the foreign seller, and it does not appear in the document signed by the Italian buyer”. 36. Tribunal Supremo (Spain), 6 October 1998, Delta Cereales v Barredo Hermanos, in Yearbook XXVI-2001, 854 et seq. 37. Judgment of 8 October 1977, Bobbie Brooks Inc. v Lanificio Walter Banci s.a.s., in Rass. arb., 1978, 161.

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In this case, the Court of Appeal of Florence decided that the sending of the invoices implied a written acceptance of the orders and consequently of the arbitration clause.

Similar situations arise when a party sends written statements (for example, requests to postpone delivery, or information about the establishment of a letter of credit), which imply acceptance of a specific contract of sale. In all these cases, the observance of the written form may be doubtful; in fact, there is a written statement that shows the intent to accept the contract, but such statement does not in itself constitute an acceptance in writing of the conditions of the contract of sale (and in particular of the arbitration clause). A further problem arises when the arbitration clause is contained in the general conditions of sale (or purchase). If such conditions are printed on the back of the document (e.g. of the order confirmation), there should be no doubt that the written acceptance of such document also implies the acceptance of the arbitration clause contained in the general conditions.38

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The question is more complicated when the arbitral clause is contained in general conditions to which the contract refers, but which are not included in the contract itself. Several Court decisions consider sufficient a general reference to general conditions containing the arbitration clause,39 while others require that there should be evidence that that the counterpart knew or should have known such general conditions.40 This will normally be the case where the general conditions have been annexed to the contract or where it appears that they were actually known by the counterpart. However, some jurisdictions take a stricter approach and consider the arbitration clause as validly agreed in writing only if the document which refers to the general conditions expressly mentions that these conditions contain an arbitration clause.41 4.5.1.3 The

application of more flexible national rules

Most national laws on arbitration, which entered into force in the years following the New York Convention, provide less demanding formal requirements for the arbitration agreement, and in some cases, even no such requirement. This means that arbitration clauses not complying with the strict rules of the New York Convention, may in some cases be nevertheless valid under a specific national law. But when the validity of the arbitration agreement must be assessed under the New York Convention (e.g. because a party requests a national court to refer the dispute to arbitration, or recognize and enforce the award), is it possible to apply the less demanding form conditions of the applicable national law? The answer would be negative, if one accepts the theory that Article II imposes a “minimum” form requirement which the contracting States are required to apply in any case.42 However, it is now generally accepted that the New York Convention sets a maximum standard: arbitration clauses cannot be submitted to stricter requirements

38. However, if the document is sent by fax, it may not be easy to prove that also the back page was sent. 39. Tribunal Supremo (Spain), 31 May 2005, Pueblo Film Distribution c. Laurenfilm SA, in Yearbook, XXXII-2007, 608; Oberlandesgericht Celle, 14 December 2006, in Yearbook, XXXII-2007, 372: United States Court of Appeals, Third Circuit, 15 October 2009, Century Indemnity Company c. Certain Underwriters, in Yearbook XXXV-2010, 485. 40. See, for instance, United States District Court, Western District of Washington, 19 May 2000, Atlas v Hitachi, in Yearbook XXVI-2001, 939 et seq. where the court denies the existence of a valid arbitration agreement in a case where the arbitration clause was contained in “Terms and Conditions” mentioned in the purchase order, but never handed over to the other party. However, in other cases the incorporation by reference seems to be admitted without limitations: see United States Court of Appeals, Third Circuit, 20 June 2003, Standard Bent Glass v Glassrobots Oy, in Yearbook XXIX2004, 978 et seq. 41. Corte di Cassazione (Italy), 2 March 1996, § 1649, Molini Lo Presti v Continentale Italiana, in Riv. arb., 1996, 717. Corte di Cassazione (Italy), 19 May 2009, § 11529, Louis Dreyfus Commodities Italia spa v Cereal Mangimi srl, in Foro pad., 2009, 2, I, 278. 42. See, e.g. Paris Cour d’Appel, 20 January 1987, Société Bomar Oil NV v ETAP, in Rev. arb., 1987, 482, 485; Swiss Federal Tribunal, 21 March 1995, in Yearbook XXII-1997, 800, 804.

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under national law.43 Consequently, more liberal national rules of the lex fori can be applied instead of the requirements of the New York Convention.44 This view has been adopted by the UNCITRAL Recommendation of 7 July 2006, which provided that Article VII, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, should be applied to allow any interested party to avail itself of rights it may have, under the law or treaties of the country where an arbitration agreement is sought to be relied upon, to seek recognition of the validity of such an arbitration agreement.

The situation described above implies that the same arbitration agreement can be considered to be valid or invalid according to the jurisdiction before which the issue is brought, as we can see in the following two examples, regarding the very frequent case of an arbitration clause contained in general conditions accepted tacitly by a party. The two following examples show how different the outcome can be under different jurisdictions. Example 4-7 - Tacit acceptance of general conditions containing the arbitration clause

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A Dutch supplier, I.S.S. Tanks B.V. (ISS), sent as an Austrian counterpart, CMB Maschinenbau & Handels Gmbh (CMB) an offer subject to its conditions of sale, providing for the application of Dutch law and the exclusive jurisdiction of its courts. After further negotiations, CMB sent ISS a confirmation of order which contained an arbitration clause in favour of the Arbitral Centre of the Austrian Federal Economic Chamber in Vienna. Thereafter ISS provided a bank guarantee as required in CMB’s confirmation of order. Thus, the contract could be considered as tacitly concluded since ISS, by providing the guarantee, implicitly accepted the proposal contained in CMB’s order confirmation. When a dispute arose, ISS commenced proceedings in the Court of Leeuwarden, but CMB argued that the Dutch Court lacked jurisdiction (due to the arbitration clause contained in CMB’s confirmation of order) and should refer the case to arbitration in Austria. The Court held that the arbitration clause, although not conforming to the form requirements of the New York Convention, was valid the less demanding rules of Dutch law and declared that it had no jurisdiction. Rechtbank Leeuwarden, 3 September 2008, I.S.S. Tanks B.V. v CMB Maschinenbau & Handels Gmbh, in Yearbook XXXIII-2008, 613.

Example 4-8 - Arbitration clause contained in the order of the buyer, carried out by the seller The English company Robobar, ordered certain refrigerating units to the Italian company Finncold. The purchase orders contained the following arbitration clause: any dispute arising out of this order shall be exclusively referred to arbitration by a person to be appointed by the President of the Law Society. Finncold supplied the products ordered (and thus tacitly agreed to Robobar’s contract proposal, but did not accept the order in writing as required by the New York Convention. When a dispute arose, Finncold initiated proceedings before the Court of First Instance of Casale Monferrato. Robobar, invoking the arbitration clause, requested a preliminary ruling on jurisdiction by the Court of Cassation. The Court of Cassation affirmed the jurisdiction of the Italian courts, arguing that the arbitration clause was invalid, since it had not been agreed by letter or telegram, as required by the New York Convention.

If we compare these two examples, we can see that, depending on the court before which the dispute is brought, an arbitration clause concluded without respecting the strict formal requirements of the New York Convention, may be considered valid and 43. Lew, Mistelis, Kröll, Comparative International Commercial Arbitration, Kluwer Law Intl, 113. 44. Born, 672-673.

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effective or not. This aspect is of paramount importance when a party must decide if it should bring its claim before the courts which would have jurisdiction in the absence of the arbitration clause, or if it should, on the contrary, commence the arbitration proceedings. 4.5.2 The essential

elements of an arbitration clause

The purpose of an arbitration clause is to submit certain future disputes regarding one or more specific legal issues to arbitrators instead of having recourse to ordinary courts. This means that, provided the applicable law does not require specification as to further elements, the clause must at least:  make clear that possible future disputes must be settled by arbitration (and not by ordinary courts);  determine some basic elements about the arbitration (by indicating an arbitral institution, or the method of choosing the arbitrators).

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In many legal systems, there are rules whereby even very “short” arbitration clauses may become effective. Therefore, for example, an ad hoc arbitration clause that does not specify the criteria for choosing the arbitrators or determining their number will be effective under legal systems that have specific rules for filling this “gap” (e.g. providing the right of a party to request a court to nominate the arbitrator). Also, the Geneva Convention of 1961 has interesting rules in this respect. Of course, a clause that does not make clear that the parties intend to refer to arbitration,45 or that does not identify the disputes which are to be submitted to arbitration, or that does not give a minimum certainty about the type of arbitration the parties require (e.g. by naming an arbitral institution or by stating that each party must appoint an arbitrator, and the arbitrators a chairman), will, in principle, be ineffective. However, the above risk is not as great as it would appear at first sight, because it will be possible, in many cases, to imply from other clauses of the contract what the parties actually intended. Consequently, an arbitration clause in a specific contract that does not specify the disputes to which it refers, may be interpreted as referring to disputes arising out of that particular contract;46 a clause not giving any detail about the type of arbitration may, in certain businesses, be interpreted as referring to the arbitration managed by the institution to which all the traders of that business refer.47 Finally, even a clause not mentioning the word “arbitration” may be considered as a valid arbitration clause if it appears clearly from the context that the parties actually wanted to submit their disputes to arbitration. There are several cases of extremely concise arbitration clauses that have nevertheless been considered valid, such as, for example, the following two clauses: Unless amicably settled, any dispute which may arise between the parties hereto out of or in connection with this agreement shall be finally settled by arbitration held and conducted (sic) in Geneva.48 Laws and Arbitration: Swiss law to apply.49 45. Thus, the Swiss Federal Court (judgment of 3 June 2015, in ASA Bull., 2015, 548), confirmed the decision of the arbitral tribunal to refuse jurisdiction with respect to the following clause: “This agreement shall be interpreted in accordance with and governed in all respects by the provisions and statutes of the International Chamber of Commerce in Zürich, Switzerland and subsidiary by the laws of Germany”, arguing that the clause does not show with sufficient clarity that the parties agreed to submit their dispute to arbitration excluding the jurisdiction of state courts. 46. See, for instance, Areios Pagos (Supreme Court, Greece), 9 May 2014, in Yearbook XL-2015, 427. 47. However, courts do not always follow this approach. So, for instance, in a case regarding a contract for the sale of skins, the arbitration clause made reference to arbitration according to the usages of commerce and the rules of arbitration and appeal in force in the place specified in clause 1 (London). Although this wording is unambiguous for the traders of hides and skins (who know exactly to which arbitration facility reference is made), the Court of Appeal of Salerno before which the dispute was brought, held that a simple reference to the city of London was insufficient (judgment of 31 December 1990, Concerie Est Partenio s.p.a. v James Garnar and Sons e Scotblair Pelts Ltd. in Riv. dir. int. priv. proc., 1992, p. 115). 48. US District Court, Eastern District of Pennsylvania, 16 November 1992, Euro-Mec Import, Inc. c. Pantrem & C. S.p.a., in Yearbook, XIX-1994, 781 et seq. 49. Court of Appeal of Bermuda, 9 November 1988, Dupont Scandinavia AB v Coastal (Bermuda) Limited, in Yearbook, XV1990, 378.

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On the contrary, there are other cases where too general clauses have been considered invalid. Thus, the Spanish Tribunal Supremo declared that the following clause could not be applied because of its vagueness. Arbitration: Arbitration, if any, or general average, if any, shall take place in London and in accordance with English law.»50

It can therefore be concluded that even “bad” arbitration clauses may often be considered as effective. But the problem is that they give the defendant the opportunity to argue that the clause is invalid and give him the option of bringing the dispute before ordinary courts. 4.5.3 Some

typical errors frequently found in arbitration clauses

In order to avoid problems, it may be useful to underline some typical errors often made in arbitration clauses. 4.5.3.1 Clauses

that confuse applicable law and arbitration

Most businessmen do not understand the difference between the substantive law that governs the contract, on one side, and the jurisdiction of arbitrators or courts that may decide possible disputes arising between the parties, on the other. This misunderstanding may give rise to “pathological” arbitration clauses, which mix up the issues of applicable law and jurisdiction/arbitration and which may not always be effective. We have examined this issue in Chapter 2, § 2.1, where a typical pathological clause of this type is also shown as Example 2-1.

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4.5.3.2 Clauses

that submit different types of disputes to different tribunals

Sometimes the parties try to escape a deadlock situation when negotiating the jurisdiction or arbitration clause, by inventing “original” compromise solutions, whereby certain issues are submitted to a particular jurisdiction, and others to a different one. The most extreme example of clauses of this type is the clause stating that one arbitration tribunal should decide the issues relating to the obligations of one party, and another arbitral tribunal (or court) should decide those regarding the obligations of the other party. It goes without saying that solutions of this kind make no sense, considering the close connection between the various obligations of the parties. However, even more acceptable distinctions — such as those appointing different tribunals for technical and legal disputes — are dangerous, since they introduce a further legal issue (that of deciding where the dispute belongs) and may create very difficult problems with respect to issues that are both legal and technical. A much less problematic situation is that of clauses that foresee alternative arbitration solutions between which the parties may choose in case of dispute, e.g. two different arbitral institutions established in the respective countries of the parties. Another possibility is to provide that the party that makes a claim must bring the claim before the arbitral institution of the country of the other party and vice versa (or before the institution of its own country and vice versa). Clauses of this type must be drafted very carefully in order not to leave doubts that the two solutions are alternatives, as shown by the following case. Example 4-9 - Case decided by the Milan Court of Appeal in 1999 A contract between an Italian seller and a Chinese buyer provided that disputes between the parties were to be settled either by an ad hoc arbitration in Stockholm (if the seller was the claimant) or by the China International Economic Trade Arbitration Council (CIETAC) (if the buyer was the claimant). The Italian party commenced arbitration in Stockholm and, at a later date, the Chinese party made a claim in China before the CIETAC. Both arbitrations ended with an award. The Italian party obtained recognition in Italy of the Swedish award. When the Chinese party requested enforcement in Italy of the CIETAC award, the Italian party opposed the enforcement, arguing that the CIETAC tribunal was constituted in violation of the 50. Judgment of 29 November 2002, Rederij Empire CV v Previsión Española SA, in Yearbook, XXXII-2007, 567

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arbitration clause, because under such clause the two tribunals were alternative solutions, and, once the procedure in Stockholm was initiated, there was no place for a parallel procedure in China. The Court of Appeal of Milan,51 before which the case was brought, refused this interpretation of the clause and decided that the clause defined “the jurisdiction of either tribunal depending on whether the seller’s claims or the buyer’s claims are to be examined”.

The solution given by the Court of Appeal is not convincing, considering that the obvious way of interpreting such a clause has always been to consider the two procedures as alternatives. And, in fact, the judgment has been reversed by the Supreme Court,52 which rightly decided that the two arbitrations had been foreseen as alternative solutions and that consequently, once the dispute was brought before one of them, the other option could no more be exercised. However, it also shows how dangerous it is to use clauses of this type without additional drafting. 4.5.3.3 Clauses

that give too narrow a definition of the disputes covered

The obvious way of writing an arbitration clause is to refer to any dispute arising out of or connected with a given contract.

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However, sometimes the parties feel this is too simple and consequently prefer to make reference to disputes relating to the “interpretation, performance, validity, etc.” of the contract. By doing so, they open the way to possible objections by the defendant when a dispute arises. For instance, a clause referring to the interpretation of the contract could mean that the parties did not want to cover disputes about its performance; or a clause mentioning the performance could be seen as excluding the issues regarding contract termination. Of course, if these problems are brought before courts experienced in arbitration, such courts will understand that the parties did not actually intend to create such limitations. However, courts with a more formalistic approach may take a different view, arguing that, since the arbitral clause implies a derogation from the ordinary jurisdiction, it must be interpreted restrictively. 4.5.3.4 Contracts

containing both arbitration and choice of forum clauses

It is not unusual to see contracts that provide for arbitration and jurisdiction of ordinary (domestic) courts at the same time. This type of situation, which may entail the ineffectiveness of the arbitration clause, should be avoided. For more details, see supra, § 3.2.1.3. 4.5.3.5 Clauses

in which the reference to the arbitral institution is ambiguous

A rather common problem arises when the arbitration clause refers to an arbitral institution, but defines such institution ambiguously so that different institutions could be implied. Typical examples are clauses indicating the International Chamber of Commerce of Geneva, or of Zurich, where doubt arises as to whether the parties are referring to the chamber of commerce of that city, or are indicating arbitration under the ICC rules, with a seat in Switzerland. Awards and court judgments exist that have considered clauses of this kind as a valid choice of ICC arbitration.53 Thus, the Court of Appeal of Paris54 decided that a clause making reference to “l’arbitrage de la Chambre de commerce internationale de Genève” must be interpreted: comme désignant la Chambre de Commerce Internationale de Paris comme organisatrice de l’arbitrage et Genève comme siège de l’arbitrage.

On the contrary, in a similar case, a German court55 decided that the clause was invalid. 51. Court of Appeal of Milan, 2 July 1999, Tema Frugoli spa v Hubei Space Quarry Industry Ltd, in Yearbook, XXVI-2001, 807 et seq. 52. Court of Cassation (Italy), 7 February 2001, Tema Frugoli spa v Hubei Space Quarry Industry Ltd, in Riv. dir. int. priv. proc., 2001, 443 et seq 53. See, for instance, ICC award in case 4472/84, in Jarvin, Derains, ICC Awards 1974-1985, p. 524; ICC award 2626/77 in Jarvin, Derains, ICC Awards 1974-1985, 316. 54. Judgment of 28 October 1997, Société Procédés de préfabrication pour le béton v Libye, in Rev. arb., 1998, 399. 55. Oberlandesgericht Hamm, 15 November 1994, in RIW, 1995, p. 681.

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A similar problem of uncertainty arises when the same contract indicates two different arbitration institutions, without explaining how the choice between them should be made. In a case decided by the Austrian Supreme Court,56 the clause said: The present contract is submitted to the exclusive jurisdiction of the arbitration tribunals of the Hungarian Chamber of Commerce and the Federal Economic Chamber of Vienna.57

The Supreme Court decided that the clause gave each party the right to choose between the two institutions. However, in a similar case, the Lebanese Supreme Court58 came to the conclusion that a clause of this type required a subsequent agreement by the parties as to choice, and that a unilateral choice made by one party was to be considered invalid. 4.5.4 The optional

elements of the arbitration clause

As a general rule, it is preferable to use a standard clause without optional elements, and only to add provisions when it is really useful and it has been verified that these elements may not adversely affect the course of the arbitration. In other words, before adding further elements to the arbitration clause, one should ask oneself if they are really necessary and, in the case of a positive answer, check that there are no reasons to exclude them. I will examine, in the next section, some typical additional elements and their pros and cons. 4.5.4.1 Seat

of the arbitration

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This is almost an essential element, at least in ad hoc arbitration (in administered arbitration the arbitration rules will give an answer, if no choice is made). The place of arbitration is very important, because the courts of the country of the seat will normally be competent with respect to possible actions for annulment or setting aside of the award. This is a good reason for establishing the seat in countries that have modern rules on international arbitration and where international arbitrations are regularly held, so that the local courts have practical experience (and will consequently not attach importance to purely formalistic objections to the award). Of course, the strategy could be different if one needs to prepare a defence against a future award where one expects to be the losing party. Parties should in principle avoid having the seat in either of their respective countries. In such a case, there is a risk that an enforcement of the award in the country of the seat may be not be considered as being the enforcement of a “foreign” award and thus not submitted to the New York Convention,59 but rather to the domestic law of such country. This will not normally be a problem, because the effectiveness of a domestic award will be greater than that of a foreign award. However, in countries where the domestic rules are less favourable to arbitration than those of international origin, the enforcement of the award may give rise to problems. 4.5.4.2 Language

of the arbitration

This is certainly a very important point. If it is not prima facie obvious that a certain language must be used, disputes about this matter should be avoided from the very beginning. 56. Oberster Gerichtshof (Austria), 11 July 1990, in Gaja, New York Convention, V.324. 57. “Der vorliegende Vertrag unterliegt der ausschließlichen Kompetenz der Schiedgerichte der Ungarischen Handelskammer, Budapest, sowie der Bundeswirtschaftskammer, Wien”. 58. Cour de Cassation libanaise, 27 April 1987, in Rev. arb., 1988, p. 723. 59. Which Convention, as specified in Article I (1), applies to the recognition and enforcement of arbitral awards “made in the territory of a State other than the State where the recognition or enforcement of such awards are sought” or to arbitral awards “not considered as domestic awards in the State where their recognition and enforcement are sought”. Actually, some countries give a broad interpretation to the notion of non-domestic awards and apply the New York Convention to awards made in their country that show connections with foreign countries or involve foreign parties: see for example United States District Court, Southern District of Florida, 4 June 2003, Four Seasons Hotels v Consorcio Barr, in Yearbook XXIX-2004, 882 et seq.; United States District Court, Southern District of New York, 4 February 2004, Shanghai Foodstuffs Import & Export v International Chemical, Inc., in Yearbook XXIX-2004, 1209 et seq.

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However, too rigid rules on this issue may be dangerous. Where several languages are used in the relations between the parties, and provided the arbitrators are proficient in all of them, it would be excessively burdensome to oblige a party to translate documents produced in a language that is understandable to every party involved in the arbitral procedure. In fact, the clause should leave some flexibility so that the details can be decided by the arbitrators. It should be remembered that some “less international” arbitral institutions consider the use of the local language as the normal solution. Since this may prove dangerous if the other party (or the arbitral tribunal) refuses to make an exception, the mention of the language in the arbitration clause may be of great importance in such a context. 4.5.4.3 The

number of arbitrators

It is difficult to foresee, before the dispute arises, if one arbitrator or a tribunal of three members should be preferred. It is clear that the standard solution of a three-member tribunal is normally to be preferred. However, if the dispute is too small, the “full” tribunal will normally be too burdensome a solution.

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A decision on the number of arbitrators in the clause itself may be inappropriate, since the parties cannot know beforehand what type of dispute may arise in the future. This is why it may be advisable to leave this matter open. particularly in cases of administered arbitration, where the final decision can be taken by a neutral and competent organization if the parties cannot agree on this point when the dispute arises. For example, under the ICC rules, which provide in Article 12 (2) the appointment of a sole arbitrator “save where it appears to the Court that the dispute is such as to warrant the appointment of three arbitrators”, the system is flexible enough to warrant that in case the parties cannot agree on the number of arbitrators when the dispute arises, the Court can take the most appropriate decision. Of course, if a party is certain that — independently of the amount and characteristics of the future dispute — a particular solution is preferable (e.g. that there should in any case be an arbitral tribunal with a one-party arbitrator of its choice), this issue should be expressly dealt with in the clause. 4.5.4.4 Obligation

to try an amicable settlement before arbitration

Businessmen are fond of using arbitral clauses that state in general terms that the parties must seek an amicable settlement before beginning arbitration proceedings. Clauses of this type almost never reach the goal pursued by their drafters. If the parties can settle, they will do so, independently of what the arbitral clause says. On the contrary, such clauses can create a pretext for the defendant to object that the arbitration proceedings do not conform to the clause, because not all possible ways of settlement have been pursued by the claimant before commencing the arbitration. Even if this type of problem will normally be overcome by arbitrators, the fact remains that this can be an additional issue for litigation. If the parties wish to increase the chances of an amicable settlement, they should foresee a mediation procedure, making reference to an experienced organization (e.g. under the ICC Mediation Rules60) capable of providing a competent, neutral forum and then set out a time schedule whereby, if no settlement is reached within a given time, the arbitration procedure can begin without hindrance. 4.5.4.5 Setting

of time limits for rendering the award

Another dangerous initiative is to fix rigid time limits for the award within the arbitration clause. Clauses of this type are based on the illusion that the procedure will be faster if the clause says that the arbitrators must decide within a given date. In practice, this is not always possible (for reasons for which the arbitrators may not be responsible), and the final result may be that the non-observance of the time limit will affect the validity of the arbitration proceedings.

60.

Supra, § 3.2.3.

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For example, a French court61 decided that the failure by the arbitrators to respect the three-month time limit for rendering the award, contained in the arbitration clause, constituted a violation of public policy, justifying a refusal to grant enforcement of the award. If the parties require a swift procedure, they should choose “fast-track” arbitration, provided such procedure is considered to be appropriate for their needs, since this type of procedure inevitably sacrifices some procedural rights to the goal of rapidity, and they should, in any case, bear in mind that truly complicated issues cannot be discussed within too short a time limit. 4.5.4.6 Qualifications

of the arbitrators

Another rather illusory addition is to establish criteria — such as languages known, nationality, experience, etc. — to which the arbitrator(s) must conform, in order to warrant their neutrality and technical qualifications. Except in cases where there are special reasons justifying this approach, it is far preferable to concentrate upon the procedures for choosing the arbitrators. If such procedures warrant a sufficient involvement of the parties — such as the right to appoint an arbitrator and the possibility to agree with the other party on the name of the chairman — the parties will use these means when there is already an actual dispute in order to ensure that the arbitrators have the desired qualities, as far as possible.

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On the contrary, a rigid clause will, in most cases, have the effect of giving the other party a pretext for sabotaging the arbitration proceedings.

61. Cour d’Appel de Paris, 22 September 1995, Dubois & Vanderwalle v Boots Frites BV, in Yearbook, XXIV-1999, p. 640.

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Chapter 5

LITIGATION BEFORE ORDINARY (NATIONAL) COURTS

5.1 International Contracts and National Jurisdictions Unless the parties have made a choice in favour of arbitration, possible disputes must be brought before national jurisdictions. Since there is no special “transnational” jurisdiction for cross-border commercial disputes, reference must be made to the courts of the various countries, which will inevitably give rise to the following problems: (a) how to

determine which court(s) have jurisdiction, i.e. which court(s) can deal with the case, and determine if and how a judgment by the courts of one country can be recognized and enforced in other countries.

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(b) how to

In principle, the answer to the question of whether a given court has jurisdiction over a certain dispute and how a judgment can be recognized and enforced abroad will be found in the rules on international procedure and jurisdiction of the various countries involved. These rules are normally established unilaterally by each state, which means that each legal system will autonomously fix the boundaries of the jurisdiction of its courts with respect to disputes that involve other countries, such as those with foreign parties, and set out the conditions for the recognition and enforcement of foreign judgments. In such a context it is, in principle, not excluded that the same claim may be brought before courts of several countries and that such courts may render conflicting judgments regarding the same dispute, as noted in the next paragraph. At the same time, a trend can be observed, at least in certain geographic areas, towards the establishment of common rules on jurisdiction and recognition of foreign judgments. This is especially the case in the European area, where a common framework has been created through the Brussels and Lugano Conventions and Regulation 1215/2012 (infra, § 5.3). A further important step towards uniform rules has been made by the 2005 Hague Convention on the Choice of Court Agreements, although such Convention has been ratified at present only by a very limited number of countries (infra, § 5.4).

5.2 The Domestic Rules on Jurisdiction Where no international conventions or other rules establish a coordination between different states on the issue of international jurisdiction and recognition of judgments, one must consider separately the legal situation of each country involved in order to determine which court (or courts) may have jurisdiction with respect to a given dispute and where a judgment can be recognized and enforced. It is impossible to give any general overview of the criteria adopted in the various legal systems for determining the jurisdiction of their courts and for fixing the conditions for the recognition of foreign judgments, since these vary substantially from case to case. For example, in many common law countries a court has jurisdiction over a foreigner if

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he is present in the forum at the time of the commencement of the proceedings,1 while in some civil law countries it is sufficient that the claim be made by a national of that country2 or that the disputed obligation has been performed, or is to be performed, in the country. At most, one can distinguish in very general terms between a traditional approach, whereby states confer to their courts a wide ambit of jurisdiction against foreigners — and, at the same time severely limit the possibility of recognizing and enforcing foreign judgments — and a more “modern” approach, whereby the ambit of jurisdiction towards foreigners is more limited and recognition of foreign judgments is relatively easy.3 The traditional approach gives rise to a paradoxical situation: on the one hand, it is easy for a national to bring a foreign party before its courts, but on the other hand, it is almost impossible thereafter to enforce the judgment in the country of the counterpart. Where this scheme is adopted, parties tend to have recourse to their own courts when they are in a defensive position and to bring disputes directly before the courts of the other party when they have a claim. For many years, states have tried to at least partially overcome the uncoordinated situation described above by entering into bilateral treaties on the recognition and enforcement of judgments.

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Currently, the most important step towards a common system of rules has been made in the European area,4 where a much closer coordination between the different jurisdictions has been established in the framework of the Brussels and Lugano Conventions (infra, § 5.3) and may change significantly in the future if the Hague Convention on choice of court agreements (infra, § 5.4) enters into force in a substantial number of countries.

5.3 The Rules Applicable in the European Area In the European area, a new situation has emerged since the coming into force of the Brussels Convention of 1968. This Convention, originally entered into between the six founder states of the European Community, has led to substantial coordination between jurisdictions of the signatory countries through the introduction of:  uniform rules of jurisdiction with respect to defendants of other signatory countries;  the exclusion of jurisdiction when a dispute on the same claim is pending before a court of a signatory country (lis pendens);  a very effective system of recognition and enforcement of judgments between the signatory countries. The Brussels Convention has been extended to the countries that became part of the European Community in 1978 (United Kingdom, Ireland and Denmark), 1982 (Greece) and 1989 (Spain and Portugal). In 1988, an almost identical convention (the Lugano Convention) was concluded between the 12 EC Member States of the European Community and six EFTA countries (Finland, Iceland, Norway, Austria, Sweden and Switzerland).5

1. In some cases, particularly in the United States, it is sufficient that the defendant be served with a writ in the country of the court. 2. For example, Article 14 of the French Civil Code (applicable mainly outside Europe, i.e., where Regulation No. 1215/2012 and the 2007 Lugano Convention do not apply) generally recognizes the right of French citizens to bring a foreign defendant before French courts. 3. An interesting example of this (probably too liberal) approach can be found in the Italian private international law of 1995, which limits the ambit of international jurisdiction of Italian courts (referring to the same criteria set out in the Brussels Convention of 1968) and, at the same time, fixes very wide criteria for the recognition and enforcement of foreign judgments. 4. The term “European area” has been used in order to cover the countries of the European Union (originally parties to the Brussels Convention of 1968 and now under Regulation 1215/2012), as well as some other European countries (Iceland, Norway and Switzerland) that have substantially adopted the same system through the Lugano Convention. 5. On 30 October 2007 a new Lugano Convention has been signed, which replaces the Lugano Convention of 1988. This new convention is almost identical to Regulation 44/2001.

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Thereafter, Austria, Finland and Sweden joined the European Union and acceded to the Brussels Convention, so that at present the Lugano Convention remains applicable to relations with Iceland, Norway and Switzerland. In 2001, the Brussels Convention was replaced by EC Regulation 44/2001 (also called Brussels I Regulation), applicable in all Member States of the EU, and thereafter by Regulation 1215/2012, in force since 2015. This means that there is at present a European Jurisdictional Area, comprising the greatest part of the continent (i.e. the EU countries, plus Iceland, Norway and Switzerland), where substantially similar rules apply with respect to jurisdiction, recognition and enforcement of judgments. Except for the rules of the Lugano Convention, these rules are submitted to the European Court of Justice for interpretation. The courts of the EC Member States can refer preliminary questions to the Court for the interpretation of the Brussels Convention and Regulations 44/2001 and 1215/2012. The following paragraphs examine some of the main characteristics of the common European rules. These rules apply in principle only to relations between courts of those states that are part of the area, i.e. the Member States of the European Union (Regulation 44/2001), and the three remaining EFTA States (Lugano Convention). As regards relations with other countries, existing domestic rules continue to apply.

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Although the Brussels Convention is no longer in force (it has been replaced in all Member States by Regulation 44/2001 and now Regulation 1215/2012), we will nevertheless take into account the case law developed by the Court of Justice under such Convention, when it refers to rules that have not substantially changed, and which is consequently still relevant for the interpretation of Regulation 1215/2012, and also for a better understanding of its rules. 5.3.1 The rules

on international jurisdiction

The European rules establish common criteria of jurisdiction to be applied in case of disputes with persons domiciled in the European area. This means that, within the European area, the issue of whether a claim can be brought before a given court is to be decided under the uniform rules of Regulation 1215/2012 and the Lugano Convention instead of the national rules on jurisdiction, which continue to apply with respect to disputes with parties from third countries. 5.3.1.1 The

general rule: jurisdiction of the court of the defendant

The general rule, contained in Article 4 of Regulation 1215/2012 and Article 2 of the Lugano Convention, is that persons domiciled within their territorial ambit (European Union and Lugano countries) may in principle be sued only before the courts of their home country. Article 4(1) of Regulation 1215/2012 Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State.

This means that it is always possible to sue a party before the courts of its domicile. There are a number of exceptions to the above rule. Some of them concern special situations, such as insurance (Articles 10-16), consumer contracts (Articles 17-19) and individual employment contracts (Articles 20-23). Other very important exceptions, which are frequently used by claimants who wish to attract foreign defendants before their own courts, are the option to sue the defendant before the courts of the place of performance of the contract and — with regard to non-contractual obligations — before the courts of the place where the harmful event occurred. Finally, we should mention a further exception, i.e. the possibility of excluding the jurisdiction of the courts of the defendant through a choice of jurisdiction clause, infra, § 5.3.2.

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of the courts at the place of performance of contractual obligations (Article 7,

No. 1)

The most important and most commonly used means for establishing the jurisdiction of its own courts against a foreign defendant is Article 7, No. 1, of Regulation 1215/2012 and Article 5.1 of the 2007 Lugano convention. Article 7.1 of Regulation 1215/2012 A person domiciled in a Member State may be sued in another Member State: 1.

(a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;



(b) for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be:



 in the case of the sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered,



 in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided;



(c) if point (b) does not apply then point (a) applies.

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This provision, which was introduced in the present text by Regulation 44/2001 as Article 5.16 (and remained unchanged as Article 7.1 of Regulation 1215/2012) provides, in addition to the general rule of the place of performance, two specific rules for the contracts of sale and the contracts for the provision of services. This means that with respect to the contracts of sale and for the provision of services, reference is made to the place indicated in sub-paragraph (b), without considering the place of performance of the specific obligation whose performance is sought in the proceedings. We will examine how Article 7.1 applies to three typical situations: commercial agency agreements, contracts of sale and distributorship contracts. (a) Agency

agreements

As regards commercial agency agreements, the courts of the place where the agent performs his activity will have jurisdiction under Article 7.1, whatever the obligation whose performance is sought in the proceedings may be. Example 5-1 – Possible claim by a French agent A Maltese company appoints an agent in France for the promotion of its products in France. The contract does not provide anything with respect to the applicable law and the resolution of possible disputes. After a first period of fruitful collaboration, relations deteriorate and the principal terminates the contract. The agent then informs the principal that he is entitled to an indemnity of at least two years’ commission, as well as damages for sales made in breach of the agent’s exclusivity. The principal, who is still awaiting payment of certain sums that the agent has collected on his behalf, would like to avoid a dispute in France, and asks his lawyer if he can bring a claim before the courts of Malta or submit the dispute to arbitration in a neutral place.

As regards the arbitration, the answer is, of course, no, since there is no arbitration clause and it is rather unlikely that the agent might agree to such a clause after the dispute has arisen. Concerning the possibility of bringing a claim in Malta, there would have been some space under Article 5.1 of the Brussels Convention, provided the principal could show that under the applicable law the agent was to pay the sums collected at the principal’s place of business in Malta.7 However, under Article 7.1(b) of Regulation 1215/2012, one must refer to the place where the agent provided his services (France). 6. It is important to mention Article 5.1 of Regulation 44/2001, since the greatest part of the jurisprudence of the Court of Justice, which is applicable as well to Article 7.1 of Regulation 1215/2012, refers to Article 5.1 of Regulation 44/2001. 7. Nevertheless, the main problem, i.e. whether Maltese courts would also have jurisdiction on the agent’s claim for indemnity and damages, would have remained unsolved.

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Consequently, the principal cannot avoid the agent bringing a claim before the French courts (which will apply French law in accordance with Article 4(1)(b) of the Rome I Regulation),8 and he knows that in case the outcome is successful for the agent, the judgment will be easily recognized in Malta. It is therefore important to bear in mind that, whenever there is a contract for the provision of services, the party providing the service will always be able to bring the other party before the courts of the country where it performs its activity, unless otherwise agreed in a choice of forum clause: infra, § 5.3.2. On the contrary, the party receiving the service will never be able to bring its counterpart before its own courts unless through a choice of jurisdiction clause. (b) Contracts

of sale

As regards contracts for the sale of goods, Article 7.1(b) of Regulation 1215/2012 says that reference must be made to the place in a Member State where, under the contract, the goods were delivered or should have been delivered, without specifying whether “delivery” is intended in the strictly legal sense, as the place where the seller fulfils his delivery obligations (e.g. by delivering the goods to a carrier), or as the place where the goods are actually handed over to the buyer.

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The Court of Justice has decided in favour of the second interpretation in a dispute between an Italian buyer (KeySafety) and a German manufacturer (Car Trim). When KeySafety terminated the contract, Car Trim brought an action for damages before the court of its seat (Chemnitz). The court of Chemnitz declined jurisdiction and the case was brought before the Bundesgerichtshof which decided to stay proceedings and to ask the Court of Justice whether the place of delivery is the place of physical transfer to the purchaser or the place where the goods are handed over to the first carrier. The Court decided as follows: Court of Justice, 25 February 2010, KeySafety/Car Trim Place of delivery under Article 5(1)(b), Regulation 44/2001 The first indent of Article 5(1)(b) of Regulation No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters must be interpreted as meaning that, in the case of a sale involving carriage of goods, the place where, under the contract, the goods sold were delivered or should have been delivered must be determined on the basis of the provisions of that contract. Where it is impossible to determine the place of delivery on that basis, without reference to the substantive law applicable to the contract, that place is the place where the physical transfer of the goods took place, as a result of which the purchaser obtained, or should have obtained, actual power of disposal over those goods at the final destination of the sales transaction.

Thus the Court decided in favour of the physical transfer of the goods, which implies that in principle the court of the place of destination of the goods will have jurisdiction under Article 5.1 (now 7.1 of Regulation 1215/2012).9 However, at the same time the Court said very clearly that this rule applies only if it is impossible to determine the place of delivery on the basis of the contract clauses, i.e. when it is necessary to have recourse to the legal rules in order to find out where delivery is to be made. This means that the main issue will be to decide whether the parties have determined the place of delivery in the contract. If the seller is able to prove that he agreed in the contract that delivery would be made at his premises, he will be able to bring a claim before his courts under Article 5.1 and the buyer will not be entitled to make a claim before the courts of his place of business. For the purpose of determining the place of delivery a possible reference to the Incoterms® may play an important role, as decided by the Court of Justice in the Electrosteel case. 8.

Supra, § 2.5.3.

9. But in the less frequent case where the goods are to be delivered to a third party, it should be the court of the place of business of such third party.

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Court of Justice, 9 June 2011, Electrosteel Europe/Edil Centro In order to verify whether the place of delivery is determined ‘under the contract’, the national court seised must take account of all the relevant terms and clauses of that contract which are capable of clearly identifying that place, including terms and clauses which are generally recognised and applied through the usages of international trade or commerce, such as the Incoterms® drawn up by the International Chamber of Commerce in the version published in 2000.10

We can therefore conclude that a reference in the contract to an Incoterm implying delivery at the seller's domicile (like Ex works, FCA, CIP) or at a place in the seller’s country (like FOB or CIF) will entitle the seller to claim before the courts of his country, while, on the contrary, a clause providing for delivery at destination (like DAP) will entitle the buyer to claim before his courts. (c) Distributorship

contracts

With respect to contracts with resellers, the critical issue is whether they should be qualified as contracts of sale (where the reseller acts mainly as buyer) or as distributorship contracts (where the reseller actually performs services regarding the distribution of the supplier’s products. This issue arises in particular in the absence of a written contract, where the relationship evolved from a simple sale-purchase relationship to a more complex relationship where the reseller assumed a number of obligations regarding the distribution of the products, such as participation to fairs, advertising, etc.

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The Court of Justice dealt with this issue in the Corman-Collins case11 where the French company “Maison du Whisky” had a commercial relationship for approximately 10 years with the Belgian company Corman-Collins, which used to buy from the former various brands of whisky, for reselling them in the Belgian market. During such period, Corman-Collins used the appellation “Maison du Whisky Belgique” and an Internet site called www.whisky.be, without causing any reaction from the French company. In December 2010, La Maison du Whisky informed Corman-Collins that it would confer the distribution of two whisky brands to another company and banned it from using the appellation “Maison du Whisky Belgique”. Corman-Collins sued La Maison du Whisky before the Tribunal of Verviers on the basis of the Belgian law of 1961, seeking an order for payment of compensation due to distributors under such law, and the Tribunal asked the ECJ whether the contract in question should be regarded as a contract for sale or as a contract for the provision of services, which would have given Corman Collins the right to sue the supplier before his own courts, on the basis of Article 5.1(b), second indent, of Regulation 44/2001 (now Art. 7.1(b) of Regulation 1215/2012). The Court stated that, if the relationship is limited to the provision of products, even through a long term commercial relationship, it should be considered as a contract of sale, but, on the contrary, this is would not be the case if the contract corresponds “to the general scheme of a typical distribution agreement, characterized by a framework agreement, the aim of which is an undertaking for supply and provision concluded for the future by two economic operators, including specific contractual provisions regarding the distribution by the distributor of goods sold by the grantor”.12 In other words, if the reseller undertakes specific obligations concerning the distribution of products, it should be considered as a distributorship contract, to be classified as a contract for the provision of services. On the same line, the Court decided in the Granarolo case13 that a long-standing business relationship between a supplier and a purchaser who resells the goods, is to be classified as a “contract for the sale of goods” if the characteristic obligation of the contract at issue is the supply of goods or as a “contract for the provision of services” if the characteristic obligation is a supply of services. 10. The reference to Incoterms® 2000 is due to the fact that the case deals with a contract made before the adoption of the Incoterms® 2010. 11. Court of Justice, 19 December 2013, case C-9/12, Corman-Collins SA v La Maison du Whisky SA. 12. § 36. 13. Court of Justice, 14 July 2016, Case C196/15, Granarolo S.p.A. v Ambrosi Emmi France SA.

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of jurisdiction clauses

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Article 25 of Regulation 1215/2012 (which replaces Article 23 of Regulation 44/2001 and Art. 17 of the Brussels Convention and the Lugano Convention) fully recognizes the parties’ freedom to choose a particular jurisdiction within the EU, by stating the following: 1.

If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. The agreement conferring jurisdiction shall be either:

(a)

in writing or evidenced in writing;

(b)

in a form which accords with practices which the parties have established between themselves; or

(c)

in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned.

2.

Any communication by electronic means which provides a durable record of the agreement shall be equivalent to ‘writing’.

This means that, except for the matters for which the jurisdiction is exclusively reserved to certain courts (e.g. consumer contracts or individual contracts with employees) the parties are free to choose the jurisdiction, even when this conflicts with a domestic rule providing for the exclusive jurisdiction of its courts.14 In principle, the clause must be in writing or evidenced in writing. This requirement of form can be overcome only in specific cases, such as an established practice binding the parties, or regularly observed international usages. The issue that arises most frequently is whether a choice of court clause contained in general conditions of a party has been validly concluded. In case of the written acceptance of a proposal (e.g. an order or a confirmation of order) that contains the general conditions, including the choice of court clause, the answer is yes. Thus, in one of the first cases decided by the Court of Justice,15 it was decided that: … where a clause conferring jurisdiction is included among the general conditions of sale of one of the parties, printed on the back of a contract, the requirement of a writing under the first paragraph of article 17 of the Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters is fulfilled only if the contract signed by both parties contains an express reference to those general conditions.

When the document proposed by one party and accepted in writing by the other does not contain the choice of forum clause, but only a reference to general conditions that include such clause, the answer is less certain. Some courts require that the clause that makes reference to the general conditions expressly state that such general conditions contain a choice of forum clause; other courts will verify whether the general conditions have actually been transmitted to the party in question. However, the most critical situation arises when the proposal containing the general conditions (or referring to them) is tacitly accepted, as is frequently the case.

14. For example, a choice of forum clause in a contract with a Belgian distributor will be valid notwithstanding the Belgian law of 1961, which recognizes the distributor’s right to claim before the Belgian courts. Similarly, the Italian rules providing for the exclusive jurisdiction of “labour courts” in disputes with self-employed commercial agents acting as individuals will not be opposable against a choice of forum clause in favour of the seat of the principal in another EU country. 15. Judgment of 14 December 1976, case 24-76, Estasis Salotti v Rüwa Polstereimaschinen, in ECR., 1976, 1831 et seq.

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Example 5-3 – Jurisdiction clause tacitly accepted An Italian company, Società Esercizio Cantieri, purchased certain mechanical products from a German manufacturer. The German manufacturer sent a confirmation of order, which contained its general conditions of sale. Article 13 of such conditions indicated the exclusive jurisdiction of the courts of the manufacturer’s place of business. The Italian buyer did not object to the above confirmation of order and took delivery of the goods and paid them. When some defects arose, the purchaser made a claim before the courts of his place of business, and the seller objected that his courts (in Germany) had jurisdiction due to the choice of forum clause. The Court of Cassation (Italy)16 decided that the tacit acceptance of the general conditions by the purchaser did not amount to an acceptance in writing and that, consequently, the choice of forum clause was not valid.

The above example shows that choice of forum clauses contained in one party’s contract proposals will, in most cases, be ineffective due to the lack of acceptance in writing. The result might be different if the interested party can rely on the provisions of Article 25(1)(b) and 25(1)(c)17 and is able to show that:  a practice has been established between the parties, according to Article 25(1)(b) of Regulation 1215/2012, to consider the general conditions and the choice of court clause as applicable to their future contracts,18 or

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 a tacit acceptance of the choice of forum clause corresponds to a usage in international trade, as admitted under Article 25(1)(c) of Regulation 1215/2012. With respect to usage in international trade, the Court of Justice has stated19 the following principles: Court of Justice, 16 March 1999, Trasporti Castelletti/Hugo Trumpy The ‘contracting parties’ consent to the jurisdiction clause is presumed to exist where their conduct is consistent with a usage which governs the area of international trade or commerce in which they operate and of which they are, or ought to have been, aware. The existence of a usage, which must be determined in relation to the branch of trade or commerce in which the parties to the contract operate, is established where a particular course of conduct is generally and regularly followed by operators in that branch when concluding contracts of a particular type.

This means that it is not easy for a party to prove the existence of a usage whereby a jurisdiction clause can be accepted tacitly by performing the contract. It is interesting to note that under Article 25(2) of Regulation 1215/2012 communication by electronic means is also considered to be “in writing” where such communication provides “a durable record of the agreement”. The territorial ambit of application of the rule on choice of forum also extends to parties of third countries, provided the forum chosen is within the territory covered by the Regulation. Thus, a clause in a contract between an Australian company and a Belgian party providing for the exclusive jurisdiction of the courts of Brussels, will be valid under Article 25 of Regulation 1215/2012.

16. Judgment of 22 January 2002, § 718, Lohmann & Stolterfoht v Società Esercizi Cantieri, in JurisData, sent. cass. civ.. 17. It should be noted that these provisions are the same in Article 17 of the most recent version of the Brussels Convention, so that reference can be made to the case law on the Convention. 18. See, for instance, the judgment of the French Court of Cassation of 12 February 2002, Isocar v Truillet (quoted by Mourre, Droit judiciaire privé européen des affaires, 2003, 231). In this case, 55 invoices sent by the seller during a period of one year contained the jurisdiction clause. Since the buyer never objected in the past, he could not pretend not to have accepted the clause. 19. Judgment of 16 March 1999, Trasporti Castelletti Spedizioni Internazionali Spa v Hugo Trumpy Spa, in ECR., 1999, I-1597 et seq.

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Of course, the courts of the other party in Australia will not be bound by Regulation 1215/2012.20 However, the court chosen will determine its jurisdiction under the “European” rules — instead of the domestic rules, which would normally be applicable when dealing with a party of a third country — and the courts of other countries of the “European” area will also be bound Regulation 1215/2012. 5.3.3 The rules

regarding lis pendens

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A very important feature of the European jurisdictional system is the rule contained in Article 29 of Regulation 1215/2012, according to which: 1.

Without prejudice to Article 31(2), where proceedings involving the same cause of action and between the same parties are brought in the courts of different Member States, any court other than the court first seised shall of its own motion stay its proceedings until such time as the jurisdiction of the court first seised is established.

2.

In cases referred to in paragraph 1, upon request by a court seised of the dispute, any other court seised shall without delay inform the former court of the date when it was seised in accordance with Article 32.

3.

Where the jurisdiction of the court first seised is established, any court other than the court first seised shall decline jurisdiction in favour of that court.

This means that no space is left in the European area21 for parallel proceedings before courts of different countries. In all cases where more than one court could have jurisdiction, only one of them (i.e. the first one to have been seized) will be competent, and all of the others will be excluded. Therefore, if a party succeeds in seizing its own courts before the other party can do the same, it can obtain a significant strategic advantage in the litigation. Since this principle could severely affect the effectiveness of choice of court clauses, by claiming first before the court of a country where justice is slow (like for instance Italy: for this reason this strategy has been called the “Italian torpedo”) in order to avoid the jurisdiction of the court designated in the forum selection clause, Regulation 1215/2012 has introduced the rule according to which the jurisdiction of the court designated in the choice of court agreement always prevails over that of other courts. This principle is stated in Article 31(2) of Regulation 1215/2012, where it is said that: … where a court of a Member State on which an agreement as referred to in Article 25 confers exclusive jurisdiction is seised, any court of another Member State shall stay the proceedings until such time as the court seised on the basis of the agreement declares that it has no jurisdiction under the agreement.

This means that, when a party wishing to avoid the court designated in the jurisdiction agreement brings a claim before another court and thereafter the other party seizes the court designated in the agreement, the first one must stay proceedings and the designated court will have the exclusive jurisdiction to decide whether the choice of court agreement is valid and effective. Finally, Article 25 of the new Regulation expressly provides that the designated court will decide on the substantive validity of the agreement under its own law (the lex fori). The following example shows how the issue would be dealt with under Regulation 44/2001 and under Regulation 1215/2012. Example 5-4 – Litigation between an Italian seller and a Slovak purchaser The company Mario Rossi sells a load of 2,500 pairs of shoes to the Slovak company, Olympia Sportswear. The goods are shipped CIP (Incoterms® 2010) to Bratislava, to the premises of the Slovak purchaser. The order placed by Olympia referred to its general conditions of purchase, attached to the same, which contained a choice of jurisdiction clause in favour of the courts of 20. To the same extent as they would not be bound by a domestic rule on jurisdiction of a third country. 21. With respect to proceedings pending before a court of a third state the court in a Member State seised, may, in its discretion, stay proceedings under certain conditions: see Lookofsky, Ketilbjørn, European Union Private International Law in Contract and Tort, 2nd ed., Copenhagen 2015, 38-39.

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Bratislava. This order was not expressly accepted in writing by Rossi, since the final conditions regarding the price and the date of delivery were agreed later by telephone. When a dispute arises about the quality of the shoes, each party consults a lawyer, asking him if it would be able to bring a claim before its own courts. The Italian company fears that the courts in Slovakia may not be familiar with international sales law, while the Slovak party fears that a dispute in Italy would be too expensive and burdensome. The Italian lawyer informs Rossi that the choice of forum clause is ineffective, since it has not been accepted in writing. Consequently, Rossi can claim before the courts of its seat in Italy according to Article 7(1) of Regulation 1215/2012 since the goods were delivered in Italy when handed over to the first carrier in compliance with the agreed Incoterm (CIP). The Slovak lawyer, appointed by Olympia, says that the courts in Bratislava are competent by virtue of the choice of forum clause contained in the general conditions of purchase, even in the absence of a written acceptance, because there has been a practice established in the past between the parties to consider the general conditions of Olympia as applicable to their future contracts, in conformity with Article 25(1)(b) of Regulation 1215/2012.

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Since the decision whether the choice of forum clause is effective depends on an evaluation of the factual situation of the previous relations between the parties, it is very difficult, if not impossible, to foresee what the respective courts may decide.

When a situation of this type arises, where both courts may have good reasons for accepting jurisdiction, each party will be put in a more advantageous situation if it can succeed in bringing the claim before its court first, because this will prevent the other party from doing the same. Of course, where, as in this case, the outcome of the issue on jurisdiction is not certain, it may be that the court seized will decline jurisdiction (and in this case the other court will have jurisdiction), but it is already an advantage to have this issue decided by its own courts and not by the courts of the other party’s country. Thus, under Regulation 44/2001, the party being able to first bring the claim before its courts, could exclude the jurisdiction of the courts of the other party (at least until the Court first seized would declare that it has no jurisdiction). Under Regulation 1215/2012 the situation is quite different. If Rossi brings a claim before the Italian court before Olympia, the latter will always have the right to claim before the court designated in the choice of jurisdiction clause and that court will be the only one to decide, under its own law, whether the jurisdiction agreement has been validly concluded. It is important to stress that the new rules introduced by Regulation 1215/2012 strengthen the effectiveness of the jurisdiction clauses, not only against those who disregard them without any valid reason (i.e. for the only purpose of delaying proceedings), but also against those who have sound objective reasons to believe that the clause is ineffective. This may be a further reason for advising parties to use, to the extent possible, choice of jurisdiction clauses in their contracts.

5.4 The Hague Convention of 2005 on Choice of Court Agreements It has been noted that, except for the special regime of the European area analyzed in the previous paragraph, there is little space for the recognition of choice of court agreements and court judgments between different countries. This situation may substantially change if the Hague Convention of 30 June 2005 on choice of court agreements, in force since 1 October 2015, will be ratified by a large number of countries. At present the Convention has been ratified by the Member States of the EU, Mexico and Singapore. Since the Convention does not apply to the relations between EU countries, its present importance is very limited, but this situation might change if the United States, which signed the Convention, decides to ratify it.

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The 2005 Hague Convention provides an important means of establishing uniform rules for the recognition and enforcement of judgments between different countries. It should be said from the outset, however, that the 2005 Hague Convention has a more limited scope than the European rules examined above, because it applies only to situations where the parties have agreed upon a choice of court agreement, while the Brussels and Lugano Conventions and Regulation 1215/2012 apply generally to all disputes in civil and commercial matters. The original project prepared by the Hague Conference on Private International Law, i.e. the Preliminary Draft Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters of 1999, had a much broader scope, more similar to the Brussels and Lugano Conventions. However, it appeared that this project was too ambitious and would not receive sufficient support by Member States. It was then decided prepare a draft to cover only those situations in which the parties have agreed upon a choice of court (forum selection clause). Of course, this is a substantial difference from that of the European system. At present the Hague Conference is reconsidering a Judgments Project.22

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In the European area, a claimant knows he can bring a claim on the basis of the grounds of jurisdiction established in this common system of rules (e.g. before the court where the goods are delivered in case of a sales contract: supra, § 5.3.1.2), and he knows that these rules are the same in all countries included in the area (since the European rules have replaced domestic rules on jurisdiction), and that the judgment of the competent court will be recognized and enforced in all countries within it. In the framework of the 2005 Hague Convention, the above uniformity and “free circulation” of judgments only applies when the parties have agreed upon a choice of court agreement, and consequently the Convention is of no use in any cases where the parties are unable to agree upon a selection of forum clause. This being said, the fact remains that even with this limitation, the 2005 Hague Convention constitutes a substantial step forward in favouring the recognition of judgments in wider geographical areas. 5.4.1 Scope

of application

The Convention applies “in international cases to exclusive choice of court agreements concluded in civil or commercial matters” (Article 1(1)), with the exclusion of consumer and employment contracts and a number of matters indicated in Article 2(2) such as, inter alia, family law matters, wills and succession, insolvency, carriage of persons and goods, antitrust (competition) matters, validity of intellectual property rights other than copyright or related rights, infringement of intellectual property rights other than copyright or related rights, except where infringement proceedings are brought for breach of a contract between the parties relating to such rights. Article 2(3), however, expressly states that: Notwithstanding paragraph 2, proceedings are not excluded from the scope of this Convention where a matter excluded under that paragraph arises merely as a preliminary question and not as an object of the proceedings. In particular, the mere fact that a matter excluded under paragraph 2 arises by way of defence does not exclude proceedings from the Convention, if that matter is not an object of the proceedings.

This means that those matters excluded from the scope of the Convention under Article 2(2) may also be dealt with in a judicial proceeding falling under the Convention, provided that they do not constitute the subject matter of the proceeding. For example, if a party sues someone under a contract and the defendant claims that such contract is void because it infringes the antitrust rules, the proceedings are not outside the scope of the Convention, because the principal issue concerns the breach of the contract and not the antitrust issue.

22. See: HCCH, Explanatory Note providing Background on the Proposed Draft Text of a Convention on the Recognition and Enforcement of Foreign Judgments, April 2016.

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choice of court agreements

The Convention applies, as noted, to exclusive choice of courts agreements. An “exclusive choice of court agreement” is defined in Article 3(a) as: … an agreement concluded by two or more parties that meets the requirements of paragraph c) and designates, for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting State or one or more specific courts in one Contracting State to the exclusion of the jurisdiction of any other courts.

Paragraph c) defines the formal requirements of a choice of court agreement, stating that it must be concluded or documented in writing, or by any other means of communication which renders information accessible so as to be usable for subsequent reference. The last sentence should make clear that choice of court agreements could be validly concluded by fax or e-mail. There are two principal effects of a choice of court agreement:  The court chosen shall have jurisdiction to decide the dispute,23 and consequently cannot decline jurisdiction in favour of another court24 (Article 5);  The court not chosen shall refrain from hearing the case, even if it would have had jurisdiction under its national law (Article 6).

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However, the obligation of the court not chosen to refuse jurisdiction is subject to a number of exceptions that may substantially limit the effectiveness of this principle, in particular, those under Article 6 (c) and (d), which refer to situations where: c)

giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the state of the court seised;

d)

for exceptional reasons beyond the control of the parties, the agreement cannot reasonably be performed.

It is difficult to foresee how these rather broad exceptions may be interpreted in the future by courts in the contracting states. 5.4.3 Recognition

and enforcement

Article 8(1) of the Convention provides that: A judgment given by a court of a Contracting State designated in an exclusive choice of court agreement shall be recognized and enforced in other Contracting States in accordance with this Chapter. Recognition or enforcement may be refused only on the grounds specified in this Convention.

This principle is subject to a number of exceptions listed in Article 9 regarding: the validity of the choice of court agreement and the capacity of the parties to conclude it, improper notification of the proceedings, public policy of the requested state and inconsistency with other judgments between the same parties. 5.4.4 Conclusions

If it is ratified by a significant number of states, the 2005 Hague Convention may become a powerful instrument for favouring international trade by making the resolution of disputes through national courts more effective and foreseeable, particularly by enhancing certainty in international litigation before national jurisdictions. At present, however, it is difficult to foresee the future of the Convention as regards its acceptance by the states and its application thereafter. Considering the substantial importance of this tool for the progress of international law, hopefully it will receive the widest possible acceptance around the world.

23. Unless the agreement is null and void under the law of the state of the chosen court. 24. This excludes the application of the forum non conveniens doctrine, frequently applied in common law jurisdictions, as well as the possibility of invoking the lis pendens exception. Thus, the fact that a proceedings before another court involving the same cause of action is pending between the same parties cannot be a reason for the chosen court to decline jurisdiction.

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5.5 Strategies for the Appropriate Choice of Jurisdiction If the parties wish to increase the predictability and certainty of their deals, they should try to determine beforehand how possible disputes should be resolved, by agreeing on arbitration, or — if they wish to have recourse to ordinary courts — by inserting a choice of forum clause into their contract. At first sight, the most appropriate solution for a party is a choice in favour of its own courts. In fact, the other two possible alternatives — courts of the other party or of a third country — are, in most cases, less appropriate. A choice in favour of the courts of the other party is not normally advantageous25 and will be accepted by a party only if the other party requests it and the matter appears to be non-negotiable. As regards the choice of a neutral forum, i.e. of the courts of one country other than those of the two parties involved, such a solution is not frequent, probably because it is considered to be inappropriate to submit disputes to courts that have no connection with the case and that could easily refuse to accept jurisdiction. In fact, where there is a great need for a neutral solution, the most common recourse will be to refer the matter to arbitration, which is the most appropriate tool warranting the highest level of neutrality. 5.5.1 Choice

of forum in favour of its own courts

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As noted previously, the most obvious solution for a party when negotiating a choice of court agreement is to give exclusive jurisdiction to the courts of its country. In doing so, the party in question wants to make sure that possible disputes will be decided under a well-known procedural system, by judges who use the same language, with the assistance of lawyers it is familiar with, etc. However, even when the other party is willing to accept this solution, agreeing upon the exclusive jurisdiction of its own court is not always the most appropriate choice. Thus, in cases where it is unlikely that a judgment by the courts of the country of a party would be recognized and enforced in the country of the other party, the choice of forum clause may become a handicap, as shown in the following example. Example 5-5 – Transfer of technology to a developing country A European manufacturer enters into a transfer of technology contract with a licensee in a developing country. The contract expressly provides that in case of dispute, the courts of the licensor’s country will have exclusive jurisdiction. When the licensee stops paying the royalties, the licensor decides to bring a claim before his courts, but his lawyers discourage him, arguing that it would be impossible to recognize and enforce a judgment by the courts of the licensor’s country in the country of the licensee. The licensor then decides to claim before the courts of the licensee, but the licensee objects that his courts must decline jurisdiction in order to respect the choice of forum clause.

It is not certain that the court of the licensee will accept this paradoxical solution; it might also decide that it is not bound to respect the jurisdiction clause. But the fact remains that the exclusive jurisdiction clause is not appropriate in the above situation. The licensor should at least have tried to negotiate a clause whereby he reserved the right to claim in the licensee’s country, as described in § 5.5.3. One can therefore draw a first conclusion, i.e. that a choice of forum in favour of the courts of one party may not be appropriate for such party if the judgments of the chosen court are not easily enforceable in the country of the other party.

25. And even in case a party decides that it is in its interest to claim before the courts of the other party, it will need no choice of court clause, since it is always possible to bring a claim before the courts of the defendant.

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However, this is only relevant when a party expects that it may need to enforce a possible judgment in the other party’s country. If, on the contrary, a party is in a situation, or has created a situation, in which it will not need to claim against the other party, but rather to defend itself against a possible claim, the enforceability of a possible judgment in the other party’s country will not be relevant. For example, in the context of a commercial agency agreement, the principal knows that in case of contract termination he will mainly have to defend himself against claims for payment of commission, goodwill indemnity, etc., while it is unlikely that he will need to make claims against the agent. Or, if we take the example of a sales contract providing for payment by documentary credit, the seller will normally not need to take the initiative against the purchaser. When a party envisages situations of this kind, it may choose the exclusive jurisdiction of its own courts, even when it knows that possible judgments would not be recognized and enforced in the other party’s country. Example 5-6 – US principal appointing a commercial agent in Italy A US company appoints an individual as a commercial agent in Italy. The contract provides for the application of the substantive law of the state of New York and the exclusive jurisdiction of the courts of New York. When the contract is terminated, the Italian agent claims a goodwill indemnity under the Italian rules, which implement the European directive and which cannot be derogated.

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The Court of New York rejects the claim, arguing that no goodwill indemnity is due under New York law, which is the applicable law.26

The above judgment would not be enforceable in Italy: first, because the choice of jurisdiction clause, with a commercial agent acting as individual, is not valid in Italy (due to the exclusive jurisdiction of “labour courts”, which cannot be excluded), and second, because denying the indemnity would be against public policy. However, this is not a problem for the US principal, since he does not need to enforce the judgment in Italy. The situation might, however, become less secure for the American party if the Italian agent decided to bring an action before his own courts. Although it is very unlikely, if not impossible, that the agent would succeed in enforcing in New York an Italian judgment condemning the principal to pay the goodwill indemnity, he could try to satisfy himself on goods or credits of the principal in Italy, by obtaining an attachment on sums owed to the principal by Italian purchasers. The above example shows that the “defensive strategy” described above is fully effective only when it is certain that the choice of court agreement will be respected by the courts of the country of the counterpart. Where this is not the case, the party choosing the jurisdiction of its own court must consider the possibility of defending itself against a claim in the country of the other party. However, it should not be forgotten that in areas where choice of jurisdiction clauses are fully effective and recognition and enforcement of judgments is warranted (as in the European area described in § 5.3), the above problems do not arise, and there are practically no objections to a choice of forum in a party’s own country, as shown in the following example. Example 5-7 – Sale of equipment in Belgium A Czech company sells a grinding machine to a Belgian manufacturer. The contract provides for an advance payment and payment of the balance 90 days after delivery. An express clause provides that the courts in Prague will have jurisdiction for all possible disputes arising between the parties.

26. This conclusion is very likely, although not absolutely certain. In fact, the New York Court might consider section 187(2) of the Restatement (second) of Conflict of Laws (see above, § 2.7.3) and argue that the application of New York law would be contrary to a fundamental policy of a state which has a greater material interest in warranting the indemnity to the agent.

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If the purchaser thereafter refuses to pay the balance due to alleged defects of the equipment, the dispute must be brought before the courts of Prague, and if the buyer makes a claim before its courts in Belgium, these must refuse jurisdiction, since under Regulation 1215/2012, all courts must respect a choice of forum clause, which complies with the requirements of Article 25 of Regulation 1215/2012. Moreover, both parties know that a judgment of the Czech court will be easily recognized in Belgium.

Of course, the solution envisaged in this example puts the seller in a very favourable position and would, in principle, be his preferred choice, while the buyer would prefer the opposite solution, i.e. a jurisdiction clause in favour of its own courts. 5.5.2 Exclusive

and non-exclusive jurisdiction clauses

A choice of jurisdiction clause can be exclusive or non-exclusive. With an exclusive choice of forum clause, the parties intend to give jurisdiction to a given court and to exclude the jurisdiction of any other court. A non-exclusive clause only gives jurisdiction to the court indicated in the clause in order to make sure that such court is entitled to decide the case, but does not exclude that the parties may make a claim before other competent courts.

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Some laws provide that a clause not specifying its exclusive or non-exclusive character must be considered as exclusive. This is the case under Regulation 1215/2012. In particular, its Article 25 provides that when parties agree that the court or the courts of a Member State are to have jurisdiction, such jurisdiction shall be exclusive unless the parties have agreed otherwise. A similar rule is contained in the 2005 Hague Convention on choice of court agreements. Article 3(b) of the Convention expressly states that: a choice of court agreement which designates the courts of one Contracting State or one or more specific courts in one Contracting State shall be deemed to be exclusive unless the parties have expressly provided otherwise.

Other laws, however, do not take this position, so that a clause not specifying that the chosen forum is exclusive may leave the parties free to claim before other jurisdictions. This is why parties should, in any case, clarify this point in the clause itself by expressly stating if they wish the chosen court to have exclusive jurisdiction. 5.5.3 Drafting

choice of forum clauses

An example of a simple exclusive forum clause, in line with the prevailing practice in Europe, is the following: Example of choice of forum clause § 1 All disputes arising out of or in connection with the present contract shall be subject to the exclusive jurisdiction of the courts in …………….

In principle, a clause such as the above should be sufficient. However, in some countries, lawyers may prefer to set out a number of additional issues. An interesting example of this type of approach is the following clause of American origin:27 Example of choice of forum clause § 2 (US) 1. All disputes, differences, controversies or claims arising in connection with, or questions occurring under, this present Agreement, shall be subject to the exclusive jurisdiction of the courts in ________. 2. With respect to any such action, each party hereby: (i) consents to the personal jurisdiction of the above-designated jurisdiction; (ii) agrees that venue properly lies in the above-designated jurisdiction; (iii) waives any claim that any such action should be dismissed on grounds of inconvenient forum or lack of jurisdiction, or that any such action should be transferred to any court or tribunal outside the above-designated jurisdiction. 27. This clause is proposed as a model clause by Park, International Forum Selection, 1995, 187.

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3. The parties agree that a final judgment by any court in the above-designated jurisdiction covered by this Agreement shall be conclusive and may be enforced in other jurisdictions in any manner provided by law. 4. The parties hereby waive any claim that a judgment obtained in the abovedesignated jurisdiction is invalid or unenforceable. 5. This Agreement shall be governed and construed according to the laws of ______________ excluding its choice-of-law principles.

Sometimes, the parties agree upon a clause that grants exclusive jurisdiction to the courts of one of their countries (normally those of the party having more bargaining power), but which at the same time gives that party the option of claiming before the courts of the other party. The following is an example of this type of clause: Example of choice of forum clause § 3 The competent law courts of …… (place of business of party A) shall have exclusive jurisdiction in any action arising out of or in connection with this contract. However, as an exception to the principle hereabove, party A is in any case entitled to bring its action before the competent court of the place where party B has its place of business.

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Under this clause, party B can only sue party A before the courts of the latter’s place of business, while party A has a choice between his own courts and the courts of party B’s place of business. A clause of this type is certainly unbalanced to the disadvantage of one of the parties.28 In fact, the French Court of Cassation29 invalidated the following unilateral jurisdiction clause: Potential disputes between the client and the Bank shall be subject to the exclusive jurisdiction of the Courts of Luxembourg. In the event the Bank does not rely on such jurisdiction, the Bank reserves the right to bring an action before the Courts of the client’s domicile or any other court of competent jurisdiction.

It could be argued that the clause should nevertheless be valid, particularly in the context of the Brussels and 1988 Lugano Conventions, where Article 17(4) says that: if an agreement conferring jurisdiction was concluded for the benefit of only one of the parties, that party shall retain the right to bring proceedings in any other court which has jurisdiction by virtue of this Convention.

In fact, since the two Conventions admit that a clause can be for the benefit of one party only — even where this is not expressly stated in the clause itself, but it clearly results from the contract or other circumstances)30 — there should be no doubt about the validity of a clause explicitly affirming the same principle At the same time it should be noted that the provision of Article 17(4) has not been included in the corresponding provision (Article 23) of Regulation 44/2001, in Article 25 of Regulation 1215/2012 and in Art. 23 of the new Lugano Convention. Finally, under Regulation 1215/2012, a clause of this kind might prevent the application of Article 31(2), which recognizes the exclusive jurisdiction of the court designated in the jurisdiction agreement, since it could be argued that the clause does not provide such exclusive jurisdiction for both parties. Considering the above, utmost caution is required when choosing this type of unilateral clauses. 28. A further problem is that the clause may be misunderstood by the courts of party B, which could argue that by permitting party A to claim before the courts of B, parties have made a choice in favour of a non-exclusive clause. This is not correct, because the clause is actually exclusive for party B, and only party A may choose to claim before the courts of party B, but the courts of B’s country also may be induced to follow the above interpretation, because it remedies the unbalanced character of the clause. This is why the clause in question should be used with caution, especially outside the European area. 29. Cass. civ (1ère chambre) 26 September 2012, n° 11-26.022, Mme X v Banque Privée Edmond de Rothschild. 30. See Court of Justice, 24 June 1986, case 22/85, Anterist v Crédit Lyonnais, in ECR 1986, 1951.

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requirements of jurisdiction clauses

Since choice of jurisdiction clauses may have the effect of excluding the jurisdiction of a court that would otherwise be competent, legislators tend to include formal requirements in order to warrant that the parties are well aware of their choice. This is why most legislations require the written form for a clause to be valid. As noted before (supra, § 5.3.2), also Regulation 1215/2012, requires the written form or equivalent solutions. This is very important when parties include the clause in general conditions, considering that in most cases these conditions are not accepted in writing and consequently the choice of forum clause will not be validly concluded if the strict interpretation of the requirement of the written form is followed. 5.5.5 Effectiveness

of the choice of forum clauses

One of the purposes of a choice of jurisdiction clause is to prevent the parties from bringing their claim before other courts. However, this result can only be obtained if the courts that would otherwise have jurisdiction over the case are willing to respect the clause and to decline jurisdiction.

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In many countries, choice of forum clauses do not oblige the courts to refuse jurisdiction in favour of the forum selected by the parties, but reserve to themselves a discretionary power to decide if it is appropriate to follow the indications of the clause. Moreover, even countries that recognize in principle the effectiveness of a choice of jurisdiction clause in favour of foreign courts will not be bound by the clause if the subject matter of the dispute is reserved to the jurisdiction of the courts of that country. Consequently, some legal systems provide for the exclusive jurisdiction of specialized courts (labour tribunals) for contracts of employment and sometimes also for agency contracts with individuals, which normally implies that disputes reserved to these special courts cannot be validly submitted to foreign courts. Similar rules exist whereby special protection is granted to the “weaker party” in certain contracts, for example, distributors in Belgium and Lebanon. In European Union countries and for signatories of the Lugano Convention, however, choice of jurisdiction clauses are admitted in general terms, provided that they respect the formal requirements described in the preceding paragraph, with the exception of particular types of contracts (insurance, consumer and employment contracts). This means that in all other cases, the choice of jurisdiction will be fully effective, even if this goes against a domestic rule reserving certain matters to its own courts. For example, a clause in a contract with a Belgian distributor establishing the exclusive jurisdiction of the courts of another Member State of the European Union will be valid and effective, even though Belgian law does not permit excluding the jurisdiction of its courts for disputes with Belgian concessionnaires. The same applies to Italian selfemployed agents falling under the exclusive competence of labour courts. This is a fundamental difference with respect to arbitration where the dispute subjected to the exclusive jurisdiction of local courts is considered to be non-arbitrable, which will normally be the case when a certain type of dispute is reserved to the local courts. These courts will affirm their jurisdiction and disregard the arbitration clause. For example, in the case of a Belgian distributor, an arbitration clause will not prevent Belgian courts from affirming their jurisdiction, while a jurisdiction clause in favour of a court of a country of the European Union (or covered by the Lugano Convention) will be valid and effective, because the EU Regulation or international convention prevails over the domestic law.

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Chapter 6

DRAFTING, NEGOTIATING AND CONCLUDING INTERNATIONAL CONTRACTS

6.1 Why Negotiate and Draft a Contract?

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In domestic business relationships it is common for parties, when entering into a contractual relationship, not to discuss the legal aspects of their agreement, but to limit themselves to negotiating the basic contents of their deal. For example, in the case of a regular sale in a shop, the parties will agree upon the goods purchased and their price, and will take immediate delivery of the goods without discussing the legal obligations arising out of the deal. If any problem arises later (e.g. if the goods prove to be defective), the solution will be found in the rules of the applicable law governing the contract in question. However, when contracts are more complicated or involve greater amounts of money, including most contracts between businessmen, parties will normally prefer to establish their own rules, to expressly define what their respective obligations are under the contract, while remaining within the framework of the applicable rules of law, which may, in various ways, limit their freedom (party autonomy), especially by dictating mandatory rules that the parties must, in any case, observe. Where the law provides specific rules for a given contract such as a contract of sale, in principle the parties will only need to draft their own rules when the standard solutions provided by the law do not conform to their needs or do not answer issues they need to clarify.1 However, many contracts currently used — for example: distributorship, franchising, patent licence, trademark licence and transfer of technology — are not regulated by the law in most legal systems. Where this is the case, there is an additional reason for drafting detailed contracts: namely, to establish precise rules on the main issues of the contract in question. When we shift from domestic to international contracts, the need for establishing specific contractual rules increases substantially because cross-border contracts are placed in a far less certain and foreseeable legal framework. If the parties have not made a clear choice of the applicable law, it may be difficult to determine in advance which law will govern the contract and, consequently, which rules will govern the obligations of the parties not expressly covered by the provisions of the contract. 6.1.1 The trend

towards self-sufficient contracts

Although parties should decide under which law the contract will be placed before drafting and negotiating a contract, it is not always possible to follow this practice. Contracts are often drafted and negotiated before the applicable law has been chosen, because many negotiators consider this to be of secondary importance. Moreover, parties frequently work out standard contracts for use in several potential future situations and in the (possible) context of different national laws, which implies that they cannot be construed in compliance with a specific domestic law. 1. This is at least the typical attitude in the context of civil law countries, where many contracts of common use are codified. In common law jurisdictions, on the contrary, the basic idea is that all the obligations of the parties should result from the provisions contained in the contract. This explains why the lawyers in common law countries tend to draft contracts that are far more detailed and exhaustive than those of civil law countries.

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Finally, many types of contracts frequently used in cross-border trade are not “codified” in domestic laws; consequently the drafters tend to cover the greatest possible number of issues in the contract itself. Many of these contracts (e.g. licensing agreements, distribution contracts, M&A agreements and turnkey contracts) circulate across national borders, and the standard clauses they contain tend to impose themselves in contractual practice, independently of the national law that will actually govern them. This scenario explains why cross-border contracts tend to be drafted, as far as possible, as self-sufficient documents that are becoming more and more independent from specific domestic laws. In other words, contracts used in international trade are tending to become increasingly similar and less closely linked to a given domestic legal system. It should be clearly stated, however, that the idea of a self-sufficient contract which can “stand up” under any legal system is an impossible and illusory goal. Due to the variety of rules of the different legal systems, it is impossible to draft a contract that complies with all of them. However, at the same time, it is possible to reduce the risk of conflict with the applicable rules of law by both drafting contracts that are as detailed and exhaustive as possible,2 and by choosing applicable rules of law from legal systems which have few mandatory rules or which have mandatory rules that conform to the expectations of international traders.3

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Therefore, it is very useful to devise contracts that are as self-sufficient as possible, bearing in mind that, whenever possible, one should check their compliance with the rules of the applicable law in advance.4 This trend towards self-sufficient and complete contracts, which has also been influenced by common law lawyers who tend to use this approach in their domestic deals, is a positive one, provided that the drafting technique is applied in a reasonable way and without excess. It is important that a contract cover all important issues, but this does not justify the technique of “inflating” contracts by adding unnecessary clauses or by complicating matters that can be kept simple. For inexperienced parties, there is a danger that lawyers, instead of helping them by “streamlining” the various issues and construing a coherent and well-organized set of rules, may introduce unnecessary complications that do not answer the parties’ actual needs. This risk has become greater now that, due to the wide circulation of contracts in digital form, it is extremely easy to copy clauses from existing models. Of course, when parties say that the contract must be short and simple, they underestimate the fact that this contradicts the need for completeness. A contract cannot be short and exhaustive at the same time. On the other hand, there should always be a fair compromise between completeness and reasonable length when deciding which issues a contract must cover. If there is a close cooperation between the lawyer who drafts the contract and the businessman who signs it — because the two decide together which issues are relevant and which are not — the above risk will be significantly reduced.

2. Because if the contract regulates all important issues that may give rise to disputes, there will be little space for the application of non-mandatory rules of the applicable law, which may vary from one legal system to the other. Of course, this drafting technique does not solve the problem of compliance with possible mandatory rules of the applicable law and will consequently be an appropriate solution where no mandatory rules exist. 3. Consequently, the general principles of lex mercatoria, while having the disadvantage of being rather vague, do have the advantage that the mandatory principles they contain — such as, for example, the prohibition of bribery and consequent nullity of the respective contracts — will rarely conflict with a reasonably drafted cross-border contract. 4. But if such a control is impossible (e.g. because the party is forced to accept the submission of the contract to a law the contents of which cannot be verified, or where the verification would be far too expensive in relation to the importance of the deal), a well-drafted and exhaustive contract will, in any case, reduce the risks.

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and written contracts

Many non-lawyers fail to understand the difference between an agreement by which the parties undertake certain obligations towards each other, and the written document, signed by the parties, which contains the terms of such agreement. Business people are therefore often convinced that only the written agreement signed by them is a binding contract and that whatever they agree orally does not bind them, as can be seen in the following example. Example 6-1 – Appointing a foreign agent Mr Klaus Schmidt, director of the company Bio-Marmeladen Gmbh, a small German producer of organic food, meets at a fair in Paris Mr Jean Dupont, a French individual who is well placed in the business and who is interested in promoting in France the products manufactured by Bio-Marmeladen. The parties do not sign any contract, but Mr Dupont regularly transmits orders of French customers to Bio-Marmeladen and the latter pays him a commission on the business transmitted. When some disagreements arise with Mr Dupont, and the latter sends a letter to Mr Schmidt claiming his rights under the French rules on commercial agency, the latter consults a lawyer and discovers, against his expectations, that his company is bound by an agency contract to Mr Dupont.

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Mr Schmidt thought, when entering into the relationship with Mr Dupont, that he had been very clever in not signing any contract, assuming that he would avoid having any obligation towards the agent. He now discovers that the fact of having appointed Mr Dupont for the promotion of his products and having agreed to remunerate his activity has been sufficient to create a legal relationship. What is worse, he understands that he would have been much better off if he had negotiated and signed a written contract made with the assistance of a lawyer, because in such a context he might have inserted a number of clauses in his favour, such as a choice of forum clause and/or a clause providing for German law as the applicable law. However, in the absence of contractual clauses to the contrary, the French agent will be able to bring a claim before his courts (under Article 7(1) of Regulation 1215/2012 (supra, § 5.3.1.2)), which will apply French law (see above, § 2.5.2), which provides a much higher indemnity in case of termination.

This is a rather extreme example, since it presupposes that a businessman is unaware that a contractual relationship can come into being without a written agreement (although this situation is far less exceptional in practice than one would imagine). A more realistic example would be a case in which a manufacturer entertains a continuing relationship with an importer who purchases and resells his products in a given country. In this case, it may not be clear if the importer is effectively a mere customer or if he should be considered to be a distributor, protected by the rules that may be applicable in his country to this contract.5 If there is no closer relationship, there are no problems. But where the continuing relationship with the importer would be qualified under the law of the distributor’s country as a distributorship contract, the fact of not having put such agreement in writing may entail considerable disadvantages for the exporter, as shown in the following example. Example 6-2 – Continuing relationship with a German importer For 20 years, a Brazilian manufacturer has been selling his products to a German company, which resells them on the German market. The German importer is de facto the sole importer of the products of the Brazilian supplier. Over the years, he

5. In fact, although not many countries have enacted specific laws protecting distributors, in many legal systems the courts recognize the distributor’s right to be granted a reasonable period of notice in case of termination and to recover damages if such period of notice is not granted. Also the European Court of Justice recognized, in the context of the Brussels Regulation on jurisdiction, that long-term agreements with resellers may be qualified as distributorship agreements (and consequently as contracts for the provision of services): see above, § 5.3.1.2.

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has organized a network of sub-dealers and has regularly increased the turnover. On the Brazilian company’s website, the German company is indicated as “General Agent for Germany”. However, the parties never concluded a distributorship contract. When the Brazilian supplier decides to establish his own company in Germany for the distribution of its products and to replace the German distributor, he has to face the problem of terminating the relationship with the latter. The supplier is convinced that the German company is simply a customer and that it is free to interrupt deliveries without any further obligation. On the contrary, the lawyers consulted by the supplier say that a distributorship relationship has been established and that the distributor is entitled to a reasonable term of notice and that, if the notice period is insufficient, damages for the loss of profit in the remaining period may be due to the distributor.

In this case, it would have been better to conclude a written contract, in which the parties could have agreed upon a reasonable notice period (the duration of which would, in principle, be recognized by the courts, while in the absence of such indication it is more difficult to determine what the correct notice period should be), and where other useful clauses could have been inserted, such as an arbitration or choice of forum clause.

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All of this demonstrates that relying on oral agreements is dangerous. Whenever parties enter into relationships that could give rise to future problems, they should establish a written contract and specify all relevant issues in that context. This is not only useful for the purpose of clearly establishing the contents of their agreement, but may also be a device for checking whether all relevant issues have been considered. 6.1.3 Letters

of intent and similar documents

A rather common practice in international trade, particularly in the context of complex dealings, is to sign documents that leave some ambiguity as to their binding character. These are presented under various names: letter of intent (LOI), memorandum of understanding (MOU), heads of agreement. It should be said from the outset that in many cases the ambiguity is due to the more or less intentional desire of one party to bind the other party, without being bound itself. It has been rightly said that:6 … obscurities and ambiguities are not totally unintentional. […] Each party, in other words, seems to be preoccupied by the concern of binding the other party not to re-discuss the points of agreement recorded in the letter of intent, while at the same time preserving for itself the freedom to re-discuss said points. Thus, perhaps not always at a conscious level, each party appears to show a tendency to consider a letter of intent as binding only for the other party.

It is impossible to determine the binding character of this type of document in general terms. This will depend very much upon the wording of the agreement and the applicable law. Since a precise answer to these questions can only be given with respect to a particular case, and with reference to a specific legal system, I will limit myself to a general overview of some typical situations where the above problems arise. 6.1.3.1 Situations

where letters of intent are used

The purpose of letters of intent varies substantially from case to case. It may be helpful to examine some typical situations frequently encountered in international trade. First, there are a number of situations in which the non-binding nature of the document should be beyond dispute. This is the case, for example, when the negotiators simply wish to confirm their reciprocal interest in negotiating the contract, mainly because they need to show the party they represent that there are good reasons to continue such negotiation. Alternatively, a party may wish to obtain — in the course of negotiation — a non-binding declaration of interest from the other party, 6. Draetta, The Pennzoil Case and the Binding Effect of the Letters of Intent in the International Trade Practice, in RDAI, 1988, 155 et seq., 157.

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because it hopes that this might put the other party under moral pressure if it changes its mind. In this type of case, there should be little doubt about the non-binding nature of the document, although no certain conclusion can be drawn without considering the specific wording of the letter of intent and the applicable rules of law. A less clear situation arises when the parties sign a document in which they sum up the results reached at a certain stage of the negotiations, distinguishing the issues agreed upon from those still to be negotiated. Agreements of this type may imply an understanding not to bring up for discussion the issues already agreed upon7 and, more generally, an obligation to conduct further negotiations in good faith.8 In fact, agreements of this kind may cause more confusion than create advantages for the parties, considering the difficulty of assessing which behaviour conforms to good faith and which does not. Another common situation arises in the context of contracts that are necessarily negotiated and concluded through subsequent steps. If one considers an M&A contract for the acquisition of the shares of a company, normally the parties will sign a letter of intent when they have agreed on the basic aspects of the transaction and will postpone the conclusion of the agreement until a number of further steps have been taken.

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A similar situation arises when the parties agree to establish a cooperation project involving the creation of a jointly owned company (joint venture). Here, the parties first need to agree upon the overall scheme and thereafter work out the details of the operation, which implies the creation of one or more companies, the drafting of contracts between the mother companies and the joint venture, obtaining government authorizations when necessary, etc. In cases of this kind, the letter of intent or memorandum of understanding will normally be much more than a simple declaration of intent: it will be an agreement on the essential terms, which leaves open for further determination the terms that could not be defined at this stage. Situations of this kind are very difficult to classify from a legal point of view. In some jurisdictions, particularly those that do not accept the idea of an “agreement to agree”, the letter of intent will have little or no value; in others, it may give rise to a duty by the parties to continue and conclude in good faith the negotiation on the issues left open. Example 6-3 – Contract with a Middle Eastern manufacturer9 A US supplier of telecommunications systems and a Middle Eastern supplier of cables entered into an agreement whereby the parties undertook to negotiate in good faith the supply of cables to the US party if the latter succeeded in becoming prime contractor for a telecommunications expansion project. The agreement did not contain a choice-of-law clause. The US supplier obtained the contract and became prime contractor, but the parties were unable to reach an agreement on the supply of cables. When the dispute was submitted to arbitration, the question arose as to whether the undertaking to negotiate in good faith was valid and enforceable. According to some legal systems (English law, Saudi law), the agreement should be considered non-enforceable, while under other laws (e.g. New York law, UNIDROIT Principles) the agreement would be valid. The arbitral tribunal argued that, in determining the applicable law, it should prefer a legal system that would satisfy the expectations of the parties, i.e. a legal system under which the agreement would be considered valid. The tribunal decided in favour of New York law, after having ascertained that under such law the agreement 7. However, the application of this principle is anything but easy, considering that most issues in a contract are connected. Therefore, it cannot be excluded that the negotiation of a new issue will also involve old issues. In such a case, a renegotiation of the “old” issue, together with the connected new one, would certainly be justified. 8. Of course, such a conclusion cannot be drawn without considering the specific wording of the contract and the applicable law, especially with regard to possible rules on pre-contractual liability: see infra, § 6.3.4. 9. See ICC case 8540/96, published on the Unilex website.

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would be enforceable. In addition, the arbitral tribunal emphasized that this result was in conformity with general principles of the law of international trade as expressed in the UNIDROIT Principles.

The above case shows how uncertain the solutions can be with respect to agreements that refer certain issues to further negotiation. Parties should, where possible, know in advance which legal system governs their agreement and make clear if and to what extent their agreement is effective under the applicable law. When this is not possible, arbitration will normally be the most appropriate solution in case of a dispute.10 In some jurisdictions, a letter of intent or memorandum of understanding leaving a number of issues open for further negotiation may be considered a binding contract, the details of which can be filled in by the competent courts on the request of one of the parties. An interesting case, decided by an ICC arbitral tribunal in 1996,11 is described in the following example. Example 6-4 – Joint venture in Iran A Swedish manufacturer of trucks and an Iranian company signed a Memorandum of Understanding (MOU) concerning the supply to the Iranian party of trucks and respective spare parts, the organization by the purchaser of an after-sales service, the setting-up of a joint venture and a future cooperation in the assembly of trucks.

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Thereafter, the supplier did not implement the MOU, failing to set up the joint venture. In the dispute brought before the ICC arbitral tribunal, the Iranian party contended that the MOU did bind the parties, while the Swedish supplier sustained that such document did not bind them, since it had not agreed upon the specific contracts to be negotiated in the framework of such general scheme. The arbitral tribunal decided as follows: “Whereas the Arbitral Tribunal considers that when the parties agree upon general issues to be implemented by them at a later stage they cannot be released from their obligations to use their best efforts to ensure that such general issues become specific terms of contracts to be executed by the parties. “The Arbitral Tribunal, having considered paragraph 2 of Article 5.4 of UNIDROIT ‘Principles of International Commercial Contracts’, rules that the general description of the parties’ intentions to reach agreements on certain issues contained in the MOU obligates the parties to exert their best efforts in order to have such intentions become defined terms of contracts legally binding for each of them.”

In the above case, the arbitral tribunal awarded damages to the Iranian party for the loss of the ability to enjoy the probable benefits of the two aborted projects. 6.1.3.2 Advice

to negotiators

As shown in the above examples, it can be difficult to foresee the actual value of letters of intent and similar documents, since this depends on the specific wording and, most of all, on the rules of the applicable law, which vary substantially from country to country. The problem is that in most cases the parties themselves wish to avoid clarity and to maintain a certain ambiguity with respect to the binding force of the document they are drafting. Consequently, the first task of a negotiator is to understand what the party in question really wants. Does it want to be bound or not? Does it expect the other party to be bound or not?

10. This is because arbitrators will have greater freedom when it comes to finding a solution that answers the reasonable expectations of the parties. In the above case, the arbitral tribunal was able to choose a legal system under which the agreement could be considered as valid (thus conforming to the likely expectations of the parties, since it is to be assumed that they entered into the agreement with the intent of performing it), while it is likely that a state court would have taken a more rigid approach. 11. ICC case 8331/96, in ICA Bull., 2/1999, 67.

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Once it is clear where the ambiguity lies, in principle it is possible to redraft the clauses to avoid any possible misunderstanding. Thus, the parties can explicitly state that certain promises are not legally binding and that the other party cannot rely on them. Or, on the contrary, they can expressly state that certain undertakings are legally binding in all respects. This kind of exercise can be useful to ensure a better understanding of what the parties really want, but where ambiguity is necessary to reach an agreement (because its very purpose is to hide an actual disagreement), it may be necessary to accept the risk of unclear wording. If this is the case, because no other solution is possible, the negotiator should try to minimize the risk by drafting clauses that are as close as possible to the expectations of his party and should, at the same time, check the effect of the clauses under the applicable law. In any case, the negotiator must be aware that his party is taking a risk against which it should be protected, for example, by choosing a resolution of disputes mechanism that may put his party in the best possible situation in case of a dispute.

6.2 Preparing for the Negotiation of an International Contract

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As noted in previous chapters of this book, international contracts, unlike domestic contracts, are negotiated in a far less predictable legal framework, in which a great number of issues (applicable law, jurisdiction) may vary substantially from case to case. This situation has a considerable impact on the negotiation stage of a contract, since the parties will need to investigate a number of issues in order to identify the legal framework within which the contract will be situated and, where necessary, to change this framework according to their specific needs. Of course, the decision of how to approach these problems depends upon the particularities of each case and the preferences of the negotiators, which makes it difficult to set out precise rules. I will try to describe here the various steps that are normally appropriate, which does not mean that they should always be followed, since such a decision will depend upon the complexity and the particular circumstances of each contract. 6.2.1 Identifying

the legal framework where the contract is to be situated

A first step to be taken is to identify, at least in general terms, the legal framework where the contract is to be situated, which will also determine the choice of applicable law. The steps normally to be followed in this stage are the following: (a) First, one

should identify the rules that govern the type of contract in question within the potentially applicable legal systems (normally those of the countries of the parties),12 in order to verify if these rules conform to the expectations of those drafting the contract and whether there are mandatory rules that cannot be derogated contractually.

(b) It may also

be appropriate to verify if there are other rules, such as currency regulations, antitrust rules, prescriptions regarding the products (with respect to security, labelling, rules on reservation of title, etc.), that may affect the contract in the legal systems at issue. Of course, it is impossible to say a priori which issues should be considered, since this depends on the subject matter of each contract and the specific needs of the parties.

(c) The result

of this inquiry should put the negotiator in a position to make a first assessment about the acceptability of the laws of the countries involved as possible governing laws of the contract. Of course, the choice of the applicable law will also depend on other considerations,13 but knowing what the impact of the possible alternatives is will certainly provide the negotiator with important elements for making a responsible choice.

12. Where the contract is to be performed in a third country, the legal system of such country may also be relevant. 13. See especially § 2.9 on the actual options for the choice of the governing law.

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identified which law can be considered in the first instance as the most suitable with respect to the needs of the negotiator, one should verify to what extent the choice envisaged would actually be recognized and effective in the interested countries.14

A problem not to be underestimated is the difficulty of obtaining information about foreign legal systems, especially those in certain countries. In recent years this issue has become less critical, because the laws of a great number of countries can be found on the Internet, but it should be considered that this will normally not be sufficient in the absence of information about the actual interpretation and implementation of such rules. Where it appears impossible to know the contents of the foreign law, negotiators should approach the problem realistically and look for alternative solutions, such as the choice of a neutral law and a satisfactory solution for the resolution of possible disputes, even where these may imply some risks. 6.2.2 Establishing

a draft in view of the negotiation

While identifying the legal framework in which the contract is to be placed, the parties will normally begin to draw up the terms of the contract in order to have a draft to submit to the other party. 6.2.2.1 The

use of standard clauses or models

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For those who draft international contracts, models are an essential tool for identifying the key issues of the contract in question and for obtaining useful hints about the possible solutions to consider. Since model contracts are normally the result of a comparison between several individual contracts, they generally offer a comprehensive view of the main issues of a particular type of contract and the respective solutions already vested in contractual clauses. While a good model is an essential basis for drafting an individual contract, it may become a dangerous tool if used “as such”, without adapting it to the specific circumstances of the case. Parties should, whenever possible, draft their contracts with the assistance of a lawyer, who will have the responsibility of adapting the clauses to their specific needs and making sure that the solutions chosen are lawful and effective. This being said, it is common knowledge that many traders prefer drafting contracts by themselves, without the assistance of a lawyer, on the basis of the materials they are able to find.15 This tendency should be opposed by making the users aware of the dangers that arise when drafting international contracts without the advice of an expert. However, whatever attempts are made in this direction, the fact remains that many businessmen continue (and will continue) to negotiate and draft international contracts without any legal assistance. It follows that if this is the real-life situation, there is a clear need for good model contracts that can at least reduce the risk of bad drafting.16 This is why ICC decided to prepare standard forms, which are not only intended to serve as a “model” for the lawyer who needs to draft a tailor-made agreement, but which can also be used as such by a businessman, together with a number of devices intended to reduce the risk of inappropriate manipulation of the contract text. This issue will be discussed later in § 7.1.2.3.

14. This may give rise to serious problems if the law which is excluded by virtue of the choice of law (e.g. the law of the other party) contains internationally mandatory rules: supra, § 2.9.1.2. 15. Moreover, currently most small- and medium-sized undertakings normally copy contracts from their competitors, who will, in turn, have done the same in the past. The resulting legal quality of such agreements is almost always catastrophic. 16. This tolerance towards the “do-it-yourself” approach is often criticized. It is said that by circulating ready-made models which can be used without the intervention of a lawyer, parties are induced to consider the lawyer’s role as superfluous. This is certainly true, at least to a certain extent, and all possible efforts should be made to inform the parties about the risks of drafting contracts without legal advice. However, one must also recognize that many companies will, at least with respect to “smaller” contracts, do the drafting by themselves using the materials they can find. Bearing this in mind, it is better to help the parties by giving them models of good quality, which will do less harm than the use of a bad text.

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Another problem, which arises as a consequence of the growing availability of easy-tocopy model forms (especially after the introduction of personal computers and the Internet), is the possible abuse of standard forms, including by lawyers. Since it has become so easy to obtain hundreds of well-drafted clauses, many drafters cannot resist the temptation to use this wealth of material in order to draw up extremely ponderous and comprehensive contracts, at the risk of forgetting the actual needs of the party involved. Moreover, the technique of mixing clauses of different origin may cause the drafter to lose control over the contract as a whole and give rise to inconsistencies or insufficient coordination between the various clauses. Another risk is that the negotiator may feel bound to the pre-established clauses because he does not want to take the responsibility of adapting them to the circumstances of the case, and may consequently refuse the requests of his client to look for alternative solutions that would better comply with his needs. All of this means that model contracts and standard clauses must be used in the right way. They are certainly essential tools for preparing a good contract, but the negotiator must be able to use them appropriately without losing the necessary creativity for setting up a contract that truly matches the specific needs of the parties. 6.2.2.2 Identifying

the most appropriate solutions and negotiation margins

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While identifying the critical issues of the contract, the lawyer must determine, in close cooperation with his client, the contractual solutions most appropriate in the specific case. This is a very delicate stage, where a close cooperation between the lawyer and the businessman is needed, since almost all issues to be decided involve economic and commercial choices which affect the allocation of risks and charges between the parties, but which may have legal implications. This is because a certain solution may be unlawful and another not, or because one solution may be more or less onerous. This means that a reasonable compromise must be found between the business needs of the party on the one hand and the legal requirements on the other. The lawyer must understand the needs of the businessman and look for solutions which can answer such needs without breaching the law, but the latter must accept that not all of the solutions he would prefer are legally acceptable. In this context, the lawyer will try to work out reasonably unambiguous clauses, knowing that the agreement whose contractual provisions are too vague often hides a substantial disagreement, which may create problems during the performance of the contract. But here too, a certain degree of flexibility is required, because a too rigid attitude on this subject matter may cause difficulties in negotiation. In other words, a certain degree of ambiguity may be unavoidable, and a good lawyer should try to find the right balance in order to reach a compromise solution with the least possible risk. Finally, a very useful exercise during this preparation stage consists in working out alternative solutions on those issues where it is likely that the other party will not accept the proposed clauses. This is not only because it is important to have alternatives to propose in the course of the negotiation, but also because it is important to know in advance what the disadvantages are in terms of costs, risks, etc., of the various solutions.

6.3 The Negotiation Stage Except in circumstances where a party is forced to accept the contract without discussion — a situation that frequently arises where the bargaining power of the parties is very unbalanced — the contract will normally be a compromise between the opposing positions of the parties, which is not always easy to reach. Depending on the complexity of the issues in question, the respective needs of the parties and the distance between their expectations, the negotiation can last a few hours or several months.

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to negotiation

The negotiation of a contract implies by its very nature that the parties will discuss their respective positions and look for compromise solutions that reflect their respective bargaining power. However, it is not only the bargaining power that counts. The ability of the negotiator can also play an important role. It is therefore wrong to assume, as many small companies do, that negotiating with a stronger party is useless because the latter’s requests will have to be accepted in any case. Of course, there are situations where there is almost no room for discussion (e.g. where a very big company asks for the application of its general conditions of purchase), but in many other cases the stronger party makes proposals which it is open to discuss, and it would be wrong to accept them before having at least tried to modify them. Moreover, small companies often see themselves as weaker than they actually appear to be in the eyes of their counterpart. Finally, it can never be excluded that reasonable requests, when they are explained and presented in the right way, may be considered seriously by the other party, particularly in the context of long-term contracts where it is important to create a good spirit of cooperation and to maintain it during the life of the contract. An important tool for strengthening the bargaining position of a party is to base the discussion on a draft worked out by that party and to continue the negotiation using the same document, thus giving the negotiator the advantage of discussing within a familiar context.17

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6.3.2 The ICC

Principles to facilitate commercial negotiation

The ICC Commission on Commercial Law and Practice (CLP Commission) has prepared a set of Principles to Facilitate Commercial Negotiation, directed at small, medium or large businesses across many sectors, which are intended to help negotiators conduct smooth and efficient commercial negotiations, which can be downloaded from the ICC website, www.iccwbo.org. The Principles are based on the idea that the best deals are struck between negotiating partners that not only want or need to collaborate, but also respect and trust one another. They provide the direction for creating or enhancing a productive working relationship, for transactions of any size or length. The Principles cover a variety of issues: preparing the negotiation, taking into account cultural differences between the parties, agreeing timely about the negotiation process, acting with transparency and integrity, making realistic commitments. The ICC Principles to Facilitate Commercial Negotiation can be a useful tool for preparing to negotiation and also for convincing the other party to follow the same reasonable and transparent approach. 6.3.3 The role

of the lawyer in the course of negotiation

We have already noted (§ 6.2.2.2) the importance of a close cooperation between the lawyer and the manager in preparing a draft contract. The same need for a joint approach exists during the negotiation stage, where the businessman needs to know from his lawyer if the alternative solutions discussed with his counterpart are legally feasible and, if not, what other solutions can be found. It is therefore important that the lawyer be involved in the negotiation from the very beginning and that he actually knows the strengths and weaknesses of the deal his client is negotiating, so he can understand the importance of the issues in discussion. The practice of involving the lawyer at the very end and asking him to give his advice on a contract that has already been negotiated is unacceptable. The lawyer involved at the end of the process will only be able to give some advice concerning a number of 17. This is not an absolute rule. There are situations in which it may be better for a party not to put its cards on the table and, on the contrary, to wait for the first move of the other party. However, such a choice should be made consciously and not simply because a party does not want to prepare a draft.

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strictly legal clauses — such as the choice of law clause or the arbitration clause — but he will be unable to judge from a legal point of view whether the best possible solutions have been found for the other issues. This is because he does not know their context. If the lawyer does not know which type of risk the parties were expecting to cover with a given clause, he cannot say whether the clause is effective and to what extent. This is why the lawyer should be involved in the negotiation of complex deals during the whole negotiation stage. Of course, his participation will be effective only if he is able and willing to understand the business needs of his client,18 and provided that he has the creativity needed to work out alternative solutions that may help overcome possible deadlocks. This does not mean that the businessman must always be accompanied by his lawyer. In less important deals, where the participation of the lawyer at this stage would be too onerous, the non-lawyer will negotiate the contract prepared in advance with his lawyer and possibly wait to approve the final text after having verified the modifications with him. This is particularly the case when the lawyer has worked out a standard form with the client to be used in several circumstances, a typical situation with respect to agency or distribution agreements. Here the lawyer will mainly be involved in order to check if there are special problems with respect to the legal system of the other party, and to verify, if possible, whether modifications required by the counterpart are acceptable.

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6.3.4 The recourse

to local lawyers

Where there are no particular problems concerning the application of a foreign law (e.g. because the interested party is able to negotiate that the contract will be governed by its own law), there will normally be no need for involving foreign lawyers in the negotiation. Where, on the contrary, the contract is to be governed by a law not known by the lawyer responsible for the drafting, this should, in principle, require the assistance of a lawyer from the country whose law is to be applied. This is in order to verify whether the solutions negotiated are fully valid and effective under such law. However, it must be noted from the outset that such a solution is more difficult than one might think. In fact, in many cases the foreign lawyer will not understand the drafter/negotiator’s point of view of and will consequently be unable to give the right advice. There are several reasons for this. First, lawyers tend to reason within the framework of their own legal system and have difficulty in understanding questions that arise in a different context. Second, a lawyer who has not been closely involved in the negotiation and is not familiar with the underlying problems will be unable to identify the real legal issues and to work out alternatives that will provide a solution to the problems raised. This does not mean that one should not request the advice of local lawyers, but rather that such advice will only be fully effective if the foreign lawyer has the necessary legal background — which mainly means the practice of assisting foreign companies — and if he can be closely involved in the negotiation so that he can appreciate the reasons why the legal issue on which he is being asked to give advice is important for the contract in question. If, on the contrary, the lawyer is simply asked to answer a purely legal question, which is not placed in the actual context of the negotiation, it is likely that his advice will be of little use, except that the negotiators may discharge their responsibility if something goes wrong.

18. Some lawyers assume that they should only deal with strictly legal matters, but this is incorrect. A good business lawyer must also be able to understand business issues, because he would otherwise be unable to find the legal solution to the problem his client is facing.

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of the parties during negotiation

An important issue which arises when negotiations fail is that of determining if and to what extent the parties must respect certain obligations, even in the period before conclusion of the contract. The approach to this problem varies substantially from one legal system to another. Most civil law countries adopt the principle that during negotiations the parties must act in good faith, which means in particular that a party that interrupts negotiations in bad faith (e.g. after having given its counterpart a reasonable expectation that it would conclude the contract), or that carries out parallel negotiations without informing the other party, may be liable for damages. The precise conditions for such “precontractual liability” are not the same in all countries. Furthermore, as regards the recoverable damages, some legal systems limit the compensation to the so-called negative interest (i.e. the expenses sustained for the negotiation) while others also include the loss of profit or loss of a chance. Common law countries tend to follow a more restrictive approach. In English law, for example, a traditional view seems to prevail whereby the parties have no obligations as to the conduct of the negotiation and are free to interrupt it and/or to carry out parallel negotiations with third parties until the contract is concluded.19 This practice, however, has been substantially mitigated in recent times.

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Considering these differences, it is impossible to determine the extent of the parties’ liability during the negotiation stage without analyzing the legal system applicable in a specific case. An attempt to set out uniform rules adapted to the needs of international trade has been made in the UNIDROIT Principles, which mainly follow the civil law approach, by stating the following rules: UNIDROIT Principles – Article 2.1.15 – Negotiations in bad faith (1)

A party is free to negotiate and is not liable for failure to reach an agreement.

(2)

However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party.

(3)

It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.

This provision, after having stated in the first paragraph the general principle of freedom of negotiation, provides in the following paragraph that such freedom is not unlimited, but must be coordinated with the obligation to negotiate in good faith.20 As to the actual meaning of good faith in this context, the official commentary to Article 2.1.15 says that: A party’s right freely to enter into negotiations and to decide on the terms to be negotiated is, however, not unlimited, and must not conflict with the principle of good faith and fair dealing laid down in Article 1.7. One particular instance of negotiating in bad faith which is expressly indicated in Paragraph (3) of this Article is that where a party enters into negotiations or continues to negotiate without any intention of concluding an agreement with the other party. Other instances occur when one party has deliberately or by negligence misled the other party as to the nature or terms of the proposed contract, either by mispresenting facts, or by not disclosing facts which, given the nature of the parties and/or the contract, should have been disclosed.

Another article of the UNIDROIT Principles provides that parties who negotiate a contract are bound to respect a duty of confidentiality.

19. See De Coninck, Le droit commun de la rupture des négociations précontractuelles, in Fontaine (ed.), Le processus de formation du contrat, Bruxelles-Paris, 2002, 17 et seq. 20. Contained in Article 1.7 of the UNIDROIT Principles, according to which “each party must act in accordance with good faith and fair dealing in international trade”.

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UNIDROIT Principles – Article 2.1.16 - Duty of confidentiality Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party.

The above provisions can be very useful for arbitrators, in cases where they decide to apply these rules instead of domestic rules to a dispute involving pre-contractual liability. However, it should be noted that where the UNIDROIT Principles are incorporated by reference into the contract the parties have been negotiating (but have not managed to conclude), the rules on pre-contractual liability contained in the Principles should in theory not be applicable (since they are part of the contract that has not been concluded) unless the parties have agreed in advance that the Principles will govern all of their future deals. 6.3.6 Agreeing

upon special rules for negotiation

In some cases, particularly when they are engaging in negotiations of substantial importance, the parties may agree in advance on the rules that are to govern the conduct of the negotiations. The main issues to be considered in this context are the obligation to keep the information received confidential and the obligation not to deal with other parties.

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6.3.6.1 Confidentiality

agreements

A rather common practice is that of agreeing, before starting negotiations, that the parties shall maintain confidential — and shall use only for the purpose of the negotiation — all of the information received from the other party in the context of the negotiation. This is especially the case when contracts are negotiated that imply by their very nature that the parties are exchanging confidential information, such as contracts for the acquisition of a company (where the purchaser must necessarily obtain the information necessary for evaluating the convenience of the deal and for determining the price), or transfer of technology agreements and know-how licences (where the licensee cannot assess the suitability of the deal he is negotiating without obtaining minimum information about the proposed technology necessary for the evaluation). One of the key issues when drafting confidentiality agreements is to define what the confidential information is. If the definition is too broad, the agreement may unreasonably limit the freedom of the receiving party. At the same time, a too-narrow definition may substantially deprive the agreement of its usefulness. Confidentiality agreements drafted unilaterally by the disclosing party are often unbalanced and may dangerously limit the freedom of the receiving party as regards the future use of information it already had before signing the agreement. This is why parties tend to exclude from the confidentiality obligation information that is already known to the receiving party or that is not confidential in nature, although this approach may leave room for uncertainty, which can benefit the receiving party. A possible compromise is to require that the confidential information be expressly identified as confidential. However, in this case the receiving party must have the opportunity to object to the confidential character of information that it deems to be non-confidential. Considering the above problems, parties should take great care in drafting confidentiality agreements. A useful tool to which they can have recourse is the ICC Model Confidentiality Agreement, ICC Publication No. 774, 2016 edition. 6.3.6.2 Undertaking

not to deal with third parties and other clauses

Other possible clauses whereby the parties set up rules for future negotiations are those which limit their freedom to deal with other parties during the negotiation, or which provide for the reimbursement of certain expenses borne by one of the parties.

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For example, the parties may agree not to enter into negotiations with others during a certain period or grant each other a right of first refusal. In special situations, where a party has to bear substantial costs during the negotiations, e.g. for carrying out specific projects or investigations in view of the future contract, a reimbursement of such expenses (or part of them) in case of failure to conclude the contract may be agreed on.

6.4 Drafting the Contract Drafting contracts is a very demanding task that requires specific skills. Lawyers who draft contracts are in a certain sense, required to act as “legislators” of the parties, since the contract is “the law of the parties”. The lawyers must be able to “translate” the agreement of the parties into clauses that leave the least possible space for ambiguity and that are fully enforceable. 6.4.1 The trend

towards common drafting standards

We have seen (supra, § 6.1.1) that there is a general trend in international trade towards exhaustive and self-sufficient contracts.

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Drafting techniques and standard clauses tend to establish themselves across borders, which has led certain international contracts to become more and more similar to one another, independent of the national legal system that governs them. Thus, for instance, many M&A contracts and licensing agreements follow similar (mainly AngloAmerican) drafting standards, whatever the applicable law chosen by the parties.21 This trend towards uniformity favours the establishment of a common practice in international trade that can make the negotiation of international contracts easier and more effective. At the same time, however, many international contracts are still drawn up in accordance with the domestic standards of one of the parties. This will especially be the case when a stronger party prepares a draft under its own law and according to the techniques commonly used in its country. This approach cannot be criticized as such, since the parties are free to decide how they want to draft their contracts, and once a contract is submitted to a given national law it is fairly normal that it be drafted in accordance with the common usage of such country. Nevertheless, the establishment of common contractual standards acceptable to traders the world over is certainly preferable, since it puts parties on an equal level and contributes to developing a sort of common language which makes communication and discussion easier between parties belonging to different legal systems. This is one of the reasons why ICC, when devising its model contracts, has tried, as far as possible, to set out clauses that are not linked to a particular legal system and that could become an international standard. 6.4.2 The basic

requirements of a well-drafted contract

There are no absolute rules on how to draft a good contract, since this depends on the skill and experience of each individual. Nevertheless, it may be useful to state some general criteria that should be followed as much as possible. First, the provisions of the contract should be clear and unambiguous for all those involved and not only for the parties who conclude it. When non-lawyers draft a contract, they often forget to mention issues that they take for granted, but which will not be at all obvious to a third party that may be called on in the future to decide a possible dispute. Consequently, a clause that may have a clear meaning when placed

21. Some excesses in this direction may give rise to criticism, particularly when notions that are part of a given legal system are incorporated into contracts submitted to a national law under which they are unknown. For example, the reference to “representations” common to M&A agreements, characteristic of common law systems, may give rise to problems of interpretation if the contract is submitted to the law of a civil law country, where the term has no precise meaning.

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in the context known by the parties and discussed during the negotiations, may become ambiguous, if not quite incomprehensible, to a third party, or even to the parties themselves after a certain time. It is therefore important that the clauses be drafted bearing in mind that they will be read by people not involved in the negotiation (judges, arbitrators), and that they resist a possible attempt by the lawyers to make them say the contrary of what the parties intended when concluding the agreement. At the same time, contract clauses should be written in a way that the parties (and not only their lawyers) can understand their meaning. Of course, when the subject matter involves complicated legal issues, one cannot expect the wording to be simple, but this does not justify the bad habit of using unnecessarily complicated and obscure language when the same things can be stated plainly. Another important requirement is that the contract follow a neat and coherent scheme. This will be helpful in situating the different issues within the agreement, especially if the contract is long and complicated. Even more importantly, it will help avoid contradictions between the various clauses. One should therefore remember that is not sufficient to put together a number of “good” clauses; on the contrary, it is essential to coordinate them within a coherent construction.

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This means in particular that the lawyer who drafts the contract must have a clear idea of the agreement as a whole and thoroughly understand the links between the different issues involved. He must be able to adapt the various clauses to each other and maintain control over the global coherence of the agreement while negotiating amendments and modifications. In absence of such a global understanding, the contract risks becoming a confused “pot pourri” of clauses contradicting each other, leaving wide room for disputes about their meaning. 6.4.3 Drafting

techniques commonly used in international contracts

Some drafting techniques tend to be commonly used in international contracts, as well as in countries where they have been less known in the past. These include, among others, the inclusion in the contract of a preamble and the use of defined terms, mainly under the influence of common lawyers. 6.4.3.1 Inclusion

of a preamble

A rather widespread use in international contracts is to put a preamble at the beginning of the contract. The preamble will normally contain statements that do not set out the obligations of the parties — which should be placed in the contract itself — but that are nevertheless considered to be relevant by the parties, such as, for example, a description of the qualities of the parties, a certain factual situation existing at the time of conclusion of the contract or the reasons that have led the parties to conclude the contract. For instance, the description of the circumstances that surround the conclusion of the contract and the context within which the contract is to be placed (especially when there are several connected contracts) may be important for the interpretation of its clauses when a dispute arises at a later stage, particularly when the other party tries to justify its interpretation through an untrue presentation of the facts. Furthermore, the mention of certain facts in the preamble may also be useful in order to prevent the other party from denying them at a later stage. It is not always easy to determine the legal value of the statements contained in the preamble, since this may substantially vary from case to case depending on the applicable law and other circumstances. Therefore, if the parties wish to make clear that they consider certain circumstances to be essential for the performance of their obligations, they would do better to include a clause in the contract setting out these circumstances as a condition for its effectiveness.

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As a general rule, when drafting the preamble, parties should ask themselves why they are making certain statements and verify if mentioning them in the preamble rather than in the contract itself is sufficient to obtain the result they wish to achieve. 6.4.3.2 Use

of defined terms and capital letters

A common practice in international contracts is to define certain terms and then to use capital letters in order to identify the terms so defined. This practice may be useful to avoid repeating long definitions in the various clauses. For instance, if the products that are the subject matter of the contract (and which may be listed in an Exhibit) are defined as “the Products”, the drafting of the clauses will be much simpler and the risk of using different wording for the same subject matter will be reduced. Moreover, when the defined term refers to an issue that has to be specified in a particular contract — such as “products”, “territory” or names of the parties — it is easier to draw up standard contracts that can easily be adapted from case to case, simply by replacing the contents of the respective definitions. In some cases, the parties list all the definitions at the beginning of the contract. This practice is certainly justified for complex and lengthy contracts, where certain terms are repeated several times. However, when this is not the case, it may be sufficient to define some basic terms that are to be frequently repeated in the contract when they are mentioned the first time, and to avoid “inflating” the contents through unnecessary lists of definitions.

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6.4.4 The language

of the contract

It frequently occurs in international contracts that the two parties do not speak the same language, and here the issue of language will inevitably arise. There are several possible solutions: to write the contract in two languages, to use the language of one of the parties (normally the stronger one), or to use a neutral language (normally English) known by both parties. The bilingual contract is certainly a balanced solution, but it requires a serious effort by the drafters, who must take care that the two versions truly correspond. In order to achieve this, it is not sufficient to have the contract translated by a third party, nor even by a translator specialized in legal matters. When the clauses are the outcome of a difficult compromise between the parties, the precise wording may be essential to their actual meaning. In some cases, only those who have written the clauses can ensure that the translation actually expresses what the parties had in mind. Bilingual contracts are to be especially recommended for standard contracts, which can be prepared in advance. When the agreement needs to be translated immediately, during the course of the negotiation, it is normally preferable to draft it in a neutral language (normally English) known by both parties. Sometimes one of the parties translates the contract in its own language and requests that such translation have the same value as the text written in the language used during negotiations. If this language is unknown to the other party and the exactness of the translation is difficult or impossible to verify, this may give rise to serious problems. One possibility is to refuse this request and to expressly state that the translation has no legal value. If this is unacceptable to the other party, a possible alternative solution may be to have the other party expressly warrant the exactness of the translation. In this case, the responsibility for possible differences would, in principle, be for the other party, and it would be difficult for the latter to invoke differences, since it guaranteed that the translation was accurate. In any case, it should be remembered that, when a party knows or should know that the other party does not understand the language of the contract it is signing, the risk exists in some jurisdictions that the contract may be avoided on the ground of mistake. This is why parties increasingly tend to use a language known to both of them, normally English, which is becoming the current solution.

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6.5 Clauses Frequently Used in International Contracts There are a several clauses commonly used in international contracts that are becoming more and more similar. The following paragraphs examine some of the most frequently used clauses and highlight their main characteristics, bearing in mind that clauses actually used by the parties vary from case to case and that their actual meaning and effectiveness may be influenced by the law governing the contract. 6.5.1 Force

majeure

In international contracts, particularly those that are to last for longer periods, force majeure clauses, i.e. clauses dealing with the occurrence of unforeseeable events out of the parties’ control and their effects on performance, are very common. 6.5.1.1 Force

majeure in various legal systems

The purpose of force majeure clauses is to draw a reasonable compromise between two contradictory needs: the right of a party to be exonerated from its obligations when their fulfilment is prevented by unforeseeable events for which it is not responsible, and the right of the other party to obtain the performance of the contract. This issue is covered in most (if not all) national laws, but the positions taken in the various jurisdictions are not at all homogeneous. The same circumstances may exempt a party from responsibility in one legal system and not in another.22

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A certain trend to uniformity has been favoured by the Vienna Convention on International Sale of Goods (CISG), which expressly provides, in Article 79, a provision on force majeure, although not expressly mentioning this term). Article 79 - CISG A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.

A similar clause is contained in Article 7.1.7 of the UNIDROIT Principles, which reads as follows: Article 7.1.7 - UNIDROIT Principles Non-performance by a party is excused if that party proves that the nonperformance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

In any case, the above is not sufficient, because in many cases the issue will be governed by the applicable (domestic) law, which makes it difficult to foresee what the result may be. 6.5.1.2 Force

majeure in international arbitration

A consistent arbitral case law has developed with respect to force majeure. Although this case law is based on situations that are not always comparable — since the clauses themselves as well as the governing law of the contract vary from case to case — it deserves to be mentioned because it shows how arbitrators tend, notwithstanding these differences, to take a rather uniform attitude towards these problems. The three conditions generally considered to be necessary for the existence of force majeure are: (a) the event (b) it must

must be unforeseeable;

be an event “outside the control of the parties”;

22. For example, civil law countries tend mainly to make reference to the notion of impossibility of performance, while common law countries have developed the notion of frustration, which tends to be applied in a more restrictive way.

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must make performance impossible or at least not reasonably sustainable.

 Foreseeability of the event

As regards the first condition, in several cases force majeure has been denied because the event invoked was actually foreseeable. An interesting case23 concerns a charter contract of seven fishing vessels by a Russian party (“Owner”) to a Liberian company. The vessels had been mortgaged by the Owner as a guarantee for the repayment of loans. When the vessels were impounded by his creditors, the Owner invoked force majeure, but the arbitrators decided that the arrest of the vessels by the creditors was a foreseeable event (and also an avoidable event, of course, since the Owner could have paid his debt), by stating the following:

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As unanimously recognized by the doctrine, as well as by the jurisprudence, including arbitration awards in international disputes, no matter whether in the frame of a civil law or a common law system, the essential elements of a “force majeure” situation are the unforeseeability and the irresistibility of the event. By the time the contract was signed, the seven chartered vessels were all mortgaged as a guarantee for loans apparently granted to the shipowner by a Russian bank […]. Therefore, a possible default by the shipowner, and the consequent possible impoundment of the mortgaged vessels by the creditor, were events easily foreseeable by the owner. They cannot be invoked as “force majeure” events. It was the owner’s duty and responsibility under the contract to make sure that the charterer retains uninterrupted and free possession of the chartered vessels until the expiry of the agreed-upon term. It was also very likely possible for the owner to take in due time appropriate measures in order to avoid such events occurring. Therefore the element of “irresistibility” that should characterize a “force majeure” situation is also missing.

The requirement of unforeseeability has also been used for the purpose of excluding that a delay in delivery by a seller’s supplier could be invoked by the seller as force majeure. For example, in the case 3880/8324 a Belgian seller of boots invoked force majeure because of the delay by his Romanian supplier. However, the arbitrators denied the existence of force majeure, arguing that delay by a supplier was a foreseeable contingency. In a case regarding a joint venture agreement,25 which failed to attain its objective due to a situation of social unrest, the local partner (a State Entity) claimed the existence of force majeure in order to exclude its liability for not performing its obligations, but the sole arbitrator rejected such defence considering that the change in the social climate was foreseeable and the State partner should have taken it into account when agreeing on the joint venture. In the present case, there is no clear evidence — and even no clear allegations — that the social climate had completely changed, in an unpredictable way, between the time of negotiations and the time of performance. It would have been the duty of the State Y partner to ensure that the regional social forces would not disturb performance of its contribution. […] In the present case, the non performance being almost total, it cannot be excluded that the organs of the State partner at the moment of concluding knew the difficulties and decided not to disclose them to ensure the performance of the foreign partner’s contribution before the latter noticed the difficulties. […] The existence of force majeure must be denied for the only reason that it has not been proven that the State partner could not foresee the circumstances that did not depend on it.26  Event beyond the control of the parties

As regards the second condition, i.e. that the event must be “beyond the reasonable control of the parties”, problems frequently arise with respect to its practical 23. ICC case 9466/99, in Yearbook, XXVII-2002, 107 et seq. 24. In Jarvin, Derains, Collection of ICC Awards 1974-1985, 159 et seq. 25. ICC case 12112, in Arnaldez, Derains, Hascher, Collection of ICC Awards 2008-2011, 179 et seq. 26. ICC case 12112, at 192.

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application, particularly in cases where the force majeure event is an act of government (or of a public authority) of the country of the party invoking force majeure. Although it would be excessive to say that acts by a government in the country of the party invoking force majeure cannot be considered force majeure because they are not beyond the control of such party,27 there may be situations in which these events are not really outside the control of the party concerned, especially when there are close links between the party in question and its government. Where situations of this kind are likely to arise, the foreign party should try to negotiate a force majeure clause that excludes from the definition of force majeure acts of the government in the country of the party invoking the defence.  Irresistibility

This is probably the most difficult issue; since it would be excessive to limit the operation of force majeure to cases in which the performance is absolutely impossible. Therefore, it is necessary to decide what is reasonably impossible for a party.

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For example, if a company agrees to ship iron across the ocean by sea and the vessel, which has been chartered in due time, is not available for reasons of force majeure − and no other vessels are available in time to respect the delivery date − it would be theoretically be possible to transport the iron by plane. However, if the cost of transporting iron by plane appears to be excessive, it is reasonable to claim that this alternative should not be considered reasonable and that the seller should be relieved from his obligations. An interesting case,28 which dealt with this matter in depth, concerned the construction of an airport in a country where an organization hostile to the government threatened, kidnapped and killed several employees of the foreign contractor. When the contractor decided to leave the work unfinished, invoking force majeure, the government objected that it was not impossible to complete the work, but the arbitrators decided as follows: We do not think that when the Contract was concluded in December 1981 a reasonable business man in the position of the Contractor was entitled to assume, in the light of the known internal political, ethnic and economic problems of country X, that this job would be free from risk to those engaged upon it. Nor, in the situation prevailing in mid-February 1984 do we think that it would have been literally and absolutely impossible for the Contractor to have carried out thereafter (doubtless with some additional delay) the 10-15% of the Contract work which remained to be done at the Airport. It is not literally or absolutely impossible that one who sets out to cross an uncharted mine-field will safely reach the other side. But in a commercial bargain one is concerned with pragmatic rather than abstract considerations — with commercial practicability rather than theoretical possibility. Where events beyond the control of either side supervene which merely render performance financially more onerous for a contracting party he will not, under most systems of law, be excused from further performance or (in the absence of some special contractual or statutory provision — nowadays not infrequently to be found) entitled to insist upon extra compensation […]. But events which go beyond merely increasing the financial burden on the party performing, and which reach a point where they render performance unacceptably hazardous to the lives and safety of those performing, are in a different category altogether.

The issue of irresistibility has been dealt with also in the ICC award National Oil v Sun Oil decided in 1985,29 where the US company Sun Oil, notified its counterpart that certain US passport and export regulations, enacted after the conclusion of the 27. This was substantially the position taken in the 1985 ICC Force Majeure Clause, which expressly excluded that such situations could be considered as force majeure. Conversely, the 2003 Force Majeure Clause includes (at § 3(d)) acts of authority in the listed events. 28. ICC arbitration 5195/86 in Jarvin, Derains, Arnaldez, Collection of ICC Arbitral Awards 1986-1990, 101 et seq. 29. ICC arbitration 4462, First Award on Force Majeure, 3 May 1985, National Oil Corporation v Libyan Sun Oil Company, in Yearbook, XVI-1991, 54 et seq.

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Exploration and Production Sharing Agreement, amounted to a force majeure event which prevented the performance of the contract. Although not expressly mentioned in the force majeure clause agreed between the parties,30 the arbitrators decided that the requirement of irresistibility should be implied and should be interpreted strictly. Having furthermore considered that other companies, in the same situation, had been able to overcome the obstacle. the arbitral tribunal concluded as follows: The test to be applied here is whether a reasonable person placed in the same circumstances as the party seeking to be excused would have been able, despite the supervening event, to perform the contract. Normally, the judge must refer to a theoretical reasonable person. In this case, there is an unusual situation in which parties placed in the same circumstances exist in reality and have been able to overcome the supervening obstacle to performance. It would be most difficult to accept that another similarly situated party can successfully rely on that same obstacle as a ground of force majeure. It is to be concluded that the US Export Regulations enacted on 12 March 1982 did not constitute for Sun Oil an event of force majeure excusing the discontinuance of exploration for such time as such regulations would remain in force, whether viewed separately or in conjunction with the Passport Order.31 6.5.1.3 Force

majeure clauses and rules of the applicable law

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In order to avoid the uncertainties caused by the existence of conflicting rules on this crucial subject matter, parties normally prefer to deal with it directly by incorporating a force majeure clause into the contract itself. The force majeure clause agreed contractually will often have a wider scope than the criteria generally accepted in national laws. The clause may, for instance, provide more flexible criteria for evaluating the requirement of irresistibility (through the inclusion of the reasonableness criterion) or expressly mention situations which might not necessarily amount to force majeure (like, for instance, non-delivery by sub-suppliers). In some cases, the clause does not mention at all certain requirements, such as foreseeability or irresistibility. In principle, parties are free to decide the force majeure conditions, and their agreement will prevail over the criteria dictated by the applicable law (which will normally not be mandatory). However, when the clause does not mention certain basic requirements, the arbitrators may conclude, especially in case of a poorly drafted clause, that the parties did not intend to exclude the requirements which were not expressly mentioned. Thus, in the Sun Oil case (supra, § 6.1.5.2), where the arbitration clause did not mention the irresistibility requirement, the arbitrators decided that the clause was vague and that due to the ambiguity of the clause: … it would be unjustified, in the absence of any specific provision to such effect in Art. 22, to construe such article as revealing an intent of the parties to waive an essential rule of Libyan common law according to which force majeure is only established when the event invoked by the defaulting party created an impossibility to perform whether on a temporary or a permanent basis.32

In other cases, where the force majeure clause did not mention the foreseeability requirement, the arbitrators have decided that the exemption from liability should apply even if the event was foreseeable, without considering the stricter definition of force majeure definition provided the applicable law. Thus, in a recent case regarding a Production Sharing Agreement between two oil companies and the Republic of Yemen,33 the force majeure clause did not mention the foreseeability requirement. The Republic of Yemen sustained that such requirement 30. Art. 22 of the Exploration and Production Sharing Agreement, which said: “Any failure or delay on the part of a Party in the performance of its obligations or duties hereunder shall be excused to the extent attributable to force majeure. Force majeure shall include, without limitation: Acts of God, insurrection, riots, war, and any unforeseen circumstances and acts beyond the control of such Party which render the performance of its obligations impossible.” 31. ICC arbitration 4462, First Award on Force Majeure, § 49-50. 32. ICC arbitration 4462, First Award on Force Majeure, 3 May 1985, National Oil Corporation v Libyan Sun Oil Company, in Yearbook, XVI-1991, 58. 33. ICC arbitration 19299 of 10 July 2015, Gujarat State Petroleum Corporation Ltd e.a. c. Republic of Yemen, in Italaw.com.

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should be read into the force majeure clause as part of Yemeni law, but the arbitrators rejected the argument arguing that the agreement provided a self-contained definition of force majeure, which prevailed over the legal definition.34 In another case,35 where the foreseeability requirement had been omitted, the arbitrators decided that, independently of Spanish law which was applicable and which provided the requirement of foreseeability, the force majeure would apply as well to foreseeable events, provided such events were insurmountable and beyond the control of the parties. It should in any case be considered that, even where the force majeure clause does not mention foreseeability, it would in fact be difficult to apply the clause in case of clearly foreseeable events, since it is may be presumed in this case that the obligor assumed the risk of its occurrence.36 6.5.1.4 Drafting

the force majeure clause

Force majeure clauses can be drafted in various ways, but the prevailing structure is to provide a general definition of force majeure, followed by a list of events which are to be considered to amount to force majeure (war, fire, etc.) and, finally, the consequences of force majeure, i.e. the exemption from liability of the party that cannot perform due to force majeure. Sometimes, the force majeure clause only refers to a number of events without giving a general definition of the term, as in the following clause:

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Force majeure clause (US contract) Neither Party shall be liable, or be deemed to be in default, to the other Party hereunder by reason or account of any delay or omission caused by epidemic, fire, power outages, action of the elements, strikes, lockouts, sabotage (except as caused by a Party’s employees or agents), labor disputes, governmental law, regulations, ordinances, order of a court of competent jurisdiction, executive decree or order, act of God or public enemy, war, riot, civil commotion, earthquake, flood, explosion, casualty, embargo or any other similar cause beyond the control of such Party (each, a “Force Majeure Event”).

In principle, the above type of clause is not to be recommended for several reasons. First, it does not contain a general definition of force majeure. Consequently, possible events not expressly listed may qualify as force majeure only if they are “similar” to those listed and beyond the control of a party. Second, there is no indication that the event should not be foreseeable, which may widen the scope of the clause too much and include events that should not exempt the party concerned from liability. Third, it is not clear whether the requirement that the event must be beyond the control of the party concerns only events not expressly listed, or also includes those in the list (for example, would a labour dispute be covered even when it is not beyond the party’s control?). The above considerations demonstrate that a good force majeure clause needs careful drafting and should not simply be copied from an existing contract, as is the case too frequently in practice. Since it is not always possible to find the time to work out an appropriate force majeure clause — especially when this does not appear to be crucial for the negotiators — it may be advisable to have recourse to a good standard clause, such as the ICC Force Majeure Clause 2003.37 6.5.1.5 The

ICC Force Majeure Clause 2003

The ICC Force Majeure Clause 2003, drafted by a group of qualified experts from different countries, deals in detail with most issues arising in this context. 34. It should however be noted that, after having made the above statement of principle, the arbitrators specified that they would have come to the same conclusion if the foreseeability requirement had been included in the clause, because the force majeure events were actually not foreseeable 35. ICC arbitration 8873/97, in Arnaldez, Derains, Hascher, Collection of ICC Awards 1996-2000, 500 et seq. 36. See Brunner, Force Majeure and Hardship under General Contract Principles: Exemption for Non-performance in Internatonal Arbitration, Kluwer Law Int’l, 2008, 156. This argument has been invoked by the arbitrators in the ICC case 8873/97 in order to reject the force majeure defense with respect to situations that were already known at the time of conclusion of the agreement. 37. The full text of the clause can be found in Chapter 9, § 9.6.

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The clause can be used as an example for drafting an individual clause, or can be incorporated by reference in the contract through a provision referring to it, such as the following: Clause incorporating the ICC Force Majeure Clause 2003 The ICC Force Majeure clause 2003 is incorporated by reference into this CONTRACT.  The structure of the clause

The ICC Force Majeure Clause contains a general definition of force majeure, indicating the three basic requirements, and a list of events which are normally considered as implying force majeure. According to the general definition of force majeure contained in the first paragraph of the ICC clause, a party is relieved from its duty to perform its obligations if and to the extent that that party proves: (a) that its failure

to perform was caused by an impediment beyond its reasonable

control; and (b) that it could

not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract; and

(c) that it could

not reasonably have avoided or overcome the effects of the impediment.

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An interesting feature of the ICC clause is the reference to reasonableness. Thus, an impediment which could in theory be overcome will nevertheless be qualified as force majeure if it would be unreasonable to request the party in question to overcome its effects. The second paragraph deals with a particular issue, i.e. to what extent the nonperformance by a third party (sub-supplier, sub-contractor) which prevents the contracting party to fulfil its obligations, can be considered as a force majeure event for the contractor. According to this provision, the contractor must not only prove that the requirements of force majeure are met, but also that the same requirements apply to the third party.  The relationship between the general definition and the listed events

When introducing a list of force majeure events in the clause, the question arises whether the list of events should be merely illustrative (which means that the obligor invoking the listed event should prove at the same time that the general requirements of force majeure are met) or, on the contrary, the occurrence of the event as such should be sufficient to relieve the obligor from its duty to perform. As regards the ICC Force Majeure Clause, the third paragraph lists a number of typical events of force majeure, such as war, acts of terrorism, sabotage, piracy, acts of God, general labour disturbances, etc., in conformity with the commonly used type of approach with respect to this type of clause. With respect to the relationship between the listed events and the general definition of force majeure, the clause has opted for a compromise solution, by stating that in the absence of proof to the contrary and unless otherwise agreed in the contract between the parties expressly or impliedly, a party invoking the clause shall be presumed to have established the two first conditions of the general definition (i.e. that the event is unforeseeable and beyond its control) but must in any case prove the requirement of irresistibility. In other words, the listed events are subject to the same conditions established in the general force majeure formula, but the party invoking them will benefit from the above presumption with respect to the first two requirements, thus shifting the burden of proof to the other party.

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 Consequences of force majeure

Paragraph 4 of the clause expressly states that a party successfully invoking the clause is relieved of its duty to perform its obligations under the contract from the time at which the impediment causes the failure to perform if notice thereof is given without delay, or if notice thereof is not given without delay, from the time at which notice thereof reaches the other party. The obligation regarding notification is very important, because it makes the effect of the clause dependant upon timely information from the other party and thus prevents a party from seeking at a later stage excuses for its non-performance. Moreover, according to paragraph 5, the party successfully invoking the clause is relieved from any liability in damages or any other contractual remedy, from the time it notified the event to the other party. 6.5.2 Hardship

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While force majeure mainly concerns situations where performance is made impossible or “reasonably” impossible, the notion of hardship covers the situation in which, due to an unforeseeable event beyond the control of the parties, the equilibrium of the contract is substantially altered and the performance becomes excessively onerous for one of the parties. Typical examples of hardship are extreme devaluations of a currency or very substantial price increases of certain goods, which radically modify the circumstances considered by the parties when concluding the contract. Another hardship situation arises where the contract unexpectedly loses any interest it had for a party, e.g. because the goods are no longer marketable. According to the generally accepted principle of contract law, whereby the parties are bound to respect the obligations undertaken (pacta sunt servanda) and to take the risk that the deal may become less profitable or even incur a loss, hardship situations should in principle not entitle the disadvantaged party to be freed from its obligations nor to claim that the contractual conditions be modified so as to restore the previous equilibrium. However, this restrictive view — which takes into due consideration the need for foreseeability and certainty — may be overcome when it is necessary to safeguard the interest of a party that suffers an exceptional and unforeseeable change of circumstances. There is a trend in national laws to recognize that in serious situations of hardship a party may be entitled to renegotiate the contract and/or to obtain judicially its adaptation,38 or at least its termination.39 A rather wide acceptance of the principle of hardship is contained in Articles 6.2.26.2.3 of the UNIDROIT Principles. Clauses on Hardship in the UNIDROIT Principles Article 6.2.1 – (Contract to be observed) Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship. Article 6.2.2 – (Definition of hardship) There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a)

the events occur or become known to the disadvantaged party after the conclusion of the contract;

(b)

the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;

(c)

the events are beyond the control of the disadvantaged party; and

38. See, for instance, § 313 of the German civil code and Article 1195 of the new French civil code, in force as of 1 October 2016. 39. See for example Articles 1467-1469 of the Italian civil code on the so called eccessiva onerosità sopravvenuta.

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the risk of the events was not assumed by the disadvantaged party.

Article 6.2.3 – (Effects of hardship) 1.

In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.

2.

The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.

3.

Upon failure to reach agreement within a reasonable time either party may resort to the court.

4.

If the court finds hardship it may, if reasonable,

(a)

terminate the contract at a date and on terms to be fixed, or

(b)

adapt the contract with a view to restoring its equilibrium.

The UNIDROIT Principles on hardship have been criticized because they give too much latitude to a party wishing to be freed from its obligations and especially because they give a third party (arbitrator or judge) the power to change the conditions of contract in order to restore the previous balance of the respective obligations.

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This issue has already been considered when dealing in general terms with the UNIDROIT Principles (supra, § 2.8.2.3). Business people tend to reject the idea that a third party may modify the essential elements of their contract, such as the price, without their consent. Of course, parties may in exceptional situations entrust a third party (e.g. an arbitrator) with the task of determining certain contractual issues, but this will normally be agreed with respect to a specific situation through a clause drafted for that particular purpose. It is interesting to note that a far more cautious approach has been taken in the ICC Hardship Clause 2003, which is reproduced below. ICC Hardship Clause 2003 1.

A party to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract.

2.

Notwithstanding paragraph 1 of this Clause, where a party to a contract proves that:

(a)

the continued performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that

(b)

it could not reasonably have avoided or overcome the event or its consequences,

the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reasonably allow for the consequences of the event. 3.

Where paragraph 2 of this Clause applies, but where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract as provided in that paragraph, the party invoking this Clause is entitled to termination of the contract.

Under the ICC Hardship Clause, the parties have the duty to negotiate alternative reasonable terms, but if they fail to agree upon a mutually satisfactory solution, no third party will take their place and the only consequence will be termination of the contract. This compromise solution seems to be a more appropriate response to the needs of the parties. If a hardship situation arises, the parties will have a good chance to agree upon a reasonable solution. When the parties cannot reach an agreement, the disadvantaged party will, in any case, be able to bring the issue before the competent court or arbitral tribunal. However, this court or arbitral tribunal can only decide on termination of the contract (if the conditions for hardship are met), and cannot take the parties’ place by “redrafting” the contract on their behalf.

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In this way, the party suffering the hardship situation will be freed from obligations it could not reasonably be expected to perform due to the change of circumstances and, at the same time, the danger will be avoided of a third party interfering with decisions that parties want to reserve for themselves. 6.5.3 Penalty/liquidated

damages

Penalty (or liquidated damages) clauses are clauses under which a party undertakes to pay, in case of non-performance of a specific obligation, a pre-established sum of money normally calculated as a percentage of the value of the obligation which has not been performed or has not been timely performed. Clauses of this type can have three different functions: (a) to determine

in advance the amount of the damage to be compensated, so that the party suffering the breach need not prove the amount of its loss;

(b) to induce

the other party to perform its obligations, under the pressure of a monetary penalty;

(c) to limit

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6.5.3.1 Validity

the liability for damages to the amount of the penalty/liquidated damages.

and effectiveness of penalty clauses in civil law and common law

While the function of determining the damage in advance is generally accepted in most legal systems, the second one, i.e. that of inducing the counterpart to perform, is not admitted in most common law countries, which do not accept the idea that a party may secure performance of a contract by the imposition of a fine or penalty and only admit the fixing of the amount in advance as “liquidated damages”. This implies that clauses which specify amounts of liquidated damages which are not a genuine pre-estimate of loss, and which are aimed at deterring a breach instead of determining in advance future damages, are to be qualified as penalties, and will be considered null and void. According to the traditional view prevailing in English case law, a liquidated damages clause is to be qualified as an (invalid) penalty clause when it is intended to operate in terrorem and its amount appears to be unconscionable or extravagant. However, in a recent case the Supreme Court40 has opted for a more flexible approach, replacing the traditional test of whether the clause is a “genuine pre-estimate of loss” and therefore compensatory, or whether it is aimed at deterring a breach and therefore penal, with the test whether the clause is out of all proportion to the innocent party’s legitimate interest in enforcing the counterparty’s obligations under the contract. Thus, under this new jurisprudence, the fact that the purpose of the clause is aimed at deterring a breach of contract is not sufficient: what counts is that it the innocent party has a legitimate interest in enforcing performance and that the amount agreed is not out of proportion to that interest. This means that a party can, in some circumstances, enforce a consequence for non-performance which goes beyond simply being compensated for losses, where that party’s wider legitimate interests justify such compensation. The flexible approach introduced by the Supreme Court has significantly reduced the gap existing between common law and civil law. In fact, in most civil law systems penalty clauses are not unlawful, but the courts have the right to reduce the amount of the penalty if it is excessive, as shown hereafter with regard to France.41 Article 1231-5 - New French Civil Code Lorsque le contrat stipule que celui qui manquera de l’exécuter paiera une certaine somme à titre de dommages et intérêts, il ne peut être alloué à l’autre partie une somme plus forte ni moindre. Néanmoins, le juge peut, même d’office, modérer ou augmenter la pénalité ainsi convenue si elle est manifestement excessive ou dérisoire. 40. United Kingdom Supreme Court, Cavendish Square Holding BV v Talal El Makdessi and ­ParkingEye Limited v Beavis (2015) UKSC 67. 41. See, also, § 343 of the German civil code (BGB) and Art. 1384 of the Italian civil code.

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Where the contract provides that the party which does not perform will pay a certain amount as damages, no higher or lower amount can be granted to the other party. However, the judge may, even on its own initiative, reduce or increase a penalty which is manifestly excessive or derisory.

Also, the UNIDROIT Principles provide in Article 7.4.13(2) that, notwithstanding any agreement to the contrary, the specified sum may be reduced to a reasonable amount when it is grossly excessive in relation to the harm resulting from the non-performance and to other circumstances. UNIDROIT Principles - Article 7.4.13 - Agreed payment for non-performance 1.

Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

2.

However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

We can therefore conclude that it is advisable at least where the contract is to be governed by the law of a common-law country, to avoid the term “penalty” and, generally, to fix possible liquidated damages at reasonable levels, thus reducing the risk of a qualification as penalty (under common-law legal systems) and the risk of having the amount reduced by the courts (under civil law legislations).

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6.5.3.2 Liquidated

damages and limitation of liability

As regards the third function, i.e. the limitation of liability, the solutions found in national laws differ from country to country. In some jurisdictions the general rule (applicable if parties have not agreed otherwise) is that the aggrieved party may claim further damages if it is able to prove them.42 In others, unless otherwise agreed, the liquidated damages are the maximum amount that can be claimed.43 These differences can have surprising consequences as shown in the following example. Example 6-5 - Sale of machinery with penalty clause for delay The Italian company Meccaniche Rossi S.p.A. negotiated with the German company Otto Müller GmbH a contract for the sale of a machinery having special characteristics required by the German party. The German customer requested that delivery be made within 31 May 2015. Meccaniche Rossi knew that it could respect this term, provided his subcontractors were able to manufacture in time a number of components, which was not sure, and proposed 25 July for delivery. Since Otto Müller insisted on the date of 31 May, Meccaniche Rossi decided to accept this delivery date and to take the risk of being unable to deliver on time, having considered that under the penalty clause contained in the contract of sale it would have to pay a liquidated damage of 0,3% of the contract price for each week of delay. The parties agreed that the contract, originally drafted by the lawyers of Meccaniche Rossi, would be submitted to German law. Unfortunately, the seller’s subcontractors did not supply their components in time, and finally Meccaniche Rossi delivered the machinery on 10 August 2015. Since the penalty agreed contractually for 12 weeks delay would amount to 3,6% of the contract price, Meccaniche Rossi reduced the agreed price accordingly, but the German buyer claimed that the actual damage suffered exceeded substantially the amount of the penalty, because in the 12 weeks after the agreed delivery date it lost important business and had to pay substantial penalties to its customers. Since German law was applicable, Otto Müller was entitled to claim such additional damage, provided he could prove it, according to § 340(2) of the German civil code. 42. See, for instance, § 340(2) of the German civil code. 43. See, for instance Art. 1382 of the Italian civil code.

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This was a surprise for the seller who had been reasoning under the rules of Italian law, which say that the damages arising out of the breach considered by the penalty cannot exceed the amount of the penalty, unless otherwise agreed.

The above example clearly shows how important it is to consider the applicable law (even where the Convention on the International Sale of Goods is applicable, since the penalty clause remains outside the scope of the CISG: see infra, § 7.3.1.1). The recourse to penalty/liquidated damages in case of delay in delivery is quite common in general conditions of sale as a compromise solution, which grants the buyer a compensation for the damage suffered and at the same time provides a limitation of liability for the seller. When the clause has this double purpose, parties should make sure to expressly state that the liquidated damages are the only remedy in case of delay in delivery.44 6.5.3.3 Recommendations

to negotiators

 Whenever the contract may be submitted to a common-law country, it is advisable to use the term liquidated damages instead of penalty.  When agreeing on the amount of the penalty/liquidated damages, parties should specify an amount which is reasonable, taking into account the possible consequences of an excessive amount under the law applicable to the contract.  If the parties wish that the penalty/liquidated damages also imply a limitation of liability, parties should check the applicable law and, if necessary, expressly state whether they intend to limit liability to the amount of the penalty.

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6.5.4 Requirement

of written form for modifications

It is a common practice to include clauses which provide that any future changes to the contract must be made in writing or, in more exceptional cases, that they must be made by a separate document signed by both parties.45 An example of a clause requiring a signed document is the following: Clause requiring signed document for modifications Except as otherwise provided herein, this Agreement can only be modified by a written agreement signed by authorized representatives of both parties.

Clauses of the above type are rather exceptional and should be used only where the parties have good reasons for requiring that any modification should be recorded on a separate written agreement. This can be for instance the case where the performance of certain aspects of the contract is entrusted to several people and the parties want to make sure that only some of them can agree on modifications on behalf of the company. The clause commonly used will only state that an agreement in writing is necessary, so that an exchange of letters or e-mails can be sufficient, as in the following clause: Written form for modifications Any amendment to this Contract must be in writing.

The purpose of these clauses is to induce parties to use the written form whenever they modify their agreement in order to avoid possible misunderstandings and to maintain evidence of the successive agreements. However, provisions of this type do not always correspond to actual business needs. Especially in countries where commercial contracts do not require the written form, traders are used to agreeing on many issues orally, e.g. by phone. Thus, it is frequent,

44. One should bear in mind that, where a penalty/liquidated clause has the effect of limiting liability, such clause will be subject to the rule existing in many civil law countries, whereby parties cannot limit in advance their liability in case of fraud or gross negligence. A similar principle is contained in Article 7.1.6 of the UNIDROIT Principles, which states: “A clause... which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract”. 45. The difference between these two situations is that in the first case a written communication (letter, fax) accepted through another written document will be sufficient, while in the second a document signed by both parties is needed.

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for example, in commercial agency contracts that the parties will agree orally upon a higher or lower rate of commission for a particular deal or that they will agree to include business made outside the contractual territory within the scope of the contract. This possible gap between the common practice of the parties and the contractual rule requiring the written form may give rise to inequitable results, particularly when a party that apparently agreed with, or even proposed, the oral modification thereafter claims that the modification is invalid because it does not comply with the written form requirement. In some jurisdictions, the courts avoid this result by stating the principle that by orally agreeing to modifications of the contract, the parties implicitly waive the rule that requires the written form. Article 29(2) of the UN Convention on the International Sale of Goods (CISG) states the following: Article 29(2) - CISG A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.

This rule, which can be considered as an application of the general principle of good faith, means that once one party gives the other party reasons to rely on the fact that it agrees to modify the contract orally, for instance, by proposing the modification itself, it loses the right to invoke the nullity of such modification not being made in writing.

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The same rule is contained in the UNIDROIT Principles. UNIDROIT Principles - Article 2.1.18 A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct. 6.5.5 Partial

nullity

Clauses stating that the nullity of one or more clauses does not imply the nullity of the whole contract are very common in international agreements. Some typical examples of such provisions are the following: Severability of provisions The terms of this Agreement are severable and the invalidity of any term of this Agreement shall not affect the validity of any other term. Partial nullity If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable, such decision shall not affect the validity or enforceability of any of the remaining provisions, which remaining provisions shall continue to have full force and effect. Invalid clauses Any provision to be found invalid or unenforceable shall not affect the validity of the contract as a whole.

Clauses such as the above are included for the purpose of saving the contract as a whole when one of its clauses appears to be null and void. However, this may not always conform to the needs of a party, as shown in the following example. Example 6-6 – Trademark licence with export prohibition A US producer grants a trademark licence to a licensee of a developing country that contains an obligation of the licensee not to sell the licensed products outside the contractual territory.

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The contract also contains the standard clause whereby the nullity of one of the clauses does not affect the rest of the contract. When the authorities of the licensee’s country declare that the export prohibition is null and void, the licensee begins selling the licensed products abroad, pretending that he is not bound by the clause in question, since it is null and void, while the contract remains in force.

In the above example, the export prohibition is essential for the licensor, and the clause stating that the nullity of any clause does not affect the remaining provisions of the contract is not appropriate for him. According to a rule which exists in most jurisdictions, if the above clause had not been in the contract, the party would have claimed that the nullity of the export prohibition should imply the nullity of the contract as a whole, since he would not have concluded the contract if he had known the clause was invalid. It is therefore better not to include clauses such as those mentioned above, or at least to make clear that the contract must be considered null and void in its entirety, whenever the nullity regards an essential clause. Another useful provision that may be included is to expressly provide an obligation to negotiate alternative clauses that may replace the ineffective clause without breaching the law, as provided in the following example:

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Invalid clauses If any of the provisions of this Agreement are found to be null and void, the remaining provisions of this Agreement shall remain valid and shall continue to bind the Parties, unless it can be concluded from the circumstances that, in the absence of the provision(s) found to be null and void, the Parties would not have concluded the present Agreement. The Parties shall replace all provisions found to be null and void by provisions that are valid under the applicable law and come closest to their original intention. 6.5.6 Non-waiver

clauses

Another common clause is one providing that the failure by one party to require performance of its obligations by the other party cannot be considered as a waiver of its future rights, as in the following example: Non-waiver The failure of either party hereto at any time to require performance by the other of any provision hereof shall in no way affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof constitute a waiver of any succeeding breach of the same or any other provision hereof, or constitute a waiver of the provision itself.

The effectiveness of this clause may be very different depending on the applicable law. While it is likely that the clause will be applied strictly in jurisdictions favouring a literal interpretation of the contractual clauses (e.g. England), in many civil law jurisdictions the clause will not be applied when it is clear that the failure to observe a certain obligation has been tolerated by the other party in the past. A typical example of this problem arises when a party wishes to terminate a long-term contract “for cause”, invoking the breach of an obligation expressly mentioned in the contract as a condition for contract termination without notice. If this obligation has never been respected in the past (for example, the obligation to transmit certain information at regular intervals which has never been adhered to for several years), and the other party has never complained about it, there is little chance that a civil law jurisdiction would consider the termination based on such contractual breach as valid, even if the contract contains a non-waiver clause. This is why the effectiveness of these clauses should not be overestimated and, when there is an risk that the failure to require the performance of a specific obligation can be interpreted as a waiver, a specific clause to that effect — which will have far more chance of being effective — should be drafted.

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An example of this situation can be found in the following clause, which makes clear that when the supplier decides not to enforce the minimum turnover clause (a situation which is quite frequent in practice), this does not imply a waiver of his right to do so in the future. Minimum turnover clause The Distributor undertakes to purchase, each year, Products amounting to at least the minimum yearly turnover indicated in Annex A-3. If the Distributor fails to attain before the end of any year the minimum purchase in force for such year, the Supplier shall be entitled, by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), at his choice, to terminate this Agreement, to cancel the Distributor’s exclusivity or to reduce the extent of the Territory. It is expressly agreed that any decision by the Supplier not to make use of the above rights in case of non-attainment of the minimum turnover by the Distributor, even if repeated for several years, will not be considered as a waiver of its right to invoke the same clause in the future. 6.5.7 Clauses

excluding liability for consequential damages

In order to limit liability for possible damages arising out of non-performance, traders tend to provide clauses which exclude liability for certain kinds of less direct damages, such as loss of profit, lost sales, loss of production, etc. A clause commonly used in international contracts is the following: Limitation of liability – consequential damage

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Neither party shall be liable to the other for any consequential damage with respect to any claim arising out of this agreement.

Parties using this type of clause normally intend to exclude their liability for damages that may be a further consequence of their non-performance, like, loss of production, loss of profit, etc. It is however not at all certain that a clause of this type will warrant such result, since the notion of consequential damages is ambiguous and does not necessarily cover the types of damage that the parties intended to exclude. First of all, it should be said that the term “consequential damage” does not exist as a legal notion in civil law jurisdictions. Thus, if the contract is governed by the law of a country of civil law, it is not foreseeable which type of damage may fall under the clause and be excluded from liability. But also under common-law legal systems, where the notion of consequential damages exists, its actual meaning is not clearly defined. According to the traditional approach of English Courts, which has been followed in most common-law countries, when a party breaches the contract, the other party is entitled to receive damages:  which fairly and reasonably arise naturally from the breach of contract (direct loss); and  which were reasonably in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it (consequential or indirect loss). However, when it comes to decide if a specific damage can be considered to be direct or consequential, the question cannot be answered in general terms, but will depend on the circumstances of each case. Thus, if we take for instance the common case of loss of profits, the answer depends on the circumstances of the specific agreement: in some cases, it will be considered to be a direct loss, arising naturally from the breach of contract; in others, it may be considered as a consequential or indirect loss. This issue has been dealt with by the New York Court of Appeals in Biotronik AG v Conor Medsystems Ireland Ltd.46 where the court held that the lost profits arising from a collateral contract with a third party constituted general (direct) damages and was not exempted by a “consequential damage” exclusion clause. 46.

Biotronik A.G. v Conor Medsystems Ireland Ltd., et al., 2014 WL 1237514 (N.Y. March 27, 2014).

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Example 6-7 – New York Court of Appeals – Biotronik v Conor Under an exclusive distributorship agreement, Biotronik (the distributor) agreed to purchase stents manufactured by the defendant Conor, for resale in a fixed territory. The contract provided that Biotronik would pay Conor a transfer price for each stent, calculated as a percentage of Biotronik’s net sales. Thereafter, Conor recalled its stents from the market and terminated the agreement. Claiming that Conor’s withdrawal of the stent breached the agreement, Biotronik claimed damages of $100 million in profits it claimed it would have made reselling the stents over the remaining term of the agreement. However, the contract contained the following limitation provision: “Neither party shall be liable to the other for any indirect, special, consequential, incidental, punitive damage with respect to any claim arising out of this agreement (including without limitation its performance or breach of this agreement) for any reason.” The New York Court of Appeals held that, under this particular contract, Biotronik’s lost profits were general, not consequential, damages, and therefore not barred under the parties’ agreement.

This case highlights the importance of specifically identifying lost profits in limitation of liability clauses and not just relying on a general reference excluding consequential damages.

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It is therefore recommended to always expressly mention, in addition to the reference to consequential damages, the specific loss that is to be excluded, like loss of profit, loss of production, lost sales, loss of opportunity, loss of business, additional costs sustained for overcoming the consequences of the breach, etc., in order to make clear that this type of losses is to be excluded in any case. Finally, it should be reminded that in most civil law countries limitations of liability are ineffective in case of fraud of gross negligence.

6.6 Concluding the Contract The rules concerning the conclusion (formation) of contracts are a striking example of the distance existing between legal rules and the expectations of business. Thus, in most legal systems the application of the so-called “mirror image rule” may have practical consequences that the parties do not foresee, as shown in the next paragraph. And the consequences of this gap between the law and contractual practice are even greater in case of conflicting general conditions, as explained later in § 6.7. 6.6.1 The domestic

rules of formation of contracts and resulting problems

Most national legal systems, when dealing with contracts concluded through an exchange of communications between parties located in different places — which is a very common situation, particularly with respect to international contracts — follow more or less strictly the so-called “mirror image rule”, whereby the acceptance of an offer must exactly conform to the terms of such offer. If this is not the case, the purported acceptance will be considered to be a counter-offer that must, in turn, be accepted by the other party. An example can be useful for a better understanding of this issue. Example 6-8 – Conclusion by fax of a contract of sale Mr Bigault, a Belgian importer of various goods, contacts a Swiss producer, System Watch AG, in order to purchase low-priced watches for the shops to which he is supplying. After having been sent a catalogue, Mr Bigault, on 20 February 2005, orders, by fax, 2,500 items of various models, indicating the price, delivery date (15 May 2005) and payment conditions (documentary credit, to be provided 30 days before the agreed date of delivery). Mr Cornet, commercial manager of System Watch, answers with the following fax:

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“We have the pleasure of informing you that we accept your order No. 445/05, except that we cannot meet the delivery date, which will be postponed until 30 June 2006.”

In a situation of this kind, the obvious conclusion of a businessman not versed in legal problems is that a contract has been validly concluded and that consequently System Watch can put the watches into production, knowing that Mr Bigault is obliged to take delivery of them, while Mr Bigault can enter into agreements with his customers on the assumption that System Watch has undertaken to deliver the watches on 30 June. In fact, the above conclusion would not be the case in many legal systems. Most jurisdictions follow the principle that a proposal is accepted, and amounts to the conclusion of a contract, only where the acceptance exactly corresponds to the proposal. If there are differences or exceptions, the answer to the proposal is not to be qualified as acceptance, but as a counterproposal, and the contract will be concluded only when the other party accepts such counterproposal.47 Some legal systems have a more flexible approach in admitting that a contract may be concluded when the modifications contained in the acceptance regard merely accessory aspects or do not materially alter the offer.

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For example, Article 2-207 of the US Uniform Commercial Code states the following: 1.

A definite and reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

2.

The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract, unless:



a) the offer expressly limits acceptance to the terms of the offer;



b) they materially alter it; or



c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

We can therefore conclude that the resolution of this critical issue will depend upon the law governing the formation of the contract. According to the rules prevailing in Europe, such law will be the law that would govern the contract if it were concluded. This results from Article 10(1) of the Rome I Regulation of 2008, which provides as follows: The existence and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid.

However, different rules of private international law, such as, for example, the direct application of the lex fori, may apply in other countries. This means that, when problems concerning the conclusion of the contract arise, it will not always be easy to obtain a clear answer: first, because there may be a problem of identifying the law which governs the formation of the contract in dispute and second, because the rules on formation are often complex and difficult to interpret. It should be noted, however, that disputes on these points are far less frequent than one would imagine. In most cases where the contract has not been concluded regularly, because the offeror was not aware that what he thought to be an acceptance was actually a counterproposal, he will thereafter accept the counterproposal without noticing the difference, simply by behaving as if the contract had already been concluded. Thus, in the case of example 6-8, when the subsequent behaviour of the buyer necessarily implies acceptance of the contract (e.g. the issue of the documentary 47. This would generally be the case in many legal systems, for example in England, France, and Italy. See, for a comparative analysis, Delforge, La formation des contrats sous un angle dynamique. Réflexions comparatives, in Fontaine (ed.), Le processus de formation du contrat, Bruxelles-Paris 2002, 139 et seq.

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credit), it will in most legal systems be considered to be a tacit acceptance of the counterproposal. This means that in all cases where the parties continue performing the deal, they will sooner or later give rise to a situation in which the contract can be considered as concluded. Problems will mainly arise when one of the parties changes its mind before the contract is validly concluded. In order to better understand this, we can continue citing example 6-8. Example 6-9 – Example 6-8 continued After a certain period, but before the date on which the documentary credit should have been opened, Mr Bigault meets another producer, who offers to provide him with similar watches at a more suitable price. He then goes to his lawyer and asks him what would happen if he “revoked the order” made to System Watch.

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His lawyer, after having examined the two faxes and having received confirmation from Mr Bigault that he has made no further communications to System Watch after receiving the fax purporting to be an acceptance, deduces that no contract has yet been concluded and advises him to inform Swiss Watch that he does not accept the latter’s counterproposal.

In cases such as this, which are, fortunately, rather exceptional (because parties do not frequently challenge the effectiveness of the conclusion of a contract before performing it, or before it is performed by the other party), the application of the principles on formation may have serious consequences for the party that was relying upon the valid conclusion of the contract. This is why it is important for business people to have some understanding of the rules governing contract formation, and particularly those concerning acceptance with modifications. 6.6.2 Rules

on the formation of contracts in the CISG and UNIDROIT Principles

In the previous paragraph, reference was made to the rules on formation of contracts contained in national laws. However, in actual practice most problems will arise in the context of contracts of sale, which are the main example of contracts negotiated between distant persons. Since a great number of countries have ratified the UN Convention on the International Sale of Goods (CISG), the situation most likely to arise is that this Convention and its rules on the formation of contracts of sale will apply. Thus, in the case examined in the previous paragraph, reference should be made to the CISG, since both Belgium and Switzerland have ratified the Vienna Convention of 1980. As regards the acceptance problem examined in the previous paragraph, we should first mention Article 18(1) of the CISG. Article 18(1) - CISG A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

It is therefore clear that in cases where a purported acceptance is actually to be considered as a counter-offer, such counter-offer will be considered to have been accepted as soon as the conduct of the other party indicates its assent. As regards the possibility of qualifying as acceptance a reply to an offer which contains modifications of limitations or additions, Article 19 should be considered. Article 19 - CISG 1.

A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

2.

However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without

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undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. 3.

Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

This provision, after having reinstated the traditional “mirror image” rule in paragraph 1, attempts to introduce some flexibility in the second paragraph by admitting an acceptance with modifications, provided the material terms of the offer are not altered. However, this rule is practically annulled by the third paragraph, which considers almost any type of modification as materially altering the offer. Therefore, if we look at the clause as a whole, it would seem that the CISG substantially maintains the traditional “mirror image” approach. In actual fact, the above conclusion is not completely true if we consider that in several cases the courts have considered as not materially altering the contract terms modifications that were apparently covered by § 3 of Article 19. For example, the following have been qualified as immaterial modifications: a clause reserving to the seller the right to change the period of delivery,48 revision of the price according to market trends,49 a 30-day time limit for notice of defects.50

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The UNIDROIT Principles contain in Article 2.1.11 the same text of the first two paragraphs of Article 19 of CISG, but not the third paragraph. This means that under the UNIDROIT Principles, a modified acceptance is possible if the modifications are not material and the evaluation of this requirement is left to the courts. The UNIDROIT Principles also contain a provision on “writings in confirmation” that may give rise to problems, at least for traders not used to this type of practice. UNIDROIT Principles – Article 2.1.12 - Writings in confirmation If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy.

This provision seems to be inspired by a practice common in certain countries (particularly Germany) according to which a party, after having orally concluded a contract, sends a confirmation in writing containing additional clauses normally related to the typical legal aspects, and often based on its general conditions. However, the term confirmation is a fiction, because the party in question is actually adding new terms after the agreement has been made,51 which would mean, in most jurisdictions, that it is actually proposing to change the terms of a contract which has already been concluded. An interesting example of the above situation can be found in a case decided in 2003 by a US Federal Court. Example 6-10 – Sale of corks to a winery Château des Charmes, a winery in Ontario, Canada, agreed over the telephone to purchase corks from a French producer, Sabaté. Sabaté made various shipments of corks to Château des Charmes, each of which contained an invoice with a forum selection clause in favour of the courts of Perpignan (France). Château de Charmes never objected to the invoices. When Château des Charmes sued Sabaté in a federal district court in California, Sabaté objected that the forum selection clause should be respected by the US Court. 48. Oberlandesgericht Naumburg (Germany), 27-04-1999, in Unilex. 49. Cour d’Appel de Paris (France), 22-04-1992, Sté Fauba France v Fuijtsu Mikroelektronik GmbH, in Unilex 50. Landgericht Baden-Baden, 14-08-1991, in Unilex. 51. This is a substantial difference from the previous case, where the modifications are contained in the reply to an offer.

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The Ninth Circuit52 decided that the sending of the forum selection clause was an attempt to modify an existing oral agreement, but that this proposal had not been accepted by Château des Charmes, since the failure to object to a party’s unilateral attempt to alter materially the terms of an otherwise valid agreement could not be considered as an agreement.

The above example shows that the rule contained in Article 2.1.12 of the UNIDROIT Principles may not be appropriate for parties who are not used to the practice of confirmation letters. In any case, since the additions contained in the confirmation letter can be effective only if they do not materially alter the terms of the contract, this rule should not apply to a case in which the confirmation in writing contains the general conditions of the party sending it, since general conditions practically always contain clauses which imply material modifications to the legal rules (concerning, for example, limitations of liability, resolution of disputes, etc.). Moreover, it is unlikely that the rules concerning formation of contracts contained in the UNIDROIT Principles may actually be applied. In fact, where the parties have chosen to incorporate the Principles by reference into their contract, by agreeing that such principles will govern the contract, the Principles cannot decide the issue of whether the contract incorporating them has been validly concluded. This is because the Principles can only apply if the agreement of the parties that incorporates them exists, unless there is a previous agreement whereunder the parties have agreed to apply the Principles to future contracts. This means that the rules on formation contained in the UNIDROIT Principles will mainly be applicable where they are considered by arbitrators to be part of the lex mercatoria rather than in case of contractual incorporation.

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6.6.3 Conclusion

of contracts and general conditions

While more complex international agreements are normally negotiated in detail and result in a more or less tailor-made contract, simple sales contracts tend to be standardized, i.e. a party will prepare a set of conditions to be used for all contracts of a certain type. This type of practice is normal for sales contracts regarding goods sold on a continuing basis, but is also common in the banking and insurance business. As regards the contract of sale, which is the most common example of use of general conditions, the seller (or the buyer) works out a set of contractual clauses, mainly covering the strictly legal issues of the contract (for instance, choice of jurisdiction, warranties, limitation of liability, etc.), which are added to the “special part” of the contract proposal containing the issues negotiated case by case. Therefore, it is a common practice that the parties will negotiate and agree upon a number of issues (goods sold, price, date of delivery, conditions of payment, etc.) and refer the other issues to a set of pre-established conditions, their conditions of sale or of purchase, as the case may be. In doing so, the negotiators, who are not lawyers, will only deal with the “commercial” issues and need not consider the strictly “legal” issues which are taken into account in their general conditions. The usual way of doing this is to exchange documents (offer, acceptance, offer confirmation) where the “commercial” issues negotiated between the parties are expressly indicated on the front page and, for all the others, a reference is made to the general conditions (normally written on the back of the document or attached to it). Now, with the increasing use of e-mails as means of communication, it has become easy to annex the general conditions in the respective offer or acceptance, thus facilitating the proof that the conditions were effectively made known to the counterpart. The recourse to general conditions gives rise mainly to the following critical issues:

52. United States, 5 May 2003 Federal Appellate Court (9th Circuit), Château des Charmes Wines Ltd v Sabaté USA, Sabaté S.A., http://cisgw.3.law.pace.edu/cases/030505ul.html.

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inclusion of general conditions has not been clearly agreed between the parties, and especially when both parties make reference to their own general conditions (which are, by definition, contradictory), the question arises as to whether the conditions of one of the parties have become part of the contract (infra, 6.6.3.1);

(b) where the

clauses of the general conditions have not been negotiated between the parties, but simply accepted as an imposition by the stronger party, certain rules protecting the other party may limit the effectiveness of these standard terms (infra, § 6.6.4).

6.6.3.1 When

do general conditions become part of the agreement?

Where the contract containing the general conditions is signed by both parties — a common situation for banking or insurance contracts, where the stronger party has the power to require the other party to sign — there are no particular problems (except from the point of view of protecting such other party: see, infra, 6.6.4). When, on the contrary, the contract is concluded through a written exchange (letters, faxes, e-mails), it is not always clear if the general conditions to which the parties have referred in these communications have become part of the contract, and consequently whether their provisions, which normally strongly favour the party that drafted them, have become part of the contract. This is a particularly crucial issue that may substantially change the parties’ respective positions in case of dispute.

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We will first examine the case where only one party refers to its general conditions, and thereafter the even more critical situation that arises when both parties refer to their own (conflicting) conditions, the so-called battle of forms. 6.6.3.2 First

case: only one party refers to its general conditions

When a seller makes a contract proposal which includes his general conditions of sale and the purchaser accepts such proposal, there are no particular problems, as in the following example. Example 6-11 – Sale of boots (I) A manufacturer of leather boots negotiates with a foreign purchaser the sale of 500 pairs of leather boots. At the end of the negotiation the seller sends the buyer an “order confirmation” (Order confirmation No. 0744/05 of 27 March 2005), which sets out all the conditions expressly agreed during the negotiation and which contains the following words at the bottom: “All issues not expressly dealt with hereabove are governed by the seller’s general conditions of sale, printed on the back.” The seller asks the buyer to accept the order confirmation in writing. The buyer answers with a letter in which he states that he accepts the order confirmation No. 0744/05 .

According to generally recognized principles on the formation of contract (supra, § 6.6.1 and 6.6.2), there should be no doubt that, since the buyer has accepted the seller’s proposal without any reservation, the parties have concluded a contract of sale, which includes the conditions expressly negotiated between them as well as the general conditions of the seller. Thus, if a dispute arises at a later stage, the general conditions in question will apply. Let us now imagine a slightly different situation, where the buyer makes the final proposal: Example 6-12 – Sale of boots (II) A manufacturer of leather boots negotiates with a foreign purchaser the sale of 500 pairs of leather boots. At the end of the negotiation, the buyer sends the seller an “order”, which sets out the conditions expressly agreed during the negotiation. The seller accepts the order

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by sending an “order confirmation” (Order confirmation No. 0744/05 of 27 March 2005), which reproduces exactly all the “commercial” conditions set out in the buyer’s order, but which contains the following words at the bottom: “All issues not expressly dealt with hereabove are governed by the seller’s general conditions of sale, printed on the back.”

In this second case, the seller’s “acceptance” contains additional terms, since the seller added his general conditions. We can reasonably assume that such additional terms materially alter the contract terms contained in the offer made by the purchaser. In fact, general conditions of sale are drafted with the aim of favouring the seller, and they always contain terms which derogate the otherwise applicable rules to the advantage of the seller (e.g. by limiting the seller’s liability in case of delayed delivery and in case the goods are defective, or by specifying jurisdiction by the seller’s courts). Consequently, the seller’s “acceptance” must be considered as a counter-offer, even when rules which admit an acceptance with modifications are applicable (see, above, § 6.6.1-6.6.2), since there can be no doubt that the additional terms contained in the general conditions imply a material alteration of the offer.

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If the buyer thereafter performs the contract of sale without objecting to the inclusion of the general conditions (e.g. by issuing a documentary credit or by taking delivery of the goods), this will amount to a tacit acceptance of the counter-offer and, consequently, the general conditions of the seller. However, one very important point should be mentioned in this context. Since the (written) acceptance is to be considered as a counter-offer, the real acceptance, in the form of conduct indicating assent, cannot be considered as an acceptance “in writing”.53 This is particularly important for clauses which need to be agreed in writing, such as choice of forum or arbitration clauses, which, in most jurisdictions, require written acceptance to be valid. Thus, in the case examined in example 6-11, the general conditions of the seller will apply, but the clause providing for the exclusive jurisdiction of the courts of the seller’s place of business, contained in the general conditions, will not be effective unless the applicable law considers oral choice of forum as valid, which is rather unlikely. 6.6.3.3 Second

case: both parties refer to their general conditions

The situation becomes more complicated when both parties try to incorporate their general conditions into the contract. In this situation, also called battle of the forms, both parties use forms that incorporate their respective general conditions when concluding sales contracts. Example 6-13 – International sale of wine An Italian wine producer negotiates with a German purchaser the sale of 250 boxes of various wines. At the end of the negotiation, the seller sends the buyer an “order confirmation”, which sets out all the conditions expressly agreed during the negotiation and which refers to the seller’s general conditions of sale printed on the back, asking him to confirm his acceptance in writing. The buyer, instead of sending back a signed copy of the “order confirmation”, answers with a letter in which he says that he accepts the order confirmation, but states that his general conditions of purchase, annexed to the document, will apply. The seller does not object to the letter and ships the goods within the agreed delivery date.

53. It is not certain whether conduct that indicates assent and that results from a written document can be considered as an acceptance in writing. Thus, a letter whereby the buyer informs the seller that his bank has issued a letter of credit in favour of the latter is not necessarily to be considered as a written acceptance of the seller’s counter-offer, since the writing as such is not an acceptance (but merely amounts to a conduct showing that the buyer implicitly accepts the counter-offer).

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A year later, the purchaser discovers that part of the wine is defective and that this has caused him considerable harm by damaging his image with his customers (mainly high-level restaurants). When he asks his lawyers for advice, they verify the content of the respective general conditions and discover that the seller’s conditions of sale provide that the buyer must notify possible defects within six months from delivery and that any seller’s liability for damages caused by possible defects is excluded, while the buyer’s general conditions of purchase fix a period of two years and expressly provide that the seller will hold the buyer harmless from any damages that may arise in connection with the goods sold.

It is consequently essential for the buyer to know, even if he does not want to bring a claim before a court but simply to negotiate a settlement, which rules are to be applied. If his conditions of purchase apply, he will be entitled to recover the damage (provided he can prove the existence of the defects, of course); on the contrary, if the seller’s conditions apply, he will have no claim against the seller, since the six-month term for notifying the defects has elapsed and, in any case, the right to claim damages is expressly excluded.

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If we simply apply the traditional rules on the conclusion of contracts examined in paragraphs 6.6.1-6.6.2, and especially the “mirror image rule”, the general conditions of the buyer will apply. In fact, the “acceptance” by the buyer, which does not conform to the seller’s “order confirmation” (since it adds the buyer’s conditions of purchase, which materially alter the terms of the contract proposal made by the seller), is a counterproposal that has been accepted by the seller, whose conduct (shipping of the goods) implies acceptance of such counterproposal. This conclusion, which is the logical consequence of the application of the “mirror image rule”, also called “last shot rule” because it favours the party that makes the last proposal based on its general conditions, is not very satisfactory. Since the parties are normally not aware of this mechanism, the final result is that the application of the general conditions of one or the other party is merely accidental and does not express a deliberate will of the parties. This is why in some legal systems alternative solutions have been established, which come closer to the expectations of the parties. One is the “knock out doctrine” according to which, when both parties refer to their respective general conditions, none of these conditions apply (or only those provisions which are not contradictory).54 In practice, considering the large number of countries having ratified the Vienna Convention of 1980 (CISG), in most cases the issue will have to be dealt with under Article 19 of the Convention. Since Article 19 implies a rather strict application of the mirror image rule (supra, § 6.6.2), it can be said, in general terms, that under the UN Convention, the “last shot rule” will apply in case of a battle of the forms. However, there is also case law, especially in Germany,55 that applies the so called “knock-out doctrine” and comes to the conclusion that conflicting standard forms are completely invalid and are replaced by CISG conditions, while the contract as such stays valid. A similar approach has been taken in the UNIDROIT Principles, which contain a special rule on this issue. 54. See, for instance, section 2-207(3) of the US Uniform Commercial Code, which says that “Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this Act.” In practice, the application of this rule by the courts has given rise to many problems: see, Murray, The Definitive “Battle of the Forms”: Chaos revisited, in 20 Journal of Law and Commerce 2000, 1 et seq. A similar solution has been reached by jurisprudence in Germany since 1973. 55. Amtsgericht Kehl (Germany), 6-10-1995, in Unilex and Bundesgerischtshof (Federal Supreme Court, Germany), 9 January 2002, http://cisgw3.law.pace.edu/cases/020109g1.html. See also: Perales, Battle of the Forms and the Burden of Proof: An Analysis of BGH 9 January 2002, in 6 Vindobona Journal of International Law and Arbitration (2002), 217 et seq. However, this theory of German origin appears to be less appropriate in the context of the CISG: Piltz, Internationales Kaufrecht, München 2008, 136-139.

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UNIDROIT Principles – Article 2.1.22 - Battle of forms Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.

However, as discussed above in § 6.6.2, it is unlikely that the UNIDROIT Principles can be applied to the formation of contracts that incorporate them by reference, which means that they will come into consideration only where their application has been agreed before negotiating the contract or where they are applied as part of the lex mercatoria. 6.6.3.4 Advice

to negotiators

Where parties decide to make use of general conditions of contract, they should take the necessary steps to make sure they will actually become part of the contracts they are concluding.

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In theory, the simplest way to reach this result is to request that the other party return a signed copy of a proposal containing such general conditions, e.g. a confirmation of order. In practice, however, this is difficult to obtain. If the other party is not willing to return a signed copy as requested, most companies will nevertheless complete the deal rather than risking the loss of a customer. Only sellers or buyers that have strong bargaining power will be able to impose the written acceptance of their general conditions upon the other party. We can therefore assume that in most cases the party that has drafted general conditions of sale or purchase must expect that its counterparts will not expressly agree to such conditions, or may even try to impose their own conditions. Where this is the case, the only possible strategy is to attempt to always have the last word, by including a reference to its own conditions in all documents sent to other parties.56 This strategy, which may be effective in jurisdictions that apply the so-called “last shot doctrine”, offers no certainty, but it may be a reasonable compromise solution for parties not having enough bargaining power to obtain the express acceptance of their own conditions. Another possibility is to take advantage of a situation in which one party may succeed in having the other party accept its general conditions for future deals. Thus, in the context of contracts that will give rise to a series of future contracts of sale, such as a distribution or a franchising agreement, it is possible to include a clause whereby future contracts of sale will be governed by the general conditions of one of the parties. A further option, which may be used when selling through commercial agents, is to put the general conditions in the order form that the customer is asked to sign,57 but here too the problem is that most customers will not be willing to sign the order form. 6.6.4 Effectiveness

of clauses contained in general conditions

One other important issue which arises in the context of general conditions is the need to protect the party that accepts, normally without negotiating them, terms previously drafted by the other party. In this field, possible rules protecting consumers against abusive clauses contained in general conditions (in force in the countries of the European Union as a result of EC directive 93/13) play a very important role. Under such rules, many types of clauses are simply null and void when contained in general conditions used in consumer contracts.

56. This is made easier by sending proposal and acceptance through e-mails, which can incorporate the general conditions as annex. In fact, such annex can be much more detailed than a printed text on the back of a document (as used traditionally). It is of course necessary to include the general conditions in such a way as to be able to prove that they were actually received by the counterpart. 57. So that the customer makes a contract proposal (which the agent forwards to the principal) that already incorporates the general conditions of the offeree (the seller).

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In principle, these rules are not relevant in the context of this book, which only deals with B2B contracts. However, in some jurisdictions rules protecting consumers also apply, although to a lesser extent, to contracts between business people. One possible means of protection for the weaker party is to state that certain more dangerous clauses contained in general conditions proposed by one party are only effective if they have been expressly accepted by the other party. An interesting example of this type of approach is contained in Article 2.1.20 of the UNIDROIT Principles UNIDROIT Principles – Article 2.1.20 - Surprising terms (1)

No term contained in standard terms58 which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.

(2)

In determining whether a term is of such a character regard shall be had to its content, language and presentation.

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In practice, this solution is not without danger for parties using general conditions, given that, on the one hand, it may not be easy to decide which terms can be considered as surprising and that, on the other, the “remedy”, i.e. the express acceptance, is not at all clear. Will it be sufficient to request that the accepting party sign a declaration saying that it accepts all the terms contained in the general conditions? Or should the declaration expressly indicate the surprising terms?59 Or should there be evidence that the party in question has actually read the terms before accepting them? Considering all of these uncertainties, the risk of possible abuses by the “weaker” party are, in our opinion, too great, and this type of approach appears to be inappropriate to govern B2B relations. This is why it is recommended to strike Article 2.1.20 when incorporating the UNIDROIT Principles (supra, § 2.8.2.3). 6.6.5 Clauses

governing the entry into force of the contract

Normally, the contract enters into force when it is concluded, i.e. when it is signed by both parties or agreed orally. Where the contract is agreed through a written exchange, the time of conclusion may be different according to the applicable law. In many legal systems, the contract is deemed to be concluded when the acceptance reaches the offeror60 or becomes known to the offeror; in some others, it is already concluded when the acceptance is sent to the offeror.61 In order to avoid possible uncertainties, the parties may try to expressly agree upon rules governing the contract conclusion, but in order to be effective such rules should be agreed before negotiating the contract. Thus, one should bear in mind that a relatively common practice, consisting of the inclusion of rules of this type in the general conditions (like the clause whereby the offeree is deemed to have accepted the offer if he does not answer within a certain time), will not be effective unless the parties have agreed in advance that these rules should be applied to future dealings between them.62 A more frequent situation occurs when the parties sign the contract, but wish to postpone its entry into force until a later point in time when certain conditions will have been met. Thus, they may agree that the contract will not enter into force until certain 58. Standard terms are defined in Article 2.1.19(2) as follows: “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.” 59. For example, in Italy, where Article 1341 of the Civil Code requires the express acceptance of “onerous clauses” contained in general conditions, the practice commonly accepted by jurisprudence is that the accepting party puts its signature on a list which mentions the clauses that may be considered onerous. 60. For example, Belgium, Germany, Italy and Switzerland. However, in Swiss law the contract will already produce its effects from the time when the acceptance is sent. 61. E.g. in English law, when the acceptance is sent by mail (according to the so-called mailbox rule). In French law the jurisprudence is divided: see Delforge, op.cit., 197. 62. Thus, where the parties agree upon a continuing relationship that will give rise to the conclusion of several future deals, they may agree that these future contracts will be governed by a set of rules (normally the general conditions of sale of the supplier).

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government authorizations have been granted, or until a party has fulfilled certain preliminary obligations (e.g. advance payment, issuance of a documentary credit or a bank guarantee). In most legal systems, clauses of this type would be construed as conditions. However, this may give rise to problems for several reasons. First, if a condition is still to occur, the contract should, in principle, not produce its effects. One could consequently argue that the parties are not under a contractual obligation to take the necessary steps for the event to happen. Second, in many jurisdictions if the event upon which the entry into force is conditional merely depends upon the discretion of a party, it would not be considered as a valid condition. Considering all of this, it may be preferable not to make the entry into force of the contract as a whole conditional upon certain events, but simply to state that until certain conditions are met, the performance of the basic obligations under the contract will not begin. An example of this type of approach can be found in Article 3 of the ICC Model Contract for the Turnkey Supply of an Industrial Plant,63 which makes a distinction between the entry into force of the contract and the “commencement date”.

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ICC Model Contract for the Turnkey Supply of an Industrial Plant Article 3 - Entry into force of the Contract 3.1

Entry into force. This Contract shall enter into force on the date of signature by both Parties.



The Parties will undertake all necessary steps for facilitating the occurrence of the events indicated in Article 3.2.

3.2

Commencement Date. The obligations to perform the work contemplated by this Contract shall commence on the date on which the latest of the events listed in Contract Schedule B has occurred (the Commencement Date). If no event has been listed in Contract Schedule B, the Contract obligations shall commence on the date of signature of this Contract.

3.3

Non-occurrence of the Commencement Date. If the Commencement Date has not occurred, according to Article 3.2, within six months from the date of signature (or within such other term as may be agreed between the parties: see Contract Schedule C), either Party may terminate the Contract by written communication to the other Party.

In the context of a clause of this type, there will be no doubt that if a party does not perform those obligations it has to fulfil before the commencement date (for example, the obligation to provide a bank guarantee), this will be considered as a breach of the contract (which is in force from its signature), and consequently the other party can bring, or at least threaten to bring, a claim against it under the contract. Another important point, expressly dealt with in the above clause, is to make sure that, if the conditions for the entry into force do not occur within a certain time limit, the contract can be terminated, and the parties can look for other partners.

63. ICC Publication No. 653 of 2003

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Chapter 7

THE ICC MODEL FORMS

7.1 The ICC Model Contracts in General For many years, ICC has been active in drawing up standard rules for international trade. The most important set of rules of this kind are the Incoterms®, which were published for the first time in 1935 and updated several times thereafter until Incoterms® 2010.

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About 15 years ago, ICC engaged in a new direction, i.e. the drawing-up of model contracts for international trade, with the aim of offering companies engaged in cross-border trade a set of simple and well-balanced models that can help them negotiate and draft international contracts. While the first models related to simpler and more common types of agreement (sales, commercial agency, distribution, etc.), in more recent years more sophisticated types of agreements — such as contracts for the turnkey supply of a plant, contracts for the transfer of technology, and M&A agreements — have been created. The preparation of these models has been entrusted to working parties, called “task forces”, established within the Commission on Commercial Law and Practice (CLP Commission), composed of experts proposed by ICC’s national committees. When drafting the models, the working parties try to devise “balanced” contractual rules that take into account the main issues to be considered in each type of contract. 7.1.1 The various

model forms published by ICC

To date, ICC has published 15 model contracts:  the ICC Model Contract Commercial Agency, 2015 Edition, ICC Publication No. 766;  the ICC Model Contract on Distributorship, 2016 Edition, ICC Publication No. 776;  the Model Contract Occasional Intermediary (Non-circumvention and Nondisclosure), 2015 Edition, ICC Publication No. 769;  the ICC Model International Sale Contract, 2013 Edition, ICC Publication No. 738;  the ICC Model International Franchising Contract, 2011 Edition, ICC Publication No. 712;  the ICC Short Form Model Contracts International Commercial Agency and International Distributorship, 2017 Edition, ICC Publication No. 791E;  the ICC Model Contract for the Turnkey Supply of an Industrial Plant, 2003 Edition, ICC Publication No. 653;  the ICC Model Contract Selective Distributorship, 2016 Edition, ICC Publication No. 773;  the ICC Model Contract “Consortium Agreement”, 2016 Edition, ICC Publication No. 779,  the ICC Model Mergers & Acquisitions Contract 1 – Share Purchase Agreement, 2004 Edition, ICC Publication No. 656;  the ICC Model Confidentiality Agreement, 2016 Edition, ICC Publication No. 774 ;  The ICC Model Turnkey Contract for Major Projects, 2007 Edition, ICC Publication No. 659;  the ICC Model International Trademark Licence, 2008 Edition, ICC Publication No. 673;

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 the ICC Model International Transfer of Technology Contract, 2009 Edition, ICC Publication No. 674;  the ICC Model Subcontract, 2011 Edition, ICC Publication No. 706. 7.1.2 General

characteristics of the ICC models

The ICC model contracts have some common characteristics which distinguish them from other models and which will be examined in the following paragraphs. 7.1.2.1 The

first characteristic: a fair and balanced agreement

Unlike the model forms proposed by associations representing specific categories (e.g. agents, distributors, sellers of certain goods, etc.), which, by their very nature, tend to favour the interests of one of the parties, the ICC standard forms are drafted with the intent of establishing a fair balance between the two parties. This approach is primarily justified by the fact that the International Chamber of Commerce represents all categories involved: sellers and buyers, principals and agents or distributors, licensors and licensees, etc. Consequently, a model contract issued by ICC must consider the interests of all parties involved, without favouring any one of them.

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However, there is a further reason for the “neutral” approach undertaken by the various working parties: the intent to provide an international standard to which the parties may refer as an alternative to national laws. In fact, to the extent that the ICC models are accepted by traders as international standards — and this is only possible if they are acceptable to both parties — some of the solutions contained in their provisions may gradually become a sort of trade usage. Of course, it is not easy to decide which solutions can be considered to be fair for both parties. Parties tend to consider as fair those solutions which are more favourable for them and which they would like to incorporate into their contracts, and tend to forget the clauses they may have been forced to accept in cases where their position was weaker. This is why a really “balanced” contract will often be criticized by both parties as being too much in favour of the other party. Moreover, there are cases in which a solution that in theory could be considered unfair, particularly if compared with the standard solution set out by the law, is actually the solution that both parties consider to be mutually acceptable. Take, for instance, the clauses which exclude or limit the seller’s responsibility for consequential damages. Such clauses certainly imply a deviation, in favour of the seller, from the legal rules governing contracts of sale1 but, at the same time, the principle that the seller’s liability for consequential damages should be excluded or limited to a foreseeable amount is normally incorporated in international sale contracts and thus tends to become a generally accepted international standard, which a really balanced model contract must respect. When using ICC model forms, parties should be aware that a balanced contract is not necessarily better than a contract that favours one of the parties. There are situations in which a balanced contract is needed, as well as situations where, on the contrary, a party is expected to opt for a contract that is more favourable to it and less advantageous to the other party. In a free trade system, parties have the right to negotiate the clauses they prefer provided, of course, that they do not exceed the limits established by mandatory rules of law. It is normal that the outcome may be to the advantage of the party having a stronger bargaining position. Consequently, parties may very well decide that the ICC model is too balanced for them and make the adjustments they deem necessary in order to achieve the result they consider appropriate. This being said, they should nevertheless avoid solutions that are too unbalanced in their favour, because this may compromise their relationship with the other party, particularly when a long-lasting cooperation is needed, and also because, in case of dispute, courts may have a less sympathetic attitude towards a party that has taken excessive advantage of its bargaining power. 1 Thus, under the Vienna Convention of 1980 (United Nations Convention on Contracts for the International Sale of Goods: CISG), as well as under most national sales laws, the seller’s responsibility is, in principle, unlimited.

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In any case, there are also situations in which a balanced contract is necessary. This is the case, for instance, when the parties wish to come to an agreement quickly without discussing the various “legal” issues, but want to be sure that they can trust the contract to be fair. Furthermore, when a party has a weak bargaining position, it may use a balanced model contract to justify alternative contractual solutions in the course of negotiation. Finally, a balanced and well-drafted model contract is an essential point of departure for working out an individual contract, which can be adapted to the specific needs of the drafting party. 7.1.2.2 The

exclusion of national laws and the recourse to lex mercatoria

Another distinctive characteristic of the ICC models is that all of them (except for the model sale contract2 and the model turnkey for major projects3) provide as a standard solution with respect to the applicable law that the contract be ruled by general principles of law applicable in international trade, the so-called lex mercatoria, and not by the rules of domestic laws, unless the parties expressly choose them. This approach needs some further explanation.

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When negotiating “cross border” agreements, one of the main difficulties parties face is the lack of internationally uniform rules. If one considers, for instance, the topics covered by the ICC models, it is clear that uniform rules exist only with respect to the sale contract, while in all other cases parties must rely on national laws, which normally do not take into account the specific needs of international trade, since they have been enacted in primis for the purpose of governing domestic agreements and differ substantially from one country to another. In such a context, the traditional approach, based on the application of a domestic law determined on the basis of the rules of private international law, is not the best possible solution. This is because it imposes a heavy burden on the parties, by forcing them to organize their contracts within a framework of conflicting, and often inappropriate, domestic rules, and by obliging them to check, on a case-by-case basis whether their contract conforms to the local rules. This will normally involve a disproportionate waste of energy, time and money, particularly with respect to dealings involving relatively small amounts of money, which will normally not justify the cost of a local lawyer’s advice. There is, of course, a practical way to overcome the problem of conflicting domestic rules, which consists of imposing the choice of one’s own law on all foreign partners. Thus, a powerful principal can submit all of its contracts with a network of agents or distributors established in different countries to the same law, normally the law of its own country; or a strong buyer can insist on the application of its own law with sellers from different countries.4 This approach, which appears to be the most obvious solution to lawyers who simply try to extend their usual domestic contract forms and drafting techniques to an international environment, is not always appropriate. In fact, since it forces one of the parties to accept that the contract be governed by a legal system it does not know, while giving the other party the advantage of negotiating the contract clauses under a law it is familiar with, this solution can work only when the party drafting the agreement has substantial bargaining power. Even when this is the case, the fact of imposing something that is felt to be unfair by the other party may make it more difficult to establish a trusting and fair relationship between the parties. 2 The ICC decision not to adopt the lex mercatoria approach for the model sale contract is due to the fact that in this case the contract has been submitted to the United Nations Convention on Contracts for the International Sale of Goods (CISG), and thus to a uniform law expressly made for international trade. With regard to questions not covered by CISG, it would have been in theory possible to refer to the lex mercatoria; however, since disputes regarding the kind of contracts falling within the scope of the model (manufactured goods) are normally submitted to national courts (and only exceptionally to arbitration), the lex mercatoria approach was considered inappropriate in this specific context.. 3 Which makes reference to the domestic law of the country of the site, unless otherwise agreed. The reason for adopting this solution within the task force is that in the context of large construction projects this solution would normally be imposed by the owner. 4 Thus, in many countries, the buyers often state in their general conditions of purchase that the contract of sale is governed by the national law of the buyer, and expressly exclude the application of the CISG uniform rules.

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In order to avoid this uneasy situation, and with the aim of putting at the disposal of parties engaged in international trade model contracts that may be used worldwide without having to be adapted to specific national legislation, ICC decided to base its model forms on neutral ground as far as possible, and make them detached from specific national legislation by having recourse to the so-called lex mercatoria. Take, for instance, Article 24 of the ICC Commercial Agency Model Contract (2016 edition), which reads as follows: Article 24 - Applicable law (ICC Agency Model Contract) 24.1. A38 

24.1. B 

Any questions relating to this contract which are not expressly or implicitly settled by the provisions contained in this contract shall be governed, in the following order:

This contract is governed by the laws of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(name of the country the law of which is to apply)39 regardless of the conflict of law rules of that country.

(a) by the principles of law generally recognized in

international trade as applicable to international agency contracts, (b) by the relevant trade usages, and (c) by the UNIDROIT Principles of International

Commercial Contracts,

with the exclusion — subject to Article 24.2. hereunder — of national laws.

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24.2 The parties agree that in any event

consideration shall be given to mandatory provisions of the law of the country where the Agent is established which would be applicable even if the contract is governed by a foreign law (overriding mandatory rules). Any such provisions will be taken into account to the extent they embody principles which are universally recognized and provided their application appears reasonable in the context of international trade.

Here, the recommended solution (Article 24A) consists in submitting the contract to the “principles of law generally recognized in international trade as applicable to international agency contracts”, with the exclusion of national laws. The above clause leaves the parties free, if they so prefer, to submit the contract to national law by using the option provided in Article 24.2B. However, since the model was drafted on the assumption that it would not be governed by a domestic law, it is clearly stated in the introduction and footnotes that the option of submitting the contract to the “principles of law generally recognized in international trade” (lex mercatoria) should be preferred and that, if the parties wish the contract to be governed by a specific national law, they should first check if the contents of their contract conform to such law. This approach in favour of lex mercatoria has been subject to criticism, mainly on the assumption that the “principles of law generally recognized in international trade” do not exist or are so vague that they do not offer any guidance in case of dispute. As to the absence of precise (and foreseeable) rules, it is true that there is no established set of generally recognized principles of the lex mercatoria, particularly as regards the rules governing specific contracts. However, where the contract itself contains detailed rules which cover the most important issues, there is no reason to believe that the absence of precise rules on the remaining matters may be more dangerous than the recourse to domestic rules of one of the parties, which will often not be in line with the expectations of the other party. Concerning more general

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contractual issues (formation, performance, liability, damages, etc.), the uncertainty can be substantially reduced by incorporating the UNIDROIT Principles, as in the above clause. In other words, even admitting that the reference to the lex mercatoria may introduce uncertainty about the content of the rules applicable to the issues not solved in the contract itself, the fact remains that this is the only solution that can ensure that the provisions of the model form can be applied in a uniform way to parties from different countries, without the interference of conflicting national laws.

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One important aspect that should be emphasized is that the choice of the lex mercatoria was made for the purpose of avoiding conflicting domestic rules, and not with the aim of avoiding rules that protect one of the parties. This was of substantial importance for the model agency contract, where the drafters wished to prevent the choice of lex mercatoria being understood as a means of avoiding the rules that protect the agent. This is the reason why it has been expressly stated in Article 23.1A of the model agency contract that, if the agent is established in the European Union, the principles contained in the European directive on self-employed agents (and thus the common core of rules protecting the agent implemented in the national legal systems) must be respected. More generally, most of the choice of law clauses of the ICC models which make reference to the lex mercatoria5 expressly state that any mandatory rules that would be applicable, whatever the law governing the contract, the so called lois de police or internationally mandatory rules, must be taken into account (see Article 24.2 of the agency model). This clause makes it possible to take account of internationally mandatory rules belonging to the legal system of the country or countries that have a close connection with the contract, provided such rules are the expression of universally accepted principles. Therefore, it appears reasonable to apply them outside the domestic context in which they have been enacted. An interesting aspect of the ICC clause in its latest version is that it provides a hierarchy of rules: first, the contract clauses, followed by general principles, then trade usages and finally the UNIDROIT Principles. The purpose of this provision is to make clear that trade usages apply only if they comply with the general principles and that the UNIDROIT Principles apply only to the extent that they conform to the general principles (lex mercatoria) and trade usages. Consequently, the provisions of the UNIDROIT Principles will apply only to the extent they are in accordance with the reasonable expectations of business people engaged in international trade, as they result from general principles and trade usages. It must be said that a contradiction between the UNIDROIT Principles and trade usages is likely to arise only in very exceptional cases, since the main purpose of the UNIDROIT Principles is precisely to reflect the standards prevailing in international trade. Indeed, it was the belief that the Principles were the most appropriate tool for establishing a fair and secure legal framework that led to their inclusion in the ICC model contracts. What may give rise to occasional problems are clauses that protect a party against unfairness of the other party to an extent that traders would normally consider excessive, as covered in more detail in the second chapter of this book (§ 2.8.2.3). In fact, the clause examined above is intended to provide those who have to apply the contract (especially the arbitrators, in case of dispute) with a means to enable them not to apply those rules of the UNIDROIT Principles that, in their opinion, do not truly reflect the usage of trade. Only in one case, i.e. in article 36.1(A) of the model contract for the turnkey supply of an industrial plant, are some provisions of the Principles expressly excluded, namely clauses 6.2.1–6.2.3 on hardship, which were considered by task force members to be inappropriate in the context of that particular contract. 5 See, for example, Article 24.2 of the distributorship model (second edition); Article 36.2 of the model for the turnkey supply of an industrial plant; Article 18.2 of the M&A (share purchase) agreement; Article 23.2 of the selective distribution contract.

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drafting techniques used in the various ICC models

Standard contracts that can be used as such, without the assistance of a lawyer, are called for by the business world, particularly for contracts having a limited economic value, which businessmen tend to draft by themselves using the materials they have at hand. Although this attitude should be discouraged and traders should be made aware of the risks of drafting and concluding contracts without the advice of a lawyer, the fact remains that many businessmen continue to draft contracts on their own without expert assistance. Moreover, since this cannot be avoided, it is better to provide the business world with accurate model forms, so that the users can at least refer to high-quality clauses instead of copying clauses of dubious origin, as they often do. In order to reduce the risk of inappropriate manipulation of the contract text by users, the ICC models try to separate, as far as possible, parts of the contract where the parties are asked to fill in certain details (e.g. price, goods, etc.) and choose between different alternatives.

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In order to achieve this, there must first be an adequate balance between those questions that are defined in a uniform manner (i.e. through a standard solution which should, in principle, remain as it is),6 and those on which the parties are expressly invited to make a choice between several alternatives. In fact, if there are too many alternatives, the model becomes over-complicated and users will become confused; but if there are too few, the model becomes too rigid, and consequently unacceptable for those who have needs that do not correspond to the standard solutions. In other words, if the model expressly provides alternatives for the most important options, the parties will be able to obtain the solution they wish by simply indicating the option chosen without having to modify the clauses, thus limiting the risk of incorrect manipulations. A further point is that there must always be a “default” solution corresponding to prevailing practice, which will automatically apply when the parties have made no choice.7 These goals have been pursued in the ICC model forms through two different approaches: one based primarily on the use of detailed annexes, the other based on the division into special and general conditions. (a) The first

approach: use of annexes

In several ICC model forms, the issues for which the parties need to make further specifications have been put into annexes, which are to be filled in by the parties. This implies a clear separation between the contract as such (with only a very limited number of alternatives) and the annexes. This solution also makes it possible to put more sophisticated solutions into the annexes, without complicating the text of the contract provisions. An interesting example of this drafting technique can be found in Annex V of the agency model (reproduced below), which presents a number of options regarding the calculation of commission.

6 Of course, this in no way limits the parties’ freedom to modify any part of the text of the model: the drafters have only tried to create a situation in which the parties are induced not to change the clauses of the contract by giving them predetermined options or separate spaces, like annexes, for working out more specific solutions. 7 This is far more important than one would think, because parties that use a model contract often forget to choose between the proposed alternatives, even when the need to do so is clearly indicated in the model form.

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 THE ICC MODEL FORMS

ANNEX V | COMMISSIONS § 1. Amount of commission (Art. 15.1.) 1.1. Simple commission

Amount of commission is . . . . . . . . % % 1.2. Different levels of commission according to the value of the sales contract

If this subparagraph 1.2. is filled in, it will apply in lieu of paragraph 1.1.

Sales contracts up to

��������������������������������������������������������������������������

Sales contracts from

�����������������������������������������������������

up to

����������������������������������������������������� %

Sales contracts from

�����������������������������������������������������

up to

����������������������������������������������������� %

Sales contracts from

�����������������������������������������������������

up to

����������������������������������������������������� %

Sales contracts over

�����������������������������������������������������

����������������������������������������������������� %

����������������������������������������������������� %

§ 2. Special customers/Reduced commission (Article 13.3)

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On all sales to the following customers the Agent is entitled to the following reduced commission: ����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

����������������������������������������������������������������������������������������������������������������������������������������������������������������

������������������������ %

§ 3. Negotiation margins and discounts (Art. 15.3) 3.1

Negotiation margins The Agent has a negotiation margin of . . . . . . . . % on the prices set out in the price-list in force. Therefore, the Agent may propose to customers any discount within such margins without reduction to his rate of commission.

3.2

Authorised discount The Agent is entitled to propose to customers the following discounts, which entail a reduction in his commission, in accordance with the schedule hereunder:

3.3

Negotiation margin

�������������������������%

. . . . . . . . % full commission

discount of

�������������������������%

. . . . . . . . % commission

discount of

�������������������������%

. . . . . . . . % commission

discount of

�������������������������%

. . . . . . . . % commission

Discount to be agreed upon The Agent undertakes not to propose to the customers any discount higher than the maximum discount shown in the schedule set out in § 3.2. above, without prior written authority from the Principal.

If the parties need the simplest solution — because there is only one level of commission for all types of business — they will simply have to fill in § 1.1. If, on the contrary, the situation is more complicated, they will find several other solutions in the following paragraphs of the same annex. And even if they do not find the appropriate solution in the annex, they will be induced to work out their individual solution within

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the annex without interfering with the clauses contained in the contract, thus limiting the risk that inexperienced businessmen may introduce contradictory issues in the contract. Another interesting drafting technique consists in providing a solution that will automatically apply in case the parties forget to express their choice of the options proposed within the model. Therefore, when the model provides two alternatives — which are normally presented in two columns, according to current practice in standard contracts, in order to underline the need of a choice — the model contracts consider one of them as automatically applicable if no choice has been made. Normally, there will be a provision saying that in case no choice has been made, alternative A will apply. A similar approach has also been taken in case the parties do not fill in an essential point of the contract. For instance, Annex 1 of the agency and distributorship contract states that if the parties do not determine the contractual territory or the contractual products, the contract will cover the country where the agent or distributor has his place of business and all the products manufactured and/or sold by the principal. ANNEX I | PRODUCTS AND TERRITORY (Article 1.1.) §1. Products ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� ����������������������������������������������������������������������������������������������������������������������������������������������������������������������%

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����������������������������������������������������������������������������������������������������������������������������������������������������������������������%

If this paragraph 1 of Annex I has not been filled in, all products manufactured and/or sold by the Principal at present and in the future shall be considered as “Products” for the purpose of this contract. §2. Territory ����������������������������������������������������������������������������������������������������������������������������������������������������������������������%

If this paragraph 2 of Annex I has not been filled in, the whole territory of the country where the Agent has his place of business will be considered as “Territory” for the purpose of this contract. §3. CONTRACTUAL CUSTOMERS* The categories of customers to which this agency agreement applies are all customers established in the Territory, except the following Excluded Customers:  duty-free shops  third-party web portals  public administration bodies .

. . . . . . . . . . . . . . .

(other)

Excluded Customers remain outside the scope of the agency contract and in particular of the exclusivity granted in Article 13 and of the right to commission under Article 15. ����������������������������������������������������������������������������������������������������������������������������������������������������������������������%

If this paragraph 3 of Annex I has not been filled in, all the customers in the Territory will be considered as “Contractual Customers “ for the purpose of this contract. * Parties may define market segments here or withdraw individual customers who are already customers of the principal.

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 THE ICC MODEL FORMS (b) The division

in two parts: special and general conditions

This second type of approach has been used for the model sale contract, for the occasional intermediary (NCND) contract and for the short form agency and distributorship contracts. The basic idea is to include in a first part, called “special conditions”, all issues that imply a choice between alternatives or that need to be filled in by the parties (e.g. names of the parties, contractual products, date of delivery) and to put all other clauses in a second part called general conditions. In this way, from the very beginning the parties are induced to discuss the main issues that require a specific choice in each individual contract. This means that the model form will guide them through the various alternatives and help them remember issues they might otherwise leave out, as well as limiting the risk that inexperienced parties might change the text of the contract clauses. For instance, consider Box A7 of the special conditions of the model sale contract. Several alternatives are proposed: payment on open account (i.e. deferred payment after delivery), payment in advance, payment against documents, payment through irrevocable documentary credit. Of course, the solutions proposed cannot cover the complete range of situations that exist in international trade, and this is why space is left at the bottom of the box under “Other” for further possibilities. A-7

PAYMENT CONDITIONS (ART. 5)



Payment on open account (art. 5.1) Time for payment (if different from art. 5.1) .

. . . . . . .

days from date of invoice. Other:

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. . . . . . . .

 Open account backed by demand guarantee or standby letter of credit (art. 5.6) 

Payment in advance (art. 5.2) Date (if different from art. 5.2): .

. . . . . . .

� Total price � . . . . . . . . % of the price; remaining amount . . . . . . . . % to be paid at . . . . . . . . � Payment in advance backed by advance payment bond



Documentary collection (art. 5.4) � D/P Documents against payment



� D/A Documents against acceptance

Irrevocable documentary credit (art. 5.3) � Confirmed

Place of issue (if applicable): .

� Unconfirmed . . . . . . .

Place of confirmation (if applicable): . . . . . . . .

Credit available: :

Partial shipments:

Transhipment

� At sight

__ Allowed

__ Allowed

� By deferred payment at: . . . . . . . . days

__ Not allowed

__ Not allowed

� By acceptance of drafts at : . . . . . . . . days � By negotiation

Date on which the documentary credit must be notified to seller (if different from art. 5.3) . . . . . . . . days before date of shipment other: . . . . . . . .

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

Irrevocable Bank Payment Obligation (art. 5.5) � Settlement by Payment � Settlement by Deferred Payment Undertaking and payment at maturity. Deferred payment terms . . . . . . . . days after sight or after date of . . . . . . . .

Date on which the Bank Payment Obligation must be notified to seller (if different from art. 5.5) . . . . . . . .



days before date of shipment other: .

. . . . . . .

Other: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e.g. cheque, bank draft, electronic funds transfer to designated bank account of seller)

Seller’s Bank Details IBAN*/bank account number ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������

BIC/Swift code** �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� * http://www.ecbs.org/iban.htm ** https://www2.swift.com/directories/

Art. 5 – Payment conditions (Model sale contract)

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5.1

Unless otherwise agreed in writing, or implied from a prior course of dealing between the parties, payment of the price and of any other sums due by the Buyer to the Seller shall be on open account and time of payment shall be 30 days from the date of invoice. The amounts due shall be transferred, unless otherwise agreed, by telegraphic transfer of remittance to the Seller’s bank in the Seller’s country for the account of the Seller and the Buyer shall be deemed to have performed its payment obligations when the respective sums due have been received by the Seller’s bank in immediately available funds.

Furthermore, when a specific option has been chosen, the general conditions will determine several other issues. See, for instance, Article 5.3 of the general conditions of the model sale contract, which sets out a number of additional details in case the parties have chosen the payment by documentary credit: Art. 5 – Payment conditions (Model sale contract) 5.3

If the parties have agreed on payment by documentary credit, then, unless otherwise agreed, the Buyer must arrange for a documentary credit in favour of the Seller to be issued by a reputable bank, subject to the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce, and to be notified at least 30 days before the agreed date of shipment or at least 30 days before the earliest date within the agreed shipment period. Unless otherwise agreed, the documentary credit shall be payable at sight and allow transhipments but no partial deliveries.

This technique, consisting of establishing a number of options in the special part and then providing “default rules” in the general part, has the advantage of guiding the parties through the different options, but at the same time providing a solution where the parties have not made their choice.

7.2 An Overview of the Model Forms Not Included in this Book In the context of a practical guide like this book, it was felt appropriate to specifically deal only with some basic model contracts most commonly used in international trade: the contract of sale and the agency and distributorship agreements. These model forms will be examined and commented on in detail in this chapter: infra, § 7.3.3 for the model contract of sale, § 7.4.3 for the agency model and 7.4.6 for the model distributorship contract. As regards the remaining ICC model contracts, the next paragraphs contain a short summary of their scope and general characteristics. 160 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 THE ICC MODEL FORMS 7.2.1 The ICC

Model Contract Occasional Intermediary, 2015 Edition (ICC Publication No. 769)

Occasional intermediaries — also called brokers, indicateurs − are intermediaries who promote business without being bound by an obligation to perform such activity on a continuing basis for a principal, as are commercial agents. For several years, a growing number of documents called “Non-circumvention & Non-disclosure Agreements”, “NC&ND Agreements”, “Commission Protection Guarantee”, or similar names, have been circulating among business firms engaged in international trade. Such agreements mainly cover situations where an occasional intermediary, who undertakes to provide certain services (e.g. communication of potential customers’ names, promotion of business), desires to be protected against the risk of being “circumvented” by the other party (and, consequently, not being paid for his services). Since it appeared that there is need for a model contract covering this situation, the International Chamber of Commerce (ICC) decided in the year 2000 to draft a “Model occasional intermediary contract – Non-circumvention & Non-disclosure Agreement” (Publication 619) to which parties engaged in international trade could make reference for contracts of this type.

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This initiative intended at the same time to react against an abusive practice consisting in presenting certain NCND agreements ICC products, like, for instance, “ICC Covenant for Non-circumvention & Non-disclosure”, “ICC Non-circumvention & Non-disclosure Agreement” or “ICC NCND”). In certain cases, reference has been made to nonexistent ICC rules said to govern such an agreement (e.g. “ICC non-circumvention and non-disclosure rules”, “ICC 400 rules”, “International Chamber of Commerce Convention”). Most of these model agreements which can be found on the Internet are poorly drafted and do not adequately protect the respective interests of the parties. By publishing, in the year 2000, the ICC Model Occasional Intermediary Contract (Non-circumvention & Non-disclosure agreement) which contains in part B a set of rules named “ICC General Conditions for Non-circumvention & Non-disclosure Agreements”, the ICC has officially established its own NCND Rules which automatically replace those of any document NCND agreement which refers to the ICC. This should give parties which inadvertently sign one of the above “fake” agreements the possibility of invoking the application of to the ICC rules, which warrant a fair and balanced contractual framework. The same approach has been maintained in the updated version of this contract by putting the term NCND agreement in the second part of the title. One of the main problems arising in the context of contracts with occasional intermediaries is the difficulty of defining what an occasional intermediary is. In fact, the notion of occasional intermediary can cover rather different situations. Sometimes the intermediary’s task is limited to the supply of information about possible customers; in other cases, he undertakes to put his principal in contact with a customer and, in some cases, to assist him in negotiating a deal. This is why the model form has to consider these several options as shown in the initial boxes of the special conditions, where the parties are asked to fill in one of the possible alternatives, as shown below:

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A-1

SERVICES WHICH THE INTERMEDIARY IS TO PROVIDE

� A-1.1.

Communication of information about a third party or a particular deal The Intermediary hereby agrees to transmit to the Counterpart in accordance with A-2: � name(s) and address(es) of third party(ies) with whom the Counterpart may enter into business relations � information with respect to a specific deal or contract the Counterpart may enter into with a named third party � other information: ………………….

� A-1.2

Putting into contact and assistance in the negotiation The Intermediary hereby agrees:

A.

to put the Counterpart into contact with a third party: � for possible future business � for a particular deal or contract

B.

� to put the Counterpart into contact with a third party and/or for a particular deal or contract and to assist him in the contract negotiation until conclusion

C.

� to put the Counterpart into contact with a third party and/or for a particular deal or contract and to assist him in the contract negotiation until conclusion and thereafter during performance

 A-1.3

Other

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The Intermediary hereby agrees to perform the following services for the Counterpart: The purpose of Box A-1 is to indicate the type of service the Intermediary agrees to provide. The information (if any) to be transmitted to the Counterpart (e.g. name of the potential third party) may be provided when signing the contract or at a later stage, as indicated in A-2 hereunder. Article 4.2 of the General Conditions provides that the type of services to be supplied by the intermediary must be clearly stated and that, if they are not sufficiently identified in the agreement, no obligation will arise on the side of the counterpart. The reason for this choice is that if it appears impossible to clearly establish, on the basis of the contract or other written documents, what the intermediary is actually expected to do,8 it would be unfair to request the counterpart to undertake the corresponding obligations (not to circumvent the intermediary, not to disclose the information received, to pay for the service, etc.).9 Articles 4.3 and 4.4 provide, furthermore, for the integration of incomplete clauses, e.g. by stating that the simple indication that the intermediary is to supply information means that he is not to provide further services, such as assistance during negotiation (Article 4.3), and that the obligation to put the counterpart into contact with a third party means that the intermediary must actually establish direct contact between the counterpart and the third party (Article 4.4). Other important issues dealt with in detail in the model are:  possible exclusive rights of the intermediary;  a possible undertaking not to compete;  the intermediary’s remuneration.

8 Numerous examples of clauses that do not sufficiently identify the services to be supplied by the intermediary are found in NCND agreements, such as, for example, a clause referring to “any business transaction whatsoever, done through, via and/or with the cooperation of either parties to this agreement”. 9 Moreover, in many jurisdictions a contract which does not sufficiently define the obligations of the parties may be considered unenforceable.

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 THE ICC MODEL FORMS 7.2.2 The ICC

Model International Franchising Contract, 2011 Edition (ICC Publication No. 712)

The model published in the year 2000 has been revised and updated in 2011. Franchising is usually defined as an agreement whereby the franchisor grants the franchisee, in exchange for direct or indirect financial compensation, the right to exploit a package of industrial or intellectual property rights relating mainly to knowhow and commercial symbols, and to receive continuing commercial or technical assistance for the duration of the contract.10 The ICC model deals exclusively with international distribution franchise agreements, i.e. franchising regarding the marketing of products manufactured or or supplied by the franchisor; it does not cover service franchise agreements. The main components of the franchise relationship, as set out in the model contract, are: For the franchisor:  the licensing of know-how embodied in operational manuals and permanently updated, with a training support system;  the licensing of trademarks and symbols;  the provision of assistance regarding distribution and management. For the franchisee:  the franchisor’s exercise of reasonable quality controls over the franchisee to protect its intellectual property;  the payment of initial and ongoing fees in exchange for the right to use these intangible assets;

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 the participation in training courses organized by the franchisor;  the use of the franchisor’s trademarks and symbols;  the strict compliance with the franchisor’s commercial standards; and  the information given to the franchisor concerning any difficulty which may appear or improvements which may seem suitable. The franchising model includes commentaries under various clauses that explain the provisions and give advice to the users. 7.2.3 The ICC

Model Selective Distribution Contract (ICC Publication No. 657)

Selective distribution contracts are mainly used in international trade when an exporter wishes to establish a direct link with the retailers who sell his products to the end user, in order to be able to control the way his products are marketed until the final consumer. The reasons for this are mainly the need to guarantee a certain level and uniformity of the sales service given to the consumer. For instance, for technically sophisticated products sold on the consumer market, the producer may wish to have them sold only by retailers able to give competent technical advice to the prospective purchaser. Therefore, for products with an exclusive and upmarket image, it is the interest of the producer and of the existing network that such products be only obtainable in shops with certain exclusive characteristics (regarding their location, furniture, etc.).11 Selective distribution contracts are one possible means12 of achieving this result, by selecting a number of distributors willing to respect certain minimum requirements and to follow certain marketing directives when selling the products. By choosing to organize the sale of its products through a selective distribution network, the producer can be certain that his products will be offered to the consumer only by the resellers he has chosen, who are bound to respect the quality level he has fixed. 10 Introduction to the ICC Model International Franchising Contract (Publication No. 712), § 3. 11 Of course, this implies that all the members of the network (as well as the producer himself) must undertake the obligation not to sell the products to traders who are not part of the network. 12 Franchising contracts can also be used for obtaining control over retail distribution, but they imply further requirements, such as the existence of commercial know-how. Moreover, franchising implies, in most cases, that the franchisee/retailer sell only one brand of products, while in selective distribution the retailer usually sells a variety of competing products.

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All this implies, of course, that selective distribution is appropriate only in certain cases where the products require particular care in their retail distribution, and provided the producer thinks it is worthwhile organizing such a network. It should also be emphasized that a selective distribution network can work effectively only to the extent that it is actually managed as a closed network, i.e. to the extent the products are not sold by retailers not part of the network. This is why it is appropriate to have recourse to selective distribution only if it appears possible to obtain from resellers the respect of the obligation not to sell outside the network. The establishment of a network of retailers bound to the producer, such as a selective distribution or a franchising network, is traditionally made at national level. Companies that wish to operate a selective distribution network in several countries will often establish a subsidiary in each country that will directly manage the network and the contracts with its members. However, it has become more frequent in recent years to organize selective distribution across borders, i.e. between two parties in different countries.13 The ICC model selective distribution contract is designed for the second situation, i.e. one where the supplier is established in a country other than that of the distributor. Model Contract for the Turnkey Supply of an Industrial Plant, 2003 Edition (ICC Publication No. 653)

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7.2.4 The ICC

This model contract intends to cover a particular category of turnkey contracts, i.e. contracts for the supply of a complete plant or production line to be erected within facilities that already exist, or which are to be constructed by the purchaser or by a third party for the purchaser’s account. In other words, the model refers to a contract which is called “turnkey” because it comprises in principle whatever is necessary for a certain purpose (a complete production unit), but such “turnkey approach” is limited to the plant or production line, i.e. to the equipment necessary for manufacturing certain products and does not extend to the items which “surround” the plant, such as buildings, supply of energy, etc., which remain outside the scope of the contract. From this point of view, this turnkey contract must be clearly distinguished from more comprehensive turnkey contracts, which cover all other items, such as civil works, etc., like the turnkey contract for a major project which will be examined hereafter. The difference between the two types of turnkey contracts is substantial. While in a “full turnkey” the contractor undertakes to perform a task (i.e. to build a factory, a bridge, etc.), in the contract for the turnkey supply of a plant, the supplier’s main obligation is to supply the equipment and to assist the purchaser during erection and start up, together with an overall warranty that the plant as a whole, and not only each single part of the equipment, will meet certain performance parameters. A first consequence of this different approach is that the turnkey contract for a plant is mainly a contract for the sale of equipment, governed by the rules on sale contracts, and particularly the United Nations Convention on the International Sale of Goods (CISG), although with peculiar characteristics closer to a construction (works) contract, such as the involvement of the supplier in the erection, start up, etc., and the overall warranty of performance of the plant. Another important difference is that, while in the full turnkey contract the contractor will generally have complete control and responsibility over the site until it is taken over, in the turnkey contract for the supply of a plant or production line, the supplier will perform its obligations regarding assistance during erection, start up, etc., within facilities that are under the purchaser’s control. This is particularly the case when a line is to be installed within an existing factory. Moreover, it is normal that the purchaser will take delivery of the equipment before erection and that consequently during the erection stage, start up, etc., the purchaser controls the equipment and bears the respective risk. The turnkey supply of a plant is a complex operation involving a number of stages.

13 This is particularly the case within the European Union.

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The supply of a plant obviously implies the need for a plant project. Normally, the supplier will prepare a very general project when submitting the offer and, if the contract is concluded, he will proceed to a more detailed design (layout) thereafter. Such layout will take into account the indications given by the supplier and will, at the same time, determine the environment that is to be provided by the purchaser: civil works, water and energy connections, etc. Thereafter, the supplier will produce the equipment, and/or purchase certain parts of it, that is to be shipped to the purchaser. When the equipment at the site is ready for erection, the purchaser will proceed to erect it under the supplier’s supervision. The model contract has considered the most common option, namely that the various activities, such as erection, start up, etc., will be carried out by the purchaser and that the supplier’s task in this respect consists only in supervising such activity. After the erection stage, erection testing is to be carried out under the supplier’s supervision. When erection testing has been completed, the plant will be gradually put into operation and the purchaser’s personnel will be trained to use it. As soon as the plant has attained a sufficient production capacity, the parties will proceed to performance testing in order to verify its capacity to reach the guaranteed performance. If the performance testing is successful, the plant will be taken over by the purchaser.

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A crucial issue in this contract is to decide what the consequences of not reaching the agreed performance should be. As a general principle of law, non-performance of the contract by a party gives the other party the possibility of suspending performance and requesting damages and, if non-performance implies a material breach, of terminating the contract. However, in the context of this particular contract, termination by the purchaser may cause disproportionate damages to the supplier — especially if it takes place when the equipment has already been manufactured, delivered and erected. In fact, the extreme consequence of contract termination, i.e. that the supplier should dismantle and take back the plant and give back the money, would, in most cases, imply for the latter a loss much greater than the contract price. Considering that the equipment is frequently tailor-made and cannot be resold to others and that the dismantlement and transport costs can be very high, a termination at this stage could imply unreasonably high losses for the supplier. On the other hand, the purchaser must be protected against the risk of being forced to keep a plant that does not fulfil its reasonable expectations. If the plant does not correspond to what the purchaser was entitled to expect, he must retain the right to terminate the contract and get his money back. The model contract attempts to reach a workable compromise between the positions of the parties by admitting the possibility of a contract termination in special circumstances and by limiting the effects of termination to obligations still to be performed. Only in the extreme case, where the plant does not reach the minimum guaranteed performance, will the purchaser be entitled to terminate the contract with retroactive effect, i.e. to require the supplier to dismantle and take back the equipment and to return the price to the purchaser. Of course, in all other cases, the party terminating the contract in case of default by the other party will retain the right to recover damages within the maximum limits fixed in the contract — and even over these limits, if the default by the other party amounts to fraud or wilful misconduct. 7.2.5 The ICC

Model M&A Contract 1: Share Purchase Agreement, 2004 Edition (ICC Publication No. 656)

The ICC working party entrusted with the drawing up of an ICC M&A model contract decided to proceed by successive steps and to begin with a share purchase agreement in its simplest form, i.e. the acquisition of the totality of the shares of one company. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 165

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This ICC model does not aim to “compete” with the more sophisticated forms used for complex and large M&A deals. Its purpose is mainly to help parties and lawyers who are not specialized in the field of M&A contracts, for instance lawyers from developing countries, to draft a simple contract covering the most important issues involved. As regards the drafting technique used, the following should be noted. The structure and content of M&A agreements are strongly influenced by models and forms developed within common law jurisdictions. This has brought the contracting parties to use, independently from the law governing the contract, clauses and concepts that belong to common law legal systems.

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A striking example of this attitude is the reference to “representations & warranties”. It is difficult to imagine a share purchase agreement without “reps and warranties”, which represent one of the main features of such a contract. However, these two terms have no precise meaning outside common law jurisdictions and may be misleading even within these legal systems. For example, while the two terms, representations and warranties, have almost an equivalent meaning in the United States, under English law there is a substantial difference between a representation and a warranty, which results in English lawyers tending to prefer using only the term “warranties”. Parties expect these terms to be in their M&A agreement, but it should be clear that these two “magic words” have actually acquired within this type of contract an almost autonomous meaning, independent of the legal notions of “representations” and “warranties” within a specific national legal system. In principle, the members of the task force would have preferred to avoid using these terms and to replace them with more neutral wording, but in this particular case it was felt that the terms were so closely connected to M&A contracts that replacing them would have been going against well-established usage. However, as a general rule, the drafters have tried not to use terms that are too specific to a particular jurisdiction, in order to make the model compatible, as far as possible, with any legal system. One of the main issues of any share purchase agreement is the exact definition of the warranties given by the seller. By purchasing the shares, the buyer acquires the company that the shares represent, but the nominal value of the shares as such does not reflect the actual value of the company, which depends on a number of circumstances, such as the value of the assets, goodwill, etc. The purpose of the warranties is, therefore, to define the critical factors in relation to which the purchase price has been determined. Any breach of a warranty will be related to a reduction of the value of the target business and may result in a reduction of the purchase price. The buyer will obtain information about all relevant attributes of the company, normally through due diligence investigations. However, the buyer has no certainty that the information he received is accurate, and this is why the seller will be asked to give a number of warranties as to the truth and completeness of certain information received by the buyer for the purpose of valuing the company. In this context, a contractual technique has been developed over the years, whereby each warranty states a positive principle and then possible exceptions are disclosed by the seller to the buyer. These exceptions to the warranties can be contained in a separate document, the so-called “disclosure letter”, or in a document more strictly connected to the “reps and warranties”. In order to facilitate a comprehensive view of these matters, the model contract sets out the exceptions to the warranties in a parallel document that follows the same order and numbering. Furthermore, for the convenience of the reader these two schedules have been placed in parallel on the same page, so that the warranties and their exceptions can be seen together. 7.2.6 The ICC

Model Turnkey Contract for Major Projects, 2007 Edition (ICC Publication No. 659)

There is no uniformly accepted definition of the term “turnkey”. The basic concept is that the contractor shall provide the works ready for use at the agreed price. The reality is that the employer wants to be, and should be, actively involved in the project at all stages. When the contract is a turnkey contract, there are articles allowing changes to the contract’s scope, price and time for completion. 166 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

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The aim of ICC in producing this form of contract is to provide a balanced contract for the parties to turnkey construction projects, while recognizing the desire of all parties for certainty of price and scope, the need for swift and effective dispute resolution, and the need for complete and informed allocation of risks. 7.2.7 The ICC

Model International Trademark Licence, 2008 Edition (ICC Publication No. 673)

This model is intended to cover the situation where the owner of a well-known trademark licenses such trademark to a company which will use it with respect to products other than those manufactured or sold by the licensor. In this case it is assumed that the licensed products will be designed and developed by the licensee and that the main preoccupation of the licensor is to ensure that the licensed products conform to the overall image of the licensor and its trademarks. Considering the variety of situations falling within the scope of this model (trademark licenses of this type are by their very nature rather different from case to case) it is rather unlikely that it can be used as such, without modifications and adaptations. The model contract is based on the assumption that the license would be exclusive, i.e. that only the licensee would have the right to manufacture and sell the licensed products in the contractual territory. 7.2.8 The ICC

Model International Transfer of Technology Contract, 2009 Edition (ICC Publication No. 674)

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The term “transfer of technology” may cover a variety of situations, ranging from patent and/or know-how licenses to more complex dealings involving the supply of technical assistance, equipment, etc. The model covers the situation where a company (licensor), which itself manufactures certain products, licenses to another company (licensee) a global package of information and intellectual property rights in order to put the licensee in the condition to manufacture the products using the technology of the licensor. A characteristic of this type of agreement is that the package of transferred information and rights is more important than an exclusive right to any of them individually. In other words, the licensee expects to obtain all the information, technical assistance, intellectual property rights, etc. necessary for enabling it to manufacture the contractual products to the quality standards of the licensor and with licensor’s technology: the individual elements put at its disposal are important only to the extent they are necessary for attaining this goal. 7.2.9 The ICC

Model Subcontract, 2011 Edition (ICC Publication No. 706))

International turnkey construction projects are often complex transactions, requiring correspondingly complex legal documentation. ICC has prepared this model international subcontract for use in major turnkey projects, in order to provide subcontractors and main contractors with a unique, balanced platform that is fair to all parties. At the same time, the model accommodates the desire of all parties for price and scope certainty, the need for swift and effective dispute resolution, and the need for complete and informed allocation of risks. The Subcontract Drafting Group has chosen to draft this Model form as a “back-toback” contract to the Main Contract between the Owner/Developer and the Main Contractor, such “back-to-back” or “flowdown” contractual technique being one of the common legal methods of subcontracting. 7.2.10 The ICC

Model Contract “Consortium Agreement”, 2016 Edition (ICC Publication No. 779)

International and national cooperation between companies, be they small, medium or large, require solid and balanced terms and conditions for such cooperation and it is vital that the arrangements put in place be durable, clear and equitable, thereby enhancing business in general. ICC has prepared this Model Agreement for use in cooperation between said companies, in order to provide them with a unique, balanced platform that is fair to all parties to it.

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At the same time, the model accommodates the desire of all parties for a solid unanimous decision-making process, a clear allocation of participation and provision of resources, the need for swift and effective dispute resolution, and the need for complete and informed allocation of risks.

7.3 Contracts of Sale Contracts of sale are the most commonly used contracts in international trade and consequently represent one of the main issues of international trade law. With respect to this particular contract, it has been possible, after many years of discussion,14 to establish a set of uniform rules through the Vienna Convention of 1980, the United Nations Convention on Contracts for the International Sale of Goods (CISG). 7.3.1 The UN

Convention on the International Sale of Goods (CISG)

The Vienna Convention of 1980 establishes a uniform law on contracts for the international sale of goods incorporated in the legal system of the states that ratify the Convention. In other words, when a country ratifies the CISG, it will have a special set of rules on international sale contracts in addition to its domestic rules, which continue to apply to domestic sales. Since the rules on international sales are the same in all countries that apply the Convention, contracts between parties of these countries will be governed, in principle, by the same rules and it will make no difference which law governs the contract, as in the following example:

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Example 7-1 – Contract between a Belgian seller and a Chinese purchaser A Belgian company sells chocolate to a Chinese buyer. The agreement is made through an exchange of faxes, without indicating anything about the applicable law. Thereafter a dispute arises between the parties about alleged defects of the goods, and especially about the timely notification of such defects by the buyer. Should the dispute be decided under Belgian or Chinese law?

Since both countries are parties to the Vienna Convention of 1980, the CISG applies, and the issue of timely notification of the defects must be decided according to Articles 38-40 of the CISG. Moreover, the CISG will be easy to apply, since it is available both in French and Chinese and since it is a well-known set of rules in both countries. The above example shows the obvious advantages of the uniform rules. Considering the large number of states that have ratified the Convention and the fact that they comprise the majority of the countries involved in international trade (unfortunately, however, the United Kingdom is still absent), the CISG has become one of the main instruments of facilitating international trade.

14 A first project of uniform law on sales was launched by UNIDROIT in 1929 and led to two international conventions, the Uniform Law on International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS). Since these conventions were unable to achieve broad acceptance, UNCITRAL worked out a new project in the years 1968-1977, which culminated in the Vienna Convention in 1980.

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States which had ratified (or acceded to) the UN Convention on the International Sale of Goods (CISG) as of June 2017 Albania

Fiji

Montenegro

Argentina

Finland

Netherlands

Armenia

France

New Zealand

Australia

Gabon

Norway

Austria

Georgia

Paraguay

Azerbaijan

Germany

Peru

Bahrain

Ghana

Poland

Belarus

Greece

Republic of Korea

Belgium

Guinea

Republic of Moldova

Benin

Guyana

Romania

Bosnia and Herzegovina

Honduras

Russian Federation

Brazil

Hungary

Bulgaria

Iceland

Saint Vincent and the Grenadines

Burundi

Iraq

Canada

Israel

Chile

Italy

China (PRC)

Japan

Colombia

Kyrgyzstan

Congo

Latvia

Croatia

Lebanon

Cuba

Lesotho

Cyprus

Liberia

Czech Republic

Lithuania

Denmark

Luxembourg

Dominican Republic

Macedonia

Ecuador

Madagascar

Egypt

Mauritania

El Salvador

Mexico

Estonia

Mongolia

San Marino Serbia Singapore Slovakia Slovenia Spain Sweden Switzerland Syrian Arab Republic Turkey Uganda Ukraine United States of America Uruguay Uzbekistan Viet Nam Zambia

This being said, even between countries that are part of the CISG, the situation is not as simple as shown above. 7.3.1.1 Scope

of application of the uniform rules

In fact, it is not 100% correct to say that, in sale contracts where both parties belong to states that have adhered to the Vienna Convention, it is irrelevant to decide which law governs the contract, because the rules are, in any case, the same. In practice, as provided by its Article 4, the CISG only covers the basic provisions of the contract of sale as such. Article 4 - CISG This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with:

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The validity of the contract or of any of its provisions or of any usage;

(b)

The effect which the contract may have on the property in the goods sold.

Issues which remain outside the scope of the Convention are, in addition to those expressly mentioned, the validity and scope of a penalty clause, the validity of a settlement agreement, assignment of a contract, etc. Where these issues must be decided, one must go back to the domestic law, as in the following example. Example 2-7 – Sale of goods and penalty15 A French company sold prêt-à-porter clothes from the “Kenzo” collection to a Belgian purchaser. The general conditions of the seller provided that in case of annulment of the order by the buyer, the latter would pay a sum equal to:  30% of the price if the annulment was made within 15 days from order confirmation;  50% of the price if said annulment was made between 15 and 45 days from order confirmation;  100% of the price if said annulment was made after 45 days from order confirmation.

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Since the buyer actually annulled the orders later than 45 days from order confirmation, the seller brought a claim before the Belgian court for payment of 100% of the price. The Belgian buyer objected, however, that this amounted to a penalty clause, which should be considered null and void under Belgian law. The Court of Appeal of Antwerp decided that the above remuneration, although worded as a termination clause (permitting contract termination against payment of a lump sum), should actually be considered as a penalty clause. The contract of sale was governed by the CISG. However, the validity of a penalty clause is an issue not covered by the CISG and was consequently to be decided according to the domestic law governing the contract. In this specific case, the court decided that the contract was governed by French law, which admits the validity of penalty clauses, but authorizes the courts to reduce the amount, if excessive. Consequently, the court awarded a penalty of only 50%.

The above case shows that the incorporation of the uniform rules on international sale into the legal systems of the countries of the parties is not sufficient to overcome potential problems. Whenever problems arise outside the scope of the uniform rules, it once again becomes important to know which law governs the contract. In other words, it is still important to know which national law governs the contract, even when the CISG applies, because several crucial issues not covered by the CISG will need to be decided under the applicable domestic law. A further point that should be considered when evaluating the effectiveness of the CISG as a means of unification of international trade law is the following. The CISG is incorporated in the legal systems of the ratifying countries. Since the uniform rules become part of their legal systems, there is a risk the same rules may be interpreted differently by the courts of different countries. In fact, the Convention itself says in Article 7(1) that, in the interpretation of the Convention: … regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

This means that courts should take into account the development of case law in all countries where the CISG is in force in order to favour a uniform interpretation of its rules. It must be said that, quite surprisingly, national courts, which traditionally refused to look outside the borders of their own country, have been rather open-minded and tend to accept a truly international approach when applying the CISG. 15 This is an actual case, decided by the Appellate Court of Antwerp on 18 June 1996 (http://www.law.kuleuven.ac.be/ ipr/eng/cases/1996-06-18.html).

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This type of approach has certainly been favoured by the existence of several databases where one can easily access all existing case law and compare the points of view of courts belonging to different countries. Some databases on CISG case law 

CLOUT case law on UNCITRAL texts: www.uncitral.org/uncitral/en/ case_law.html



CISG on line: www.cisg-online.ch



Pace Law School CISG database: http://cisgw3.law.pace.edu



Unilex: www.unilex.info

7.3.1.2 When

does the CISG apply?

This issue is dealt with in Article 1(1) of the CISG, which reads as follows: Article 1(1) - CISG This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a)

when the States are Contracting States; or

(b)

when the rules of private international law lead to the application of the law of a Contracting State.

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This means that the uniform rules of the Convention only apply to international contracts of sale, i.e. to contracts entered into between parties having their place of business in different states. Contracts of sale between parties of the same country continue to be governed by the respective domestic laws. When the states of both parties are contracting parties (i.e. when both of them have adopted the Convention), the CISG applies directly, without the need to resort to the rules of private international law. When only one of the states is a contracting party, the uniform law will apply if the rules of private international law lead to the application of the law of a contracting state. An example can be useful for clarifying this point. Example 3-7 – Sale of wine in the UK A French wine producer sells its wine to a UK importer having its place of business in London. The contract does not say anything about the applicable law. When a dispute is brought before the court of the French producer, the question arises as to which rules govern the contract of sale. Since the UK is not a contracting state, the CISG cannot apply directly, and the French court must decide which law governs the contract. Under the rules of private international law in force in France (Article 4 of the Rome I Regulation: supra, § 2.5.2), the court will almost certainly decide to apply the law of the seller’s country16 (France). Therefore, the contract will be governed by the CISG, since this is the law which governs international contracts of sale in France.

However, if we imagine a slightly different situation, e.g. that an English company is selling whisky to a French importer, then the law of the seller (which should be applied by a French court) will be English law and consequently, since England has not adhered to the CISG, the domestic rules of the English legal system will govern the contract of sale. It is important to underline that the CISG will also apply whenever the parties choose the law of a country which is a contracting party of the Vienna Convention, unless it appears that the parties wanted the domestic rules on sales to apply instead of the CISG.17 16 In theory the French court could come to a different solution if it were to find a closer relationship with England (by virtue of Article 4(5) of the Rome Convention (supra, § 2.5.2)), but this is unlikely. 17 This may be the case, for example, where the parties expressly refer to provisions of the domestic rules on contracts of sale of the law chosen. However, if the parties refer in their pleadings to the domestic rules, before having become aware that the CISG is applicable, this will not amount to a choice in favour of the domestic rules: see Tribunale Vigevano (Italy), 12 July 2000, Rheinland Versicherungen v Atlarex, in http://cisgw3.law.pace.edu/cases/ 000712i3.html.

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Example 3-8 – Sale of soy sauce to Portugal A Vietnamese producer of soy sauce agrees to sell its products to a Portuguese importer. The contract expressly provides for arbitration before the International Arbitral Centre of the Federal Economic Chamber in Vienna and that it will be governed by Austrian law. Since Austria has ratified the Vienna Convention, the arbitrators will apply the CISG (as part of Austrian law), even though the countries of the seller and the buyer are not contracting parties of the CISG.

The parties may also expressly choose the CISG as the applicable law. This is the solution proposed in Article 1.2 of the General Conditions of the ICC Model International Sale Contract: ICC International Sale Contract – General Conditions - Article 1.2

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Any questions relating to this contract which are not settled by the provisions contained in the contract itself (i.e. these General Conditions and any specific conditions agreed upon by the parties) shall be governed: A.

by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, hereafter referred to as CISG), and

B.

to the extent that such questions are not covered by CISG, and that no applicable law has been agreed upon, by reference to the law of the country where the Seller has its place of business.

This solution has the advantage of making sure that the contract will, in any case, be governed by the CISG instead of a national law, even where the CISG would otherwise not be applicable. However, in this case it is also recommended to agree which law will govern the issues not covered by the CISG. 7.3.1.3 Should

parties exclude the application of CISG?

Article 6 of the CISG recognizes the right of the parties to exclude the application of the Convention and its uniform rules. This means that the parties are in any case free to agree that their contract should be governed by the domestic law of one of their countries (or of a third country) instead of the CISG. Especially during the first years after the entry into force of the Vienna Convention, parties frequently had recourse to this option by stating that the application of the CISG was excluded and that the domestic rules of their country were to apply. This attitude was mainly due to the fact that many lawyers felt unfamiliar with the new rules introduced by the Vienna Convention and preferred to continue applying their domestic rules. The main argument brought forward in defence of this choice, which is still rather frequently used, is that domestic rules are better that those of the CISG. In most cases this is a weak argument. Of course, it is understandable that a lawyer prefers the domestic rules he is familiar with, but this does not mean that these rules are a better choice than a recourse to the CISG. In fact, the uniform rules of the CISG are a set of fair and balanced rules that have the added advantage of taking into account a number of specific issues that arise in the context of cross-border transactions. However, the most important factor is that the CISG is neutral legislation that makes it possible to overcome conflict between the national laws of the parties. If none of the parties is willing to accept that the contract be governed by the laws of the other party, the application of the CISG will be the right solution. Moreover, the more lawyers become acquainted with this set of rules, the easier it will be for them to accept it as the governing law of their contracts. This is why companies engaged in cross-border trade should not be wary of the CISG and should organize themselves for submitting their contracts to this uniform law, one that will make negotiation with foreign parties easier. Of course, if a party has a strong bargaining position which facilitates the choice of its own domestic rules being accepted by its counterparts, and provided that it has good reasons to prefer that its contracts are governed by its own domestic rules (e.g. 172 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

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because there are some specific provisions in its national law which it considers of major importance, or because its lawyers have worked out general conditions based on such law), the decision to exclude the CISG may be justified. However, where the main reason for such decision is an unwillingness to become acquainted with a new set of rules, such a negative choice should not be encouraged. It is far more preferable that companies engaged in cross-border trade should specialize in using the CISG, since these rules are the most appropriate in such a context, not just with respect to their content, but also because of their broad acceptance worldwide. 7.3.1.4 Choice

of law clauses and CISG

As noted previously, even where the CISG applies automatically, because the countries of both parties are contracting parties of the Vienna Convention, it is still important to choose the applicable law, since this law will govern a number of important issues remaining outside the CISG. Therefore, a party belonging to a country which is a contracting party of the Vienna Convention may nevertheless include in its contracts a choice of law clause in favour of its own law, in order to make it clear that the CISG will apply within the framework of such law and consequently, that potential matters not covered by the CISG will be dealt with by that law. A possible way to make this solution easier to accept for the other party is to expressly state that the CISG will apply, and that the national law of the drafting party will only govern those issues that remain outside the uniform rules, as in the following clause: Choice of law clause in favour of the CISG and a national legal system

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This contract of sale is governed by the United Nations Convention on the International Sales of Goods and, with respect to questions not covered by such Convention, by the laws of Switzerland.

Of course, it would be exactly the same to simply state that the contract of sale is governed by the laws of Switzerland, since the CISG is part of Swiss law. However, the above wording has the advantage of making clear, also to a counterpart having no experience in international contracts, that the rules governing the contract will be, for the most part, those of the CISG, i.e. uniform rules generally accepted in international trade. An even more “neutral” solution may be to submit the contract to the CISG together with the general principles of law and the UNIDROIT Principles, as in the following clause: Choice of law clause: CISG, general principles and UNIDROIT Principles This contract of sale is governed by the United Nations Convention on the International Sales of Goods and, with respect to questions not covered by such Convention, by the principles of law generally recognized in international trade as applicable to international contracts of sale together with the UNIDROIT Principles of International Commercial Contracts (except for Articles 2.1.20, 3.2.7 and 6.2.1-6.2.3).

However, the above solution — which is certainly appropriate in the context of international arbitration — is less recommended when potential disputes are to be decided by ordinary (state) courts, which tend not to recognize the choice of general principles. 7.3.2 Incoterms®

2010

Incoterms®, the official ICC rules for the interpretation of trade terms, were created by ICC with the aim of facilitating international trade. They constitute one of the most important tools developed and continuously updated by ICC. Since their first edition in 1936, this undisputed worldwide contractual standard has been regularly updated (in 1953, 1967, 1976, 1980, 1990, 2000 and 2010) to keep pace with the development of international trade. Incoterms® 2010 take account of the recent changes in international trade.

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The number of Incoterms® rules has been reduced in the 2010 edition from 13 to 11. This has been achieved by substituting two new rules that may be used irrespective of the agreed mode of transport — DAT (Delivered at Terminal) and DAP (Delivered at Place) — for the Incoterms® 2000 rules DAF, DES, DEQ and DDU. The purpose of the Incoterms® is to provide a set of international rules for the interpretation of the most commonly used terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree. Incoterms® rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms® 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. As a result, the Incoterms® 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable. Incoterms® deal only with the relation between sellers and buyers under the contract of sale. Moreover, they only do so in some very distinct respects, especially with respect to a number of identified obligations imposed on the parties — such as the seller’s obligation to place the goods at the disposal of the buyer or hand them over for carriage or deliver them at destination — and regarding the distribution of risk between the parties in these cases. 7.3.2.1 The

various categories of Incoterms

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In the 2010 Incoterms®, the 11 Incoterms® have been classified as follows: RULES FOR ANY MODE OR MODES OF TRANSPORT EXW EX

WORKS

FCA

FREE CARRIER

CPT

CARRIAGE PAID TO

CIP

CARRIAGE AND INSURANCE PAID TO

DAT

DELIVERED AT TERMINAL

DAP

DELIVERED AT PLACE

DDP

DELIVERED DUTY PAID

RULES FOR SEA AND INLAND WATERWAY TRANSPORT FAS

FREE ALONGSIDE SHIP

FOB

FREE ON BOARD

CFR

COST AND FREIGHT

CIF

COST INSURANCE AND FREIGHT

However, in order to understand the differences between the various Incotems (apart from the sea transport issue) it remains important to consider at the same time the traditional classification, according to which the terms have been grouped into four basically different categories:  first, the term whereby the seller only makes the goods available to the buyer at the seller’s own premises (the E-term EXW);  second, a group of terms whereby the seller has to deliver the goods to a carrier appointed by the buyer (the F-terms FCA, FAS and FOB);  third, a group of terms where the seller has to contract for carriage, but without assuming the risk of loss of or damage to the goods or additional costs due to events occurring after shipment and dispatch (the C-terms CFR, CIF, CPT and CIP); and  finally, terms whereby the seller has to bear all costs and risks needed to bring the goods to the place of destination (the D-terms DAT, DAP and DDP).

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In addition, under all terms the respective obligations of the parties have been grouped under ten headings in which each heading on the seller’s side “mirrors” the position of the buyer with respect to the same subject matter. 7.3.2.2 The

main characteristics of the various Incoterms

This paragraph contains the summary description of the 11 Incoterms® 2010 given in the Guidance notes of each term. For a better understanding of each term, parties should read the full text of the respective Incoterm, where all of the relevant contents are defined in detail. (1) EXW –

EX WORKS (… named place)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. It is suitable for domestic trade, while FCA is usually more appropriate for international trade. “Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e. works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the costs and risks to that point are for the account of the seller. The buyer bears all costs and risks involved in taking the goods from the agreed point, if any, at the named place of delivery. EXW represents the minimum obligation for the seller. The rule should be used with care as:

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a) The seller

has no obligation to the buyer to load the goods, even though in practice the seller may be in a better position to do so. If the seller does load the goods, it does so at the buyer’s risk and expense. In cases where the seller is in a better position to load the goods, FCA, which obliges the seller to do so at its own risk and expense, is usually more appropriate.

b) A buyer

who buys from a seller on an EXW basis for export needs to be aware that the seller has an obligation to provide only such assistance as the buyer may require to effect that export: the seller is not bound to organize the export clearance. Buyers are therefore well advised not to use EXW if they cannot directly or indirectly obtain export clearance.

c) The buyer

has limited obligations to provide to the seller any information regarding the export of the goods. However, the seller may need this information for, e.g. taxation or reporting purposes.

(2) FCA – FREE

CARRIER (… named place)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point. If the parties intend to deliver the goods at the seller’s premises, they should identify the address of those premises as the named place of delivery. If, on the other hand, the parties intend the goods to be delivered at another place, they must identify a different specific place of delivery. FCA requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (3) FAS – FREE

ALONGSIDE SHIP (… named port of shipment)

This rule is to be used only for sea or inland waterway transport.

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“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. The parties are well advised to specify as clearly as possible the loading point at the named port of shipment, as the costs and risks to that point are for the account of the seller and these costs and associated handling charges may vary according to the practice of the port. The seller is required either to deliver the goods alongside the ship or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (‘string sales’), particularly common in the commodity trades. Where the goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule would be inappropriate, and the FCA rule should be used. FAS requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (4) FOB – FREE

ON BOARD (… named port of shipment)

This rule is to be used only for sea or inland waterway transport.

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“Free on Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (‘string sales’), particularly common in the commodity trades. FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA rule should be used. FOB requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (5) CFR – COST

AND FREIGHT (… named port of destination)

This rule is to be used only for sea or inland waterway transport. “Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. When CPT, CIP, CFR or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract. The parties are well advised to identify as precisely as possible the point at the agreed port of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.

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The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment to the destination. In addition, the seller is required either to make a contract of carriage or to procure such a contract. The reference to “procure” here caters for multiple sales down a chain (‘string sales’), particularly common in the commodity trades. CFR may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such circumstances, the CPT rule should be used. CFR requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (6) CIF – COST,

INSURANCE AND FREIGHT (… named port of destination)

This rule is to be used only for sea or inland waterway transport. “Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

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The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements. When CPT, CIP, CFR, or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract. The parties are well advised to identify as precisely as possible the point at the agreed port of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties. The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment to the destination. In addition, the seller is required either to make a contract of carriage or to procure such a contract. The reference to “procure” here caters for multiple sales down a chain (‘string sales’), particularly common in the commodity trades. CIF may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such circumstances, the CIP rule should be used. CIF requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (7) CPT – CARRIAGE

PAID TO (… named place of destination)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed.

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“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between the parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. When CPT, CIP, CFR or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. The parties are well advised to identify as precisely as possible in the contract both the place of delivery, where the risk passes to the buyer, and the named place of destination to which the seller must contract for the carriage. If several carriers are used for the carriage to the agreed destination and the parties do not agree on a specific point of delivery, the default position is that risk passes when the goods have been delivered to the first carrier at a point entirely of the seller’s choosing and over which the buyer has no control. Should the parties wish the risk to pass at a later stage (e.g. at an ocean port or airport), they need to specify this in their contract of sale.

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The parties are also well advised to identify as precisely as possible the point within the agreed place of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties. CPT requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (8) CIP – CARRIAGE

AND INSURANCE PAID TO (… named place of destination)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between the parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements. When CPT, CIP, CFR or CIF are used, the seller fulfils its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. The parties are well advised to identify as precisely as possible in the contract both the place of delivery, where the risk passes to the buyer, and the named place of destination to which the seller must contract for carriage. If several carriers are used for the carriage to the agreed destination and the parties do not agree on a specific point of delivery, the default position is that risk passes when the goods have been delivered to the first carrier at a point entirely of the seller’s choosing and over which the buyer has no control. Should the parties wish the risk to pass at a later stage (e.g. at an ocean port or an airport), they need to specify this in their contract of sale. The parties are also well advised to identify as precisely as possible the point within the agreed place of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties.

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CIP requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. (9) DAT – DELIVERED

AT TERMINAL (… named terminal at port or place of destination)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. The parties are well advised to specify as clearly as possible the terminal and, if possible, a specific point within the terminal at the agreed port or place of destination, as the risks to that point are for the account of the seller. The seller is advised to procure a contract of carriage that matches this choice precisely.

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Moreover, if the parties intend the seller to bear the risks and costs involved in transporting and handling the goods from the terminal to another place, then the DAP or DDP rules should be used. DAT requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. (10) DAP –

DELIVERED AT PLACE (named place of destination)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. The parties are well advised to specify as clearly as possible the point within the agreed place of destination, as the risks to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties. DAP requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. If the parties wish the seller to clear the goods for import, pay any import duty and carry out any import customs formalities, the DDP term should be used. (11) DDP –

DELIVERED DUTY PAID (… named place of destination)

This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities. DDP represents the maximum obligation for the seller.

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The parties are well advised to specify as clearly as possible the point within the agreed place of destination, as the costs and risks to that point are for the account of the seller. The seller is advised to procure contracts of carriage that match this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties. The parties are well advised not to use DDP if the seller is unable directly or indirectly to obtain import clearance. If the parties wish the buyer to bear all risks and costs of import clearance, the DAP rule should be used. Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sales contract 7.3.3 The ICC

Model International Sale Contract

The ICC Model International Sale Contract was published for the first time in 1997. It was probably the first example of a model contract which dealt with a number of specific points, such as payment conditions, that are normally left open in most model forms and general conditions of sale. The model has been reviewed and updated in 2012. The following description of the ICC model is based for the most part on the introduction to the model form, the full text of which can be found in ICC publication No. 738. The text of the ICC Model International Sale Contract can be found in § 7.3.4.

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7.3.3.1 The

division into two parts: specific conditions and general conditions

The ICC Model International Sale Contract is divided into two parts: A. Specific

Conditions, setting out terms which are special to a particular contract of sale; and

B. General

Conditions, setting out standard terms common to all contracts incorporating the General Conditions of the ICC Model International Sale Contract (Manufactured Goods).

This approach is similar to the usual practice involving individual contracts of sale, where the issues which vary from case to case (such as goods sold, price, time of delivery) are set out in a special part, while the general conditions, mainly covering the strictly “legal” aspects of the contract, are attached thereto, normally on the back of the document. While most standard forms only deal with the general conditions and leave it to the parties to the individual contract to set out the special conditions, the ICC model also deals with these issues in a first part (Specific Conditions) and guides the parties through the various alternatives. For example, the model form does not simply leave it to the parties to fix the payment conditions but, on the contrary, proposes a series of alternative solutions (payment on open account, documentary credit, etc.) between which the parties must choose in part A, as well as “default solutions” in the General Conditions which will apply if no choice has been made. For example, where the parties have made no choice as to the payment conditions, the default solution of Article 5.1 of the General Conditions, payment on open account within 30 days from the date of invoice, will apply. Or, in case payment by documentary credit is chosen without further specifications, Article 5.3 provides that: … the Buyer must arrange for a documentary credit in favour of the Seller to be issued by a reputable bank, subject to the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce, and to be notified at least 30 days before the agreed date of shipment or at least 30 days before the earliest date within the agreed shipment period. Unless otherwise agreed, the documentary credit shall be payable at sight and allow transhipments but no partial deliveries.

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This approach should help the user remember the various issues he has to deal with and, at the same time, induce him to make possible adaptations within the alternative solutions provided in Part A, without touching the General Conditions where the risk of inappropriate modifications is higher. Of course, the parties may also use the General Conditions together with their own special conditions by incorporating only part B into their contract. Where the parties wish to use only part B of the model contract, they should include terms such as the following in their special contract: “This contract shall be governed by the ICC General Conditions of Sale (Manufactured Goods).”

Of course, in this case, part A would not be used, and any reference in part B to the clauses in part A would be deemed to refer instead to any relevant specific term, if any, agreed by the parties in their special contract: see Article 1.1 of part B. 7.3.3.2 Scope

of application: manufactured goods intended for resale

The model contract is primarily directed at contracts for the sale of manufactured goods, where the purchaser is not a consumer and where the contract is an independent transaction rather than part of a long-term supply arrangement. Each of these features of the contracts for which this model is intended is discussed below.  “Manufactured goods”: the model contract does not cater for the special terms required in contracts for the sale of commodities, in particular raw materials, agricultural produce or food and perishable goods.

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 The model contract does not cover sales to consumers, but only to professional purchasers who are in the business of re-selling goods, e.g. distributors, importers, wholesalers, etc.  The model is principally designed for one-off sales rather than continuing supply arrangements.18 This is the reason why the model does not contain terms more likely to appear in long-term supply agreements, such as price adjustment clauses and deliveries in instalments. 7.3.3.3 The

governing law: the reference to the CISG

Failing contrary agreement between the parties, the model contract subjects the transaction to the United Nations Convention for the International Sale of Goods (CISG), also known as the Vienna Convention of 1980. By means of this incorporation of the Vienna Convention into the model contract in Article 1.2(A) of Part B, the Convention will apply, whether the countries of the seller and buyer have ratified the Vienna Convention or not, provided that the applicable conflict of law rules permit such a choice. The Task Force chose not to offer the possibility to exclude application of the Vienna Convention (notwithstanding the fact that application of CISG in practice is often excluded) because it was felt necessary to draft the contract within the specific context of a uniform law, such as CISG, expressly made for international transactions. The model contract has therefore been drafted on the assumption that the parties’ rights and obligations will be governed by the Vienna Convention. As to questions not governed by this Convention, and unless otherwise agreed by the Parties, the law of the country where the seller has its place of business will apply (Article 1.2.B of Part B). If parties wish another law than that of the seller to govern questions not covered by CISG, they should fill in box A-15 of Part A. In any case, parties should make sure that the applicable law (chosen or not) will not render the model contract unenforceable. In this respect, the Task Force suggests the choice of Swiss law as the validity of the contract (e.g. regarding limitation of liabilities) has been checked against this law.

18

However, if the parties enter into an agreement setting up the framework for a number of individual sale contracts, such as a distribution agreement, the sale contracts made under such framework agreement may be governed individually by these conditions.

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and delivery conditions

The parties are invited to choose the appropriate trade term19 under the Incoterms® 2010 rules and to specify the relevant place or port, and point within that place or port as precisely as possible. Although Part A of the model contract lists all current Incoterms® rules in A-3, the Task Force recommends that the parties should seriously consider avoiding the use of Incoterms® rules providing for delivery to or on a vessel, such as FAS, FOB, CFR and CIF. Manufactured goods are often shipped ‘door-to-door’ or handed over for carriage at terminals, whether within the port precincts or at an inland depot and the use of Incoterms® rules that provide for delivery ‘on the ship’ might consequently be inappropriate to the type of goods for which the model contract is intended. Moreover, manufactured goods are rarely sold or pledged in transit and consequently rarely require the use of a transferable transport document. Likewise, parties ought to think carefully before using, in conjunction with this model contract, the EXW and DDP Incoterms® 2010 rules as EXW is usually only suitable for domestic transactions and DDP may pose complications for a seller who, for example, may not be in a position to arrange import clearance in a foreign country. Consequently, the Task Force recommends that the Incoterms® 2010 rules most appropriate for use with the model contract would normally be FCA, CPT, CIP, DAT or DAP. It is for this reason that these rules are listed first rather than in the order set out in the Incoterms® 2010 rules. Contracting parties are also reminded that while the Incoterms® rules spell out the main duties of and the allocation of risk and costs as between sellers and buyers, they do not provide comprehensive answers to all the possible issues which may arise between the parties.

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7.3.3.5 Documents

to be provided by the seller

It is common practice in international sales that the seller provides the buyer with certain documents: invoice, transport document, certificates, etc. A-8 of Part A of the model contract gives the parties an opportunity to expressly indicate their intentions as to documents. 7.3.3.6 Retention

of title

By completing A-6 of Part A of the model contract or otherwise, the parties may agree that the goods will remain the property of the seller until complete payment of the price, as indicated in Article 7 of Part B of the model contract. However, it should be noted that under many national laws retention of title of goods intended for resale is not always effective. The seller should therefore carefully check under the relevant law — which normally will be the law of the country where the goods are situated — if and to what extent he may rely on Article 7 of Part B, e.g. against third parties. 7.3.3.7 Warranty

to consumers

Manufacturers of the type of goods for which the ICC model sale contract is primarily intended typically grant a warranty (for repair and/or replacement as the case may be) to the ultimate purchaser (consumer). In such a case, the manufacturer’s warranty to the final user may overlap with the obligations of the seller under the sale contract. In fact, where the goods are defective, the final purchaser may, in principle, make a claim against his seller under the sale contract or directly against the manufacturer under the warranty given by it or provided by law. In these cases, it may be appropriate for the parties to the international sale contract specifically to agree that the buyer will co-operate with the seller, who might itself be the manufacturer, in managing the warranty, for example by confirming the date of the on-sale to the ultimate consumer, which is normally the commencement date of the manufacturer’s warranty. The parties may also agree that the buyer will perform on the manufacturer’s behalf certain obligations under the warranty, for example the duties of repair or replacement of non-conforming goods. Elements of desirable co-operation between the parties are provided for in Article 12 of Part B of the model contract. Parties may wish to stipulate for other aspects of co-operation by appropriate stipulation in A-17 of Part A of the model contract. 19

In the absence of such choice FCA (Seller’s premises) shall apply: see art. 8 of Part B.

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provisions on time of delivery

It is important to bear in mind that the time of delivery, to be inserted by the parties at A-4 of Part A of the model contract, refers to the date on which or period within which the seller undertakes to perform its delivery obligations under the contract of sale, and in particular under the relevant Incoterms® 2010 rule selected by the parties. This “time of delivery” is linked to the contractual place of delivery, which is not necessarily the place where the goods reach the buyer. Thus, under CPT (Carriage Paid to) the seller fulfils its obligation to deliver the goods (according to article A4 of this Incoterms® rule) when it delivers the goods into the custody of the carrier and not when the goods arrive at the named place of destination. The Task Force therefore recommends that, before agreeing on the time of delivery by completing A-4 of Part A of the model contract, parties should check carefully the stage at which delivery occurs according to the Incoterms® rule chosen in A-3 of the model contract: i.e. the operation described as delivery under the relevant Incoterms® rule which the seller must perform at or by the time agreed in A-4 of the model contract.

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The parties can agree a time of delivery by agreeing a precise date (e.g. “10 February 2012” or “by 10 February 2012”) or a period (“third week of February 2012”, “March 2012”). The parties can also agree a period of time running from a certain date (e.g. “60 days from signature of the sale contract”, “90 days after receipt of the agreed advance payment”). If a period of time is agreed, the seller may, according to article 33 CISG, deliver the goods at any time within that period, unless circumstances or the applicable Incoterms® 2010 rule indicate that the buyer is to choose a date. When the buyer needs at all cost the delivery by a given date, box A-9 of Part A (Cancellation Date) should be used. In this case the seller is advised to ensure that it can in any case meet such delivery date, since seller will be unable to put forward any excuse, including force majeure, if it does not deliver. As regards the rules on delay in delivery and the consequences of such delay, the ICC model contains provisions substantially different from those of the CISG.20 According to CISG, a delay in delivery for which the seller is responsible (i.e. which is not justified by force majeure) entitles the buyer to damages and, provided the delay implies a fundamental breach under Article 25 of the CISG21 or where the seller has not respected a reasonable additional period of time granted by the buyer,22 to contract termination. The model contract, on the contrary, provides in general terms that the buyer is entitled to liquidated damages amounting to 0.5% of the price of the products not delivered in time, up to a maximum of 5%. Until the maximum period is reached (i.e. ten weeks), the buyer cannot terminate the contract, which means that he must accept to receive the goods with a delay. He is compensated for such inconvenience through liquidated damages. If the seller does not deliver the goods within the maximum period, the buyer may avoid the contract and, in this case, may claim damages (in addition to the liquidated damages) which in the aggregate do not exceed the price of the non-delivered goods, or such maximum amount as may be agreed in Box A-11. The above system is a compromise between the different needs of the parties: the buyer can count upon a lump-sum payment in case of delay (which should also induce the seller to be punctual) and the seller knows that by paying the liquidated damages he is sure not to lose the contract (unless he exceeds the maximum period). Of course, this type of solution may be inadequate when respecting the delivery time is essential for the buyer. When this is the case, the parties can modify the above 20 It should be noted that according to Article 6 of the CISG parties are free to derogate from or vary the effect of any of its provisions. 21 According to which “A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.” 22 According to Article 47(1) and Article 49(1)(b) of the CISG.

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figures (an option expressly provided in box A-10 of the Special Conditions) by increasing the amount of the liquidated damages and/or by reducing the maximum amount. Furthermore, in extreme cases the parties have the option to provide a “cancellation date” (by filling in box A-9), which entitles the buyer to terminate the contract if the goods are not delivered within such term for whatever reason, including force majeure events. 7.3.3.9 The

remedies available in case of delivery of defective goods

The model contract follows a radically different approach if compared with the general rules of the CISG on another crucial topic, that of the remedies available to the buyer in case of non-conforming (defective) goods. According to the CISG, where the goods are non-conforming, and provided he notifies the defect in due time, the buyer is entitled, to recover the damage suffered and to obtain the repair of the goods or a price reduction. In addition, where the nonconformity amounts to a fundamental breach, the buyer can demand contract termination, which implies that the seller must take back the goods and return the amount paid.

Table of Contents

The ICC model follows a radically different approach, based on the idea that the seller should always have the right to make good the defects, even when they are substantial and imply a fundamental breach, and that the buyer should be entitled to avoid the contract only if the seller is unable to remedy the defects within a reasonable period of time. In the ICC model, the non-conformity of the goods does not in itself give the buyer the right to avoid the contract, and if the seller remedies the breach, the buyer’s damages are limited to liquidated damages for the delay involved up to an amount which, when aggregated with the damages for the first period of delay (if any) under Article 10.1, cannot exceed the contractually agreed price of the non-conforming goods.

184 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 THE ICC MODEL FORMS 7.3.4 Model

Form | ICC International Sale Contract (Manufactured Goods)

CONTRACT

Seller’s reference N° . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buyer’s reference N°

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A SPECIFIC CONDITIONS These Specific Conditions have been prepared in order to permit the parties to agree the particular terms of their sale contract by completing the spaces left open or choosing (as the case may be) between the alternatives provided in this document. Obviously this does not prevent the parties from agreeing other terms or further details in Box A-17 or in one or more annexes. Any reference to “Articles” means “Articles of the General Conditions of the ICC Model International Sale Contract (Manufactured Goods)”. SELLER Name, corporate form and address

CONTACT PERSON

����������������������������������������������������������������������������������������������������

Name ���������������������������������������������������������������������

����������������������������������������������������������������������������������������������������

Telephone �������������������������������������������������������������

����������������������������������������������������������������������������������������������������

E-mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax identification code/Other registration code:

Table of Contents

..................................................

BUYER Name, corporate form and address

CONTACT PERSON

����������������������������������������������������������������������������������������������������

Name ���������������������������������������������������������������������

����������������������������������������������������������������������������������������������������

Telephone �������������������������������������������������������������

����������������������������������������������������������������������������������������������������

E-mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax identification code/Other registration code:



..................................................

A-1 Goods sold Item/packages – item description – product code – origin – commodity code1 – quantity ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������

If there is insufficient space parties may use an annex A-2 CONTRACT PRICE (ART. 4) Indicate the currency referring to the ISO -3 currency code (e.g. USD, EUR etc.)2 Currency:����������� Amount: ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Amount in words�������������������������������������������������������������������������������������������������������������������������������������������������������

1. The commodity code or customs code is the 6-digit code of the product under the Harmonised System of the World Customs Organisation (http://www.wcoomd.org/home_hsoverviewboxes.htm) or any more specific (extended) code under national customs legislation. In the latter situations it might be wise to indicate the nature of the code (TARIC, MERCOSUR, TVNED, etc.) 2. UNECE ECE/Trade/203 Recommendation n°9 – Alphabetic Code for the Representation for Currencies; available at http://www.unece.org/cefact/recommendations/rec_index.html.

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A-3 DELIVERY TERMS (ART. 8) Recommended terms (according to the Incoterms® 2010 rules): see Introduction, §5 

FCA Free Carrier

Named place: ������������������������������������������������������������������������������������������ . ����������������������������������������������������������������������������������������������������������������

Shipped by (when different from buyer) ��������������������������������������������������� ����������������������������������������������������������������������������������������������������������������



CPT Carriage Paid To

Named place of destination: ���������������������������������������������������������������������������������������� ����������������������������������������������������������������������������������������������������������������������������������������������� Shipped from: ������������������������������������������������������������������������������������������������������������������



CIP Carriage and Insurance

Paid To �������������������������������������������������������������������������������������������������������������������������������

Named place of destination:  ����������������������������������������������������������������������������������������������������������������

Shipped from: �������������������������������������������������������������������������������������������

Insurance cover:  max. cover  War Risk /SRCC3 

Table of Contents



DAT Delivered at Terminal

Named terminal or quay of destination: �����������������������������������������������������

DAP Delivered at Place

Named place of destination: ���������������������������������������������������������������������

����������������������������������������������������������������������������������������������������������������

����������������������������������������������������������������������������������������������������������������

Other terms (according to the Incoterms® 2010 rules): see Introduction, §5 

EXW Ex Works

Named place: ������������������������������������������������������������������������������������������� ����������������������������������������������������������������������������������������������������������������





DDP Delivered Duty Paid

Named place of destination: ���������������������������������������������������������������������

FAS Free Alongside Ship

Named port of shipment: �������������������������������������������������������������������������

����������������������������������������������������������������������������������������������������������������

Shipped by (when different from buyer)  ����������������������������������������������������������������������������������������������������������������



FOB Free On Board

Named port of shipment: �������������������������������������������������������������������������

Shipped by (when different from buyer)  ����������������������������������������������������������������������������������������������������������������





CFR Cost and Freight

Named port of destination: �����������������������������������������������������������������������

CIF Cost Insurance and Freight

Named port of destination: �����������������������������������������������������������������������

Shipped from: �������������������������������������������������������������������������������������������

Shipped from: �������������������������������������������������������������������������������������������

Insurance cover:  max. cover  War Risk /SRCC CARRIER OR FORWARDER (where applicable) NAME AND ADDRESS

CONTACT PERSON

������������������������������������������������������������������������

������������������������������������������������������������������������

������������������������������������������������������������������������

������������������������������������������������������������������������

������������������������������������������������������������������������

������������������������������������������������������������������������

3. Strikes, Riots and Civil Commotion

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 THE ICC MODEL FORMS

A-4 TIME OF DELIVERY Indicate here the date or period (e.g. week or month) at which or within which the Seller must perform its delivery obligations of the respective Incoterms® rule according to Box A-3 (‘Delivery Terms’) (see Introduction, § 6) and, when applicable, a date of shipment (see Introduction, § 7) A-5 INSPECTION OF THE GOODS (ART. 3) 

Upon shipment

Surveyor ..............................



Before shipment

Surveyor ..............................



Other:

Place of inspection ..............................





Inspection fee on Seller’s account



Inspection fee on Buyer’s account

A-6 RETENTION OF TITLE (ART. 7)

Table of Contents

 Yes

 No

A-7 PAYMENT CONDITIONS (ART. 5) 

Payment on open account (art. 5.1) Time for payment (if different from art. 5.1) . . . . . . days from date of invoice. Other: . . . . . . . . . . .  Open account backed by demand guarantee or standby letter of credit (art. 5.6)



Payment in advance (art. 5.2) Date (if different from art. 5.2): .

. . . . . . . . . .

 Total price  .

. . . . . . . . . .

% of the price; remaining amount .

. . . . . . . . . .%

to be paid at .

. . . . . . .

 Payment in advance backed by advance payment bond  

Documentary collection (art. 5.4)  D/P Documents against payment

 D/A Documents against acceptance

Irrevocable documentary credit (art. 5.3)  Confirmed

 Unconfirmed

Place of issue (if applicable): �������������������������������������������������������������������������������������������������������������������������������������������� Place of confirmation (if applicable):������������������������������������������������������������������������������������������������������������������������������

Credit available

Partial shipments

Transhipment

 At sight

 Allowed

 Allowed

 By deferred payment at: ___ days

 Not allowed

 Not allowed

 By acceptance of drafts at : ___ days  By negotiation Date on which the documentary credit must be notified to seller (if different from art. 5.3) . . . . . .

days before date of shipment other: .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Irrevocable Bank Payment Obligation (art. 5.5) Settlement by Payment Settlement by Deferred Payment Undertaking and payment at maturity. Deferred payment terms . . . . . . days after sight or after date of . . . . . . Date on which the Bank Payment Obligation must be notified to seller (if different from art. 5.5) . . . . . . days before date of shipment other: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other:  (e.g. cheque, bank draft, electronic funds transfer to designated bank account of seller) Seller’s Bank Details IBAN4/bank account number ����������������������������������������������������������������������������������������������������������� BIC/Swift code5 �������������������������������������������������������������������������������������������������������������������������������

A-8 DOCUMENTS (ART.9) Indicate here documents to be provided by Seller. Parties are advised to check the Incoterms® 2010 rule they have selected under A-3 of these Specific Conditions. As concerns transport documents, see also Introduction, § 8. 

Commercial Invoice

number of originals/copies

Table of Contents

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Packing list

specific requirements (language, legalization, etc.) . . . . . . . . . . . . . . . . . . . . . . . .

number of originals/copies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Certificate of origin

number of originals/copies

 preferential (indicate type)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 economic 

specific requirements (language, legalization, etc.) . . . . . . . . . . . . . . . . . . . . . . . .

Transport documents

  Full set

(indicate type of transport document required)

number

specific requirements (e.g. consignee, notify, etc.)

. . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . .



Insurance document



Other ����������������������������������������������������������������������������������������������������������������������������������������������

��������������������������������������������������������������������������������������������������������������������

A-9 CANCELLATION DATE To be completed only if the parties wish to modify Art. 10 If the goods are not delivered for any reason whatsoever (including force majeure) by (date) . . . . . . . the Buyer will be entitled to declare the contract avoided immediately by notification to the Seller.

4. 5.

http://www.ecbs.org/iban.htm https://www2.swift.com/directories/

188 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

. .

 THE ICC MODEL FORMS

A-10 LIABILITY FOR DELAY (art. 10.2)

A-11 LIMITATION OF LIABIL­ITY FOR DELAY (art. 10.4)

To be completed only if the parties wish to modify Art.10.2

To be completed only if the parties wish to modify Art.10.4

Liquidated damages for delay in delivery shall be:

In case of avoidance for delay, Seller’s liability for damages for delay is limited to . . . . . . . . . % of the price of the non-delivered goods.

. . . . . . % (of price of delayed goods) per week, with a maximum of . . . . . . % (of price of delayed goods)

A-12 PLACE OF EXAMINATION AT ARRIVAL (ART. 11.1) To be completed only if the parties wish to modify Art.11.1 The goods delivered will have to be examined after their arrival at the following place :  Place of business of the consignee to which the goods are sent or redirected  Other: �����������������������������������������������������������������������������������������������������������������������������������������������������

A-13 MAXIMUM DELAY FOR NOTIFICATION OF NON-CONFORMITY (art 11.1)

Table of Contents

To be completed only if the parties wish to modify Art.11.1 Defects must be notified to the Seller immediately upon discovery or as soon as they ought to have been discovered, but not later than . . . . . . months after arrival of the goods. This shall not affect the periods of limitation (art. 11.6). A-14 LIMITATION OF LIABIL­ITY FOR NON-CONFORMITY (ART. 11.4) To be completed only if the parties wish to modify Art.11.4 Seller’s liability for damages arising from lack of conformity of the goods shall be: limited to proven loss (including consequential loss, loss of profit, etc.) not exceeding . % of the contract price OR

. . . . . . . .

��������������������������������������������������������������������������������������������������������������������������������������� (specify amount)

A-15 APPLICABLE LAW (ART. 1.2) To be completed only if the parties wish to choose a law other than the Seller’s law for questions not covered by the CISG Any questions not covered by CISG will be governed by the law of ������������������������������������������������������������ (country).

A-16 RESOLUTION OF DISPUTES (ART. 14) 

ARBITRATION  ICC (according to art.14.2  Other ______________ (specify)



LITIGATION (ordinary courts In case of dispute the courts of �������������������������������������������������������������������������� (place), shall have exclusive jurisdiction

Place of arbitration ����������������������������������������������������������������������������������������� Language of the arbitration ����������������������������������������������������������������������������������������� Number of arbitrators ����������������������������������������������

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A-17 OTHER

The present contract of sale will be governed by these Specific Conditions (to the extent that the relevant boxes have been completed) and by the General Conditions of the ICC Model International Sale Contract (Manufactured Goods) which constitute Part B of this document. ��������������������������������������������������������������������������������������� (date)

The Seller

The Buyer

Name�����������������������������������������������������������������������������������������

Name�����������������������������������������������������������������������������������������

Title �������������������������������������������������������������������������������������������

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190 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 THE ICC MODEL FORMS Model Form | International

Sale Contract

ICC INTERNATIONAL SALE CONTRACT (MANUFACTURED GOODS) B. General

Conditions

The General Conditions of the ICC Model International Sale Contract (Manufactured Goods) Art. 1 General 1.1 These

General Conditions are intended to be applied together with the Specific Conditions (Part A) of the ICC Model International Sale Contract (Manufactured Goods), but they may also be incorporated on their own into any sale contract. Where these General Conditions (Part B) are used independently of the said Specific Conditions (Part A), any reference in Part B to Part A will be interpreted as a reference to any relevant specific conditions agreed by the parties. In case of contradiction between these General Conditions and any specific conditions agreed upon between the parties, the specific conditions shall prevail.

1.2 Any

questions relating to this contract which are not settled by the provisions contained in the contract itself (i.e. these General Conditions and any specific conditions agreed upon by the parties) shall be governed:

A. by the United

Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, hereafter referred to as CISG), and

B. to the extent

that such questions are not covered by CISG and that no applicable law has been agreed upon, by reference to the law of the country where the Seller has its place of business.

reference made to a publication of the International Chamber of Commerce is deemed to be made to the version current at the date of conclusion of the contract.

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1.3 Any

1.4 No modification

of the contract is valid unless agreed or evidenced in writing. However, a party may be precluded by its conduct from asserting this provision to the extent that the other party has relied on that conduct.

1.5 Any

limitation to remedies in case of breach of contract shall be ineffective in cases of fraud or gross negligence of the breaching party.

Art. 2 Characteristics 2.1 It is

of the goods

agreed that any information relating to the goods and their use, such as weights, dimensions, capacities, prices, colours and other data contained in catalogues, prospectuses, circulars, advertisements, illustrations, price-lists of the Seller, shall not take effect as terms of the contract unless expressly referred to in the contract.

2.2 Unless

otherwise agreed, the Buyer does not acquire any property rights in software, drawings, etc. which may have been made available to it. The Seller also remains the exclusive owner of any intellectual or industrial property rights relating to the goods.

2.3 It is

agreed that the goods are suitable for the purpose for which they are intended by their very nature or which is evident from the contract of sale.

2.4 If express

reference is made in the contract of sale to technical, safety, quality or other regulations and documents clearly designated in the agreement, even if not attached to the contract, the Seller shall be deemed to have knowledge of these. The Seller shall bear the costs related to, and obtain the necessary permission, permits or licences in good time required for carrying out the contract and for complying with the conditions stipulated therein.

Art. 3 Inspection

of the goods before shipment

If the parties have agreed that the Buyer is entitled to inspect the goods before shipment, the Seller must notify the Buyer within a reasonable time before the shipment that the goods are ready for inspection at the agreed place. Art. 4 Price 4.1 The

price indicated under Box A-2 (contract price) includes any costs which are at the Seller’s charge according to this contract. However, should the Seller bear any costs which, according to this contract, are for the Buyer’s account (e.g. for transportation or insurance under FCA, EXW, FAS or FOB), such sums shall not be considered as having been included in the price under Box A-2. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 191

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4.2 If no

price has been agreed, the Seller’s current list price at the time of the conclusion of the contract shall apply. In the absence of such a current list price, the price generally charged for such goods at the time of the conclusion of the contract in the Seller’s currency shall apply.

4.3 Unless

otherwise agreed in writing, the price does not include indirect taxes (VAT, sales tax, excise duties, etc.), and is not subject to price adjustment.

Art. 5 Payment 5.1 Unless

conditions

otherwise agreed in writing, or implied from a prior course of dealing between the parties, payment of the price and of any other sums due by the Buyer to the Seller shall be on open account and time of payment shall be 30 days from the date of invoice. The amounts due shall be transferred, unless otherwise agreed, by telegraphic transfer or remittance to the Seller’s bank in the Seller’s country for the account of the Seller and the Buyer shall be deemed to have performed its payment obligations when the respective sums due have been received by the Seller’s bank in immediately available funds.

5.2 If the

parties have agreed on payment in advance, without further indication, it will be assumed that such advance payment, unless otherwise agreed, refers to the full price, and that the advance payment must be received by the Seller’s bank in immediately available funds at least 30 days before the agreed date of shipment or the earliest date within the agreed shipment period. If advance payment has been agreed only for a part of the contract price, the payment conditions of the remaining amount will be determined according to the rules set forth in this article.

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5.3 If the

parties have agreed on payment by documentary credit, then, unless otherwise agreed, the Buyer must arrange for a documentary credit in favour of the Seller to be issued by a reputable bank, subject to the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce, and to be notified at least 30 days before the agreed date of shipment or at least 30 days before the earliest date within the agreed shipment period. Unless otherwise agreed, the documentary credit shall be payable at sight and allow transhipments but no partial deliveries.

5.4 If the

parties have agreed on payment by documentary collection, then, unless otherwise agreed, documents will be tendered against payment (D/P) and the tender will in any case be subject to the Uniform Rules for Collections (URC 522) published by the International Chamber of Commerce.

5.5 If the

parties have agreed on payment against the security of a Bank Payment Obligation, then, unless otherwise agreed, the Buyer must arrange for the Seller to receive an assurance of payment in accordance with the agreed payment terms in the form of a Bank Payment Obligation to be issued by a bank in favour of the Seller’s Bank, subject to the URBPO rules (Uniform Rules for Bank Payment Obligations) published by the International Chamber of Commerce, and to be notified at least 30 days before the agreed date of shipment or at least 30 days before the earliest date within the agreed shipment period. Unless otherwise agreed, the Bank Payment Obligation shall be payable at sight and allow transhipments but no partial deliveries.

5.6 To the

extent that the parties have agreed that payment is to be backed by a bank guarantee, the Buyer is to provide, at least 30 days before the agreed date of shipment or at least 30 days before the earliest date within the agreed shipment period, a first demand bank guarantee subject to the Uniform Rules for Demand Guarantees (URDG 758) published by the International Chamber of Commerce, or a standby letter of credit subject either to such Rules, to the International Standby Practices (ISP 98) or to the Uniform Customs and Practice for Documentary Credits (UCP 600) published by the International Chamber of Commerce, in any case issued by a reputable bank.

Art. 6 Interest 6.1 If a

in case of delayed payment

party does not pay a sum of money when it falls due the other party is entitled to interest upon that sum from the time when payment is due to the time of payment.

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 THE ICC MODEL FORMS 6.2 Unless

otherwise agreed, the rate of interest shall be 5% above the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place of payment, or where no such rate exists at that place, then the same rate in the state of the currency of payment.

Art. 7 Retention

of title

If the parties have validly agreed on retention of title, the goods shall, notwithstanding delivery and the passing of risk in the goods, remain the property of the Seller until the complete payment of the price, or as otherwise agreed. Art. 8 Contractual

term of delivery

Unless otherwise agreed, delivery shall be at FCA Seller’s premises (Incoterms® 2010 rules). Art. 9 Documents

Unless otherwise agreed, the Seller must provide the documents (if any) indicated in the applicable Incoterms® rule or, if no Incoterms® rule is applicable, according to any previous course of dealing. Art. 10 Late-delivery, 10.1 If the

non-delivery and remedies therefore

parties have agreed upon a cancellation date in Box A-9, the Buyer may declare the contract avoided by notification to the Seller in case delivery has not occurred by such cancellation date for any reason whatsoever (including a force majeure event).

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10.2 When

there is delay in delivery of any goods, the Buyer is entitled to claim performance and liquidated damages equal to 0.5% or such other percentage as may be agreed of the price of those goods for each commenced week of delay. Liquidated damages for delay shall not exceed 5% of the price of the delayed goods or such maximum amount as may be agreed in Box A-10.

10.3 When

article 10.1 does not apply and the Seller has not delivered the goods by the date on which the Buyer has become entitled to the maximum amount of liquidated damages under article 10.2, the Buyer may at any time ask for performance or declare the contract to be avoided in writing.

10.4 In

case of avoidance of the contract under article 10.1 or 10.3 the Buyer is entitled to claim damages which in the aggregate do not exceed the price of the non-delivered goods, or such maximum amount as may be agreed in Box A-11.

10.5 The

remedies under this article exclude any other remedy for delay in delivery or non-delivery.

Art.11 Non-conformity 11.1 The

of the goods

Buyer shall examine the goods as soon as possible after their arrival at the place of business of the Buyer or any other agreed place of examination and shall notify the Seller in writing of any lack of conformity, specifying the nature of the lack of conformity of the goods within a reasonable time from the date when the Buyer discovers or ought to have discovered the lack of conformity. In any case the Buyer shall have no remedy for lack of conformity if it fails to notify the Seller thereof within 24 months from the date of arrival of the goods at the place of business of the Buyer or the otherwise agreed place of examination, if any.

11.2 Goods

will be deemed to conform to the contract despite minor discrepancies which are usual in the particular trade or through course of dealing between the parties.

11.3 Where

goods are non-conforming, the Seller shall at its option and provided it can do so without unreasonable delay and without causing the Buyer unreasonable inconvenience:

(a) replace

the goods with conforming goods, without any additional expense to the Buyer, or

(b) repair the

goods, without any additional expense to the Buyer.

The Buyer will be entitled to liquidated damages for the delay due to replacement or repair as specified under article 10.2 or as may be agreed in Box A-10. 11.4 If the

Seller has failed or refused to properly perform its duties under article 11.3 within a reasonable period, and provided the parties have not agreed on a price reduction, INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 193

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

the Buyer may resort to the remedies provided for by the CISG having regard to the terms laid down in this contract. As to the damages proven by the Buyer the maximum amount is limited to the contractually agreed price of the non-conforming goods. 11.5 Unless

otherwise agreed in writing, the remedies under this article 11 exclude any other remedy for non-conformity.

11.6 Unless

otherwise agreed in writing, no action for lack of conformity can be taken by the Buyer, whether before judicial or arbitral tribunals, after 4 years from the date of arrival of the goods at the place of examination. It is expressly agreed that after the expiry of such term, the Buyer shall not plead non-conformity of the goods, or make a counter-claim thereon, in defence to any action taken by the Seller against the Buyer for non-performance of this contract.

Art. 12 Cooperation 12.1 The

between the parties

Buyer shall promptly inform the Seller of any claim made against the Buyer by its customers or third parties concerning the goods delivered or industrial or intellectual property rights related thereto.

12.2 The

Seller shall promptly inform the Buyer of any claim which may involve the product liability of the Buyer.

Art. 13 Force

majeure

13.1 A party

is not liable for a failure to perform any of its obligations in so far as it proves:

(a) that the

failure was due to an impediment beyond its control, and

(b) that it could

not reasonably be expected to have taken into account the impediment and its effects upon its ability to perform at the time of the conclusion of the contract, and

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(c) that it could

not reasonably have avoided or overcome the impediment or

its effects. 13.2 A party

seeking relief shall, as soon as practicable after the impediment and its effects upon that party’s ability to perform become known to it, give notice to the other party of such impediment and its effects on that party’s ability to perform. Notice shall also be given when the ground of relief ceases. Failure to give either notice makes the party thus failing liable in damages for loss which otherwise could have been avoided.

13.3 Without

prejudice to article 10.2, a ground of relief under this clause relieves the party failing to perform from liability in damages, from penalties and other contractual sanctions, from the duty to pay interest on money owing as long as and to the extent that the ground subsists.

13.4 If the

grounds of relief subsist for more than three (3) months, either party shall be entitled to declare the contract to be avoided without notice.

Art. 14 Resolution 14.1 The

of disputes

parties may at any time, without prejudice to any other proceedings, seek to settle any dispute arising out of or in connection with the present contract in accordance with the ICC ADR Rules.

14.2 Unless

otherwise agreed in writing, all disputes arising out of or in connection with the present contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

14.3 An

arbitration clause does not prevent any party from requesting interim or conservatory measures from state courts.

7.4 AGENCY

AND DISTRIBUTORSHIP AGREEMENTS

This part deals with contracts regarding the distribution of goods. After an introduction where the different means of organizing distribution will be analysed (infra, § 7.4.1), it concentrates on the two major contracts used in this context: commercial agency (§ 7.4.2-7.4.5) and distributorship contracts (§ 7.4.6-7.4.8).

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 THE ICC MODEL FORMS 7.4.1 Organizing

distribution of products abroad

Distribution plays a vital role in international trade. A company wishing to sell its products in a foreign market will normally need to establish a distribution network in such country or at least appoint an importer or agent. The following paragraphs examine the main alternatives for companies wishing to market their products abroad and highlight the most commonly used solutions. 7.4.1.1 Selling

to exporters in the home country of the manufacturer

A first alternative, which cannot actually be considered as “distribution abroad”, consists of selling to a company from the same country as the manufacturer, which will subsequently sell the products abroad. This is a very timid approach to the foreign market, since it does not give the manufacturer any control over the resale abroad; he will normally be unable to know the names of the foreign customers and sometimes will not even know in which country his products are sold. On the other hand, this solution has the advantage that the manufacturer does not need to worry about the problems of selling his products abroad and can concentrate on producing and selling in his home market. Contracts of this type are common in certain countries (e.g. Japan) where powerful trading companies traditionally take over the export business of local producers. However, this alternative heavily limits the manufacturer’s opportunities to expand his business abroad: the actual exporter (trading company) will take — together with the risks — a large share of the benefits of such activity. Moreover, the danger exists that the exporter may replace his supplier when he finds a better (or cheaper) alternative.23

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7.4.1.2 Direct

sales to foreign customers

If we now take the alternative ways of making sales abroad, the simplest is that of a direct sale to foreign customers, without having recourse to a distribution organization in the foreign country. In this context, one can distinguish two rather different situations: the direct sale to the final customer and the sale to a foreign company that resells in its own country. The first situation may arise, for instance, when a direct contact with the foreign customer is established at a trade fair or exhibition, but this will normally only give rise to occasional sales which do not imply an actual presence in the foreign territory. Only in particular industries (e.g. sale of equipment or tailor-made machines) where it is usual practice for the deal to be negotiated directly between the manufacturer and the end user, may a marketing organization in the foreign country not be necessary, since the exporter will be able to send his own personnel abroad to negotiate the business. However, even in such cases, parties may have recourse to occasional intermediaries that inform the manufacturer about the potential business and act as intermediaries on a case-by-case basis. The second situation arises when the manufacturer chooses to sell to a foreign purchaser who already owns or controls a distribution network, for example a company with its own retail organization (e.g. modern distribution or a chain of retailers), or a company wishing to include within its range a product manufactured by a third party that it will resell under its own trademark. In these cases, the exporter will normally be unable to influence the purchaser’s marketing strategies. In most cases, he cannot even make his product known on the foreign market, since it will be marketed without a trademark or under the purchaser’s trademark. Contracts of this type are radically different from the typical distribution agreements, and particularly from the distributorship contract that will be examined later. These supply or OEM contracts24 focus mainly on supply to the foreign customer and on the matters concerning such supply, such as minimum turnover, quantity forecasts, criteria 23 The latter risk will be greater if the products are sold without the manufacturer’s trademark or under a trademark belonging to the exporter. 24 The term OEM (Original Equipment Manufacturer) contract is frequently used in the electronics field (computers, printers, photocopiers, etc.) for contracts implying the supply of complete products, which the purchaser will resell as if they were manufactured by itself (i.e. with its trademark, servicing, etc). In the case of the supply of components to be incorporated by the purchaser in its own products, the term “industrial subcontracting” is more frequently used.

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for fixing and revising the prices (if the contract is to last for a longer period) instead of on the resale of the products, which will be decided by the purchaser without any interference from the exporter. This type of solution has certain advantages for the exporter (high volumes of sales, low selling costs), but it does not give the exporter access to the foreign market. It cannot actually be considered as a method for distributing products abroad, although it may be a useful tool, particularly if it does not also prevent the exporter from marketing, through other channels, the products under his own trademark.25 A last case that should be mentioned in this context arises when the foreign purchaser uses buying agents established in the exporter’s country, a situation particularly common in the fashion industry. In this case, there will also be a direct sale to the foreign customer, but without establishing any actual presence in the foreign market, particularly if the goods are sold under the purchaser’s trademark. 7.4.1.3 Sale

through non-integrated resellers or intermediaries (commission agents, wholesalers)

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Another possible way of marketing the products in a foreign market is to sell the products though intermediaries or resellers who deal with several competing products. A typical example of this type of distribution is wholesalers whose function is precisely to offer their customers (normally retailers) the largest possible choice between competing brands. Another example is commission agents in certain trades (e.g. agricultural products) who act as intermediaries for a variety of competitors. However, this solution appears to be less appropriate for branded products, which normally need to be marketed through a dedicated distribution network26 made up of people who do not work for competitors and who are willing to concentrate their efforts on promoting the manufacturer’s products in direct competition with those of his competitors. Of course, the choice of an integrated distribution network does not necessarily exclude recourse to independent wholesalers. For example, the manufacturer may appoint a distributor/importer for a given country, and such distributor may sell through wholesalers to retailers, unless he prefers to supply retailers or final users directly through an integrated network (e.g. agents or sub-distributors). In other terms, a manufacturer who normally sells his products on his home market through a non-integrated network, may also have recourse to a dedicated/integrated distributor (exclusive importer) capable of organizing and controlling distribution in the country for which it is responsible. 7.4.1.4 Sale

through occasional intermediaries

A solution frequently used when beginning to approach new markets, or for the sale of products that do not require a stable presence in the foreign territory, is to appoint occasional intermediaries, sometimes called brokers, indicateurs and the like. The category of occasional intermediaries covers a large variety of situations. On the one hand, we find intermediaries appointed for a single business, who may act, according to the circumstances, as fully independent intermediaries (brokers)27 or as intermediaries acting in the interest of the appointing party. On the other hand, there are intermediaries, who, without assuming an obligation to promote business in a continuative way that would normally give rise to a commercial agency contract, are appointed for the negotiation of an undetermined number of possible contracts. These intermediaries tend to be more closely integrated into the manufacturer’s distribution network and, in many cases, may become real commercial agents at a later stage if their activity develops. 25 This is, in fact, one of the critical points that arise when negotiating the contract. The purchaser will normally request an exclusive purchase right, while the supplier will try not to grant any exclusivity. A compromise is often found by differentiating the external appearance (colour, etc.) of the products sold by the purchaser and by the exporter under their respective trademarks. 26 This kind of distribution is frequently called «integrated distribution», because the distributor, be it a reseller or an intermediary, is part of the manufacturer’s distribution network, while the wholesaler is a wholly independent trader, not closely bound to any particular supplier. 27 Normally paid by both parties.

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 THE ICC MODEL FORMS 7.4.1.5 Sale

through agents and distributors

One of the solutions most commonly used in international distribution consists of appointing persons or companies bound to the exporter by a long-term contractual relationship, who undertake the responsibility of organizing and promoting sales in conformity with the marketing strategies of the manufacturer and thus become strictly integrated into the distribution network of the latter. The main advantage of this formula is that it gives the exporter the advantage of having recourse to self-employed intermediaries who organize their activity in the most efficient way, and without fixed costs for the manufacturer and, at the same time, opens the possibility of directing their activity so that it conforms to the exporter’s distribution and marketing policies. The two main examples of the above28 are commercial agents and distributors (concessionnaires, exclusive importers). Both of these can be used by the exporter as an instrument for carrying out its own marketing policies, without becoming part of the manufacturer’s organization like employees or subsidiaries.

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While the commercial agents are intermediaries in the strict sense of the word, who promote the conclusion of contracts between the manufacturer and its customers against payment of a commission, the distributors perform tasks similar to those of an agent, as regards commercial activity, i.e. organizing and promoting sales, but who act as buyers-resellers and are remunerated through a margin (i.e. the difference between the purchase price and the resale price). Both contracts represent an interesting compromise solution with respect to setting up an organization owned by the manufacturer, such as a branch or a subsidiary. On the one hand, they imply lower costs for the manufacturer, with the further advantage that such costs are related to the actual sales made (be it the agent’s commission or the distributor’s margin), while the fixed costs of distribution are at the expense of the intermediary. On the other hand, they give the manufacturer the possibility of carrying out its own commercial policy through a dedicated intermediary. Thus, it is normal that agents and distributors undertake not to market competing products. 7.4.1.6 Sale

through subsidiaries or distribution joint ventures

An even more integrated form of distribution consists in marketing the products through a subsidiary, which imports the goods and organizes their distribution in the country where it is established, in conformity with the manufacturer’s commercial strategies. This formula is particularly appropriate where a very strict control over the distribution is needed, e.g. when the manufacturer decides to manage a distribution network meant to reach the final consumer (franchising, selective distribution)29 or, more generally, where a direct presence on the foreign market is needed. At the same time, this solution is workable only if there is an important turnover that can justify the high fixed costs that such a solution involves. An intermediate solution, frequently used in the transition from a sales network organized by a distributor and the distribution through a subsidiary, is that of a joint venture with a local distributor-importer. This solution makes it possible to create the basis for establishing a wholly owned subsidiary without a brisk interruption in the relationship with the existing distributor, who will be involved, as minority shareholder, in the management of the joint venture and who will receive compensation for his past activity at a later stage when the exporter purchases the distributor’s shares. 7.4.1.7 Distribution

systems implying control over a network of local retailers: franchising, selective distribution

The previous paragraphs have examined some forms of distribution involving a relationship between the exporter and counterparts of the foreign country acting at the wholesale level: occasional intermediaries, agents, distributors, subsidiaries. 28 Leaving aside those intermediaries which act at retail level, such as franchisees, which will be considered later: § 7.4.1.7. 29 Or, in case the manufacturer chooses to sell through a network of employed agents. In fact, it only makes sense to appoint employed agents who can be obliged to strictly follow the principal’s directions if the principal is actually capable of exercising such control through an organization established in the country where the network of employed agents is located.

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However, in certain cases, the manufacturer may decide to organize more sophisticated distribution networks that extend to the retail level. These more advanced distribution systems frequently imply the presence in the foreign country of a stable organization, normally a subsidiary, on which the sales network will depend.30 This is because the management of the network requires a close relationship with its members, which is normally not possible in a cross-border relationship. Another reason is that the applicable rules (e.g. administrative rules governing retail trade, as well as special laws regarding franchising, etc.) may differ from country to country. These are the main reasons why franchising or selective distribution networks are normally organized on a national level.31 When this type of organization based on several national networks is set up, contracts with retailers (franchisees or selective distributors) will normally be domestic contracts, since they are entered into between parties from the same country. At the same time, however, the company that sets up a network composed of several national networks will normally need to obtain the maximum possible degree of uniformity of the contract terms in force within the different countries. Since the contracts will normally be governed by different laws, this requires careful legal analysis. 7.4.1.8 Direct

sales to consumers through Internet

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In recent years, it has become possible to directly reach customers thanks to Internet, and many companies are establishing websites for the direct sale of their products to consumers, without passing through the traditional distribution channels. Internet sales are developing steadily for certain types of products, like fashion, sportswear, etc., and may give rise to the necessity of a coordination with the traditional channels. A further problem is that companies which in the past did not need to consider the rules protecting consumers, since they were supplying their products only to resellers, now need to set up specific conditions for the sale on the Internet which must comply with the rules protecting consumers in the countries where the products are sold. 7.4.2 Contracts

with commercial agents

The recourse to commercial agents represents the easiest and least expensive means of entering a foreign market. This is why commercial agency contracts are frequently used in international trade. 7.4.2.1 The

notion of commercial agent

A commercial agent is an intermediary entrusted with promoting, on a continual basis, the conclusion of contracts on behalf of a principal. In the great majority of cases, the activity of the commercial agent consists in negotiating the terms of a contract proposal (order) that is transmitted to the principal and that the principal is, in principle, free to accept or refuse. Sometimes, though it is rather exceptional in international trade, the principal grants the agent the authority to directly conclude contracts in his name and on his behalf. A definition of commercial agent relevant for most European countries is contained in Article 1(2) of the European Directive 86/653/EC. According to such provision: ‘commercial agent’ shall mean a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called ‘the principal’, or to negotiate or conclude such transactions on behalf of and in the name of such principal. 7.4.2.2 The

agent’s main activity: negotiating contracts

The basic task of the agent is to negotiate contracts for the principal and, exceptionally, to conclude them in the name of the principal.

30 Another possible option is to license a third party to operate the network in the foreign country, e.g. through a master franchising contract. 31 However, within the European Union, due to the unification of the national markets, cross-border networks are also beginning to develop. For example, there are some cases of franchisors who appoint franchisees in neighbouring countries without the intermediary of a company responsible for such country.

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 THE ICC MODEL FORMS

It should be said very clearly that in the practice of cross-border commercial agency the principal will almost never entrust the agent with the authority to conclude contracts in his name.32 In other words: the normal situation is that of an agent who negotiates a sales contract with a prospective customer, obtains an order from the customer and transmits such order to the principal, who will usually — if he has the products in stock, if he trusts the customer, etc. — accept such order and thus conclude the contract of sale. In this context, the term “negotiate” may give rise to some misunderstandings. In fact, why should an agent who does not have the authority to conclude the contract negotiate its terms with the potential customer? The answer is that the agent will actually discuss the contract conditions with the potential customer on the basis of terms and conditions he knows to be acceptable to the principal, and thus he will convince the customer to place an order which will most likely be accepted by the principal. The principal will nevertheless retain the right to decide, in his sole discretion, if he wishes to conclude the contract. 7.4.2.3 The

commercial agent as “representative” of the principal

As stated in the previous paragraph, the main activity of the agent consists in promoting the conclusion of contracts for the principal, i.e. the typical activity of an intermediary.

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However, the commercial agent is much more than an intermediary: he is responsible in more general terms for looking after the principal’s interests — at least from the point of view of the distribution of his products — in the territory for which he has been appointed. In other words, he “represents” the principal within the ambit (territory or group of customers) entrusted to him, where the term “represent” should not be understood by its legal meaning (i.e. having the authority to make contracts in the name and on behalf of the principal), but in the more general sense of acting in the interest of the principal. This explains why the term “representative” is commonly used to define commercial agents who normally have no authority to bind the principal, like the German Handelsvertreter or the “sales representatives” described in certain statutes of US states. Of course, this characteristic of the commercial agent necessarily implies a continuous relationship with the principal and thus a difference from occasional intermediaries. Moreover, at least in some legislations, it implies a general obligation of the agent to protect the principal’s interests.33 Although the commercial agency contract originates from the wider notion of agency (in the sense of mandat in French law, of Geschäftsbesorgung, in German law, etc.), it has gradually become a different contract — especially in those legal systems which have enacted special statutory rules on commercial agents. While the general notion of agency is characterized by the agent’s authority to bind the principal, in most cases a commercial agent does not have this authority. Moreover, the core of the commercial agent’s activity is not to “represent” the principal from a legal point of view (i.e. to enter into contracts on his behalf), but to promote his sales by visiting customers, participating in fairs, collecting orders, etc., in other words, to “represent” the principal from an economic point of view. Of course, this does not exclude the fact that in legal systems that have no specific rules on commercial agents, the more general rules on agency may apply to the extent they are compatible with the functions of a commercial agent.

32 For example, the ICC model commercial agency form does not even provide an alternative for the agent to have the authority to conclude contracts on the principal’s behalf: see article 3.3 of the model form and respective footnote. 33 See, for example, Article 3(1) of the European directive (infra, § 7.4.2.5), which says that “… in performing has activities a commercial agent must look after his principal’s interests and act dutifully and in good faith.”

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It should finally be noted that in some jurisdictions (e.g. a number of countries of the Middle East)34 the term “agency” is used in a much wider sense, and covers intermediaries as well as buyers-resellers (distributors) who promote business for a principal/supplier. 7.4.2.4 Employed

agents

The activity that consists of promoting the conclusion of contracts on a continuing basis, which is typical of the commercial agent, can also be carried out by employees, persons bound to the principal/employer by an employment contract. In this case, the difference from a normal commercial agent is that the employed agent is much less independent. He will be bound to observe strict instructions given by his employer, as regards which clients to visit and, more generally, the organization of his time. Also, he will not bear the risks which are typically faced by a self-employed person (the employer will normally provide the office, a car, etc.). Employed agents will not be dealt with here. If parties wish to appoint an agent on terms and conditions that do not leave him the degree of independence typical of a self-employed agent, they should check to see whether or not the contract will be subject to the labour law of the agent’s country.

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A somewhat different situation arises where, under the applicable law, agents that would otherwise be considered to be truly self-employed commercial agents are qualified as employees by virtue of a legal presumption. Typical examples of this are the French Voyageurs Représentants Placiers (VRP) and the Belgian représentants de commerce. Laws of this type have been enacted with the purpose of protecting agents acting as individuals35 by extending to them the protection of the rules of labour law, although they are not actually employees in the sense that, without the presumption of subordination contained in the law, they would be considered as independent traders. Of course, laws that aim at protecting agents through a fictitious assimilation to employees must be considered with great caution, since an individual who would be qualified as a self-employed commercial agent under most laws may actually be qualified as an employee and thus be subject to protective rules applicable within such a framework, if that particular law is applicable.36 7.4.2.5 Commercial

agency within the national legal systems

The approach of a national legal system towards commercial agency contracts can vary enormously from country to country. The following paragraphs provide a short overview of the main approaches, it being understood that a thorough understanding of the situation under a given legal system can only be gained on the basis of an in-depth examination of the local law and case law. (a) Countries

with no special rules on commercial agency

There are still many countries in which no special rules on commercial agents exist and where the parties consequently enjoy the widest freedom in establishing the contents of their contracts. A typical example of this type of approach can be found in most common-law countries, where the general principles governing agency do not actually deal with the specific problems of commercial agency and thus leave a very flexible framework for the drafting of commercial agency contracts. However, this situation is changing: the United Kingdom has been forced to enact statutory rules on commercial agents in order to implement the European directive; in the US, many states have enacted statutory rules on so-called “sales representatives”, who are actually very similar to commercial agents (as this term is understood in Europe).

34 See, for instance, Lebanon, Saudi Arabia, Yemen. 35 With regard to companies, there is normally no rationale for arguing they are employees. 36 This is why special precautions should be taken when dealing with agents acting as individuals in countries like France or Belgium in order to make sure that they are qualified as true self-employed commercial agents and not as «VRPs» or “représentants de commerce”.

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A similar situation arises in a number of civil law countries where, in the absence of specific rules on commercial agents, reference is to be made to the general rules on agency (mandat, mandato) and commission contracts contained in the civil and commercial codes. This situation was common to many European countries before the implementation of the European directive)37 and still exists in a number of South American states (e.g. Chile, Peru, Uruguay). Where no statutory rules on commercial agency exist, the courts may have worked out some principles applying to this contract. In the absence of protective rules on selfemployed commercial agents, the courts may refer — with respect to agents acting as individuals — to the contract of employment. These situations need to be verified case-by-case on the basis of a specific national law. (b) Countries

that have enacted specific rules on commercial agency

To the extent that the recourse to commercial agents is developing in domestic as well as in international trade, more and more countries have felt the need to enact rules governing this contract. Some countries have followed a more neutral approach by establishing a set of rules that simply state the obligations of the parties without having mandatory rules aimed at protecting the agent as a weaker party.38

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Several other countries, which represent the majority of those setting out specific rules on commercial agency, do protect the agent through mandatory rules that cover the main critical aspects where there is a risk that the agent would accept unbalanced conditions when entering into the contract, such as, commission, terms of notice, goodwill indemnity, etc. This approach has mainly been followed in Europe. Other national legislations do not attempt to extensively regulate the commercial agency contract, but prefer to focus on a more limited number of issues. For example, the statutes on “sales representatives” enacted by several US states mainly concentrate on the agent’s right to a commission in case of contract termination. In several Arab countries, the main aspect covered is reserving the right to exercise the activity to citizens of the country, who must be inscribed on a special register.39 In a number of Latin American countries, the main purpose of the local law is to grant an indemnity to agents and distributors of foreign manufacturers in case of contract termination.40 (c) Relevance

of mandatory rules of the law of the agent’s country

One of the main problems in the field of international commercial agency is how to know to what extent the possible mandatory rules of the agent’s country should be considered when drafting the contract. This issue has been dealt with in general terms in Chapter 2, § 2.7. At this stage, it is sufficient to recall that the parties have a certain freedom of choice and that the exact extent of that freedom, especially the effectiveness of the choice made by the parties, depends mainly on those laws which are potentially applicable (first of all, on the law of the agent’s country) and on the jurisdiction which is to decide the case. Consequently, before drafting the agency contract the parties should inquire about the existence of mandatory rules in the law of the countries involved, and particularly in the law of the agent’s country.41

37 It should be noted that all the countries that became part of the European Union in 2004 and 2007 have implemented the European directive. 38 See for example China, and the Russian Federation. 39 See, for instance, Bahrein, Egypt, Kuweit, Saudi Arabia, Oman, Syria. 40 See, for example, Guatemala, Panama. 41 An information about the laws of almost any country in the world can be found on the website of the International Distribution Institute, www.idiproject.com.

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Directive No. 86/653 on self-employed agents

The EC Directive 86/653 of 18 December 198642 was enacted with the purpose of harmonizing the laws of the Member States of the European Community regarding independent (“self-employed”) commercial agents. The above directive (called hereafter “European directive”) has substantially influenced, and is continuing to influence, the development of commercial agency legislation in Europe43 and also outside Europe.44 Although the directive has brought only a partial harmonization of the various domestic laws (many important provisions are still governed by differing rules), it does have the merit of having established a common core of principles recognized by most legal systems within the European area. The preamble of the European directive on commercial agents indicates the following main reasons justifying its enactment: (a) to warrant

uniform conditions of competition within the European Community;

(b) to warrant

a higher level of protection to the agent in his relationship with the principal;

(c) to increase

the security of transactions by removing differences between national legislations that “inhibit substantially the conclusion and operation of commercial representation contracts where principal and agent are established in different Member States”.45

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In practice, the second objective has been the most successfully attained by increasing the level of the agent’s protection in most countries. As to the goal of removing obstacles to trade within the Community, the results are far less convincing. In fact, due to the substantial differences still remaining between the various national laws, parties to a cross-border agreement cannot trust that the legislation of two Member States to be the same and must, on the contrary, accurately check the exact wording of the national laws which may apply. Thus, a German principal wishing to appoint a French commercial agent would discover that, although the laws of these two countries are harmonized, both having implemented the directive, the agent will be entitled under French law to a termination indemnity amounting to two or three years’ commission, while under the German law the indemnity cannot exceed a maximum of one year.46 In other words, the European directive accomplishes only partial harmonization, mainly for the following reasons. (a) Some important

issues are not dealt with in the directive, leaving the Member States free to choose the solution they prefer. A striking example is the issue of del credere, i.e. the possibility to include in the contract an obligation of the agent to cover the principal’s loss in case of non-payment by a customer. Since the Member States were apparently unable to reach an agreement within the Council,47 the matter was simply left open, and Member States have still maintained substantially different rules on this important issue.

(b) In certain

cases, the Member States have been given the opportunity to choose between alternative solutions that vary substantially. An enlightening example of this approach can be found in Article 17, regarding the agent’s termination indemnity. In order to overcome the problem of choosing between the German model (i.e. an indemnity for the goodwill created by the agent and which benefits

42 The directive has been commented on by several authors. See, inter alia, Leloup, La directive européenne sur les agents commerciaux, in Semaine Juridique, 1987, Ed E, II, 491 et seq.; Crahay, La directive européenne relative aux agents commerciaux indépendants, in Droit commercial belge, 1987, 164 et seq.; De Theux, Le statut européen de l’agent commercial, Bruxelles, 1992. 43 Since the directive has been implemented by all Member States of the European Union and by several other European countries, for example Iceland and Norway. 44 A number of African countries, bound by the Ohada Treaty, have adopted legislation on commercial agency based on the European directive. 45 § 2 of the Preamble. 46 This is only the most striking difference between the two systems. 47 It should be noted that the issue was dealt with in the previous draft of the directive in 1976 OJ C 13 of 18 January 1976, 2 et seq., but was not taken up in the final text.

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the principal after termination) and the French solution (construed as a compensation for the damage the agent suffers in case of lawful termination of the agency contract), it was decided to include both systems as alternatives in Article 17.2 and, respectively, in Article 17.3. The advantage of this solution was that neither France nor Germany was forced to change its law on this point except for very minor points, but the price paid for this compromise is that there are substantial differences between these countries that have implemented the European directive. In the French “compensation” there is no maximum amount, and compensation is due for the simple reason that the agent suffers damages, while under the German system there is a “ceiling” of one year's commission, and the indemnity is due only to the extent that the agent has developed new customers and the principal can take advantage of them after the contract’s termination. (c) Furthermore,

the Member States are free to introduce solutions in their laws that are more favourable to the agent than those required under the directive.48 This means that each country’s law must be accurately checked in order to ascertain whether it contains rules more favourable to the agent.

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(d) Finally,

the directive, which deals only with “self-employed” agents, does not harmonize the criteria for distinguishing between independent and employed agents. Consequently, if a domestic law artificially expands the notion of “employed” agent, for example, by presuming, in the absence of evidence to the contrary, that the physical person exercising the activity of a commercial agent is to be qualified as an employee and subjected to the rules of labour law,49 these individuals will remain outside the scope of the directive, while in other countries individuals having the same degree of subordination will be qualified as selfemployed commercial agents, and thus fall under the law implementing the directive.

7.4.3 The ICC

Model Commercial Agency Contract (long form)

The ICC Model Commercial Agency Contract, prepared in 1991, was the first in the series of ICC model contracts that now cover almost all types of agreements in the field of distribution (the list of the ICC model forms can be found in § 7.1.1). At present, the model agency contract exists in two forms: a long form constituting a complete commercial agency contract, which is described in this paragraph, and a short form treating only the main issues, which will be examined in § 7.4.5. The text of the model was revised in 2015 in order to take into account the latest developments in the law of agency and also to harmonize it with the models devised by ICC in the following years. The following description of the model is based for the most part on the introduction to the model form, the full text of which can be found in the ICC publication No. 766. 7.4.3.1 A uniform

model form for international trade

When negotiating agency agreements abroad, one of the main difficulties faced by parties engaged in international trade is the lack of uniform rules for agreements of this type. Since there is no internationally agreed uniform legislation on the subject, unlike, for example, in the case of the international sales contracts,50 parties must rely on national laws on agency, which: (i) do not take into account the specific needs of international trade, since they have been enacted in primis for domestic agreements, and (ii) substantially differ from one country to another. An important step towards the harmonization of national laws, has been made within the European Union, in virtue of the EEC Directive n° 86/653 of 18 December 1986, which has been implemented in all Member States and has influenced the development of legislation in countries outside Europe. However, the directive does not cover all 48 This principle is expressed in the fifth paragraph of the preamble, where it is said that “it is appropriate to be guided by the principles of article 117 of the Treaty and to maintain improvements already made.” 49 See the French rules on Voyageurs, Représentants Placiers (VRP) and the Belgian rules on the so-called représentants de commerce. 50 In particular, the Vienna Convention on the International Sale of Goods of 1980 (CISG).

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aspects of the contract and leaves the Member States free to choose, with regard to several matters, between alternative solutions. Moreover, it leaves Member States free to maintain, or possibly adopt in the future, provisions that derogate the directive in favour of the agent. This means that even within the European Union, there are still important differences between national laws on commercial agency. If we consider the rest of the world, the differences are much greater. For the above reasons, ICC believes that there is space for an alternative solution, consisting in the use of uniform contractual rules, not based on any specific national law, but incorporating the prevailing practice in international trade, as well as the principles generally recognized by the domestic laws on agency. In preparing this model form, the working group has tried to find fair and balanced solutions to the main problems arising from an agency relationship, in accordance with prevailing legislative standards, and in particular those indicated in the European directive. However, since it is impossible to make uniform rules and, at the same time, to respect every rule of the various national laws, which may contradict each other, the model form may contain some clauses which are not in accordance with the specific mandatory provisions of a particular legal system. However, since it is in line with the basic principles of domestic agency laws, the risk of conflict with national ordre public provisions — and in particular with domestic rules which would remain applicable whatever the law applicable to the contract — should be almost non-existent. In any event, in order to cover exceptional situations of this kind, it is expressly stated that, if a conflict with ordre public rules of the country of the agent arises, the latter provisions should be considered, if their application appears reasonable in the context of international trade (Article 24.2).

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7.4.3.2 The

governing law

The model contract has been based on the assumption that it will not be governed by a specific national law, but only by the provisions of the contract itself and the principles of law generally recognized in international trade as applicable to agency contracts (also called lex mercatoria). The purpose of this solution is to ensure that the rules of this model form can be applied in a uniform way to principals and agents from different countries, without the interference of national laws, which may differ on a number of points of detail,51 and without giving one party the advantage and the other party the disadvantage of applying that party’s national law. Of course, this solution, while avoiding the particularities of national laws, implies — at least for matters not expressly governed by the contract clauses — the recourse to less precise and predictable rules than those contained in the domestic laws on agency, although not all countries have detailed rules on commercial agency contracts. The drafting group is of the opinion that this can be overcome by making a reference to the UNIDROIT Principles of International Commercial Contracts, which offer a reasonably foreseeable legal framework for most issues that may arise. In fact, the UNIDROIT Principles offer adequate solutions to the majority of contractual problems of a more general nature (e.g. formation of contract, validity, performance, non-performance, damages, etc.). Only in some very exceptional cases, may the provisions of the UNIDROIT Principles not actually reflect the expectations of international trade.52 However, when this happens the general principles of international trade and the trade usages will prevail over the particular provisions of the UNIDROIT Principles on the basis of Article 24.1A, which puts the various sources incorporated by reference in the following hierarchical order: contract clauses, general

51 However, in particular cases, mandatory rules of the law of the agent’s country may be held to be applicable by the courts of such country, notwithstanding the choice to submit the contract exclusively to general principles. 52 This may be the case with respect to certain rules which protect the disadvantaged party to an extent that goes beyond the usual standards in business-to-business relations: see for instance, Article 3.2.7 on gross disparity (particularly as concerns the end of the sentence in para 1(a), where reference is made to “the improvidence, ignorance, inexperience or lack of bargaining skill” of a party in order to justify contract avoidance) and the rules on hardship contained in Articles 6.2.1–6.2.3 (particularly with regard to the rule authorizing courts to modify the contract terms). Parties may also expressly exclude the application of specific rules they consider inappropriate.

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principles of law, trade usages, UNIDROIT Principles. This also implies that, even when the UNIDROIT Principles provide that certain rules are mandatory, the Principles will not prevail over the contractual clauses, general principles of law or trade usages. In any case, if the parties wish to have their contract governed by a specific national law, they can use the alternative set forth in Article 24.2B. In such a case, they should carefully check if this model form conforms to all provisions and/or judicial precedents of the national law they have chosen.53 The alternative national law is preferable if the parties submit the contract to the jurisdiction of ordinary courts (see Article 23) instead of arbitration. 7.4.3.3 The

EU rules on competition

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On 20 April 2010, the European Commission enacted Regulation No. 330/2010, which came into force on the 1 June 2010 and which replaces Regulation No. 2790/1999. Such regulation exempts certain vertical agreements from the prohibition of Article 101 of the Treaty on the Functioning of the European Union (TFEU) . As a general rule, agency agreements do not fall under the prohibition of Article 101 of the TFEU, because they are not considered to constitute an agreement between independent undertakings for the purpose of Article 101. Only in special cases where the agent bears risk or costs relating to the sale of the goods which would normally be for the principal (e.g. advertising, transportation, repair and assistance of products, stock of products and/or spare parts), may Article 101 apply, and the parties will have to check if the contract conforms to Regulation No. 330/2010.54 Under this regulation, the agent must have the right to accept non-solicited orders from customers outside the contractual territory. He must be free to grant price reductions on his own commission. A possible non-competition clause (prohibition to promote products of the principal’s competitors) should not last more than five years and should not, in any case, apply after contract termination. Since situations where contracts with commercial agents fall under Article 101 are rather exceptional, this model contract does not contain clauses specifically drafted to meet this situation. If parties think that their agency contract might fall under Article 101, they should seek expert advice on drafting the appropriate clauses. 7.4.3.4 Sales

through the Internet

Since e-commerce has opened new possibilities for marketing products, the working party decided to deal with the issue of whether and to what extent sales made by the principal through his website should fall under the exclusivity, by adding a new clause, 13.5 and by retaining Article 6.5 on limits on agent’s right to sell on the Internet. The issue is not simple, since situations where the principal sells through his website may be very different. In some cases (e.g. for products sold directly to professional users, such as machine tools), the principal will reach exactly the same customers through the Internet as those contacted by the agent. In other cases, the Internet will be a means to promote the products to new customers not within the agent’s reach. For example, a wine producer sells to consumers through a website, while an agent promotes sales to wine shops, restaurants, wholesalers, etc. While the first situation implies that the principal is making direct sales to the same market as the agent — and it appears therefore appropriate to warrant the agent full commission on such sales — in the second case, the principal is opening a new distribution channel and it may therefore be reasonable not to offer the agent a commission on such sales, provided the Internet sales do not interfere with the agent’s activity.

53

In any case, even if no choice of a national law has been made, according to Article 23.3 the mandatory rules of the agent’s country which would be applicable independently from the applicable law (the so-called lois de police) must be considered.

54 For further details, see paragraphs 12-21 of the Guidelines on Vertical Restraints of the European Commission.

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It is for this reason that the working party decided to have two alternative solutions, respectively Articles 13.5A and 13.5B. Parties are invited to use alternative B only in cases where sales through the Internet do not appreciably interfere with the agent’s activity. 7.4.3.5 The

provisions on indemnity

Provisions in a certain number of countries grant the agent an indemnity if the contract expires or is terminated for reasons other than a default attributable to the agent. Such “indemnity” may be construed as a compensation for goodwill created by the agent and which accrues to the principal after the end of the contract, or as a compensation for the loss suffered by the agent (e.g. loss of the commissions he would have earned had the contract lasted for a longer period or the investments he would have amortized if the contract had not been terminated) as a consequence of the expiration or termination of the contract. These two solutions are incorporated (as alternatives) in Articles 17.2 and 17.3. of the EC directive. In fact, they have the same purpose, to compensate the agent for the loss of goodwill when the contract is terminated without his fault. Hereafter the above indemnity or compensation will be referred to as “goodwill indemnity”. On the other hand, many countries do not foresee any right to a goodwill indemnity in favour of the agent.55 Under these conditions, it appears appropriate to give the parties the opportunity to choose whether or not they wish to include the indemnity provision in their contract. For this purpose, Article 21 provides two alternatives (A and B) to cover the different situations.

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It is strongly recommended to choose alternative A whenever the right to indemnity is recognized by the law of the agent’s country. In particular, as concerns EU countries alternative B of Article 21 would conflict with mandatory rules of the legislation of the agent’s place of business. It should be noted that the European Court of Justice has ruled that when the agent performs his contractual activity within the European Union the rules on indemnity of the directive must apply even if the parties have submitted the contract to the law of a non-EU country.56 Furthermore, even in cases in which the legislation of the agent’s country has no rules on indemnity, it may be fair to grant indemnity to the agent, particularly if this conforms with international trading practice in that particular business and/or area. As concerns the system of indemnification, the model form has incorporated the principles contained in Article 17.2 of the EC directive, i.e. the “German” system, which appears to prevail in the countries that recognize the indemnity.57 7.4.3.6 Resolution

of disputes

(a) Arbitration

Since the model form is a set of uniform contractual rules avoiding, as far as possible, the direct application of conflicting domestic legislations, it is appropriate that possible disputes be solved by a uniform resolution system organized on an international level. From this point of view, the most appropriate solution appears to be international commercial arbitration (see particularly Article 23.2 A), and this is the reason why in Article 23.2 arbitration is the “default solution” which applies automatically if the parties make no choice (see Article 25.1). However, recourse to arbitration is not recommended in cases where the dispute may be considered as non-arbitrable (i.e. “not capable of settlement by arbitration”) 55

For example, this is the case in most common law countries with the exception of Great Britain, which introduced the indemnity in order to implement the EC directive of 1986, and in general in countries where no statutory rules protecting the agent exist. This does not exclude the fact that the agent may be entitled to compensation for damages suffered as a consequence of a contract termination which amounts to a breach of the contract by the principal.

56 See Court of Justice, judgment of 9 November 2000, case C-381/98, Ingmar GB Ltd v Eaton Leonard Technologies. 57

This means that the indemnity system of the model form is not in strict compliance with the laws of those countries like France which follow the alternative solution set forth in Article 17.3 of the EC directive. However, since the model form meets the requirements of the EC directive, it is unlikely that the non-compliance with a specific solution of a law based on the same directive should give rise to problems.

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according to the New York Convention of 1958. The above risk exists in particular under national laws which assimilate agents to employees (see § 7.2.), whenever this implies a special jurisdiction for disputes of this type.58 In these situations, it is advisable to contract with agents who are legal persons (see § 7.2), or to choose other solutions for the resolution of disputes, e.g. by submitting possible disputes to national courts (see § 6.2). (b) Jurisdiction

of national courts

Under Article 23.2 B, the parties may choose to submit possible disputes to the national courts indicated in this clause. When choosing this alternative, parties must check whether the choice of forum clause is effective in the countries involved. (c) ADR/Mediation

It may be advisable to try to solve the dispute without litigation through recourse to Mediation, a procedure aimed at facilitating an amicable settlement of the controversy. In fact, a qualified mediator will often be able to help the parties agree on a settlement, thus avoiding the recourse to arbitration or courts. Under Article 23.1, each party may propose to the other party to proceed to mediation under the ICC Mediation Rules but such request is without prejudice to the proceedings under Article 23.2. This means that mediation is optional and in no way limits the parties’ right to have recourse to arbitration or national courts, according to the choice made under Article 23.2.

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If the parties wish that mediation should be obligatory, i.e. that parties should be bound to submit the dispute to settlement proceedings before starting arbitration or submitting the dispute to courts, they should modify Article 23.1 appropriately.59 7.4.3.7 Scope

of application

This model form was prepared on the assumption that it would apply only to international agency agreements, with self-employed commercial agents acting for the sale of goods. (a) International

agreements

In this respect, it is undisputable that international agency contracts should be governed by special rules in order to take into account the special situation existing in an agency agreement between parties from two different countries. Since the present model form was established especially for these situations, it will, in principle, not be appropriate for domestic contracts, i.e. contracts between parties having their place of business in the same country. The parties are therefore advised not to use this model form for domestic contracts unless they check which amendments are necessary in order to comply with a local situation. (b) Contracts

with employed agents

In several countries, special rules govern contracts with agents qualified as employees,60 or more generally with agents assimilated to the status of employees.61

58 E.g. for V.R.P. (France) and Représentants de commerce (Belgium) or for agents acting mainly with personal resources (Italy). In all of these cases, the national law provides an exclusive jurisdiction specialized in labour disputes which cannot be excluded by an arbitration clause. 59 See, for example, the clauses suggested in the ICC ADR Rules (Publication No. 809). 60 E.g. in France, with regard to VRP (voyageurs, représentants placiers), and in Belgium for représentants de commerce. The above rules establish a presumption that the agent is an employee: thus, even if the contract clearly states that the agent is independent, he will, in principle, be considered to be an employee. In the Netherlands, labour law may apply to the so-called Einfirmenvertreter, i.e. agents which represent only one principal. 61 E.g. in Italy the special procedural rules, that exclude inter alia recourse to arbitration, which govern employment contracts also apply to agency contracts in all cases where the agent has no important organization of his own, but is acting mainly with his own family and personal resources.

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In these countries, there is a risk the agent may be qualified, independently of the definition given in the contract, as an employee and that consequently the rules applicable to employed agents which will, in many cases, conflict with the provisions of this model form, will apply. A simple way to avoid such problems, particularly in the context of this model form, could be to contract with agents who are legal persons (e.g. companies).62 This solution is especially recommended when the agent is established in a country where a broad notion of employed agents, or agents assimilated to employed agents, is accepted by the law or jurisprudence. (c) Buying

agents

This model is meant for agents who represent a seller of goods, without taking into account so-called “buying agents”, i.e. agents who promote the purchase of goods, acting for the buyer. (d) “Service”

agents

The model form is intended for the most common case of agents selling goods, and could need adaptation should it be applied to agents concerned with the promotion of services. (e) Consignment

of the goods

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It frequently occurs that the principal wishes to appoint the agent as consignee of a stock of goods or spare parts placed in the agent’s country. However, this involves a number of special problems that should be dealt with in a separate contract. Consequently, the problems connected with consignment of goods have not been considered in this model form. 7.4.3.8 Precautions

for use of the model form

Any model contract should, to the extent possible, be adapted to the circumstances of a specific case. Of course, in theory the best solution consists in drafting an individual contract based on existing model forms in order to take account of all the specific requirements of the parties. However, the parties are often not in a position to prepare a specific contract and prefer to have recourse to a ready-to-use balanced model form. In this case, they will ask for a model that can be used as it stands, without any need to make modifications or additions. The present model is an attempt to achieve a balance between these two possibilities. ICC has tried to work out a single solution on every issue. However, where this has not been possible (see e.g. Articles 8, 13, 18, 21, 23, 24 and 29), alternatives have been suggested. Such alternative solutions are presented side-by-side under the letters A and B, in order to underline that only one of them can apply. Therefore, before signing the contract, the parties must decide which of the alternative solutions they wish to choose, and then cancel the alternative they do not want to apply. In any event, the model form provides that, if the parties do not make a choice by cancelling one alternative, one of them will automatically apply according to Articles 25.1 and 25.2 of the model form. There are also a number of points on which the parties must fill in their requirements: definition of the territory and the products, amount of commission, etc. All such points have been put in the annexes to this document so that the parties can fill in and, where necessary, modify the annexes during the life of the contract without making changes to its basic text. Before signing the contract, the parties should (and must, as far as Annex V is concerned) fill in the Annexes and, if appropriate, delete the parts they do not need. 62 Since it is normally admitted that a legal entity cannot, by definition, be considered as an employee.

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 THE ICC MODEL FORMS

In order to avoid misunderstandings, the parties should, when signing the contract, put their initials on each page of the contract and of the Annexes, in order to make sure which amendments they have agreed upon or which alternative solutions they have chosen. The Annexes have been construed throughout (except for Annex V regarding commission) so that even when the parties do not fill in some points, a solution can be found within the contract. 7.4.4 Text

of the ICC Model Commercial Agency Contract (long form)

MODEL FORM OF INTERNATIONAL AGENCY CONTRACT

Between

. . . . . . . . . . ........................................................................................................................................................

w h os e re gi ste re d o f f i ce i s at .............................................................................................................. (h e re inaf te r c al l e d “the   P ri nci pal ”) Le ga l fo rm............................................................................................................................................... 





Re g i strati o n No ......................................................................................................................................

and

. . . . . . . . . . ........................................................................................................................................................

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w h os e re gi ste re d o f f i ce i s at .............................................................................................................. (h e re inaf te r c al l e d “the Age n t”) Le ga l fo rm............................................................................................................................................... Re g i strati o n No ...................................................................................................................................... IT IS AGREED AS FOLLOWS Article 1 Scope 1.1 The

of contract: Territory, Products and customers63

Principal appoints the Agent, who accepts, as its commercial agent, to promote the sale of the products listed in Annex I, § 1 (hereinafter called “the Products”) in the territory defined in Annex I, § 2 (hereinafter called “the Territory”) to the customers (hereinafter called “Contractual Customers”), as defined in Annex 1, § 3.

1.2 Contractual

Customers are all customers, except the Excluded Customers (if any) listed in Annex 1, § 3.

1.3 If the

Principal decides to sell any other products in the Territory, it shall inform the Agent in order to discuss the possibility of including them within the Products defined under Article 1.1. However, the above obligation to inform the Agent does not apply if, in consideration of the characteristics of the new products and the specialization of the Agent, it is not to be expected that such products may be represented by the Agent (e.g. products of a completely different range).

63 Parties may wish to limit the scope of the contract to certain categories of customers, brands of products and/or product lines. In this case they should exactly define the group of customers for which the agent is appointed and the brand is positioned to make sure that there is no overlap with other distribution channels (direct sales, agents or distributors). It should also be taken into account that limiting the scope of the contract to certain categories of customers will reflect on other clauses, like for example Article 13 (Exclusivity) and Article 15.1 (Commission) which need to be modified appropriately.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 2 Good

faith and fair dealing

2.1 In carrying

out their obligations under this contract the parties will act in accordance with good faith and fair dealing.

2.2 The

provisions of this contract, as well as any statements made by the parties in connection with this agency relationship, shall be interpreted in good faith.

Article 3 Agent’s 3.1 The

functions

Agent agrees to use its best endeavours to promote the sale of the Products in the Territory in accordance with the Principal’s reasonable instructions and shall protect the Principal’s interests with the diligence of a responsible businessperson.

3.2 The

Agent shall not solicit orders from customers established outside the Territory unless permitted to do so by the Principal. Where the Agent solicits orders from customers in the Territory which results in contracts of sale with customers established outside the Territory,64 Article 15.2 shall apply.

3.3 Unless

otherwise specifically agreed, the Agent has no authority to make contracts on behalf of, or in any way to bind the Principal towards third parties.65 The Agent only solicits orders from customers for the Principal, who is free (save as set forth in Article 4.2 hereafter) to accept or to reject them.66

3.4 When

dealing with customers, the Agent shall offer Products strictly in accordance with the terms and conditions of the contract of sale which the Principal has communicated to it.67 Agent is not entitled to receive payments on the Principal’s behalf without prior written authorization from the Principal to that effect. When the Agent has been so authorized, it must transmit them as soon as possible to the Principal and until then hold them separately on deposit on the Principal’s behalf.68

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3.5 The

Article 4 Acceptance 4.1 The

of orders by the Principal

Principal shall inform the Agent without undue delay of its acceptance or rejection of the orders transmitted by the latter. The Principal may accept or reject any individual order transmitted by the Agent at its own discretion.

4.2 The

Principal may not however unreasonably reject the orders transmitted by the Agent. In particular, a repeated refusal of orders contrary to good faith (e.g. if made for the only purpose of hindering the Agent’s activity) shall be considered as a breach of contract by the Principal.

Article 5 Undertaking 5.1 Without

not to compete69

the prior written authorization of the Principal, the Agent shall not, directly or indirectly, represent, manufacture or distribute any products which are in competition with the Products, for the entire term of this contract.

64 E.g. for goods to be sold to a subsidiary established in another country: the agent is acting within its territory, but the sale is made to a foreign customer, and the agent would have (in absence of Article 15.2.) no right to commission. 65 The other alternative, i.e. to give the agent the authority to conclude contracts on behalf of the principal, has not been considered in the model form, since it is uncom­mon in interna­tional trade. If the parties have special reasons for permitting the agent to make contracts on be­half of the principal, they can however so provide in Article 3.3. 66 It should be noted that in certain cases the third party (customer) may rely on the apparent authority of the agent: this means that, especially in legal systems where it is com­mon that the agent is authorized to act on behalf of the principal, the exclusion of any such authority provided for in the con­tract between principal and agent (like Article 3.3 of this model form) does not necessarily bind a third party which had good reasons to rely on the apparent authority of the agent. It is, therefore, recom­mended that the principal avoids any action which may give third parties the impression that the agent has representative pow­ers, and that it informs, if necessary and possible, third parties that the agent has no authority to bind the principal. 67

This is to ensure that orders by the cus­tomers conform to the Principal’s terms and conditions (e.g. prices, delivery terms, etc.): if this is not the case, the principal will be in an embarassing situation (at least from a commercial point of view) if it refuses the order.

68 Parties should clarify whether this is an extra service that entitles the Agent to additional commission. 69 This clause only refers to the non-competition obligation during the contract. A clause whereby the agent agrees not to promote or represent competing products after contract termination is not very common in international trade and has therefore not been included in this model, which of course does not prevent parties from doing otherwise. In this case, however, they should consider possible limitations under the applicable laws. So, for instance, Article 20 of the EEC Directive states that the postcontractual non-competition undertaking cannot exceed two years and must be limited to the territory, products, etc. covered by the agent; moreover, in some countries there are stricter limitations, and in certain cases the agent is entitled to a special compensation if it undertakes a non-competition obligation for the period after contract termination. For possible problems of conformity with EU antitrust rules, see Introduction, § 4.

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 THE ICC MODEL FORMS 5.2 The

Agent may represent, distribute or manufacture any products which are not competing with the Products, provided the Agent informs the Principal in advance of such activity. However, the above obligation to inform the Principal does not apply if, in consideration: (i) of the characteristics of the products which the Agent wants to represent, and (ii) of the field of activity of the Principal for whom the Agent wishes to act, it is unreasonable to expect that the Principal’s interests may be affected.

5.3 The

Agent shall refrain from representing or distributing non-competing products of a manufacturer who is a competitor of the Principal, if requested to do so by the Principal, provided the latter’s request is reasonable, taking into account all the circumstances of the case.70

5.4 The

Agent declares that it represents (and/or distributes or manufactures, directly or indirectly) the products listed in Annex II on the date on which this contract is signed.

Article 6 Sales 6.1 The

organization, advertising and fairs, the Internet

Agent shall provide an adequate organization to promote sales and, where appropriate, after-sale service, with all necessary means and personnel, in order to ensure the fulfilment of its obliga­tions throughout the Territory under this contract.

6.2 The

Agent agrees to accept any reasonable invitation of the Principal to discuss, develop, imple­ment, evaluate and when applicable amend a marketing and advertising strategy for the Territory.

6.3 The

parties may agree on the advertising and other marketing activities to be made in the Territory. The contents of any advertising must be approved by the Principal. The cost of advertising carried out by the Agent shall be apportioned between the parties as indicated in Annex III, § 1.

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6.4 The

parties shall agree on their participation in fairs, exhibitions within the Territory. The cost of the Agent’s participation in such promotional activities shall be apportioned between the parties as indicated in Annex III, § 2.71

6.5 The

Agent is not authorized to advertise the Products or its activity as Agent of the Principal on the Internet without the Principal’s prior written approval.

Article 7 Sales 7.1 The

targets — Guaranteed Minimum Target72

parties may agree annually on the sales targets for the forthcoming year.

7.2 The

parties shall make their best efforts to attain the targets agreed upon, but the non-attainment shall not be considered as a breach of the contract by a party, unless that party is clearly at fault.

7.3 In Annex

IV the parties may agree on a Guaranteed Minimum Target and on the consequences of its non-attainment.

Article 8 Sub-agents73

A

B

The Agent may engage sub-agents, provided he informs the Principal at least one month before the engagement.

The Agent must carry out its activity without recourse to sub-agents.

The Agent shall be responsible for the activities of its sub-agents.

70 E.g. if there are reasons to fear that the collaboration with a competitor may impair the confidence between the parties or the protection of confidential information. 71 If advertising is at the agent’s charge, there may be a risk that the contract may be considered as a distributorship agreement with regard to antitrust rules, see Introduction, § 3. 72 A distinction is made between a “sales target” (Articles 7.1., 7.2.) the non-attainment of which does not, in principle, involve a contract breach, and a “guaranteed minimum target” (Article 7.3.), which im­plies a possi­ble contract termination (or other consequences) in case of non-attainment. If the parties wish to agree upon such “guaranteed minimum target”, they must fill in Annex IV. 73 In certain circumstances it may be advisable to add a clause providing that each party agrees not engage sub-agents and/or ­employees of the other party.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 9 Principal 9.1 The

to be kept informed

Agent shall exercise due diligence to keep the Principal informed about its activities, market conditions and the state of competition within the Territory. It shall answer any reasonable request for information made by the Principal.74

9.2 The

Agent shall exercise due diligence to keep the Principal informed about: (i) the laws and regulations which are to apply in the Territory to which the Products must conform (e.g. import regulations, labelling, technical specifications, safety requirements, etc.), and (ii) the laws and regulations concerning its activity, as far as they are relevant for the Prin­cipal.

Article 10 Financial

responsibility

The Agent shall satisfy itself, with due diligence, of the solvency of customers whose orders it transmits to the Principal. The Agent shall not transmit orders from customers of which it knows or ought to know that they are in a critical or difficult financial position, without informing the Principal in advance of such fact. The Agent shall, furthermore, give reasonable assistance to the Principal in recovering debts due. Article 11 Principal’s 11.1 The

trademarks, trade names and symbols

Agent shall use the Principal’s trademarks, trade names and symbols, but only for the purpose of identifying and advertising the Products, within the scope of this contract, in the Principal’s sole interest.

11.2 The

Agent shall not register nor have registered on its behalf any trademarks, trade names, or symbols of the Principal (or which are confusingly similar with the Principal’s), or use such as domain names or metatags, in the Territory or elsewhere.75

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11.3 The

right to use the Principal’s trademarks, trade names and symbols, as provided for under the first paragraph of this Article, shall cease immediately for the Agent, on the expiration or termination, for any reason, of the present contract.

11.4 The

Agent shall notify the Principal of any infringement of the Principal’s trademarks, trade names and symbols that comes to its attention.

Article 12 Complaints

by customers

The Agent shall immediately inform the Principal of any observations or complaints received from customers in respect of the Products. The parties hereto shall deal promptly and properly with such complaints. The Agent has no authority to engage in any way the Principal, unless after the Agent has received a specific written authorization to such effect. Article 13 Exclusivity 13.1 The

Principal shall not, during the life of this contract, grant any other person or undertaking within the Territory the right to represent or distribute the Products to the Contractual Customers.

13.2 The

Principal is however entitled to deal directly, without the Agent’s intervention (provided the Principal informs the latter) with customers situated in the Territory; in respect of any sales arising therefrom, the Agent shall be entitled to the commission provided for in this contract, unless provided otherwise in Article 13.5.

13.3 The

Principal shall be entitled to deal di­rectly with the special customers listed in Annex V, § 2; in respect of the sales to such customers the Agent shall be entitled to the reduced commission or to no commission, if the parties so agree, as provided for in Annex V, § 2. Paragraph 13.3. shall not apply if § 2 of Annex V (Special customers/ Reduced commission) has not been filled in by the parties.

13.4 Parties

may agree on a possible withdrawal by the Principal of certain Contractual Customers from the exclusivity in consideration of an equitable compensation in conformity with Article 21 to the Agent.

74 The parties may agree in an annex on the kind and form of information to be provided. 75 It is of course preferable that the principal registers its trademarks in the agent’s country. However if this is not possible (or too expensive), it is in any case important to provide an express prohibition, since under most trademark laws a registration made in breach of an express agreement may be invalidated. Moreover the prohibition also covers trademarks which are confusingly similar.

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 THE ICC MODEL FORMS

13.5.A 

13.5.B 

The Principal is entitled to promote and sell the Products through its website (if any). Unless otherwise agreed in writing, the Agent will be entitled to commission at the rate set out in § 2 of Annex V with respect to sales made by the Principal through the Internet to Contractual Customers established in the Territory.

The Principal is entitled to promote and sell the Products through its website (if any). Unless otherwise agreed in writing, no commission will be due to the Agent with respect to such sales. The Principal will take reasonable precautions in order to reduce interference of its promotion through the Internet with the Agent's activity.

Article 14 Agent 14.1 The

to be kept informed

Principal shall provide the Agent with all necessary written information relating to the Products (such as price lists, brochures, etc.) as well as with the information needed by the Agent for carrying out its obligations under the contract.

14.2 The

Principal shall furthermore inform the Agent without undue delay of its acceptance, refusal and/or non-execution of any business transmitted by the Agent.

14.3 The

Principal shall keep the Agent informed of any relevant communication with customers in the Territory.

14.4 If the

Principal expects that its capacity of supply will be significantly lower than that which the Agent could normally expect, it will inform the Agent within a reasonable time.

Article 15 Agent’s

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15.1 The

commission

Agent is entitled to the commission provided for in Annex V, § 1, on all sales of the Products which are made during the life of this contract to customers established in the Territory.

15.2 If the

Agent, when dealing with customers established in the Territory, secures orders resulting in contracts of sale with customers established outside the Territory, and if the Principal accepts such orders, the Agent shall be entitled to receive a reduced commission, the amount of which shall be decided on a case-by-case basis. Similarly, the Agent’s commission shall be reduced when another agent solicits orders with customers established outside the Territory resulting in contracts of sale with customers established within the Territory.

15.3 A reduced

commission may be agreed in advance between the Principal and the Agent in appropriate circumstances where a Contractual Customer is to be granted terms or conditions which are more favourable than the Principal’s standard conditions, with respect to special customers (Annex V, § 2) or in case of discounts granted under Annex V, § 3. If the parties have filled in § 3 of Annex V, the figures indicated therein shall apply in the respective situations.

15.4 Unless

otherwise agreed in writing, the commission covers any expenses incurred by the Agent in fulfilling its obligations under this con­tract (such as telephone, office, travel expenses, etc.).

Article 16 Method

of calculating commission and payment

16.1 Commission

shall be calculated on the EXW Incoterms® rule reference value, irrespective of the Incoterms® rule chosen in the contract of sale.76

16.2 The

Agent shall acquire the right to commission after full payment by the customers of the invoiced price. In case of partial payment made in compliance with the sales contract, the Agent shall be entitled to a proportional payment.

16.3 The

Principal shall provide the Agent with a statement of the commissions due in respect of each quarter and shall set out all the business in respect of which such commission is payable. The commission shall be paid not later than the last day of the month following the relevant quarter.

16.4 The

Agent is entitled to receive all the information, and in particular extracts from the Principal’s books, necessary to check the amount of the commission due to it. The

76 Please note that ICC does not recommend the Incoterms® rule EXW as the selected trade term for international sales.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Principal shall permit an independent auditor appointed for that purpose by the Agent to inspect the Principal’s books for the purpose of checking the data relevant for the calculation of the Agent’s commission. The costs of such inspection shall be borne by the Agent. The Principal shall reimburse the costs of such inspection should the inspection prove the statements provided by the Principal in 16.3 to be incorrect. 16.5 Should

any governmental authorization (e.g. due to exchange control regulations in the Principal’s country) be necessary for the Principal to transfer abroad the commission (or of any other sum the Agent may be entitled to receive), then the payment of the amount shall be made after such authorization has been given. The Principal shall take all necessary steps for obtaining the above authorizations.

16.6 Except

as otherwise agreed, the commission shall be calculated in the currency of the sales contract in respect of which the commission is due.

Article 17 Unconcluded 17.1 No

business

commission shall be due in respect of offers or orders transmitted by the Agent and not accepted by the Principal.

17.2 If a

contract made by the Principal as a result of orders transmitted by the Agent is not thereafter put into effect, the Agent shall be entitled to commission unless nonperformance of the contract is due to reasons for which the Principal is not responsible.

Article 18 Term

of the Contract

A

B

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18.1 This contract is concluded for an

indefinite period and enters into force on

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18.2 This contract may be terminated by

either party by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than four months in advance. If the contract has lasted for more than five years, the period of notice will be of six months. The end of the period of notice must coincide with the end of a calendar month. The parties may agree in writing on longer periods of notice.

18.1 This contract enters into force on



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and shall remain in force until

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18.2 This contract shall be automatically

renewed for successive periods of one year, unless terminated by either party by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than three months before the date of expiry. If the contract has lasted for more than five years, the period of notice will be of six months. The parties may agree in writing on longer periods of notice.

18.3 During

the notice period the parties will act loyally towards each other and in accordance with the principles in Article 2 and Article 28.

Article 19 Unfinished 19.1 Orders

business

transmitted by the Agent or received by the Principal from customers established in the Territory before the expiry or termination of this contract and which result in the conclusion of a contract of sale not more than six months after such expiration, shall entitle the Agent to commission.

19.2 No

commission is due to the Agent for contracts of sale made on the basis of orders received after the expiry or termination of this contract, save if such transaction is mainly attributable to the Agent’s efforts during the period covered by the agency contract and if the contract was entered into within a reasonable period after the expiry or termination of this contract. The Agent must however inform the Principal in writing, before the expiry or termination of this contract, of the pending negotiations which may give rise to commission under this paragraph.

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 THE ICC MODEL FORMS Article 20 Earlier 20.1 Each

termination77

party may terminate this contract with immediate effect, by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), in case of a substantial breach by the other party of the obligations arising out of the contract, or in case of exceptional circumstances justifying the earlier termination.

20.2 Any

failure by a party to carry out all or part of its obligations under the contract resulting in such detriment to the other party as to substantially deprive it of what it is entitled to expect under the contract, shall be considered as a substantial breach for the purpose of Article 20.1 above. Circumstances in which it would be unreasonable to require the terminating party to continue to be bound by this contract, shall be considered as exceptional circumstances for the purpose of Article 20.1 above.

20.3 The

parties hereby agree that the violation of the provisions under Articles ………………78 of the present contract is to be considered in principle, unless the contrary is proved, as a substantial breach of the contract. Moreover, any violation of the contractual obligations may be considered as a substantial breach, if such violation is repeated notwithstanding a request by the other party to fulfil the contract obligations.

20.4 If the

parties have filled in Annex VI, the contract may also be terminated by the Principal with immediate effect in case of change of control, ownership and or management of the agent-company, according to the provisions set forth in Annex VI.

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20.5 If a

party terminates the contract according to this Article, but it is thereafter ascertained that the reasons put forward by that party did not justify the earlier termination, the termination will be effective, but the other party will be entitled to damages for the unjustified earlier termination. Such damages will be equal to the average commission for the period the contract would have lasted in case of normal termination, unless the damaged party proves that the actual damage is higher (or, respectively, the party having terminated the contract proves that the actual damage is lower). The above damages are in addition to the indemnity which may be due under Article 21.

77 Principals should seek legal advice to verify whether a contract ruled by the law of the country of the agent allows contract termination for cause. The parties may make reference in Article 20.3 to those articles for which a breach is of particular importance. This may be the case for Articles 5 (non competition), 7.3 (guaranteed minimum target: if agreed),11.2 (unauthorized registration of the principal’s trademarks by the agent), 13.1 (grant of exclusivity by the principal) and 15.1 (payment of commission to the agent). It is recommended that the use of Article 20.3 should be limited to essential situations only. 78 The parties may make reference here to those articles for which a breach is of particular importance. This may be the case for Articles 5 (non competition), 7.3 (guaranteed minimum target: if agreed),11.2 (unauthorized registration of the principal’s trademarks by the agent), 13.1 (grant of exclusivity by the principal) and 15.1 (payment of commission to the agent). It is recommended that the use of this article should be limited to essential situations only.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 21 Indemnity

in case of termination79 8081

A

B82 

21.1 The Agent shall be entitled to an

indemnity (“goodwill indemnity”) if and to the extent that: a) it has brought the Principal new

customers or has significantly increased the volume of business with existing customers and the Principal continues to derive substantial benefits from the business with such customers, and b) the payment of this indemnity is

21.1 The Agent shall not be entitled to an

indemnity for goodwill or similar compensation83 (“goodwill indemnity”) in case of termination of the contract. This provision does not limit the Agent’s right to claim damages for breach of contract as far as the termination by the Principal amounts to such a breach, and is not already covered by Article 20.

equitable having regard to all the circumstances and, in particular, the commission lost by the Agent on the business transacted with such customers. 21.2 The amount of the indemnity shall not

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exceed a figure equivalent to an indemnity for one year calculated from the Agent’s average annual remuneration over the preceding five years and, if the contract lasted for less than five years, the indemnity shall be calculated on the average for the period in question. 21.3 The Agent will lose the right to

indemnity if it does not request the indemnity in writing within one year from contract termination.

79 Principals should consider that in many agency contracts the agent assumes all the costs and risks of developing the market. Only after this investment has resulted in actual turnover, the agent will be rewarded and a commission will become due. Contractual clauses (or a choice of law) that allow the principal to terminate the agency agreement unilaterally without notification nor indemnity, thus appropriating the return on the investment of the agent, will often not be considered valid. 80 In some countries, such as EU countries which have adopted the EC Directive or other countries with similar mandatory rules, alternative B would violate mandatory requirements. 81 This broad definition is meant to cover any compensation to be paid in case of contract termination independent from a breach of contract by the principal, including payments which are not defined as an “indemnity”, or “goodwill indemnity”; see above, § 5 of the Introduction.

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 THE ICC MODEL FORMS 21.4 The Agent shall have no right to

indemnity in the following cases: a) where the Principal has terminated the

contract according to the conditions set out in Article 20; b) where the Agent has terminated the

contract, unless the termination is justified under Article 20 or on grounds of age, infirmity or illness in consequence of which the Agent cannot reasonably be required to continue its activities; c) where, in accordance with Article 27.2,

the Agent assigns its rights and duties under the agency contract to another person. 21.5 The goodwill indemnity provided for

under this Article is in lieu of any compensation for loss or damage arising out of the contract expiration or termination (except damages for breach of contract).

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Article 22 Return

of documents and samples

Upon expiry of this contract the Agent shall return to the Principal all advertising material and other documents and samples which have been supplied to it by the Principal and are in the Agent’s possession. Article 23 Resolution 23.1 The

of disputes

parties may at any time, without prejudice to Article 23.2, seek to settle any dispute arising out of or in connection with this agency contract in accordance with the ICC Mediation Rules.82 8384 23.2.A  Arbitration

23.2.B  Litigation (ordinary courts)86

All disputes arising out of or in connection with the present agency contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.85

In case of dispute the courts of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(place) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(country)

shall have exclusive jurisdiction.

82 The ICC Mediation Rules can be found on the web site http://www.iccwbo.org/products-and-services/arbitration-and-adr/mediation/rules/. 83 Parties should choose whether to appoint one or more arbitrators. 84 Parties should carefully check whether submission to ordinary courts will allow them to seek enforcement of a court decision in the country where payor has property.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 24 Applicable

law8586

A87 

B

24.1 Any questions relating to this contract

24.1 This contract is governed by the laws

which are not expressly or implicitly settled by the provisions contained in this contract shall be governed, in the following order: (a) by the principles of law generally

recognized in international trade as applicable to international agency contracts,

of �������������������������������������������������������������������

(name of the country the law of which is to apply)88 regardless of the conflict of law rules of that country.

(b) by the relevant trade usages, and (c) by the UNIDROIT Principles of

International Commercial Contracts,

with the exclusion — subject to Article 24.2 hereunder — of national laws.

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24.2 The parties agree that in any event

consideration shall be given to mandatory provisions of the law of the country where the Agent is established which would be applicable even if the contract is governed by a foreign law (overriding mandatory rules). Any such provisions will be taken into account to the extent they embody principles which are universally recognized and provided their application appears reasonable in the context of international trade. Article 25 Automatic 25.1 If the

inclusion under the present contract

parties have not made a choice between the alternative solutions provided in Articles 8, 13, 18, 23, 24 and 29 under the letters A and B, by deleting one of the alternatives, and provided they have not ex­pressly made a choice by other means, alternative A shall be considered applicable.

25.2 If the

parties have not made a choice between the alternative solution provided in Article 21 (goodwill indemnity in case of termination) under the letters A and B, by deleting one of the alternatives, and provided they have not expressly made a choice by other means, alternative A shall be considered applicable if the Agent is established in a country where a goodwill indemnity in case of termination is recognized by mandatory law and alternative B shall apply in the opposite case.

25.3 The

Annexes attached to this contract form an integral part of the agreement. Annexes or part of annexes which have not been filled in will be effective only to the extent and under the conditions indicated in this contract.

Article 26 Previous 26.1 This

agreements — Modifications — Nullity

contract replaces any other preceding agreement between the parties on the subject, except for any pre-existing confidentiality agreements.

26.2 No

addition or modification to this contract shall be valid unless made in writing. However a party may be precluded by its conduct from asserting the invalidity of additions or modifications not made in writing to the extent that the other party has relied on such conduct.

85 In case this alternative is chosen, it is advisable to choose arbitration (Article 23.2 A) for the resolution of disputes. In fact, it is doubful whether ordinary courts would apply general principles instead of a national law. 86 This model form has been prepared on the assumption that it would not be governed by a specific national law (as stated in alternative A of Article 24.1.). If the parties prefer nevertheless to submit the agreement to a national law, they should carefully check in advance, if the clauses of the model conform to the mandatory provisions of the law they have chosen.

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 THE ICC MODEL FORMS 26.3 The

nullity of a particular clause of this contract shall not involve the nullity of the whole agreement, unless such clause is to be considered as substantial, i.e. if the clause is of such importance that the parties (or the party to the benefit of which such clause is made) would not have entered into the contract if it knew that the clause would not be valid.

Article 27 Prohibition 27.1 The

of assignment

present contract cannot be assigned without prior written agreement between the two parties.

27.2 If Article

21 A is applicable, and if there has been assignment by the Agent with the Principal’s consent according to Article 21.3 (c), the goodwill indemnity of the new agent shall be calculated by also taking into account the activity of the old agent, according to Article 21. It is expressly agreed that the amount that may have been paid by the new agent to the previous one shall not be taken into account when calculating the indemnity.87

Article 28 Confidential

Information

Each party agrees not to disclose to third parties any Confidential Information disclosed to it by the other party in the context of this Contract in conformity with the ICC Model Confidentiality Clause at Annex VII. This Article 28 survives the termination of this contract.

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Article 29 Anti-Bribery

and Anti-corruption88

A

B

The Parties agree that any business activity carried out under this contract shall be legally correct in the Territory. This means, among other things, that any side-agreement that grants compensation to any third party in connection with, for example, sales, service, purchasing, delivery and/or payment, which is not reasonable in light of the value of the services rendered, is strictly prohibited.

The Parties agree that, at all times in connec­tion with and throughout the course of the Contract and thereafter, they will comply with and that they will take reasonable measures to ensure that their subcontractors, agents or other third parties, subject to their control or determining influence, will comply with Part I of the then-current version of the ICC Rules on Combating Corruption 2011, which is hereby incorporated by reference into the Contract, as if written out in the Contract in full and which is attached as Appendix [2].91

Article 30 Parties’

Independence89

This agency agreement shall not result in employment relationship between the Principal and the Agent or the professionals allocated by the Agent, which solely and exclusively assumes all responsibility for labour and social security obligations with regard to its representatives, employees, subcontracting and/or contractors with a relationship therewith. Furthermore, the relationship between Principal and Agent shall be that of independent contractors and not of employment or partner of the other for any purpose whatsoever. Article 31 Authentic

text

The English text of this contract is the only authentic text.90

87 The purpose of this sentence is to make clear that the price paid by the new agent to the old one (which price may be influenced by facts which are out of the scope of the agency agreement), is not a basis for calculating the indemnity. 88 Parties may wish to consult the 2010 “ICC Guidelines on Agents, Intermediaries and Other Third Parties” at: www.iccwbo.org/advocacy-codes-and-rules/areas-of-work/corporate-responsability-and-anti-corruption/ ICC-Third-Party-Guidelines. 89 Parties should attach the text of Appendix 2 of the current model. 90 If the contract is written in another language this clause should of course be modified to indicate the language of the contract.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Made in

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

on the. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Principal The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX I Products,

������������������������������������������������������������������������

Territory and Customers (Article 1.1)

§1 Products91 ������������������������������������������������������������������������������������������������������������������������������������������������� ������������������������������������������������������������������������������������������������������������������������������������������������� �������������������������������������������������������������������������������������������������������������������������������������������������

If this paragraph 1 of Annex I has not been filled in, all products manufactured and/or sold by the Principal at present and in the future shall be con­sidered as “Products” for the purpose of this contract.92 §2 Territory �������������������������������������������������������������������������������������������������������������������������������������������������

If this paragraph 2 of Annex I has not been filled in, the whole territory of the country where the Agent has its place of business will be considered as “Territory” for the purpose of this contract. §3 Contractual

Customers93

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The categories of customers to which this agency agreement applies are all customers established in the Territory, except the following Excluded Customers: …… duty-free shops …… third-party web portals …… public administration bodies ……

�����������������������������������������������������������������������������������������������������������������������������������

(other)

Excluded Customers remain outside the scope of the agency contract and in particular of the exclusivity granted in Article 13 and of the right to commission under Article 15. �������������������������������������������������������������������������������������������������������������������������������������������������

If this paragraph 3 of Annex I has not been filled in, all the customers in the Territory will be considered as “Contractual Customers “ for the purpose of this contract. ANNEX II Products

and Principals Represented by the Agent (Article 5.4)

This Annex is applicable only if filled in by the parties. The Agent hereby declares that it represents (and/or distributes or manufactures) the following products, directly or indirectly, at the time of the conclusion of the present contract:

91 Parties may define product lines here. 92 If the parties choose this solution (including any future products in the contract) problems may arise in case of conflict between new products from the principal and products of other manu­facturers already represented by the agent. If such problems are foreseeable, the parties should de­fine appropriate rules for solving the conflict. 93 Parties may define market segments here or withdraw individual customers who are already customers of the principal.

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PRINCIPAL

PRODUCTS

�������������������������������������������������������������������

�������������������������������������������������������������������

�������������������������������������������������������������������

�������������������������������������������������������������������

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �������������������������������������������������������������������

������������������������������������������������������������������� ������������������������������������������������������������������� ������������������������������������������������������������������� ������������������������������������������������������������������� ������������������������������������������������������������������� �������������������������������������������������������������������

ANNEX III Advertising §1 Advertising

and Other Marketing Activities

(Article 6.3)

Except as otherwise agreed in writing, the costs of agreed advertising shall be shared between the parties as follows: Principal: ������������������� % Agent: ����������������������� % If the figures left blank in the above paragraph are not filled in by the par­ties, each party will bear the advertising expenses it has incurred.

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§2 Fairs and

exhibitions (Article 6.4)

Except as otherwise agreed in writing, the costs for participation in fairs and exhibitions in the Territory shall be shared between the parties as follows: Principal: ������������������� % Agent: ������������������������ % If the figures left blank in the above paragraph are not filled in by the parties, each party will bear the expenses for participation in fairs and exhibitions it has incurred. ANNEX IV Guaranteed

Minimum Target (Article 7.3)

This Annex IV is applicable only if the parties have fixed the mini­mum target by filling in one of the alternative figures hereafter. The Agent undertakes, during each year, to transmit orders for not less than: …… ������������������������������������������������������������������������������������������������� (amount in money)94 …… ������������������������������������������������������������������������������������������������� (amount in Products) …… ������������������������������������������ % of the target agreed upon in accordance with Article 7.1. If at the end of the year the above Guaranteed Minimum Target has not been attained, for reasons other than those for which the Principal can be held responsible, subject to giving one month’s notice, the Principal shall be entitled at its choice, to terminate this contract, or to cancel the Agent’s exclusivity, or to reduce the extension of the Territory. This right must however be exercised in writing not later than two months after the end of the year in which the Guaranteed Minimum Target has not been attained. Unless the parties hereafter agree on different figures, the Guaranteed Minimum Target indicated above shall also be applicable for each year of the duration (including the case of renewal) of this contract. ANNEX V Commissions § 1 Amount 1.1 Simple

of commission (Article 15.1)

commission

Amount of commission is

�������������������

%

94 If this alternative is chosen, care should be taken in order to avoid that the agreed sum is automatically reduced (from year to year) as a consequence of inflation, e.g. by providing a yearly in­crease.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 1.2 Different

levels of commission according to the value of the sales contract95

If this subparagraph 1.2 is filled in, it will apply in lieu of paragraph 1.1. Sale contracts up to

������������������������

Sale contracts from

������������������������

up to

Sale contracts from

������������������������

Sale contracts from

������������������������

Sale contracts over

������������������������

§ 2 Special



%

���������������������������



%

up to

���������������������������



%

up to

���������������������������



%

�������������������������%

customers/Reduced commission (Article 15.3)

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On all sales to the following customers the Agent is entitled to the following reduced commission: ������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

������������������������������������������������������������������������������������������������������������������

����������������� %

§ 3 Negotiation 3.1 Negotiation

margins and discounts (Article 15.3)

margins

The Agent has a negotiation margin of …………… % on the prices set out in the price-list in force. Therefore, the Agent may propose to customers any discount within such margins without reduction to its rate of com­mission. 3.2 Authorised

discount

The Agent is entitled to propose to customers the following discounts, which entail a reduction in its commission, in accordance with the schedule hereunder: Negotiation margin

��������������� %

full commission

Discount amounting to

��������������� %

������������������������������������� % commission

Discount amounting to

��������������� %

������������������������������������� % commission

Discount amounting to

��������������� %

������������������������������������� % commission

Discount amounting to

��������������� %

�������������������������������������������������������� %

3.3 Discount

to be agreed upon

The Agent undertakes not to propose to the customers any discount higher that the maximum discount shown in the schedule set out in § 3.2 above, without prior written authority from the Principal.

95 If a contract lasts more than one year, parties should agree if they wish to consider the agreement for the following year as a separate agreement. Parties should also clearly define the crite­ria for consider­ing a group of supplies (e.g. machines and equipment for the same project) as one sales contract or as separate contracts.

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 THE ICC MODEL FORMS ANNEX VI Change

of Control, Ownership and/or ­Management in the Agent-Company (Article 20.4) The Principal may terminate the contract with immediate effect, if:

…… M r/Ms. ����������������������������������������������������������������������������������������������������������������������������������� ceases to own more than ������������������� % of the shares of the Agent-company …… M s ����������������������������������������������������������������������������������������������������������������������������������� ceases to be the ������������������������������������������������������������������������� 96 of the Agent-com­pany At the same time, if alternative A of Article 21.1 is applicable, the Agent-company may terminate this contract on grounds of the age, infirmity or illness of Mr/Ms. ���������������������������������������������������������������������������������������������������������������������������������� according to Article 21.3, (b), without losing the right to the goodwill indemnity under such provision. ANNEX VII

ICC Model Confidentiality Clause 2006 (Article 28)

1.1 “Agreement”

means the contract incorporating this Clause.

“Purpose” means the purpose of the Agreement. “Disclosing Party” means the Party disclosing Confidential Information to the Receiving Party. “Permitted Recipients” means any director, officer, employee, adviser or auditor of the Receiving Party or any of its Related Companies who reasonably needs to know Confidential Information for the Purpose. “Receiving Party” means the Party receiving Confidential Information from the Disclosing Party.

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“Related Company” means any corporation, company or other entity that controls, or is controlled by, one Party or by another Related Company of that Party, where control means ownership or control, direct or indirect, of more than fifty (50) per cent of that corporation’s, company’s or other entity’s voting capital. “Confidential Information” means any information or data, or both, communicated by or on behalf of the Disclosing Party to the Receiving Party, including, but not limited to, any kind of business, commercial or technical information and data in connection with the Purpose, except for such information that is demonstrably non-confidential in nature. The information shall be Confidential Information, irrespective of the medium in which that information or data is embedded, and whether the Confidential Information is disclosed orally, visually or otherwise. Confidential Information shall include any copies or abstracts made of it as well as any products, apparatus, modules, samples, prototypes or parts that may contain or reveal the Confidential Information. Confidential Information is limited to information disclosed on or after the date of signature of this Agreement. 1.2 The

Receiving Party shall:

a) not disclose

any Confidential Information to anyone except to the Permitted Recipients, who are bound to the same level of confidentiality obligations as set forth by this Clause;

b) use any

Confidential Information exclusively for the Purpose; and

c) keep

confidential and hold all Confidential Information with no less a degree of care as is used for the Receiving Party’s own confidential information and at least with reasonable care.

1.3 Any

obligation to keep confidential all Confidential Information shall not apply to the extent that the Receiving Party can prove that any of that information:

a) was in

the Receiving Party’s possession without an obligation of confidentiality prior to receipt from the Disclosing Party;

96

Specify here the position that the qualifying person has in the agent-company, e.g. direc­tor, general manager, ­president of the board, as the case may be. This clause may be dangerous for the agent-company, particularly if the qualifying person is not the owner, but only an employee.

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the time of disclosure, or subsequently becomes, generally available to the public through no breach of this Agreement by the Receiving Party or any Permitted Recipient;

c) is lawfully

obtained by the Receiving Party from a third party without an obligation of confidentiality, provided that third party is not, to the Receiving Party’s best knowledge, in breach of any obligation of confidentiality to the Disclosing Party relating to that information; or

d) is developed

by the Receiving Party or its Related Companies independent of any Confidential Information.

1.4 Unless

otherwise specified by the Disclosing Party at the time of disclosure, the Receiving Party may make copies of the Confidential Information to the extent necessary for the Purpose.

1.5 Nothing

in this Agreement shall obligate either Party to disclose any information. Each Party has the right to refuse to accept any information under this Agreement prior to any disclosure. Confidential Information disclosed despite an express prior refusal is not covered by the obligations under this Clause.

1.6 Nothing

in this Agreement shall affect any rights the Disclosing Party may have in relation to the Confidential Information, neither shall this Agreement provide the Receiving Party with any right or license under any patents, copyrights, trade secrets, or the like in relation to the Confidential Information, except for the use of Confidential Information in connection with the Purpose and in accordance with this Clause. Disclosing Party makes available the Confidential Information as is and does not warrant that any of this information that it discloses is complete, accurate, free from defects or third-party rights, or useful for the Purpose or other purposes of the Receiving Party.

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1.7 The

1.8 This

Clause does not:

a) create

any other relationship between the Parties;

b) oblige

a Party to enter into any other contract; or

c) require

consideration for any information received.

1.9 In addition

to any remedies under the applicable law,the Parties recognize that any breach or violation of any provision of this Clause may cause irreparable harm to the other Party, which money damages may not necessarily remedy. Therefore, upon any actual or impending violation of any provision of this Clause, either Party may obtain from any court of competent jurisdiction a preliminary, temporary or permanent injunction, restraining or enjoining such violation by the other Party or any entity or person acting in concert with that Party.

1.10 Within

ninety (90) days of termination of this Agreement, the Disclosing Party may request the disposal of the Confidential Information. Disposal means execution of reasonable measures to return or destroy all copies including electronic data. Destruction shall be confirmed in writing. Disposal shall be effected within thirty (30) days of the request being made.

The provisions

for disposal shall not apply to copies of electronically communicated Confidential Information made as a matter of routine information technology back-up and to Confidential Information or copies of it that must be stored by the Receiving Party or its advisers according to provisions of mandatory law, provided that this Confidential Information or copies of it shall be subject to continuing obligations of confidentiality under this Agreement; but no further use shall be permitted as from the date of the request.

1.11 Neither

Party shall be in breach of this Clause to the extent that it can show that any disclosure of Confidential Information was made solely and to the extent necessary to comply with a statutory, judicial or other obligation of a mandatory nature, afterwards referred to as “Mandatory Obligation”. Where a disclosure is made for these reasons, the Party making the disclosure shall ensure that the recipient of the Confidential Information is made aware of and asked to respect its confidentiality. This disclosure

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shall in no way diminish the obligations of the parties under this Clause except to the extent that a Party is compelled by any Mandatory Obligation to disclose Confidential Information without restriction. To the

extent permitted by any Mandatory Obligation, the Receiving Party shall notify the other Party without delay in writing as soon as it becomes aware of an enquiry or any process of any description that is likely to require disclosure of the other Party’s Confidential Information in order to comply with any Mandatory Obligation.

1.12 Upon

termination, the Receiving Party shall stop making use of the Confidential Information. The obligations of the Parties under this Agreement shall survive indefinitely or to the extent permitted by the applicable mandatory law.

7.4.5 The ICC

Model Commercial Agency Contract (short form)

The ICC Short Form Model International Agency Contract, which was prepared several years after the publication of the “long form”, intends to answer the needs of business people seeking a short contract dealing only with the most important issues. The following description of the model is based for the most part on the introduction to the model form, the full text of which can be found in ICC publication No. 791. 7.4.5.1 Scope

of application of the short form

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The ICC Short Form Model International Agency Contract is a simplified contract intended for parties who do not want a detailed commercial agency contract, but prefer a shorter, simpler form covering only the most essential issues. It should be stressed that a “short form” contract will contain only provisions covering the most typical issues arising between the parties, and will not provide the choice of more sophisticated alternative provisions which might actually be more appropriate for some users. Indeed, some issues may arise which are not covered at all. They will be left for the courts to determine. If parties need more sophisticated solutions, they should use the “full” ICC Model Commercial Agency Contract” (ICC publication No. 766), which provides a more complete set of clauses and options, particularly through the annexes. The model has been made bearing in mind mainly the situation of agents who promote the sale of goods. It can also be applied to agents who promote services, but in such cases, the parties should check whether all of the clauses are appropriate for their situation. 7.4.5.2 Comments

on specific points

Products (Box A-3-A). If the parties do not fill in A-3, the contract will cover all of the principal’s products (see Article 1.2). If the parties define the products in box A-3, they may refer to categories of products or to specific models. If the space is not sufficient, reference may be made to an Annex, e.g. by writing in box A-3-A “see Annex 1”. Goodwill indemnity (Box A-6). In many countries (e.g. in all Member States of the European Union) the law provides that, except in the circumstances identified in Article 9.3, the agent is entitled to an indemnity in the event of termination by the principal, in order to repay the agent for the goodwill developed by the agent from which the principal will benefit after the contract has ended. If the agent is domiciled in such a country, it is strongly recommended that the agent be granted such an indemnity, by choosing alternative A-6-A (or by not completing Box A-6, which will have the same effect: see Article 9). If, on the contrary, the agent is domiciled in a country where no such indemnity is required by law, the parties may choose alternative B. Applicable law (Box A-7). The recommended solution is not to submit the contract to a specific national law, but to only refer to the general principles of law generally recognized in international trade together with the UNIDROIT Principles (see Article 10.1). In many countries (e.g. in all Member States of the European Union) the law provides that, except in the circumstances identified in Article 9.3, the agent is entitled to an indemnity in the event of termination by the principal, in order to repay the agent for the goodwill developed by the agent from which the principal will benefit after the contract has ended. If the agent is domiciled in such a country, it is strongly INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 225

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recommended that the agent be granted such an indemnity, by choosing alternative A-6-A (or by not completing Box A-6, which will have the same effect: see Article 9). If, on the contrary, the agent is domiciled in a country where no such indemnity is required by law, the parties may choose alternative B. For a more detailed information about the pros and cons of this a-national choice of law clause, you can consult the study drafted by a special task force of the CLP Commission: “Developing neutral legal standards for international contracts. A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts”. The publication in question is available for free download on the ICC store homepage: http://store.iccwbo.org/. However, since this solution (i.e. that the contract be governed by general principles of law instead of a domestic law) is more appropriate when disputes are submitted to arbitration rather than to litigation in national courts, the choice of a specific national law will be preferable if the parties decide to have recourse to litigation before the ordinary courts (see Box A-8). In this case, however, the parties should check if and to what extent the contract conforms to the provisions of the applicable domestic law.

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Resolution of disputes (Box A-8). Box A offers the choice between arbitration and jurisdiction of ordinary courts. If no choice is made, ICC arbitration will apply, by virtue of Article 12.3. Parties should be aware that in certain countries the above clauses may be ineffective due to public policy rules reserving jurisdiction to local courts. EU competition rules. As regards contracts within the European Union (or capable of producing significant effects within the EU) the EU competition rules and particularly Article 101 of the Treaty on the Functioning of the European Union (TFEU) are to be respected. However, in principle agency agreements do not fall under the prohibition of Article 101 and therefore need not to comply with the EU antitrust rules. Only in exceptional cases, where the agent takes financial and commercial risks which are similar to those of a distributor (reseller), the contract may fall under Article 101 and will therefore need to comply with Regulation 330/2010 in order to be exempted from the prohibition. In this case parties should ask for expert advice. Internet sales. If the Principal wishes to sell its products on the Internet through its own website or otherwise, parties should decide whether they should exclude such sales from the exclusivity granted to the agent under Article 5 or look for other possible solutions. It has been considered that it was not appropriate to deal with this issue in this “short form”. A clause offering two alternative solutions to this issue can be found in Article 13.5 of the “full” ICC Model Commercial Agency Contract” (ICC publication No. 766). 7.4.6 Text

of the ICC Model Commercial Agency Contract (short form)

ICC SHORT FORM MODEL CONTRACT International Commercial Agency PART I Special Conditions

A-1 Principal Name:  Address:  Tax identification number  Represented by  in his/her capacity of  (hereinafter called the “Principal”)

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 THE ICC MODEL FORMS

A-2 Agent Name:  Address:  Tax identification number  Represented by  in his/her capacity of  (hereinafter called the “Agent”)

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A-3 Products and Territory (Article 1.1) A. The contractual products are:

B. The contractual territory is:

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A-4 Excluded customers (Article 5.3) The following customers (or categories of customers) are excluded from the scope of the agency contract and will be managed directly by the Principal A-5 Agent’s commission (Article 6) The rate of commission is ____ %

Commission shall be due:  when the Principal delivers the goods  when the customer pays the price  other: �������������������������������������������������������������������

A-6 Goodwill indemnity (Article 9) A.

 Goodwill indemnity

B.

Upon contract termination the Agent will be entitled to a goodwill indemnity in accordance with Article 9.

 No goodwill indemnity Upon contract termination the Agent will not be entitled to any goodwill indemnity or similar compensation.

Alternative B should be avoided when the law of the Agent’s country provides for a goodwill indemnity or similar compensation.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

A-7 Applicable law The two solutions hereunder (general principles of law and domestic laws) are alternatives: parties should not choose both of them. If no choice is made, general principles of law will apply, in accordance with Article 10.1. A.  General principles of law

B.  Domestic law

This agency contract shall be governed by the rules and principles of law generally recognised in international trade together with the UNIDROIT Principles of International Commercial Contracts, as specified in Article 10.1 of the general conditions.

This agency contract shall be governed by the laws of �������������������������������������������������������������������(country).

If the parties select alternative B, they should first check if the provisions contained in the present contract are in accordance with the domestic law they have chosen. A-8 Resolution of disputes

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The two solutions hereunder (arbitration or litigation before ordinary courts) are alternatives: parties cannot choose both of them. If no choice is made, ICC arbitration will apply, in accordance with Article 10.3. A.  ARBITRATION

B.  LITIGATION (ordinary courts)

 ICC (In accordance with Article 10.3)

In case of dispute the courts of



��������������������������������������������������������������������(country) shall have exclusive jurisdiction.

 Other:

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����������������������������������������������������������������������� (place)

Place of arbitration: ��������������������������������������������������������������������������������������

A-9 Date and signature of the parties This agency contract (the “Contract”) is governed by the Special Conditions hereabove (to the extent the respective boxes have been filled in) and by the General Conditions contained in Part II hereafter. ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� (place) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(date)

The Principal

The Agent

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PART II General Conditions 1 Territory 1.1 The

and Products

Principal appoints the Agent, who accepts, to promote the sale of the products listed in box A-3A as well as any other products the parties may agree in writing to include in box A-3-A at any time during the term of this Contract (hereinafter called the “Products”) in the territory (if any) indicated in box A-3B (hereinafter called the “Territory”).

1.2 If the

parties have not completed box A-3A, all products manufactured and/or marketed by the Principal at present and in the future will be considered as “Products” for the purpose of this Contract.

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 THE ICC MODEL FORMS 2 Good faith

2.1 In carrying

and fair dealing

out their obligations under this Contract the parties will act in accordance with good faith and fair dealing.

2.2 The

provisions of this Contract, as well as any statements made by the parties in connection with this agency relationship, shall be interpreted in good faith.

3 Agent’s functions 3.1 The

Agent agrees to use its best endeavours to promote the sale of the Products in the Territory in accordance with the Principal’s reasonable instructions and shall protect the Principal’s interests with the diligence of a responsible person.

3.2 Unless

otherwise specifically agreed, the Agent has no authority to make contracts on behalf of, or in any way to bind the Principal towards third parties. The Agent only solicits orders from customers for the Principal, who is free to accept or to reject them.

3.3 The

Agent shall satisfy itself, with due diligence, of the solvency of customers whose orders it transmits to the Principal. The Agent shall not transmit orders from customers of which it knows or ought to know that they are in a critical or difficult financial position, without informing the Principal in advance of such fact. The Agent shall, furthermore, give reasonable assistance to the Principal in recovering debts due.

3.4 The

Agent is not entitled to receive payments on the Principal’s behalf without prior written authorization from the Principal to that effect. When the Agent has been so authorized, it must transmit them as soon as possible to the Principal and until then hold them separately on deposit on the Principal’s behalf.

4 Undertaking

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4.1 Without

not to compete

the prior written authorization of the Principal, the Agent shall not, directly or indirectly, represent, manufacture or distribute any products which are in competition with the Products, for the entire term of this Contract.

4.2 The

Agent is entitled to represent, manufacture, market or sell any prod­ucts which are not competitive with the Products, pro­vided it in­forms the Principal in advance of such activity.

5 Exclusivity 5.1 The

Principal shall not, during the term of this Contract, grant any other person or undertaking (including a subsidiary of the Principal) within the Territory the right to represent or distribute the Products.

5.2 The

Principal shall be entitled to deal directly, without the Agent’s intervention, with customers situated in the Territory provided the Principal informs the Agent in advance. In respect of such sales the Agent shall be entitled to the commission provided for in Article 6.1.

5.3 If box

A-4 has been filled in, the customers listed in the box will be managed directly by the Principal. Unless otherwise agreed, the Agent is not entitled to commission on such business.

6 Commission 6.1 Except

as otherwise agreed, the Agent is entitled to the commission indicated in box A-5 on all sales of the Products which are made by the Principal during the term of this Contract to customers established in the Territory.

6.2 If the

Agent, when dealing with customers established in the Territory, secures orders resulting in contracts of sale with customers established outside the Territory, and if the Principal accepts such orders, the Agent shall be entitled to receive a reduced commission, the amount of which shall be decided on a case by case basis. Similarly, the Agent’s commission shall be reduced when another agent solicits orders with customers established outside the Territory resulting in contracts of sale with customers established within the Territory.

6.3 Commission

shall be calculated on the EXW Incoterms® rule reference value, irrespective of the Incoterms® rule chosen in the contract of sale.

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otherwise agreed (e.g. as indicated in box A-5), the Agent shall acquire the right to commission only after full payment by the customers of the invoiced price. In case of partial payment, made in compliance with the sale contract, the Agent shall be entitled to a proportional payment.

6.5 The

Principal shall provide the Agent with a statement of the commissions due in respect of each quarter, or such shorter period as the parties may agree, and shall set out all the business in respect of which such commission is payable. The commission shall be paid not later than the last day of the month following the relevant quarter.

7 Term and 7.1 This

termination of the Contract

Contract is concluded for an indefinite period and enters into force on the date on which it is signed.

7.2 This

Contract may be terminated by either party by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than 4 months in advance. If the Contract has lasted for more than four years, the period of notice will be of not less than 6 months. The end of the period of notice must coincide with the end of a calendar month.

8 Earlier contract

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8.1 Each

termination

party may terminate this Contract with immediate effect by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), in case of a substantial breach by the other party of the obligations arising out of the Contract, or in case of exceptional circumstances justifying the earlier termination. Any failure by a party to carry out all or part of its obligations under the Contract resulting in such detriment to the other party as to substantially deprive it of what it is entitled to expect under the Contract, shall be considered as a substantial breach for the purpose of this Article 8.1. Circumstances in which it would be unreasonable to require the terminating party to continue to be bound by this Contract, shall be considered as exceptional circumstances for the purpose of this Article 8.1.

8.2 If a

party terminates the Contract in accordance with this Article, and it appears thereafter that the reasons put forward by that party did not justify the earlier termination, the termination will be effective, but the other party will be entitled to damages for the unjustified earli­er termination. Such dam­ages will be equal to the average commis­sion for the period the Contract would have lasted in case of nor­mal termi­nation, unless the damaged party proves that the actual damage is higher (or, respectively, the party having terminated the Contract proves that the actual damage is lower). The above damages are in ad­dition to the indemnity which may be due under Article 9.

9 Goodwill 9.1 Unless

indemnity

otherwise agreed (e.g. in box A-6), upon termination of the Contract the Agent shall be entitled to an indemnity (“goodwill indemnity”) if and to the extent it has brought the Principal new customers or has significantly increased the volume of business with existing customers and the Principal continues to derive substantial benefits from the business with such customers, and the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the Agent on the business transacted with such customers and provided that the Agent claims such indemnity in writing within one year from contract termination.

9.2 The

amount of the indemnity shall not exceed a figure equivalent to an indemnity for one year calculated from the Agent’s average annual remuneration over the preceding five years and, if the Contract lasted for less than five years, the indemnity shall be calculated on the average for the period in question.

9.3 The

Agent shall have no right to indemnity in the following cases:

a) where the

Principal has terminated the Contract in accordance with Article 8;

b) where the

Agent has terminated the Contract, unless the termination is justified under Article 8 or on grounds of age, infirmity or illness in consequence of which the Agent cannot reasonably be required to continue its activities;

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 THE ICC MODEL FORMS c) where, with

the agreement of the Principal, the Agent assigns its rights and duties under this Contract to another person.

9.4 The

goodwill indemnity under this Article 9 (“Contractual Indemnity”) is in lieu of any goodwill indemnity or equivalent compensation the Agent may be entitled to by virtue of rules of law applicable to the present Contract (“Statutory Indemnity”) and will consequently replace such Statutory Indemnity (if any). However, in case the Agent’s right to the Statutory Indemnity cannot be validly replaced by the Contractual Indemnity under the applicable law, Article 9.1 will not apply and the Agent will be entitled to the Statutory Indemnity in lieu of the Contractual Indemnity set out in this Article 9.

10 Applicable 10.1 Unless

law - Arbitration

otherwise agreed in writing (whether in box A-7 or elsewhere), any questions relating to this agency Contract shall be governed, in the following order:

a) by the principles

of law generally recognized in international trade as applicable to inter­national distributorship contracts,

b) by the relevant

trade usages, and

c) by the UNIDROIT

Principles of International Commercial Contracts,

with the exclusion of national laws. 10.2 The

parties may at any time, without prejudice to Article 10.3., seek to settle any dispute arising out of or in connection with this agency Contract in accordance with the ICC Mediation Rules.97

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10.3 Unless

otherwise agreed in writing (whether by completing Box A-8 or otherwise), all disputes arising out of or in connection with this agency Contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

7.4.7 The ICC

Model Distributorship Contract (long form)

Together with commercial agency agreements, distributorship contracts are the most frequently used means for organizing the distribution of goods in a foreign country. Almost every company engaged in international trade has at least some distributors abroad, which means that most exporters, whether large or small, must face the problem of drafting an international distributorship agreement. The ICC model intends to assist business people engaged in international trade and the lawyers aiding them in drafting and negotiating contracts by proposing a model contract that tries to be time simple and complete at the same. The following description of the model is based for the most part on the introduction to the model form, the full text of which can be found in ICC publication No. 776. 7.4.7.1 A uniform

model for international trade

When negotiating distribution agreements abroad, one of the main difficulties faced by parties engaged in international trade is the lack of uniform rules for agreements of this type. In most countries, distribution agreements are not governed by specific statutory provisions.98 Where such rules are established by the courts, their decisions often refer to distributors acting as retailers at local level, which implies that they are not always adequate for international distributors-importers. Some principles are established at the international level, but they refer mainly to antitrust aspects of the contract (i.e. validity of certain restrictive clauses regarding exclusivity, territorial restrictions, etc.) and do not cover the rights and obligations of the parties. This means that parties must refer primarily to the rules they establish in their contracts; consequently, these rules must be set out carefully. 97 The ICC Mediation Rules can be found on the web site http://www.iccwbo.org/products-and-services/arbitration-and-adr/mediation/rules/. 98 There are, however, important exceptions, for example in Belgium (Law of 27 July 1961 as amended by Law of 13 April 1971).

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The ICC hereby puts at the disposal of parties engaged in international trade a set of uniform contractual rules which incorporate the prevailing practice in international trade. In preparing this model form, the ICC working group that drafted it sought to strike a fair balance between the interests of the supplier and those of the distributor-importer. In other words, this model form does not favour the position of one of the parties, but aims at protecting and balancing the legitimate interests of both. For this reason, parties looking for stronger protection of their own interests should use models prepared according to the categories to which they belong (suppliersexporters or, respectively, distributors-importers). 7.4.7.2 Scope

of application

In principle, this model form is intended to apply only to international agreements where distributors act as buyers-resellers and as importers who organize distribution in the country they are responsible for. International

agreements

Since this model form is intended for international contracts, in principle it will not be appropriate for domestic contracts, i.e. contracts between parties having their place of business in the same country. The parties are therefore advised to use this model form for domestic contracts only after having checked what amendments may be necessary in order to comply with local laws and practices.

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Buyer-reseller

The model form does not deal with transactions between principals and commercial agents.99 The distributor is not an intermediary or broker, but rather a dealer who buys goods in order to resell them in its own name and on its own behalf, even if the distributor is often called an “agent” in business practice. A different problem arises when, within the context of a “real” distribution contract, the distributor also acts as an intermediary for certain business, thus combining the functions of distributor and agent. This situation has been envisaged under Article 3.4. Distributor-wholesaler/importer

This model is designed to cover the situation of a distributor acting at the wholesale level, being responsible for organizing the distribution of the supplier’s products within a country or part of it. Therefore, it does not apply in principle to dealers selling at retail level, although many provisions of the model will be compatible with such a situation. Product liability

The working party decided not to include clauses on product liability in the model form.100 In fact, the problems arising in connection with this issue — particularly as concerns the possibility of reducing or increasing the responsibility in the relationship between supplier and distributor through exemption clauses or “hold harmless” provisions — are complex and depend on the applicable law, which may differ on the matter substantially from country to country. The parties should give serious consideration to the need for product liability insurance. 7.4.7.3 What

is a distributor?

The most commonly used terms for the type of contract which is the subject matter of this model are “distributorship” in English, concession commerciale or concession de vente in French, and Vertragshändlervertrag or Eigenhändlervertrag in German. However, in practice, the terms “agent”, or “general agent” are often used, although 99 Which are covered by the ICC Model Commercial Agency Contract (ICC publication No. 496). 100 With respect to this problem, see in particular EC Directive No. 85/374 of 25 July 1985, which has become effective in most EU countries. Note that under the directive a person who imports into the Community a product for distribution in the course of his business is responsible as a producer.

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these terms may have a different meaning in law, since a commercial agent does not normally act as a reseller. The words “importer” or “general importer” are sometimes used to define a distributor responsible for organizing distribution in a given country. The distributor is not simply a reseller;101 it is linked to the supplier by a closer tie. In particular, the following characteristics should be noted: a) in its capacity

as reseller, the distributor deals with the promotion and/or organization of distribution in the assigned territory;

b) the supplier

confers a privileged position within the territory on the distributor — generally the exclusive right to purchase the products from the supplier;

c) the relationship

must be for a certain duration and sets conditions for collaboration that, by definition, cannot be episodic;

d) the relationship

creates a fairly close tie of loyalty between the parties, which usually implies that the distributor refrain from distributing competing products;

e) the distributor 7.4.7.4 Distribution

is virtually always distributing brand name products.

contract and sales contracts

Since the distribution contract implies by definition that the parties conclude sales contracts between them, they need to agree on certain points relating to their sellerpurchaser relationship: prices, conditions of payment, warranties, etc. This is normally dealt with by making reference to the general conditions of sale of one of the parties (generally those of the supplier: see Article 7.3).

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The parties may also make use of to the General Conditions contained in the ICC Model International Sales Contract (ICC publication No. 738) However, the parties may wish to determine certain aspects of the sales contracts within the distribution contract itself, particularly with reference to points which require special rules when the buyer is a distributor (e.g. prices and/or discounts; conditions of payment). In this case, the special rules contained in the distribution contract will prevail in the event of conflict with the general conditions of sale (see Article 7.3). 7.4.7.5 The

applicable law

This model contract has been based on the assumption that it will not be governed by a specific national law, but only by the provisions of the contract itself and the principles of law generally recognized in international trade as applicable to distribution contracts (also called lex mercatoria). The purpose of this solution is to enable the rules of this model form to be applied in a uniform way to suppliers and distributors from different countries without giving one party the advantage and the other party the disadvantage of applying one party’s national law. Of course this solution, while avoiding the particularities of national laws, implies (at least for matters not expressly governed by the contract clauses) the recourse to less precise (and predictable) rules than those contained in the domestic laws (although most countries do not have specific rules governing distributorship contracts). The drafting group is of the opinion that the possible disadvantages resulting from the application of flexible and general rules is counterbalanced by the greater certainty of a uniform set of contractual rules and by the reference to a set of rules on contracts, such as the UNIDROIT Principles of International Commercial Contracts, which offer a reasonably foreseeable legal framework for most issues that may arise. For more detailed information about the choice of a-national rules to govern the contract and in particular the model clause provided in the ICC model contracts, see the study published by the ICC and drafted by a special task force of the CLP Commission: “Developing neutral legal standards for international contracts. A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts”. The publication in question is available for free download on the ICC Store homepage: http://store.iccwbo.org/. In any case, if the 101 In its judgment of 19 December 2013 in case C-9/12, Corman-Collins v La Maison di Whisky, the European Court of Justice has ruled on the distinction between distribution agreements and sales agreements, and decided that “an exclusive distribution agreement, which requires the contract binding the parties to contain specific terms concerning the distribution by the distributor of goods sold by the grantor” is a contract for the supply of services and not a contract of sale.

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parties wish to have their contract governed by a specific national law, they can use the alternative set forth in Article 24.1. B. In such case they should carefully check if this model form conforms to the provisions and/or judicial precedents of the national law they have chosen.102 This alternative (national law) is preferable if parties submit the contract to the jurisdiction of ordinary courts (see Article 23) instead of arbitration. 7.4.7.6 Countries

in which special precautions should be taken

This model, although written with the purpose of giving a balanced solution to the issues arising out of distribution, may, in exceptional cases, conflict with national laws protecting the distributor. In such cases the parties should seek the advice of an expert before using this contract. In certain cases, the protection granted to the distributor under the local law also implies that possible disputes must be decided by local courts, which may imply the ineffectiveness of arbitration clauses. 7.4.7.7 The

need to comply with antitrust rules

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Distribution contracts normally contain clauses which may restrict competition, such as exclusivity, non-competition obligations, resale price maintenance, etc., and which may consequently conflict with antitrust rules. It is therefore recommended to check if all clauses are in accordance with such rules. Since it is impossible to consider the provisions contained in the various national antitrust laws, the following paragraphs consider the rules of the European Union and only make some short reference to national laws on this subject. Clauses likely to be inconsistent with antitrust rules have been put under the title “CHECK ANTITRUST COMPLIANCE”. This does not mean that other clauses cannot conflict with antitrust rules. EU Rules:

Article 101 and Regulation 330/2010

The European Commission enacted on 20 April 2010 Regulation No. 330/2010 which replaces Regulation 2790/99 and which came into force on the 1 June 2000.103 Such Regulation exempts certain vertical agreements from the prohibition of Article 101 of the Treaty on the Functioning of the European Union (TFEU). In principle, the clauses contained in this model are in accordance with the above EU regulation. However, since some of the clauses may be inappropriate when dealing with distributors outside the common market, in certain cases (Articles 11, 12, 16.2) alternative solutions which do not comply with the EU antitrust rules have been proposed. In these cases, it has been stated very clearly that these alternatives are not meant for use within the EU.104 A particular problem arises with respect to the clause prohibiting the distributor to sell competing products (or to purchase such products exclusively from the supplier). According to Regulation 330/2010 such obligation should not last more than five years, i.e. after such period the clause should be considered as ineffective. Now, since such clause is essential within the distribution agreement (because a supplier will normally not accept that its distributor markets competing products), the model form provides in the alternative of Article 19 to be applied within the EU, (i.e. alternative A) that the duration of the contract is limited to five years. Of course, this does not prevent the parties to enter into a new contract after the previous contract has expired. In this connection, it should be noted that the block exemption under Regulation 330/2010 does not apply if the supplier’s share of its sales market or the distributor’s share of its purchasing market relating to the products in question exceeds 30%. It should also be noted that, as a rule, the block exemption under Regulation 330/2010 102 In any case (even if no choice of a national law has been made), according to Article 24.2, the mandatory rules of the distributor’s country which would be applicable independently from the applicable law (the so called «lois de police», “overriding mandatory rules”) must be considered. 103 The text of EU Regulation 330/2010 may be found at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:102:0001:0007:EN:PDF 104 The same applies to the countries of the European Economic Area (EEA), i.e. Iceland, Norway and Liechtenstein.

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does not apply to distributorship contracts between competing undertakings (e.g. where the supplier sells a competing product of a different brand at the wholesale level). In these cases parties should seek expert advice. National legislations

It is likely that the clause whereby the distributor is to respect the resale prices fixed by the supplier is prohibited under most national antitrust laws. As to the other clauses (exclusivity, non-competition, export prohibition), it is impossible to provide general indications, since the solutions may vary from country to country. 7.4.7.8 Recourse

to international arbitration

Since the model form is a set of uniform contractual rules, avoiding, as far as possible, the direct application of conflicting domestic legislations, it is appropriate that possible disputes be solved by a uniform resolution system organized on an international level. From this point of view, the best solution appears to be international commercial arbitration (see particularly Article 23), which permits a truly international approach and avoids the risk of differentiation which would arise in case of recourse to domestic courts. Since arbitration is essential in the framework of this model, this ICC model contract should be adapted in cases where the dispute may be considered non-arbitrable (i.e. “not capable of settlement by arbitration”) according to the New York Convention of 1958. The above risk exists in particular under national laws that protect the local distributor, whenever this implies an exclusive jurisdiction of the national courts.105 7.4.7.9 Precautions

for use of the model form

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To the extent possible, any model contract should be adapted to the circumstances of a specific case. Of course, in theory the best solution consists in drafting an individual contract based on existing model forms in order to take account of all the specific requirements of the parties. However, the parties are often not in a position to prepare a specific contract and prefer to have recourse to a ready-to-use, balanced model form. In this case, they will ask for a model that can be used as it stands, without any need for modifications or additions. The present model is an attempt to achieve a balance between these two possibilities. ICC has tried to work out a single solution on every issue. However, where this has not been possible (see e.g. Articles 12, 16.2, 16.3, 19, 21, 23.2 and 24), alternatives have been suggested. Such alternative solutions have been presented side-by-side under the letters A and B in order to emphasize that only one of them can apply. Therefore, before signing the contract, the parties must decide which of the alternative solutions they choose, and then cancel the alternative they do not want to apply. In any event, the model form provides (Article 25.1) that, if the parties do not make a choice by cancelling one alternative, one of them will automatically apply. There are also a number of points on which the parties must insert their requirements: definition of the territory and the products, non-competing products marketed by the distributor, reimbursement of advertising expenses, discounts, guaranteed minimum target, minimum stock, commission on direct sales, etc. All of these points have been incorporated in the annexes to this document, so that the parties can complete and, where necessary, modify by mutual agreement the annexes during the life of the contract, without making changes to the basic text of the agreement.

105

E.g. for the concessionnaires in Belgium.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Before signing the contract the parties should complete the annexes and, if appropriate, delete the parts they do not need. In order to avoid misunderstandings, the parties should, when signing the contract, put their initials on each page in order to check and make completely clear which amendments they have agreed upon or which alternative solutions they have chosen. 7.4.8 Model

Form of International Sole Distributorship Contract

ICC DISTRIBUTORSHIP CONTRACT (SOLE IMPORTER-DISTRIBUTOR)

Between whose registered office is at (hereinafter called “the Supplier”) Legal form Registration No and whose registered office is at

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(hereinafter called “the Distributor”) Legal form Registration No IT IS AGREED AS FOLLOWS:106 Article 1 Territory 1.1 The

and Products

Supplier grants and the Distributor accepts the exclusive right to market the products listed in Annex I, § 1 (hereinafter called “the Products”) in the territory defined in Annex I, § 2 (hereinafter called “the Territory”) to the customers (hereinafter called “Contractual Customers”), as defined in Annex I, § 3. Contractual Customers are all customers, except the Excluded Customers (if any) listed in Annex I, § 3.

1.2 If the

Supplier decides to market any other products in the Territory, it shall so inform the Distributor in order to discuss the possibility of including such other products within the Products defined under Article 1.1. However, the above obligation to inform the Distributor does not apply if, in consideration of the characteristics of the new products and the specialization of the Distributor, it is not to be expected that such products may be marketed by the Distributor (e.g. products of a completely different range).

Article 2 Good

faith and fair dealing

2.1 In carrying

out their obligations under this Contract the parties will act in accordance with good faith and fair dealing.

2.2 The

provisions of this Contract, as well as any statements made by the parties in connection with this distributorship relationship, shall be interpreted in good faith.

Article 3 Distributor’s 3.1 The

functions

Distributor sells in its own name and for its own account, the Products supplied by the Supplier.

106 Parties may wish to include certain introductory paragraphs describing the history of their relationship, for example to state that the contract continues a prior relationship.

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 THE ICC MODEL FORMS 3.2 The

Distributor agrees to efficiently promote the sale of the Products in the Territory in accordance with the Supplier’s policy and shall protect the Supplier’s interests with the diligence of a responsible businessperson.

3.3 The

Distributor has no authority to act in the name or on behalf of the Supplier or in any way to bind the Supplier towards third parties, unless previously and specifically authorized in writing to do so by the Supplier.

3.4 The

Distributor may, in exceptional cases in which it is not in a position to buy and resell, propose such business to the Supplier for a direct sale to the customer. For such activity as intermediary the Distributor will receive a commission as set out in Annex II, § 1 (if completed) or otherwise to be agreed upon case by case, to be calculated and paid according to Annex II, § 3. It is expressly agreed that such activity as intermediary, to the extent it remains of an accessory character, does not modify the legal status of the Distributor as a trader acting in its own name and for its own account.

Article 4 Undertaking 4.1 Without

not to compete

the prior written authorization of the Supplier, the Distributor shall not represent, directly or indirectly, manufacture, market or sell in the Territory107 any products which are in competition with the Products, for the entire term of this Contract.

4.2 The

Distributor is entitled to represent, manufacture, market or sell any products which are not competitive108 with the Products, provided he informs the Supplier in advance of such activityand provided the exercise of such activity does not prejudice the fulfilment of its obligations under this contract. Distributor declares that it represents (and/or manufactures, markets or sells, directly or indirectly) on the date on which this contract is signed the products listed in Annex III.

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4.3 The

Article 5 Sales

organization

The Distributor shall set up and maintain an adequate organization for sales and, where appropriate, after-sales service, with all means and personnel as are reasonably necessary in order to ensure the fulfilment of its obligations under this Contract for all Products and throughout the Territory.109 Article 6 Marketing 6.1 The

strategies — Advertising and Fairs

parties shall discuss in advance the marketing programme for each year. All advertising materials, including digital, must be approved by the Supplier in advance. The costs of agreed advertising and other marketing activities shall be shared between the parties in accordance with Annex IV, § 1 (if completed); otherwise each party will bear the marketing expenses it has incurred.

6.2 The

Supplier shall provide Distributor, at Supplier’s discretion, with brochures, leaflets, technical and commercial information on the Products, as a support for its marketing activity. Parties shall agree on sharing possible costs of translation and adaptation of such materials. All promotional materials delivered shall remain the exclusive property of Supplier, undertaking Distributor to return them to Supplier upon contract termination.

6.3 The

parties shall agree on their participation in fairs, exhibitions, and other promotional activities within the Territory. The costs of the Distributor’s participation in such fairs, exhibitions and other promotional activities shall be apportioned between the parties as indicated in Annex IV, § 2.

107 The distributor is therefore free to market competing products in other territories. In special situations (e.g. where a relationship between the distributor and a particular competitor of the supplier would substantially impair the confidence between the parties or negatively affect the protection of confidential information), the parties may agree to extend the non-competition obligation beyond the contractual territory. 108 In certain cases the parties may wish to extend the non-competition obligation to the sale of non-competing products supplied by a manufacturer who is a competitor of the supplier. Such prohibition may be justified in cases where a relationship with a competitor of the supplier may impair the confidence between the parties and/or conflict with the need to protect confidential information. 109 The parties may specify in more detail the obligations to be performed: e.g. the nature of the sales premises, qualifications of technical staff, number of sub-distributors, etc. (see also Article 15.2, below). They may also, if appropriate, cover this subject matter in a separate contract.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 6.4 The

parties may agree on a detailed marketing strategy on the basis of the indications contained in Annex V.110

Article 7 Conditions 7.1 The

of supply — Prices

Supplier shall supply all Products ordered, subject to their availability, and provided payment of the Products is adequately warranted. The Supplier may not unreasonably reject orders received from the Distributor; in particular, a repeated refusal of orders contrary to good faith (e.g. if made for the purpose of hindering the Distributor’s activity) shall be considered as a breach of contract by the Supplier.

7.2 The

Supplier agrees to make its best efforts to fulfil the orders it has accepted.111

7.3 Sales

of the Products to the Distributor shall be governed by the Supplier’s general conditions of sale, the currently applicable version of which is attached to this Contract (Annex VI, § 1). In case of conflict between such general conditions and the terms of this Contract, the latter shall prevail.112

7.4 The

prices payable by the Distributor shall be those set forth in the Supplier’s price list in force at the time the order is received by the Supplier with the discount, delivery conditions and lead time indicated in Annex VI, § 2.113 Unless otherwise agreed, such prices are subject to change at any time, subject to one month’s notice.114

7.5 The

Distributor agrees to comply, with the utmost care, with the terms of payment agreed upon between the parties.115

7.6 It is

agreed that the Products delivered remain the Supplier’s property until the Supplier has received payment in full.116

Article 8 Sales 8.1 The

targets — Guaranteed Minimum Target117

parties may agree annually on the sales targets for the forthcoming year.

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8.2 The

parties shall make their best efforts to attain the targets agreed upon, but the non-attainment shall not be considered as a breach of the contract by a party, unless that party is clearly at fault.

8.3 In Annex

VII the parties may agree on a Guaranteed Minimum Target and on the consequences of its non-attainment.

Article 9118

Sub-distributors or agents

9.1 The

Distributor may appoint sub-distributors or agents for the sale of the Products in the Territory, provided the Distributor informs the Supplier before the engagement.

110 The parties may agree on certain marketing rules such as the Consolidated ICC Code of Advertising and Marketing Communication Practice published on 01/08/2011, available at http://www.iccwbo.org/advocacy-codes-and-rules/ document-centre/2011/advertising-and-marketing-communication-practice-(consolidated-icc-code)/ 111 It is understood that the Supplier is not obliged to supply the Products whenever their sale to the Distributor is prohibited under the applicable law (e.g. in case of sanctions, embargo, etc.). 112 This is the more frequently used solution, which corresponds to the needs of the Supplier. However, the Distributor may not agree with all the provisions of general conditions drafted by the Supplier, and may ask to modify clauses it considers too much in favour of the other party. Parties may also wish to consult the General Conditions of the ICC Model International Sale Contract, ICC Publication No. 738, available for sale at: http://www.iccbooks.com/Product/ ProductInfo .aspx?id=686 113 The parties may incorporate the current price list (or a special price list) in Annex I, together with the list of contractual products. 114 It is usual that the supplier retains the right to modify prices, provided he or she gives an appropriate notice. However, an abuse of this right (e.g. an unjustified price increase with respect to a particular distributor) may conflict with Article 2. In order to avoid abuses, parties may agree that the distributor will be granted the most-favored customer condition. 115 Payment conditions will normally be governed by the Supplier’s general conditions of sale, or agreed upon case by case. Parties may however decide to expressly agree in the Contract on the payment conditions to be applied to future sales to the Distributor (e.g. payment by documentary credit, payment on open account possibly backed by a bank guarantee, payment by documentary collection). For further details, consult the ICC Model International Sale Contract, ICC Publication No. 738, available for sale at: http://www.iccbooks.com/Product/ProductInfo .aspx?id=686. 116 The effectiveness of this clause depends on the law applicable in the country where the goods are, and may therefore be invalid in certain countries. 117 A distinction is made between a ‘sales target’ (Articles 8.1 and 8.2) the non-attainment of which does not, in principle, involve a contract breach, and a ‘guaranteed minimum target’ (Article 8.3), which implies a possible contract termination (or other consequences) in case of non-attainment. The sales target is meant to give a realistic objective to pursue, whilst the guaranteed minimum should be the ultimate sanction against a distributor who is failing in the performance of its task. If the parties wish to agree upon such ‘guaranteed minimum target’, they must fill in Annex VII. 118 In certain circumstances it may be advisable to add a clause providing that each party agrees not to engage subagents and/or employees of the other party.

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 THE ICC MODEL FORMS 9.2 The

Distributor shall be responsible for its sub-distributors or agents.

Article 10 Supplier 10.1 The

to be kept informed

Distributor shall exercise due diligence to keep the Supplier informed about the Distributor’s activities, market conditions and the state of competition within the Territory. The Distributor shall answer any reasonable request for information made by the Supplier.119

10.2 The

Distributor shall exercise due diligence to keep the Supplier informed about: (i) the laws and regulations which are applicable in the Territory and relate to the Products (e.g. import regulations, labelling, technical specifications, safety requirements, etc.), and (ii) as far as they are relevant for the Supplier, the laws and regulations concerning the Distributor’s activity.

Article 11 Resale

prices

The Distributor is free to fix the resale prices of the Products, with the only exception of maximum sales prices that the Supplier may impose. The Supplier may indicate “non binding” resale prices, provided this does in no way limit the Distributor’s right to grant lower prices.

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Article 12 Sales

outside the Territory — Internet120 121 122

12.1 A122 

12.1 B123

The Distributor agrees not to actively promote sales (e.g. through advertising, establishing branches or distribution depots) outside the contractual Territory reserved by the Supplier exclusively for itself or allocated by the Supplier to other exclusive distributors or buyers.124

CHECK ANTITRUST COMPLIANCE The Distributor shall not sell the Products to customers established outside the Territory or to customers whom the Distributor should reasonably expect to resell such Products outside the Territory. The Distributor shall transmit to the Supplier all enquiries from customers established outside of the Territory.

12.2 The

Distributor may promote the Products through the Internet, but may not use the Supplier’s trademarks, trade names, symbols and other Intellectual property rights without previously agreeing in writing with the Supplier the details of such use.123

Article 13 Supplier’s 13.1 The

trademarks, trade names and symbols

Distributor shall use the Supplier’s trademarks, trade names and symbols for the purpose of identifying and advertising the Products, within the scope of this Contract.

13.2 The

Distributor shall not register nor have registered on its behalf any trademarks, trade names, or symbols of the Supplier (or which are confusingly similar with the Supplier’s), or use such as domain names or metatags, in the Territory or elsewhere.124

13.3 The

right to use the Supplier’s trademarks, trade names and symbols, as provided for under the first paragraph of this Article, shall cease immediately for the Distributor, on the expiration or termination, for any reason, of the present Contract.

119 Parties are advised explicitly to address whether or not the customer list is included in the information obligation. 120 This clause is in accordance with Regulation 330/2010 and should therefore be used within the European Union. It may be useful to underline that under Regulation 330/2010 the distributor cannot be prevented from selling in territories that have not been reserved to the Supplier or granted to others on an exclusive basis. 121 This alternative is contrary to EU antitrust law, and should therefore be avoided in contracts with distributors of the European Union. 122 This means that the distributor must remain free to accept unsolicited orders from customers established outside the Territory ­(passive sales). 123 The Supplier is entitled to ensure that the use by the Distributor of Supplier’s trademarks for promoting the contractual products fully complies with Supplier’s prescriptions. However, using this right for the purpose of hindering the Distributor in its recourse to the Internet might be considered a restriction of competition. 124 It is of course preferable that the supplier registers its trademarks in the distributor’s country. However if this is not possible (or too expensive), it is in any case important to provide an express prohibition, since under most trademark laws a registration made in breach of an express agreement may be invalidated. Moreover the prohibition also covers trademarks which are confusingly similar.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 13.4 The

Distributor shall notify the Supplier of any infringement of the Supplier’s trademarks, trade names and symbols as well as of any act of unfair competition or illegal trade practice in relation thereto that comes to its attention.

Article 14 Confidential

Information

Each party agrees not to disclose to third parties any Confidential Information disclosed to it by the other party in the context of this Contract in conformity with the ICC Model Confidentiality Clause at Annex VIII. This Article 14 survives the termination of this Contract. Article 15 Stock 15.1 The

of Products and spare parts — After sales service

Distributor agrees to maintain at its own expense, for the whole term of this Contract, a stock of Products and spare parts sufficient for the normal needs of the Territory, and in any case at least as indicated in Annex IX.

15.2 The

Distributor agrees to provide after sales service according to the terms and conditions set out in Annex IX, provided such Annex has been completed.

Article 16 Sole

distributorship

Supplier shall not, during the term of this Contract, grant any other person or undertaking (including a subsidiary of the Supplier) within the Territory the right to represent or market the Products. The Supplier shall furthermore refrain from selling to customers established in the Territory, except pursuant to the conditions set out under Article 17 hereafter.125

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16.1 The

16.2 A 

16.2 B 

The Supplier is entitled to sell the Products to customers outside the Territory, even if such customers intend to export the Products into the Territory, but may not actively solicit or otherwise provoke such sales to third parties with the purpose of circumventing the exclusivity under Article 16.1.

CHECK ANTITRUST COMPLIANCE

16.3 A 

16.3 B 

The Supplier is entitled to sell the Products on the Internet through its own portal or by any other means, without any limitation. The Supplier will take reasonable precautions in order to reduce interference of its promotion through the Internet with the Distributor’s activity.

The Supplier is entitled to sell the Products on the Internet through its own portal or by any other means. However, on sales to Contractual Customers established in the Territory, the Distributor shall be entitled to a reduced commission to be calculated according to Annex II, § 3.

Article 17 Direct 17.1 The

The Supplier shall not sell the Products to customers outside the Territory, when the Supplier knows, or cannot have been unaware, that such customers intend to resell the Products within the Territory. The Supplier will also impose on its other distributors an obligation corresponding to that under this Article 16.2.B.

sales

Supplier shall be entitled to deal directly with the special customers listed in Annex II, § 2; in respect of the sales to such customers the Distributor may be entitled to a commission, if any, as provided for in Annex II, § 2. This article shall not apply if § 2 of Annex II (Special customers commission) has not been completed by the parties.

17.2 Whenever

a commission is due to the Distributor, it shall be calculated and paid according to Annex II, § 3.

Article 18 Distributor

to be kept informed

125 This alternative is contrary to EU antitrust law, and should therefore be avoided in contracts with EU distributors, as well as in contracts with distributors outside the European Union, if there is a risk that they might resell (in absence of the clause) within the EU.

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 THE ICC MODEL FORMS 18.1 The

Supplier shall provide the Distributor free of charge with all documentation relating to the Products (brochures, etc.) reasonably needed by the Distributor for carrying out its obligations under the Contract.126 The Distributor shall return to the Supplier, at the end of this Contract, all documents that have been made available to it by the Supplier and that remain in its possession.

18.2 The

Supplier shall provide the Distributor with all other information reasonably needed by the Distributor for carrying out its obligations under the Contract including without limitation any information regarding a material decrease in its supply capacity.

18.3 The

Supplier shall keep the Distributor informed of any relevant communication with customers in the Territory.

18.4 If the

Supplier expects that its capacity of supply will be significantly lower than that which the Distributor could normally expect, it will inform the Distributor within a reasonable time.

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Article 19 Term

of the Contract127128 129

19.1 A129 

19.1 B130 

19.1 C131 

This Contract enters into force on

This Contract is concluded for an indefinite period and enters into force on

This Contract enters into force on the

and shall remain in force until terminated according to Articles 19.2 or 20, but shall in any case expire (if not terminated earlier) after a period of five years from the date of its entry into force. The parties agree to meet at least three months before the end of the five years’ period in order to discuss the possibility of entering into a new contract after its expiration.

and shall remain in force until

. .

126 Parties may further specify in the contract if such documentation should be adapted to the distributor’s market or if the distributor should make the necessary modifications at its own expense. 127 This alternative A has been worked out in order to comply with the EU antitrust rules. Since Regulation 330/2010 does not allow the non-competition clause (Article 4 of the model contract) to last for more than five years and since this clause is essential for the performance of the contract, Article 19.A limits the contract duration to a maximum period of five years. Of course the parties may enter into a new contract at the end of the five-year period. 128 This alternative B is very similar to option A: the only difference is that the clause does not foresee the maximum duration of 5 years requested by EU antitrust law. This clause should be considered as complying with the EU antitrust rules if the market share of each of the parties does not exceed 15% on any of the relevant markets affected by the agreement (see Commission notice on agreements of minor importance, 2014/C 291/01). 129 The parties may of course agree on shorter or longer periods of notice. It is however recommended that the period should be long enough to allow the parties to adapt themselves to the new situation created by the termination. This necessity should in particular be taken into account when the distributor agrees to make substantial investments specifically for the sale of the goods of the Supplier

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19.2 A 

19.2 B 

19.2 C 

This Contract may be terminated by either party at any time by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than 4 months in advance. If the Contract has been replaced by a new contract after the five years’ period, the period of notice will be 6 months.132 The end of the period of notice must coincide with the end of a calendar month..

This Contract may be terminated by either party at any time by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than 4 months in advance. If the Contract has been in force for more than five years, the period of notice will be 6 months. The end of the period of notice must coincide with the end of a calendar month.

This Contract shall thereafter be automatically renewed for successive periods of one year, unless terminated by either party by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than four months before the date of expiry. If the Contract has been in force for more than five years, the period of notice will be 6 months

Article 20 Earlier

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20.1 Each

termination130

party may terminate this Contract with immediate effect, by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), in case of a substantial breach by the other party of the obligations arising out of the Contract, or in case of exceptional circumstances justifying the earlier termination.

20.2 Any

failure by a party to carry out all or part of its obligations under the Contract resulting in such detriment to the other party as to substantially deprive such other party of what it is entitled to expect under the Contract, shall be considered a substantial breach for the purpose of Article 20.1. above. Circumstances in which it would be unreasonable to require the terminating party to continue to be bound by this Contract, shall be considered as exceptional circumstances for the purpose of Article 20.1. above.

20.3 The

parties hereby agree that the violation of the provisions under ……………..131 of the present Contract is to be considered, as a substantial breach of the Contract. Moreover, any violation of the contractual obligations may be considered as a substantial breach, if such violation is repeated notwithstanding a request by the other party to fulfil the contractual obligations.

20.4 Furthermore,

the parties agree that the following situations shall be considered as exceptional circumstances which justify the earlier termination by the other party: bankruptcy, moratorium, receivership, liquidation or any kind of arrangement between debtor and creditors,132 or any other circumstances which are likely to affect substantially one party’s ability to carry out its obligations under this Contract.

130 This alternative C may also be used when the parties wish to have a trial period. If they wish that after such period the contract will be for an indefinite time, they must change appropriately article 19.2. 131 The parties may make reference here to those articles for which a breach is considered of particular importance. This may be the case for Articles 4 (undertaking not to compete), 7.5 (respect of agreed payment conditions), 8.3 (guaranteed minimum target: if agreed), 13.2 (unauthorized registration of the manufacturer’s trademarks by the distributor) and 16 (respect of exclusive rights by the manufacturer). It is recommended that the use of this Article be limited to really important obligations only. 132 Although provisions of this kind are commonly found in distributorship and agency agreements, it should be reminded that in several countries clauses which provide for the earlier termination in case of bankruptcy or similar proceedings are unlawful under such law.

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 THE ICC MODEL FORMS 20.5 If the

parties have filled in Annex XI, the Contract may also be terminated by the Supplier with immediate effect in case of change of control, ownership and/or management of the Distributor company, according to the provisions set forth in Annex XI.133

20.6 If a

party terminates the Contract according to this Article, but it is thereafter ascertained that the reasons put forward by that party did not justify the earlier termination, the termination will be effective, but the other party will be entitled to damages for the unjustified earlier termination. Such damages will be equal to the gross profits of the sale of the Products for the period the Contract would have lasted in case of normal termination, based on the turnover of the preceding year, unless the damaged party proves that the actual damage is higher (or, respectively, the party having terminated the Contract proves that the actual damage is lower). The above damages are in addition to the indemnity which may be due under Article 21.

Article 21 Goodwill

indemnity134135

21 A136 

21 B 

21.1 The Distributor shall not be entitled to

21.1 In case of termination by the Supplier

an indemnity for goodwill or similar compensation137 (‘indemnity’) in case of the termination of the Contract.

for reasons other than a substantial breach by the Distributor, the latter shall be entitled to an indemnity according to Annex XII. 21.2 The goodwill indemnity under this

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Article 21 (“Contractual Indemnity”) is in lieu of any goodwill indemnity or equivalent compensation the Distributor may be entitled to by virtue of rules of law applicable to the present Contract (“Statutory Indemnity”) and will consequently replace such Statutory Indemnity (if any). However, in case the Distributor’s right to the Statutory Indemnity cannot be validly replaced by the Contractual Indemnity under the applicable law, Article 21.1 will not apply and the Distributor will be entitled to the Statutory Indemnity in lieu of the Contractual Indemnity set out in this Article 21.1 hereabove. 21.3 The above provision does not affect the

Distributor’s right to claim damages for breach of Contract as far as the termination by the Supplier amounts to such a breach, and is not already covered by Article 20.6 Article 22 Return 22.1 Upon

of documents and products in stock

expiry of this Contract the Distributor shall return to the Supplier all promotional material and other documents and samples which have been supplied to it by the Supplier and are in the Distributor’s possession.

22.2 At

the Distributor’s option, the Supplier will buy from the Distributor all Products the latter has in stock, provided they are still currently sold by the Supplier and are in new condition and in original packaging, at the price originally paid by the Distributor. Products not so purchased by the Supplier must be sold by the Distributor in accordance with the Contract on usual terms.

133 In cases where the distributor is a company, the supplier may have entered into the contract in reliance on a particular individual remaining active within the organization. Annex XI can be completed to cover this situation. 134 This provision may be contrary to mandatory rules of certain countries. See, Introduction, §5 135 This broad definition is meant to cover any compensation to be paid in case of contract termination, independent from a breach of contract by the supplier, including payments that are no defined as an ‘indemnity’ or ‘goodwill indemnity’.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 23 Resolution 23.1 The

of disputes

parties may at any time, without prejudice to Article 23.2, seek to settle any dispute arising out of or in connection with this Distributorship Contract in accordance with the ICC Mediation Rules.136 23.2 A  Arbitration

23.2 B  Litigation (ordinary courts)

Subject to Art 23.1, all disputes arising out of or in connection with the present distributorship Contract shall be submitted to the International Court of Arbitration of the International Chamber of Commerce and shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.139

In case of dispute the courts of

Article 24 Applicable

(country) shall have exclusive jurisdiction..

law137138

24 A  General principles

24 B  National law

24.1 Any questions relating to this Contract

24.1 This Contract is governed by the laws

which are not expressly or implicitly settled by the provisions contained in this Contract shall be governed, in the following order:

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(place)

(a) by the principles of law generally

of (name of the country the law of which is to apply)140 regardless of the conflict of law rules of that country.

recognized in international trade as applicable to international distributorship contracts, (b) by the relevant trade usages, and (c) by the UNIDROIT Principles of

International Commercial Contracts, with the exclusion — subject to the second paragraph of this clause — of national laws.

The parties agree that in any event consideration shall be given to mandatory provisions of the law of the country where the Distributor is established which would be applicable even if the Contract is governed by a foreign law (overriding mandatory rules). Any such provisions will be taken into account to the extent they embody principles which are universally recognized and provided their application appears reasonable in the context of international trade. 24.2 Unless

otherwise agreed in writing or regulated in the Supplier’s general conditions of sale, the sale contracts concluded between the Supplier and the Distributor within this

136 The ICC Mediation Rules can be found on the web site http://www.iccwbo.org/products-and-services/arbitration-and-adr/mediation/rules/. 137 Parties should choose whether to appoint one or more arbitrators 138 This model form has been prepared on the assumption that it would not be governed by a specific national law (as stated in alternative A of Article 24.1.). If the parties prefer nevertheless to submit the agreement to a national law, they should carefully check in advance, if the clauses of the model conform to the mandatory provisions of the law they have chosen.

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Distributorship Contract will be governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, hereafter referred to as CISG), and to the extent that such questions are not covered by CISG and that no applicable law has been agreed upon, by reference to the law of the country where the Supplier has its business. Article 25 Automatic 25.1 If the

inclusion under the present Contract

parties have not made a choice between the alternative solutions provided in Articles 12, 16.2, 16.3, 19, 21, 23.2 and 24.1 under the letters A and B, by deleting one of the alternatives, and provided they have not expressly made a choice by other means, alternative A shall be considered applicable.

25.2 The

Annexes attached to this model form an integral part of the Contract. Annexes or parts of Annexes which have not been completed will be effective only to the extent and under the conditions indicated in this Contract.

Article 26 Previous 26.1 This

agreements — Modifications — Nullity — Assignment

Contract replaces any other preceding agreement between the parties on the subject, except for any pre-existing confidentiality agreements.

26.2 No

addition or modification to this Contract shall be valid unless agreed in writing. However, a party may be precluded by its conduct from asserting the invalidity of additions or modifications not made in writing to the extent that the other party has relied on such conduct.

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26.3 If any

provision or clause of this Contract is found to be null or unenforceable, the Contract will be construed as a whole to effect as closely as practicable the original intent of the parties; however, if for good cause, either party would not have entered into the Contract knowing the interpretation of the Contract resulting from the foregoing, the Contract itself shall be null.

26.4 The

present Contract cannot be assigned without the prior written agreement of the parties.

Article 27 Authentic

text

The English text of this Contract is the only authentic text.139 Made in

on the

The Supplier

The Distributor

Annex I Products

and Territory (Article 1.1)

§ 1 Products

If this paragraph 1 of Annex I has not been filled in, all products manufactured and/or sold by the Supplier at present and in the future shall be considered as “Products” for the purpose of this Contract.140  139 If the contract is written in another language, this clause should of course be modified to indicate the language of the contract. 140 If the parties choose this solution (including any future products in the contract) problems may arise in case of conflict between new products from the Supplier and products of other manufacturers already represented by the Distributor. If such problems are foreseeable, the parties should define appropriate rules for solving the conflict.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS § 2 Territory

If this paragraph 2 of Annex I has not been filled in, the whole territory of the country where the Distributor has its place of business will be considered as “Territory” for the purpose of this Contract. § 3 Contractual

customers141

The categories of customers to which this distributorship agreement applies are all customers established in the Territory, except the following Excluded Customers: …… duty-free shops …… third-party web portals …… public administration bodies ……

(other) Excluded Customers remain outside the scope of the distribution contract and in particular of the exclusivity granted in Article 16 and of the right to commission under Article 17.

If this paragraph 3 of Annex I has not been filled in, all the customers in the Territory will be considered as “Contractual Customers “ for the purpose of this contract. Annex II Commission

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§ 1 Normal

on direct sales

commission (Article 3.4.)

When acting as an intermediary, in conformity with Article 3.4., the Distributor is entitled to a commission of % § 2. Special

customers commission (Article 17)142

On all direct sales to the following customers the Distributor is entitled to the following commission: % % % % § 3. Calculation

and payment of commission

3.1 Commission

shall be calculated on the EXW Incoterms® rule reference value, irrespective of the Incoterms® rule chosen in the contract of sale.143

3.2 The

Distributor shall acquire the right to commission after full payment by the customers of the invoiced price. In case of partial payment made in compliance with the sales contract, the Distributor shall be entitled to a proportional payment.

3.3 Except

as otherwise agreed, the commission shall be calculated in the currency of the sales contract in respect of which the commission is due.

3.4 To the

extent allowed by applicable law, any taxes imposed on the Distributor’s commission in the Territory are for the Distributor’s account.

Annex III Products

and suppliers represented by the distributor (Article 4.3)

The Distributor hereby declares that it represents (and/or manufactures, markets or sells, directly or indirectly) on the date on which this Contract is signed, the following products for the following suppliers: 141 Parties may define market segments here or withdraw individual customers who are already customers of the Supplier. 142 If the supplier wishes to include further customers in this list, he or she will require the agreement of the distributor. Parties may provide that in such case the supplier pays a goodwill indemnity on the turnover of such customers, if they have been acquired previously by the distributor. 143 Please note that the ICC does not recommend the Incoterms® EXW as the selected trade term for international sales.

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SUPPLIER PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annex IV Advertising, § 1 Advertising

fairs and exhibitions (Article 6)

and other marketing expenses (Article 6.1)

Except as otherwise agreed in writing, the costs of agreed advertising and other marketing expenses shall be shared between the parties as follows: Supplier:

%

Distributor:

%

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If the spaces left blank in the above paragraph are not filled in by the parties, each party will bear the advertising costs it has incurred. § 2 Fairs and

exhibitions (Article 6.3)

Except as otherwise agreed in writing, the costs for participation in fairs and exhibitions shall be shared between the parties as follows: Supplier:

%

Distributor:

%

If the spaces left blank in the above paragraph are not filled in by the parties, each party will bear the advertising costs it has incurred. Annex V Marketing

strategies (Article 6.4)

Note to Supplier

and Distributor

Please provide your views to adapt this Annex to your Product and target market. Market research

Distributor undertakes to accomplish during the six-month term following the date this Contract enters in force and to provide the Supplier, with a market research, whose minimum scope shall be the following:  Market trend for the Products in the Territory.  Product sales in the last three years in the Territory.  Identification of different market segments.  Key factors for customer demand, per market segment.  Comparative analysis with existing competing Products.  Identification of key opinion leaders, purchase advisors and distribution channels.  Forecast for similar products for the current year. Marketing

Strategies

Please summarize Distributor´s commitments concerning market approach, i.e.:  Exhibiting the Products in the major exhibitions held in the Territory (if there is any of special relevance for this sector, please indicate);

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 Advertising and advertising rules such as the Consolidated ICC Code of Advertising and Marketing Communication Practice published on 01/08/2011, available at http://www.iccwbo.org/advocacy-codes-and-rules/document-centre/2011/ advertising-and-marketing-communication-practice-(consolidated-icc-code)/ ;  Carrying out Product demonstrations;  Drafting technical reviews for specialised media;  Visiting key opinion leaders;  Etc. Training commitments

Distributor shall maintain competent and skilled staff properly trained by the Supplier to promote, sell and maintain an adequate after sales service for the Products (please clarify the Supplier´s contribution to this training in terms of cost, venue, term, etc). Disclosure

commitments

Distributor shall provide Supplier on a half-yearly basis:  A six-month forecast of sales.  A half-yearly sales action plan for the Territory.  A report of sales in the Territory by channel for the previous half-year. Annex VI Conditions § 1 Supplier’s

of sale — Discounts (Article 7)

general conditions of sale

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To be annexed to the Contract. The Supplier’s conditions of sale shall apply only if they have been annexed to this document, or if they have been otherwise transmitted in writing to the Distributor for the purposes of this Contract. § 2. Specific a) The

discounts and/or conditions granted to the Distributor.

Distributor is granted a discount of …. % on the list prices referred to in Article 7.4.

b) Unless

otherwise agreed, all sales are executed in accordance with the Incoterms® rule …… in the version current at the date of conclusion of the sales contract.

c) The

lead time shall be ..… days. Lead time means the period of time between the date of receipt of any accepted order and the date of shipment of the Products, irrespective of the Incoterms® rule agreed upon. If the space left blank in the above paragraph is not filled in by the parties, and provided there is no special list price for distributors, the Distributor will be entitled to the discount normally granted by the Supplier to distributors being in the same situation for similar quantities of Products.

§ 3 Terms of

payment

The parties may choose between the following terms of payment: a) by deferred b) to be

payment (with ….. days from date of invoice)

agreed upon case by case in the individual contract of sale

c) Other:

In addition, the parties have agreed on the following payment securities, if any: If neither paragraph 1 of this Annex VI is applicable, nor this paragraph 3 of Annex VI has been completed by selecting one of the alternatives and no other agreement on terms of payment has been made in writing, alternative A (with 30 days from date of invoice) shall apply.

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 THE ICC MODEL FORMS Annex VII Guaranteed

Minimum Target (Article 8.3)

This Annex VII is applicable only if the parties have fixed the minimum target by filling in one of the alternatives hereafter. The Distributor undertakes, during each year, to place orders for not less than: (amount in money)144  (amount in Products) If at the end of the year the above Guaranteed Minimum Target has not been attained, unless the Distributor shows that it cannot be held responsible for such nonattainment, the Supplier shall be entitled, subject to giving one month’s notice, at its choice, to terminate this contract, or to cancel the Distributor’s exclusivity, or to reduce the extent of the Territory or the range of the Products. This right must however be exercised in writing not later than two months after the end of the year in which the Guaranteed Minimum Target has not been attained. Unless the parties hereafter agree on different figures, the Guaranteed Minimum Target indicated above shall also be applicable for each year of the duration (including the case of renewal) of this Contract. Annex VIII ICC

Model Confidentiality clause 2006 (Article 14)

1.1 Agreement

means the contract incorporating this Clause.

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Purpose means the purpose of the Agreement. Disclosing Party means the Party disclosing Confidential Information to the Receiving Party. Permitted Recipients means any director, officer, employee, adviser or auditor of the Receiving Party or any of its Related Companies who reasonably needs to know Confidential Information for the Purpose. Receiving Party means the Party receiving Confidential Information from the Disclosing Party. Related Company means any corporation, company or other entity that controls, or is controlled by, one Party or by another Related Company of that Party, where control means ownership or control, direct or indirect, of more than fifty (50) per cent of that corporation’s, company’s or other entity’s voting capital. Confidential Information means any information or data, or both, communicated by or on behalf of the Disclosing Party to the Receiving Party, including, but not limited to, any kind of business, commercial or technical information and data in connection with the Purpose, except for such information that is demonstrably non-confidential in nature. The information shall be Confidential Information, irrespective of the medium in which that information or data is embedded, and whether the Confidential Information is disclosed orally, visually or otherwise. Confidential Information shall include any copies or abstracts made of it as well as any products, apparatus, modules, samples, prototypes or parts that may contain or reveal the Confidential Information. Confidential Information is limited to information disclosed on or after the date of signature of this Agreement. 1.2 The

Receiving Party shall:

a) not disclose

any Confidential Information to anyone except to the Permitted Recipients, who are bound to the same level of confidentiality obligations as set forth by this Clause;

b) use

any Confidential Information exclusively for the Purpose; and

c) keep

confidential and hold all Confidential Information with no less a degree of care as is used for the Receiving Party’s own confidential information and at least with reasonable care.

144 If this alternative is chosen, care should be taken in order to avoid the agreed sum being automatically reduced (from year to year) as a consequence of inflation, e.g. by providing a yearly increase.

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obligation to keep confidential all Confidential Information shall not apply to the extent that the Receiving Party can prove that any of that information:

a) was

in the Receiving Party’s possession without an obligation of confidentiality prior to receipt from the Disclosing Party;

b) is at

the time of disclosure, or subsequently becomes, generally available to the public through no breach of this Agreement by the Receiving Party or any Permitted Recipient;

c) is lawfully

obtained by the Receiving Party from a third party without an obligation of confidentiality, provided that third party is not, to the Receiving Party’s best knowledge, in breach of any obligation of confidentiality to the Disclosing Party relating to that information; or

d) is developed

by the Receiving Party or its Related Companies independent of any Confidential Information.

1.4 Unless

otherwise specified by the Disclosing Party at the time of disclosure, the Receiving Party may make copies of the Confidential Information to the extent necessary for the Purpose.

1.5 Nothing

in this Agreement shall obligate either Party to disclose any information.

Each Party has the right to refuse to accept any information under this Agreement prior to any disclosure. Confidential Information disclosed despite an express prior refusal is not covered by the obligations under this Clause.

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1.6 Nothing

in this Agreement shall affect any rights the Disclosing Party may have in relation to the Confidential Information, neither shall this Agreement provide the Receiving Party with any right or licence under any patents, copyrights, trade secrets, or the like in relation to the Confidential Information, except for the use of Confidential Information in connection with the Purpose and in accordance with this Clause.

1.7 The

Disclosing Party makes available the Confidential Information as is and does not warrant that any of this information that it discloses is complete, accurate, free from defects or third-party rights, or useful for the Purpose or other purposes of the Receiving Party.

1.8 This

Clause does not:

a) create

any other relationship between the Parties;

b) oblige

a Party to enter into any other contract; or

c) require

consideration for any information received.

1.9 In addition

to any remedies under the applicable law,2 the Parties recognize that any breach or violation of any provision of this Clause may cause irreparable harm to the other Party, which money damages may not necessarily remedy. Therefore, upon any actual or impending violation of any provision of this Clause, either Party may obtain from any court of competent jurisdiction a preliminary, temporary or permanent injunction, restraining or enjoining such violation by the other Party or any entity or person acting in concert with that Party.

1.10 Within

ninety (90) days of termination of this Agreement, the Disclosing Party may request the disposal of the Confidential Information. Disposal means execution of reasonable measures to return or destroy all copies including electronic data. Destruction shall be confirmed in writing. Disposal shall be effected within thirty (30) days of the request being made. The provisions for disposal shall not apply to copies of electronically communicated Confidential Information made as a matter of routine information technology back-up and to Confidential Information or copies of it that must be stored by the Receiving Party or its advisers according to provisions of mandatory law, provided that this Confidential Information or copies of it shall be subject to continuing obligations of confidentiality under this Agreement; but no further use shall be permitted as from the date of the request.

1.11 Neither

Party shall be in breach of this Clause to the extent that it can show that any disclosure of Confidential Information was made solely and to the extent necessary to comply with a statutory, judicial or other obligation of a mandatory nature, afterwards

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 THE ICC MODEL FORMS

referred to as “Mandatory Obligation”. Where a disclosure is made for these reasons, the Party making the disclosure shall ensure that the recipient of the Confidential Information is made aware of and asked to respect its confidentiality. This disclosure shall in no way diminish the obligations of the parties under this Clause except to the extent that a Party is compelled by any Mandatory Obligation to disclose Confidential Information without restriction. To the extent permitted by any Mandatory Obligation, the Receiving Party shall notify the other Party without delay in writing as soon as it becomes aware of an enquiry or any process of any description that is likely to require disclosure of the other Party’s Confidential Information in order to comply with any Mandatory Obligation. 1.12 Upon

termination, the Receiving Party shall stop making use of the Confidential Information. The obligations of the Parties under this Agreement shall survive indefinitely or to the extent permitted by the applicable mandatory law.

Annex IX Stock

of products and spare parts (Article 15.1)

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The Distributor agrees to maintain the following minimum stock of Products and spare parts:

If the Annex here-above is not filled in by the parties, the minimum stock will be determined according to the reasonable requirements for the Territory. Annex X After

sales service, repairs, warranty (Article 15.2)

This Annex shall be applicable only if signed by the parties. 1. The

Distributor agrees to provide, at its expense and with its own personnel and technical means, suitable after sales service, which shall extend to all the Products in respect of which such assistance may be required in the Territory. Such after sales service shall be provided in accordance with the standards indicated by the Supplier.

2. The

Supplier shall provide the Distributor with the training necessary to enable the latter’s personnel to provide the above services. The Distributor agrees that, at its own expense, its technical and sales personnel will participate in such relevant training and updating of courses as the Supplier may decide to organize.

3. The

Distributor shall carry out free of charge all repairs and replacements provided for in the warranty conditions of the Supplier and shall bear all the expenses of such service. The Supplier shall supply the Distributor with the items or parts needed to replace defective items or parts under the warranty conditions.

4. After

expiration for whatever reason of this Contract the Distributor shall discontinue any after sale or warranty service, unless otherwise agreed upon in writing between the parties. Any request from the customers shall be transmitted by the Distributor to the persons indicated by the Supplier. The Supplier The Distributor

Annex XI Change

of control, ownership and/or ­management in the Distributor (Article 20.5) The supplier may terminate this Contract with immediate effect, if: Mr./Ms.

ceases to own more than % of the shares of the Distributor company.

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Mr./Ms. the Distributor company. Annex XII Goodwill

ceases to be the

145 of

Indemnity146 (Article 21 B)

This Annex shall be applicable only if signed by the parties. § 1 In case

of Contract termination by the Supplier for reasons other than a breach by the Distributor, justifying earlier termination under Article 20, the latter shall be entitled to an indemnity equal to 50 % or % of the annual gross profit made with new customers acquired by the Distributor or with customers with whom the Distributor has significantly increased the volume of business, to be calculated on the average of the preceding five years (or, if the Contract has lasted less than five years on the average of such duration).

§ 2 The

Distributor undertakes to make its best efforts to have the existing customers transferred to the Supplier or to the new distributor (or agent) of the Supplier. In pursuance of the above obligation the Distributor agrees to refrain, for a period of 12 months from Contract termination, directly or indirectly, from selling, distributing or promoting any products which are in competition with the Products to customers to which it previously sold the Products or promoted the sale of the Products under this Contract.

§ 3 The

indemnity shall be paid in three instalments of equal amount respectively 4, 8 and 12 months after contract termination. The payment of the indemnity is made conditional upon the performance, by the Distributor, of the obligation under § 2, hereabove.

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§ 4 The

Distributor has the option to waive its right to indemnity at any time. In this case the non-competition clause under § 2 above as well as the obligation to encourage the transfer of existing customers to the Supplier or new distributor (or agent) will cease to apply. Exercising this option shall not require the Distributor to reimburse any instalment which has already been paid. The Supplier The Distributor

7.4.9 The ICC

Model Distributorship Contract (short form)

The ICC Short Form Model International Distributorship Contract intends to answer the need of business people who are looking for a short contract that only deals with the most important issues. The following description of the model is based for the most part on the introduction to the model form, the full text of which can be found in ICC publication No. 791. 7.4.9.1 Scope

of application of the “short form”

This “short form” is a simplified contract intended for parties who do not want a detailed distributorship contract, but prefer a shorter simpler form covering only the most essential issues. It should be stressed that a “short form” contract will contain only provisions covering the most typical issues arising between the parties and will not provide the choice of more sophisticated alternative provisions, which might be more appropriate for some users. Indeed, some issues may arise which are not covered at all, and they will be left for the courts to determine.

145 Specify here the position that the qualifying person has in the distributor (company), e.g. director, general manager, president of the board, as the case may be. This clause may be dangerous for the distributor company, particularly if the qualifying person is not the owner, but only an employee. 146 This clause is to be considered as an example of possible contractual solutions, which should be worked out by the parties, according to their specific needs. In particular, while this clause mainly refers to the value of the goodwill, other aspects (as, for example, investments made by the distributor) may be taken into account.

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If parties need more sophisticated solutions, they should use the “full” ICC Model Distributorship Contract (Sole Importer-Distributor) (ICC publication No. 776), which provides a more complete set of clauses and options, particularly in the annexes. 7.4.9.2 Comments

on specific points

Products (Box A-3-A). If the parties do not fill in A-3, the contract will cover all of the supplier’s products (see Article 1.2). If the parties define the products in box A-3, they may refer to categories of products or to specific models. If the space is not sufficient, reference may be made to an annex: e.g. by writing in box A-3-A “see Annex 1”. Goodwill indemnity (Box A-6). In most countries, the distributor is not entitled to a goodwill indemnity. However, since parties may wish to introduce this type of benefit, the model gives them the option (under box A-6) to make such a choice. If the parties decide to agree upon a “contractual” goodwill indemnity, such indemnity is assumed to be the only goodwill indemnity due to the distributor. This is why Article 11.2 expressly states that the goodwill indemnity under Article 11 cannot be cumulated with any indemnity that might be due under the applicable law.

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Applicable law (Box A-12). The recommended solution is not to submit the contract to a specific national law, but to only refer to the general principles of law generally recognized in international trade (see Article 12.1). In this case, parties should either not complete Box A-7 or should choose alternative A-7-A. For a more detailed information about the pros and cons of this a-national choice of law clause, you can consult the study drafted by a special task force of the CLP Commission: “Developing neutral legal standards for international contracts. A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts”. The publication in question is available for free download on the ICC Store homepage: http://store.iccwbo.org/. However, since this solution is more appropriate when disputes are submitted to arbitration rather than to litigation in national courts, the choice of a specific national law will be preferable if the parties decide to have recourse to litigation before the ordinary courts (see Box A-8-B). In this case, however, the parties should check if and to what extent the contract conforms to the provisions of the applicable domestic law. Law governing sales to the distributor (Article 12.2). As regards sales contracts concluded between the supplier and the distributor, Article 12.2 provides that the sale contract will be governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, also called “CISG”), since such solution appears to be the most appropriate for international contracts of sale. This does not, of course, prevent the parties from making a different choice, particularly by using general conditions of sale (or of purchase) annexed to the distributorship contract. Resolution of disputes (Box A-8). Box A offers the choice between arbitration and jurisdiction of ordinary courts. If no choice is made, ICC arbitration will apply, by virtue of Article 12.3. Parties should be aware that in certain countries the above clauses may be ineffective due to public policy rules reserving jurisdiction to local courts. Reservation of title (Article 6.5). This Article states in general terms that the products delivered to the distributor remain the property of the supplier until complete payment is received. However, such reservation of title will only be effective to the extent that it is permitted by the law governing transfer of title of the products, which will normally be the law of the country where the goods are. Parties should consequently check if reservation of title is valid in the distributor’s country and if any special requirements are needed for its validity. EU competition rules. As regards contracts within the European Union (or capable of producing significant effects within the EU) the EU competition rules and particularly Article 101 of the Treaty on the Functioning of the European Union (TFEU) are to be respected. Except for the case that the supplier has a market share of 30% or higher (in which case an individual exemption may be needed), in all other cases it will be sufficient that the contract complies with the block exemption under Regulation 330/2010. In this model solutions are proposed which meet the requirements of that INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 253

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

regulation, particularly as regards sales outside the contractual territory (Article 7.1) and resale prices (Article 7.2). Moreover, since under the regulation non-competition obligations should not exceed five years, the maximum duration of the contract has been limited to five years (see Article 9.1). Internet sales. If the Principal wishes to sell its products on the Internet through its own website or otherwise, parties should decide whether they should exclude such sales from the exclusivity granted to the distributor under Article 5 or look for other possible solutions. It has been considered that it was not appropriate to deal with this issue in this “short form”. A clause offering two alternative solutions to this issue can be found in Article 16.3 of the “full” ICC Model Distributorship Contract (ICC publication No. 776). 7.4.10 Text

of the ICC Model Distributorship Contract (short form)

PART I Special

A-1

Conditions Supplier

Name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������ Address: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������ Tax identification number . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������ Represented by . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������ in his/her capacity of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������

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(hereinafter called the “Supplier”) A-2

Distributor

Name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������� Address: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������� Tax identification number . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������� Represented by . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ������������������������������������������������������������������������������� in his/her capacity of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �������������������������������������������������������������������������������

(hereinafter called the “Distributor”) A-3

Products and Territory (Article 1.1)

A. The contractual products are:

B. The contractual territory is:

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A-4

Reserved customers (Article 8.3)

The following customers (or categories of customers) are excluded from the exclusivity and will be supplied directly by the Supplier in accordance with Article 8.3. ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������

Table of Contents

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A-5

Yearly Minimum Purchase (Article 5)

Year

Currency

Amount











































If this box has not been filled in, Article 5 is not applicable. A-6

Discount to Distributor (Article 6.2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .%

This box must not be completed if the price to the Distributor is already a net price (e.g. if there is a special list price for distributors). A-7

Applicable law

The two solutions hereunder (general principles of law and domestic laws) are alternatives: parties should not choose both of them. If no choice is made, general principles of law will apply, in accordance with Article 13.1. A.

 General principles of law

B.

This distributorship contract shall be governed by the rules and principles of law generally recogni­sed in international trade together with the UNIDROIT Principles of International Commercial Contracts, as specified in Article 11.1 of the general conditions.

 Domestic law This distributorship contract shall be governed by the laws of ��������������������������������������������������������������������������� (country).

If the parties select alternative B, they should first check if the provisions contained in the present Contract are in accordance with the domestic law they have chosen.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

A-8

Resolution of disputes

The two solutions hereunder (arbitration or litigation before ordinary courts) are alternatives: parties cannot choose both of them. If no choice is made, ICC arbitration will apply, in accordance with Article 11.4. A.

 ARBITRATION



 ICC (In accordance with Article Article 11.4)



 Other:

B.

In case of dispute the courts of ��������������������������������������������������������������������������� (place)

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��������������������������������������������������������������������������� (country) shall have exclusive jurisdiction.

Place of arbitration: ���������������������������������������������������������������������������

A-9

 LITIGATION (ordinary courts)

Date and signature of the parties

This distributorship contract (the “Contract”) is governed by the Special Conditions hereabove (to the extent the respective boxes have been filled in) and by the General Conditions contained in Part II hereafter. ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� (place)

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The Supplier

The Distributor

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PART II General 1 Territory 1.1 The

Conditions

and Products

Supplier grants and the Distributor accepts the exclusive right to market and sell the products listed in box A-3-A , as well as any other products the parties may agree in writing to include in box A-3-A at any time during the term of this Contract (hereinafter called “the Products”) in the territory (if any) indicated in box A-3-B (hereinafter called “the Territory”).

1.2 If the

parties have not completed box A-3-A, all products manufactured and/or marketed by the Supplier at present and in the future will be considered as “Products” for the purpose of this Contract.

2 Good faith

2.1 In carrying

and fair dealing

out their obligations under this Contract the parties will act in accordance with good faith and fair dealing.

2.2 The

provisions of this Contract, as well as any statements made by the parties in connection with this distributorship relationship, shall be interpreted in good faith.

3 Distributor’s 3.1 The

functions

Distributor sells in its own name and for its own account, in the Territory, the Products supplied by the Supplier.

3.2 Unless

otherwise agreed in writing, the Distributor is not entitled to act in the name or on behalf of the Supplier, unless previously and specifically authorized in writing to do so by the latter.

3.3 The

Distributor agrees to efficiently promote the sale of the Products in the Territory in accordance with the Supplier’s policy and shall protect the Supplier’s interests with the diligence of a re­sponsible busi­nessperson. The Distributor shall set up and maintain an adequate organiza­tion for sales and, where appropriate, after-sales service, with all means and per­son­nel as are reasonably nec­essary in order to ensure the fulfilment of its obli­ga­tions under this Contract for all Products and throughout the Territory.

3.4 The

Distributor may, in exceptional cases in which it is not in a position to buy and resell, propose such business to the Supplier for a direct sale to the customer. For such activity as intermediary the Distributor will receive a remuneration to be agreed upon

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case by case. It is expressly agreed that such activity as intermediary to the extent it remains of an accessory character, does not modify the legal status of the Distributor as a trader acting in its own name and for its own account. 4 Undertaking 4.1 Without

not to compete

the prior written authorisation of the Supplier, the Distributor shall not represent, directly or indirectly, manufacture, market or sell in the Territory any products which are in competition with the Products, for the entire term of this Contract.

4.2 The

Distributor is entitled to represent, manufacture, distribute or sell any prod­ucts which are not competitive with the Products, pro­vided it in­forms the Supplier in advance of such activity and provided the exercise of such activity does not prejudice the fulfilment of its obligations under this Contract.

5 Minimum 5.1 The

purchase obligation

Distributor undertakes to purchase, during each year, Products amounting to at least the minimum yearly turnover indicated in box A-5.

5.2 If the

Distributor fails to attain within the end of any year the minimum purchase in force for such year, the Supplier shall be entitled, subject to giving one month’s no­tice, at its choice, to terminate this Contract, or to can­cel the Distributor’s exclu­siv­ity, or to reduce the extent of the Territory. This right must however be ex­ercised in writing not later than two months after the end of the year in which the minimum yearly turnover has not been at­tained. otherwise agreed, if the contract continues in force after the last year for which the Yearly Minimum purchase is indicated in Box A-5, such Minimum shall also be applicable for each of the following years.

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5.3 Unless

6 Conditions 6.1 The

of supply - Prices

Supplier agrees to supply all Products ordered, subject to their availability, and provided payment of the Products is adequately warranted. All sales of the Products to the Distributor shall be governed by the Supplier’s general conditions of sale, if attached to this Contract or otherwise communicated in writing to the Distributor. In case of contradiction between such general conditions and the terms of this Contract, the latter shall prevail.

6.2 The

prices payable by the Distributor shall be those set forth in the Supplier’s price-lists as in force at the time the order is received by the Supplier with the discount indicated in box A-6 (if completed). Such prices are subject to change at any time, subject to one month’s notice.

6.3 The

Distributor agrees to comply, with the utmost care, with the terms of payment agreed upon between the parties.

6.4 It is

agreed that the Products delivered remain the Supplier’s property until complete payment is received by the Supplier. The Distributor agrees to cooperate with the Supplier by performing such actions as may be necessary for the protection of the latter’s rights.

7 Resale of 7.1 The

the Products by the Distributor

Distributor agrees not to actively promote sales (e.g. through advertising, establishing branches or distribution depots) into the territories reserved by the Supplier exclusively for itself or allocated by the Supplier to other exclusive distributors or buyers.

7.2 The

Distributor is free to determine its resale prices with the only exception of maximum sales prices that the Supplier may impose.

8 Exclusivity 8.1 The

Supplier shall not, during the term of this Contract, grant any other person or undertaking (including a subsidiary of the Supplier) within the Territory the right to represent or market the Products. The Supplier shall furthermore refrain from selling to customers established in the Territory, except as provided in Article 8.3.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 8.2 The

Supplier is entitled to sell the Products to customers outside the Territory, even if such customers intend to export the Products into the Territory, but may not actively solicit or otherwise provoke such sales to third parties with the purpose of circumventing the exclusivity under Article 8.1.

8.3 If box

A-4 has been filled in, the customers listed in the box will be supplied directly by the Supplier.

9 Term and 9.1 This

termination of the Contract

Contract enters into force on the date of its signature and shall remain in force until terminated in accordance with Articles 5.2, 9.2 or 10, but shall in any case expire (if not terminated earlier) after a period of five years from the date of its entry into force. The parties agree to meet at least three months before the end of the five years’ period in order to discuss the possibility of entering into a new contract after its expiration.

9.2 This

Contract may be terminated by either party at any time by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), not less than 6 months in advance. The end of the period of notice must coincide with the end of a calendar month.

10 Earlier contract

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10.1 Each

termination

party may terminate this Contract with immediate effect by notice given in writing by means of communication ensuring evidence and date of receipt (e.g. registered mail with return receipt, special courier), in case of a substantial breach by the other party of the obligations arising out of the Contract, or in case of exceptional circumstances justifying the earlier termination. Any failure by a party to carry out all or part of its obligations under the Contract resulting in such detriment to the other party as to substantially deprive it of what it is entitled to expect under the Contract, shall be considered as a substantial breach for the purpose of this Article 10.1. Circumstances in which it would be unreasonable to require the terminating party to continue to be bound by this Contract, shall be considered as exceptional circumstances for the purpose of this Article 10.1.

10.2 If a

party terminates the Contract in accordance with this Article, and it appears thereafter that the reasons put forward by that party did not justify the earlier termination, the termination will be effective, but the other party will be entitled to damages for the unjustified earlier termination.

11 Applicable 11.1 Unless

law - Arbitration

otherwise agreed in writing (whether in Box A-7 or elsewhere), any questions relating to this Contract shall be governed, in the following order:

a) by the

principles of law generally recognized in international trade as applicable to inter­national distributorship contracts,

b) by the

relevant trade usages, and

c) by the

UNIDROIT Principles of International Commercial Contracts,

with the exclusion of national laws. 11.2 Unless

otherwise agreed in writing, the sale contracts concluded between the Supplier and the Distributor within this Contract will be governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, hereafter referred to as CISG).

11.3 The

parties may at any time, without prejudice to Article 11.4., seek to settle any dispute arising out of or in connection with this Contract in accordance with the ICC Mediation Rules.147

11.4 Unless

otherwise agreed in writing (whether by completing Box A-8 or otherwise), all disputes arising out of or in connection with this distributorship Contract shall be be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators ap­poin­ted in accordance with the said Rules.

147 The ICC Mediation Rules can be found on the web site http://www.iccwbo.org/products-and-services/arbitration-and-adr/mediation/rules/.

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Appendix I

Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I)

THE EUROPEAN

UNION,

PARLIAMENT AND THE COUNCIL OF THE EUROPEAN

Having regard to the Treaty establishing the European Community, and in particular Article 61(c) and the second indent of Article 67(5) thereof, Having regard to the proposal from the Commission, Having regard to the opinion of the European Economic and Social Committee,1 Acting in accordance with the procedure laid down in Article 251 of the Treaty,2 Whereas:

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(1) The

Community has set itself the objective of maintaining and developing an area of freedom, security and justice. For the progressive establishment of such an area, the Community is to adopt measures relating to judicial cooperation in civil matters with a cross-border impact to the extent necessary for the proper functioning of the internal market.

(2) According

to Article 65, point (b) of the Treaty, these measures are to include those promoting the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction.

(3) The

European Council meeting in Tampere on 15 and 16 October 1999 endorsed the principle of mutual recognition of judgments and other decisions of judicial authorities as the cornerstone of judicial cooperation in civil matters and invited the Council and the Commission to adopt a programme of measures to implement that principle.

(4) On

30 November 2000 the Council adopted a joint Commission and Council programme of measures for implementation of the principle of mutual recognition of decisions in civil and commercial matters3. The pro- gramme identifies measures relating to the harmonisation of conflict-of-law rules as those facilitating the mutual recognition of judgments.

(5) The

Hague Programme4, adopted by the European Council on 5 November 2004, called for work to be pursued actively on the conf lict-of-law rules regarding contractual obligations (Rome I).

(6) The

proper functioning of the internal market creates a need, in order to improve the predictability of the outcome of litigation, certainty as to the law applicable and the free movement of judgments, for the conflict-of-law rules in the Member States to designate the same national law irrespective of the country of the court in which an action is brought.

(7) The

substantive scope and the provisions of this Regulation should be consistent with Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the

1 OJ C 318, 23.12.2006, p. 56 2 Opinion of the European Parliament of 29 November 2007 (not yet published in the Official Journal) and Council ­Decision of 5 June 2008. 3 OJ C 12, 15.1.2001, p. 1. 4 OJ C 53, 3.3.2005, p. 1.

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recognition and enforcement of judgments in civil and commercial matters5 (Brussels I) and Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II)6. (8) Family

relationships should cover parentage, marriage, affinity and collateral relatives. The reference in Article 1(2) to relationships having comparable effects to marriage and other family relationships should be interpreted in accordance with the law of the Member State in which the court is seised.

(9) Obligations

under bills of exchange, cheques and promissory notes and other negotiable instruments should also cover bills of lading to the extent that the obligations under the bill of lading arise out of its negotiable character.

(10) Obligations

arising out of dealings prior to the conclusion of the contract are covered by Article 12 of Regulation (EC) No 864/2007. Such obligations should therefore be excluded from the scope of this Regulation.

(11) The

parties’ freedom to choose the applicable law should be one of the cornerstones of the system of conflict-of-law rules in matters of contractual obligations.

(12) An

agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated.

(13) This

Regulation does not preclude parties from incorporating by reference into their contract a non-State body of law or an international convention. the Community adopt, in an appropriate legal instrument, rules of substantive contract law, including standard terms and conditions, such instrument may provide that the parties may choose to apply those rules.

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(14) Should

(15) Where

a choice of law is made and all other elements relevant to the situation are located in a country other than the country whose law has been chosen, the choice of law should not prejudice the application of provisions of the law of that country which cannot be derogated from by agreement. This rule should apply whether or not the choice of law was accompanied by a choice of court or tribunal. Whereas no substantial change is intended as compared with Article 3(3) of the 1980 Convention on the Law Applicable to Contractual Obligations7 (the Rome Convention), the wording of this Regulation is aligned as far as possible with Article 14 of Regulation (EC) No 864/2007.

(16) To

contribute to the general objective of this Regulation, legal certainty in the European judicial area, the conf lict-of- law rules should be highly foreseeable. The courts should, however, retain a degree of discretion to determine the law that is most closely connected to the situation.

(17) As

far as the applicable law in the absence of choice is concerned, the concept of ‘provision of services’ and ‘sale of goods’ should be interpreted in the same way as when applying Article 5 of Regulation (EC) No 44/2001 in so far as sale of goods and provision of services are covered by that Regulation. Although franchise and distribution contracts are contracts for services, they are the subject of specific rules.

(18) As

far as the applicable law in the absence of choice is concerned, multilateral systems should be those in which trading is conducted, such as regulated markets and multilateral trading facilities as referred to in Article 4 of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments8 (2), regardless of whether or not they rely on a central counterparty.

(19) Where

there has been no choice of law, the applicable law should be determined in accordance with the rule specified for the particular type of contract. Where the contract cannot be categorised as being one of the specified types or where its elements fall within more than one of the specified types, it should be governed by the law of the country where the party required to effect the characteristic performance of

5 OJ L 12, 16.1.2001, p. 1. Regulation as last amended by Regulation (EC) No 1791/2006 (OJ L 363, 20.12.2006, p. 1). 6 OJ L 199, 31.7.2007, p. 40. 7 OJ C 334, 30.12.2005, p. 1. 8 OJ L 145, 30.4.2004, p. 1. Directive as last amended by Directive 2008/10/EC (OJ L 76, 19.3.2008, p. 33).

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the contract has his habitual residence. In the case of a contract consisting of a bundle of rights and obligations capable of being categorised as falling within more than one of the specified types of contract, the characteristic performance of the contract should be determined having regard to its centre of gravity. (20) Where

the contract is manifestly more closely connected with a country other than that indicated in Article 4(1) or (2), an escape clause should provide that the law of that other country is to apply. In order to determine that country, account should be taken, inter alia, of whether the contract in question has a very close relationship with another contract or contracts.

(21) In

the absence of choice, where the applicable law cannot be determined either on the basis of the fact that the contract can be categorised as one of the specified types or as being the law of the country of habitual residence of the party required to effect the characteristic performance of the contract, the contract should be governed by the law of the country with which it is most closely connected. In order to determine that country, account should be taken, inter alia, of whether the contract in question has a very close relationship with another contract or contracts.

(22) As

regards the interpretation of contracts for the carriage of goods, no change in substance is intended with respect to Article 4(4), third sentence, of the Rome Convention. Consequently, single-voyage charter parties and other contracts the main purpose of which is the carriage of goods should be treated as contracts for the carriage of goods. For the purposes of this Regulation, the term ‘consignor’ should refer to any person who enters into a contract of carriage with the carrier and the term ‘the carrier’ should refer to the party to the contract who undertakes to carry the goods, whether or not he performs the carriage himself.

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(23) As

regards contracts concluded with parties regarded as being weaker, those parties should be protected by conflict- of-law rules that are more favourable to their interests than the general rules.

(24) With

more specific reference to consumer contracts, the conflict-of-law rule should make it possible to cut the cost of settling disputes concerning what are commonly relatively small claims and to take account of the development of distance-selling techniques. Consistency with Regulation (EC) No 44/2001 requires both that there be a reference to the concept of directed activity as a condition for applying the consumer protection rule and that the concept be interpreted harmoniously in Regulation (EC) No 44/2001 and this Regulation, bearing in mind that a joint declaration by the Council and the Commission on Article 15 of Regulation (EC) No 44/2001 states that ‘for Article 15(1)(c) to be applicable it is not sufficient for an undertaking to target its activities at the Member State of the consumer’s residence, or at a number of Member States including that Member State; a contract must also be concluded within the framework of its activities’. The declaration also states that ‘the mere fact that an Internet site is accessible is not sufficient for Article 15 to be applicable, although a factor will be that this Internet site solicits the conclusion of distance contracts and that a contract has actually been concluded at a distance, by whatever means. In this respect, the language or currency which a website uses does not constitute a relevant factor.’.

(25) Consumers

should be protected by such rules of the country of their habitual residence that cannot be derogated from by agreement, provided that the consumer contract has been concluded as a result of the professional pursuing his commercial or professional activities in that particular country. The same protection should be guaranteed if the professional, while not pursuing his commercial or professional activities in the country where the consumer has his habitual residence, directs his activities by any means to that country or to several countries, including that country, and the contract is concluded as a result of such activities.

(26) For

the purposes of this Regulation, financial services such as investment services and activities and ancillary services provided by a professional to a consumer, as referred to in sections A and B of Annex I to Directive 2004/39/EC, and contracts for the sale of units in collective investment undertakings, whether or not covered by Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 261

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transferable securities (UCITS)9, should be subject to Article 6 of this Regulation. Consequently, when a reference is made to terms and conditions governing the issuance or offer to the public of transferable securities or to the subscription and redemption of units in collective investment under­takings, that reference should include all aspects binding the issuer or the offeror to the consumer, but should not include those aspects involving the provision of financial services. (27) Various

exceptions should be made to the general conflict- of-law rule for consumer contracts. Under one such exception the general rule should not apply to contracts relating to rights in rem in immovable property or tenancies of such property unless the contract relates to the right to use immovable property on a timeshare basis within the meaning of Directive 94/47/EC of the European Parliament and of the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis10 (2).

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(28) It is

important to ensure that rights and obligations which constitute a financial instrument are not covered by the general rule applicable to consumer contracts, as that could lead to different laws being applicable to each of the instruments issued, therefore changing their nature and preventing their fungible trading and offering. Likewise, whenever such instruments are issued or offered, the contractual relationship established between the issuer or the offeror and the consumer should not necessarily be subject to the mandatory application of the law of the country of habitual residence of the consumer, as there is a need to ensure uniformity in the terms and conditions of an issuance or an offer. The same rationale should apply with regard to the multilateral systems covered by Article 4(1)(h), in respect of which it should be ensured that the law of the country of habitual residence of the consumer will not interfere with the rules applicable to contracts concluded within those systems or with the operator of such systems.

(29) For

the purposes of this Regulation, references to rights and obligations constituting the terms and conditions govern- ing the issuance, offers to the public or public take-over bids of transferable securities and references to the subscription and redemption of units in collective invest- ment undertakings should include the terms governing, inter alia, the allocation of securities or units, rights in the event of oversubscription, withdrawal rights and similar matters in the context of the offer as well as those matters referred to in Articles 10, 11, 12 and 13, thus ensuring that all relevant contractual aspects of an offer binding the issuer or the offeror to the consumer are governed by a single law.

(30) For

the purposes of this Regulation, financial instruments and transferable securities are those instruments referred to in Article 4 of Directive 2004/39/EC.

(31) Nothing

in this Regulation should prejudice the operation of a formal arrangement designated as a system under Article 2(a) of Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems11.

(32) Owing

to the particular nature of contracts of carriage and insurance contracts, specific provisions should ensure an adequate level of protection of passengers and policy holders. Therefore, Article 6 should not apply in the context of those particular contracts.

(33) Where

an insurance contract not covering a large risk covers more than one risk, at least one of which is situated in a Member State and at least one of which is situated in a third country, the special rules on insurance contracts in this Regulation should apply only to the risk or risks situated in the relevant Member State or Member States.

(34) The

rule on individual employment contracts should not prejudice the application of the overriding mandatory provisions of the country to which a worker is posted in

9 OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive 2008/18/EC of the European Parliament and of the Council (OJ L 76, 19.3.2008, p. 42). 10 OJ L 280, 29.10.1994, p. 83. 11 OJ L 166, 11.6.1998, p. 45.

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accordance with Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996 concerning the posting of workers in the framework of the provision of services12. (35) Employees

should not be deprived of the protection afforded to them by provisions which cannot be derogated from by agreement or which can only be derogated from to their benefit.

(36) As

regards individual employment contracts, work carried out in another country should be regarded as temporary if the employee is expected to resume working in the country of origin after carrying out his tasks abroad. The conclusion of a new contract of employment with the original employer or an employer belonging to the same group of companies as the original employer should not preclude the employee from being regarded as carrying out his work in another country temporarily.

(37) Considerations

of public interest justify giving the courts of the Member States the possibility, in exceptional circum- stances, of applying exceptions based on public policy and overriding mandatory provisions. The concept of ‘over- riding mandatory provisions’ should be distinguished from the expression ‘provisions which cannot be derogated from by agreement’ and should be construed more restrictively.

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(38) In

the context of voluntary assignment, the term ‘relation- ship’ should make it clear that Article 14(1) also applies to the property aspects of an assignment, as between assignor and assignee, in legal orders where such aspects are treated separately from the aspects under the law of obligations. However, the term ‘relationship’ should not be understood as relating to any relationship that may exist between assignor and assignee. In particular, it should not cover preliminary questions as regards a voluntary assignment or a contractual subrogation. The term should be strictly limited to the aspects which are directly relevant to the voluntary assignment or contractual subrogation in ques- tion.

(39) For

the sake of legal certainty there should be a clear definition of habitual residence, in particular for companies and other bodies, corporate or unincorporated. Unlike Article 60(1) of Regulation (EC) No 44/2001, which establishes three criteria, the conf lict-of-law rule should proceed on the basis of a single criterion; otherwise, the parties would be unable to foresee the law applicable to their situation.

(40) A situation

where conflict-of-law rules are dispersed among several instruments and where there are differences between those rules should be avoided. This Regulation, however, should not exclude the possibility of inclusion of conflict-of-law rules relating to contractual obligations in provisions of Community law with regard to particular matters.

This Regulation

should not prejudice the application of other instruments laying down provisions designed to contribute to the proper functioning of the internal market application of provisions of the applicable law designated by the rules of this Regulation should not restrict the free movement of goods and services as regulated by Commu- nity instruments, such as Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (Directive on electronic commerce)13.

(41) Respect

for international commitments entered into by the Member States means that this Regulation should not affect international conventions to which one or more Member States are parties at the time when this Regulation is adopted. To make the rules more accessible, the Commis- sion should publish the list of the relevant conventions in the Official Journal of the European Union on the basis of information supplied by the Member States.

(42) The

Commission will make a proposal to the European Parliament and to the Council concerning the procedures and conditions according to which Member States would be entitled to negotiate and conclude, on their own behalf, agreements with third countries in individual and excep- tional cases, concerning sectoral matters and containing provisions on the law applicable to contractual obligations.

12 OJ L 18, 21.1.1997, p. 1. 13 OJ L 178, 17.7.2000, p. 1.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (43) Since

the objective of this Regulation cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of this Regulation, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary to attain its objective.

(44) In

accordance with Article 3 of the Protocol on the position of the United Kingdom and Ireland, annexed to the Treaty on European Union and to the Treaty establishing the European Community, Ireland has notified its wish to take part in the adoption and application of the present Regulation.

(45) In

accordance with Articles 1 and 2 of the Protocol on the position of the United Kingdom and Ireland, annexed to the Treaty on European Union and to the Treaty establishing the European Community, and without prejudice to Article 4 of the said Protocol, the United Kingdom is not taking part in the adoption of this Regulation and is not bound by it or subject to its application.

(46) In

accordance with Articles 1 and 2 of the Protocol on the position of Denmark, annexed to the Treaty on European Union and to the Treaty establishing the European Community, Denmark is not taking part in the adoption of this Regulation and is not bound by it or subject to its application, in so far as they cannot be applied in conjunction with the law designated by the rules of this Regulation. The …………… … … … … … … … … … . .

HAVE ADOPTED

THIS REGULATION:

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I Scope Article 1 Material

scope

1 This Regulation

shall apply, in situations involving a conflict of laws, to contractual obligations in civil and commercial matters. It shall not apply, in particular, to revenue, customs or administrative matters.

2 The following

shall be excluded from the scope of this Regulation:

(a) questions

involving the status or legal capacity of natural persons, without prejudice to Article 13;

(b) obligations

arising out of family relationships and relation- ships deemed by the law applicable to such relationships to have comparable effects, including maintenance obligations;

(c) obligations

arising out of matrimonial property regimes, property regimes of relationships deemed by the law applicable to such relationships to have comparable effects to marriage, and wills and succession;

(d) obligations

arising under bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character;

(e) arbitration

agreements and agreements on the choice of court;

(f) questions

governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body;

(g) the question

whether an agent is able to bind a principal, or an organ to bind a company or other body corporate or unincorporated, in relation to a third party;

(h) the constitution

of trusts and the relationship between settlors, trustees and

beneficiaries; (i) obligations

arising out of dealings prior to the conclusion of a contract;

(j) insurance

contracts arising out of operations carried out by organisations other than undertakings referred to in Article 2 of Directive 2002/83/EC of the European

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 Regulation (EC) No 593/2008

Parliament and of the Council of 5 November 2002 concerning life assurance14 the object of which is to provide benefits for employed or self-employed persons belonging to an undertaking or group of undertakings, or to a trade or group of trades, in the event of death or survival or of discontinuance or curtailment of activity, or of sickness related to work or accidents at work.

3

This Regulation shall not apply to evidence and procedure, without prejudice to Article 18.



4

In this Regulation, the term ‘Member State’ shall mean Member States to which this Regulation applies. However, in Article 3(4) and Article 7 the term shall mean all the Member States.

Article 2 Universal

application

Any law specified by this Regulation shall be applied whether or not it is the law of a Member State.

II Uniform Rules Article 3 Freedom

of choice

1 A contract

shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract.

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2 The parties

may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties.

3 Where

all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

4 Where

all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law other than that of a Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement.

5 The existence

and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13.

Article 4 Applicable 1 To the

law in the absence of choice

extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows:

(a) a contract

for the sale of goods shall be governed by the law of the country where the seller has his habitual residence;

(b) a contract

for the provision of services shall be governed by the law of the country where the service provider has his habitual residence;

(c) a contract

relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated;

(d) notwithstanding

point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country;

14 OJ L 345, 19.12.2002, p. 1. Directive as last amended by Directive 2008/19/EC (OJ L 76, 19.3.2008, p. 44).

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (e) a franchise

contract shall be governed by the law of the country where the franchisee has his habitual residence;

(f) a distribution

contract shall be governed by the law of the country where the distributor has his habitual residence;

(g) a contract

for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined;

(h) a contract

concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretion- ary rules and governed by a single law, shall be governed by that law.

2 Where

the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.

3 Where

it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.

4 Where

the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.

Article 5 Contracts

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1 To the

of carriage

extent that the law applicable to a contract for the carriage of goods has not been chosen in accordance with Article 3, the law applicable shall be the law of the country of habitual residence of the carrier, provided that the place of receipt or the place of delivery or the habitual residence of the consignor is also situated in that country. If those requirements are not met, the law of the country where the place of delivery as agreed by the parties is situated shall apply.

2 To the

extent that the law applicable to a contract for the carriage of passengers has not been chosen by the parties in accordance with the second subparagraph, the law applicable shall be the law of the country where the passenger has his habitual residence, provided that either the place of departure or the place of destination is situated in that country. If these requirements are not met, the law of the country where the carrier has his habitual residence shall apply. The parties may choose as the law applicable to a contract for the carriage of passengers in accordance with Article 3 only the law of the country where:

(a) the passenger

has his habitual residence; or

(b) the carrier

has his habitual residence; or

(c) the carrier

has his place of central administration; or

(d) the place

of departure is situated; or

(e) the place

of destination is situated.

3 Where

it is clear from all the circumstances of the case that the contract, in the absence of a choice of law, is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.

Article 6 Consumer 1 Without

contracts

prejudice to Articles 5 and 7, a contract concluded by a natural person for a purpose which can be regarded as being outside his trade or profession (the consumer) with another person acting in the exercise of his trade or profession (the professional) shall be governed by the law of the country where the consumer has his habitual residence, provided that the professional:

(a) pursues

his commercial or professional activities in the country where the consumer has his habitual residence, or

(b) by any

means, directs such activities to that country or to several countries including that country, and the contract falls within the scope of such activities.

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 Regulation (EC) No 593/2008 2 Notwithstanding

paragraph 1, the parties may choose the law applicable to a contract which fulfils the requirements of paragraph 1, in accordance with Article 3. Such a choice may not, however, have the result of depriving the consumer of the protection afforded to him by provisions that cannot be derogated from by agreement by virtue of the law which, in the absence of choice, would have been applicable on the basis of paragraph 1.

3 If the

requirements in points (a) or (b) of paragraph 1 are not fulfilled, the law applicable to a contract between a consumer and a professional shall be determined pursuant to Articles 3 and 4.

4 Paragraphs

1 and 2 shall not apply to:

(a) a contract

for the supply of services where the services are to be supplied to the consumer exclusively in a country other than that in which he has his habitual residence;

(b) a contract

of carriage other than a contract relating to package travel within the meaning of Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours15;

(c) a contract

relating to a right in rem in immovable property or a tenancy of immovable property other than a contract relating to the right to use immovable properties on a timeshare basis within the meaning of Directive 94/47/EC; obligations which constitute a financial instru- ment and rights and obligations constituting the terms and conditions governing the issuance or offer to the public and public take-over bids of transferable securities, and the subscription and redemption of units in collective invest- ment undertakings in so far as these activities do not constitute provision of a financial service;

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(d) rights and

(e) a contract

concluded within the type of system falling within the scope of Article

4(1)(h). Article 7 Insurance

contracts

1 This Article

shall apply to contracts referred to in paragraph 2, whether or not the risk covered is situated in a Member State, and to all other insurance contracts covering risks situated inside the territory of the Member States. It shall not apply to reinsurance contracts.

2 An insurance

contract covering a large risk as defined in Article 5(d) of the First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance16 shall be governed by the law chosen by the parties in accordance with Article 3 of this Regulation. To the extent that the applicable law has not been chosen by the parties, the insurance contract shall be governed by the law of the country where the insurer has his habitual residence. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country, the law of that other country shall apply.

3 In the

case of an insurance contract other than a contract falling within paragraph 2, only the following laws may be chosen by the parties in accordance with Article 3:

(a) the law

of any Member State where the risk is situated at the time of conclusion of the contract;

(b) the law

of the country where the policy holder has his habitual residence;

(c) in the case

of life assurance, the law of the Member State of which the policy holder is a national;

(d) for insurance

contracts covering risks limited to events occurring in one Member State other than the Member State where the risk is situated, the law of that Member State;

15 OJ L 158, 23.6.1990, p. 59. 16 OJ L 228, 16.8.1973, p. 3. Directive as last amended by Directive 2005/68/EC of the European Parliament and of the Council (OJ L 323, 9.12.2005, p. 1).

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (e) where the

policy holder of a contract falling under this paragraph pursues a commercial or industrial activity or a liberal profession and the insurance contract covers two or more risks which relate to those activities and are situated in different Member States, the law of any of the Member States concerned or the law of the country of habitual residence of the policy holder.

Where, in the cases set out in points (a), (b) or (e), the Member States referred to grant greater freedom of choice of the law applicable to the insurance contract, the parties may take advantage of that freedom. To the extent that the law applicable has not been chosen by the parties in accordance with this paragraph, such a contract shall be governed by the law of the Member State in which the risk is situated at the time of conclusion of the contract. 4 The following

additional rules shall apply to insurance contracts covering risks for which a Member State imposes an obligation to take out insurance:

(a) the insurance

contract shall not satisfy the obligation to take out insurance unless it complies with the specific provisions relating to that insurance laid down by the Member State that imposes the obligation. Where the law of the Member State in which the risk is situated and the law of the Member State imposing the obligation to take out insurance contradict each other, the latter shall prevail;

(b) by way

of derogation from paragraphs 2 and 3, a Member State may lay down that the insurance contract shall be governed by the law of the Member State that imposes the obligation to take out insurance.

purposes of paragraph 3, third subparagraph, and paragraph 4, where the contract covers risks situated in more than one Member State, the contract shall be considered as constituting several contracts each relating to only one Member State.

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5 For the

6 For the

purposes of this Article, the country in which the risk is situated shall be determined in accordance with Article 2(d) of the Second Council Directive 88/357/ EEC of 22 June 1988 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services17 (1) and, in the case of life assurance, the country in which the risk is situated shall be the country of the commitment within the meaning of Article 1(1) (g) of Directive 2002/83/EC.

Article 8 Individual

employment contracts

1 An individual

employment contract shall be governed by the law chosen by the parties in accordance with Article 3. Such a choice of law may not, however, have the result of depriving the employee of the protection afforded to him by provisions that cannot be derogated from by agreement under the law that, in the absence of choice, would have been applicable pursuant to paragraphs 2, 3 and 4 of this Article.

2 To the

extent that the law applicable to the individual employment contract has not been chosen by the parties, the contract shall be governed by the law of the country in which or, failing that, from which the employee habitually carries out his work in performance of the contract. The country where the work is habitually carried out shall not be deemed to have changed if he is temporarily employed in another country.

3 Where

the law applicable cannot be determined pursuant to paragraph 2, the contract shall be governed by the law of the country where the place of business through which the employee was engaged is situated.

4 Where

it appears from the circumstances as a whole that the contract is more closely connected with a country other than that indicated in paragraphs 2 or 3, the law of that other country shall apply.

Article 9 Overriding

1 Overriding

mandatory provisions

mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.

17 OJ L 172, 4.7.1988, p. 1. Directive as last amended by Directive 2005/14/EC of the European Parliament and of the Council (OJ L 149, 11.6.2005, p. 14).

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 Regulation (EC) No 593/2008 2 Nothing

in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.

3 Effect

may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

Article 10 Consent

and material validity

1 The existence

and validity of a contract, or of any term of a contract, shall be determined by the law which would govern it under this Regulation if the contract or term were valid.

2 Nevertheless,

a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in paragraph 1.

Article 11 Formal

validity

1 A contract

concluded between persons who, or whose agents, are in the same country at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation or of the law of the country where it is concluded.

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2 A contract

concluded between persons who, or whose agents, are in different countries at the time of its conclusion is formally valid if it satisfies the formal requirements of the law which governs it in substance under this Regulation, or of the law of either of the countries where either of the parties or their agent is present at the time of conclusion, or of the law of the country where either of the parties had his habitual residence at that time.

3 A unilateral

act intended to have legal effect relating to an existing or contemplated contract is formally valid if it satisfies the formal requirements of the law which governs or would govern the contract in substance under this Regulation, or of the law of the country where the act was done, or of the law of the country where the person by whom it was done had his habitual residence at that time.

4 Paragraphs

1, 2 and 3 of this Article shall not apply to contracts that fall within the scope of Article 6. The form of such contracts shall be governed by the law of the country where the consumer has his habitual residence.

5 Notwithstanding

paragraphs 1 to 4, a contract the subject matter of which is a right in rem in immovable property or a tenancy of immovable property shall be subject to the requirements of form of the law of the country where the property is situated if by that law:

(a) those requirements

are imposed irrespective of the country where the contract is concluded and irrespective of the law governing the contract; and

(b) those requirements Article 12 Scope

cannot be derogated from by agreement.

of the law applicable

1 The law

applicable to a contract by virtue of this Regulation shall govern in particular:

(a) interpretation; (b) performance; (c) within the

limits of the powers conferred on the court by its procedural law, the consequences of a total or partial breach of obligations, including the assessment of damages in so far as it is governed by rules of law;

(d) the various

ways of extinguishing obligations, and prescription and limitation of

actions; (e) the consequences

of nullity of the contract.

2 In relation

to the manner of performance and the steps to be taken in the event of defective performance, regard shall be had to the law of the country in which performance takes place. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 269

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 13 Incapacity

In a contract concluded between persons who are in the same country, a natural person who would have capacity under the law of that country may invoke his incapacity resulting from the law of another country, only if the other party to the contract was aware of that incapacity at the time of the conclusion of the contract or was not aware thereof as a result of negligence. Article 14 Voluntary

assignment and contractual subrogation

1 The relationship

between assignor and assignee under a voluntary assignment or contractual subrogation of a claim against another person (the debtor) shall be governed by the law that applies to the contract between the assignor and assignee under this Regulation.

2 The law

governing the assigned or subrogated claim shall determine its assignability, the relationship between the assignee and the debtor, the conditions under which the assignment or subrogation can be invoked against the debtor and whether the debtor’s obligations have been discharged.

3 The concept

of assignment in this Article includes outright transfers of claims, transfers of claims by way of security and pledges or other security rights over claims.

Article 15 Legal

subrogation

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Where a person (the creditor) has a contractual claim against another (the debtor) and a third person has a duty to satisfy the creditor, or has in fact satisfied the creditor in discharge of that duty, the law which governs the third person’s duty to satisfy the creditor shall determine whether and to what extent the third person is entitled to exercise against the debtor the rights which the creditor had against the debtor under the law governing their relationship. Article 16 Multiple

liability

If a creditor has a claim against several debtors who are liable for the same claim, and one of the debtors has already satisfied the claim in whole or in part, the law governing the debtor’s obligation towards the creditor also governs the debtor’s right to claim recourse from the other debtors. The other debtors may rely on the defences they had against the creditor to the extent allowed by the law governing their obligations towards the creditor. Article 17 Set-off

Where the right to set-off is not agreed by the parties, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted. Article 18 Burden

of proof

1 The law

governing a contractual obligation under this Regulation shall apply to the extent that, in matters of contractual obligations, it contains rules which raise presumptions of law or determine the burden of proof.

2 A contract

or an act intended to have legal effect may be proved by any mode of proof recognised by the law of the forum or by any of the laws referred to in Article 11 under which that contract or act is formally valid, provided that such mode of proof can be administered by the forum.

III Other Provisions Article 19 Habitual 1 For the

residence

purposes of this Regulation, the habitual residence of companies and other bodies, corporate or unincorporated, shall be the place of central administration. The habitual residence of a natural person acting in the course of his business activity shall be his principal place of business.

2 Where

the contract is concluded in the course of the operations of a branch, agency or any other establishment, or if, under the contract, performance is the responsibility of such a branch, agency or establishment, the place where the branch, agency or any other establishment is located shall be treated as the place of habitual residence.

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 Regulation (EC) No 593/2008 3. For the

purposes of determining the habitual residence, the relevant point in time shall be the time of the conclusion of the contract.

Article 20 Exclusion

of renvoi

The application of the law of any country specified by this Regulation means the application of the rules of law in force in that country other than its rules of private international law, unless provided otherwise in this Regulation. Article 21 Public

policy of the forum

The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum. Article 22 States

with more than one legal system

1 Where

a State comprises several territorial units, each of which has its own rules of law in respect of contractual obligations, each territorial unit shall be considered as a country for the purposes of identifying the law applicable under this Regulation.

2 A Member

State where different territorial units have their own rules of law in respect of contractual obligations shall not be required to apply this Regulation to conf licts solely between the laws of such units.

Article 23 Relationship

with other provisions of Community law

With the exception of Article 7, this Regulation shall not prejudice the application of provisions of Community law which, in relation to particular matters, lay down conf lict-of-law rules relating to contractual obligations. Article 24 Relationship

with the Rome Convention

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1 This Regulation

shall replace the Rome Convention in the Member States, except as regards the territories of the Member States which fall within the territorial scope of that Convention and to which this Regulation does not apply pursuant to Article 299 of the Treaty.

2 In so

far as this Regulation replaces the provisions of the Rome Convention, any reference to that Convention shall be understood as a reference to this Regulation.

Article 25 Relationship

with existing international conventions

1 This Regulation

shall not prejudice the application of international conventions to which one or more Member States are parties at the time when this Regulation is adopted and which lay down conflict-of-law rules relating to contractual obligations.

2 However,

this Regulation shall, as between Member States, take precedence over conventions concluded exclusively between two or more of them in so far as such conventions concern matters governed by this Regulation.

Article 26 List

of Conventions

1 By 17

June 2009, Member States shall notify the Commission of the conventions referred to in Article 25(1). After that date, Member States shall notify the Commission of all denunciations of such conventions.

2 Within

six months of receipt of the notifications referred to in paragraph 1, the Commission shall publish in the Official Journal of the European Union:

(a) a list (b) the

of the conventions referred to in paragraph 1;

denunciations referred to in paragraph 1.

Article 27 Review 1 By 17

clause

June 2013, the Commission shall submit to the European Parliament, the Council and the European Economic and Social Committee a report on the application of this Regulation. If appropriate, the report shall be accompanied by proposals to amend this Regulation. The report shall include:

(a) a study

on the law applicable to insurance contracts and an assessment of the impact of the provisions to be introduced, if any; and

(b) an evaluation

on the application of Article 6, in particular as regards the coherence of Community law in the field of consumer protection.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 By 17

June 2010, the Commission shall submit to the European Parliament, the Council and the European Economic and Social Committee a report on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person. The report shall be accompanied, if appropriate, by a proposal to amend this Regulation and an assessment of the impact of the provisions to be introduced.

Article 28 Application

in time

This Regulation shall apply to contracts concluded after 17 December 2009.

IV Final Provisions Article 29 Entry

into force and application

This Regulation shall enter into force on the 20th day following its publication in the Official Journal of the European Union. It shall apply from 17 December 2009 except for Article 26 which shall apply from 17 June 2009. This Regulation shall be binding in its entirety and directly applicable in the Member States in accordance with the Treaty establishing the European Community. Done at Strasbourg, 17 June 2008. For the Council

The President

The President

H.-G. Pöttering

J. Lenarčič

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For the European Parliament

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Appendix II

UNIDROIT principles of international commercial contracts 2016

PREAMBLE

(Purpose of the Principles)

These Principles set forth general rules for international commercial contracts. They shall be applied when the parties have agreed that their contract be governed by them.* They may be applied when the parties have agreed that their contract be governed by general principles of law, the lex mercatoria or the like. They may be applied when the parties have not chosen any law to govern their contract. They may be used to interpret or supplement international uniform law instruments. They may be used to interpret or supplement domestic law.

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They may serve as a model for national and international legislators.

1 General Provisions Article 1.1 Freedom

of contract

The parties are free to enter into a contract and to determine its content. Article 1.2 No

form required

Nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form. It may be proved by any means, including witnesses. Article 1.3 Binding

character of contract

A contract validly entered into is binding upon the parties. It can only be modified or terminated in accordance with its terms or by agreement or as otherwise provided in these Principles. Article 1.4 Mandatory

rules

Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law. Article 1.5 Exclusion

or modification by the parties

The parties may exclude the application of these Principles or derogate from or vary the effect of any of their provisions, except as otherwise provided in the Principles. Article 1.6 Interpretation (1) In the

and supplementation of the Principles

interpretation of these Principles, regard is to be had to their international character and to their purposes including the need to promote uniformity in their application.

(2) Issues

within the scope of these Principles but not expressly settled by them are as far as possible to be settled in accordance with their underlying general principles.

Article 1.7 Good (1) Each

faith and fair dealing

party must act in accordance with good faith and fair dealing in international trade.

(2) The

parties may not exclude or limit this duty. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 273

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 1.8 Inconsistent

behaviour

A party cannot act inconsistently with an understanding it has caused the other party to have and upon which that other party reasonably has acted in reliance to its detriment. Article 1.9 Usages (1) The

and practices

parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

(2) The

parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned except where the application of such a usage would be unreasonable.

Article 1.10

Notice

(1) Where

notice is required it may be given by any means appropriate to the circumstances.

(2) A notice

is effective when it reaches the person to whom it is given.

(3) For

the purpose of paragraph (2) a notice “reaches” a person when given to that person orally or delivered at that person’s place of business or mailing address.

(4) For

the purpose of this Article “notice” includes a declaration, demand, request or any other communication of intention.

Article 1.11

Definitions

In these Principles  “court” includes an arbitral tribunal;

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 where a party has more than one place of business the relevant “place of business” is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract;  “obligor” refers to the party who is to perform an obligation and “obligee” refers to the party who is entitled to performance of that obligation.  “long-term contract” refers to a contract which is to be performed over a period of time and which normally involves, to avarying degree, complexity of the transaction and an ongoing relationship between the parties;  “writing” means any mode of communication that preserves a record of the information contained therein and is capable of being reproduced in tangible form. Article 1.12

Computation of time set by parties

(1) Official

holidays or non-business days occurring during a period set by parties for an act to be performed are included in calculating the period.

(2) However,

if the last day of the period is an official holiday or a non-business day at the place of business of the party to perform the act, the period is extended until the first business day which follows, unless the circumstances indicate otherwise.

(3) The

relevant time zone is that of the place of business of the party setting the time, unless the circumstances indicate otherwise.

2 Formation and Authority of Agents Section 1 Formation Article 2.1.1

Manner of formation

A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement. Article 2.1.2

Definition of offer

A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. Article 2.1.3

Withdrawal of offer

(1) An offer

becomes effective when it reaches the offeree.

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 UNIDROIT principles of international commercial contracts 2016 (2) An offer,

even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.

Article 2.1.4

Revocation of offer

(1) Until

a contract is concluded an offer may be revoked if the revocation reaches the offeree before it has dispatched an acceptance.

(2) However,

an offer cannot be revoked

(a) if it indicates,

whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or

(b) if it was

reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.

Article 2.1.5

Rejection of offer

An offer is terminated when a rejection reaches the offeror. Article 2.1.6

Mode of acceptance

(1) A statement

made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance.

(2) An acceptance

of an offer becomes effective when the indication of assent reaches

the offeror. (3) However,

if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act without notice to the offeror, the acceptance is effective when the act is performed.

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Article 2.1.7

Time of acceptance

An offer must be accepted within the time the offeror has fixed or, if no time is fixed, within a reasonable time having regard to the circumstances, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise. Article 2.1.8

Acceptance within a fixed period of time

A period of acceptance fixed by the offeror begins to run from the time that the offer is dispatched. A time indicated in the offer is deemed to be the time of dispatch unless the circumstances indicate otherwise. Article 2.1.9

Late acceptance. Delay in transmission

(1) A late

acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect.

(2) If a communication

containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed.

Article 2.1.10

Withdrawal of acceptance

An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective. Article 2.1.11

Modified acceptance

(1) A reply

to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer.

(2) However,

a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 2.1.12

Writings in confirmation

If a writing which is sent within a reasonable time after the conclusion of the contract and which purports to be a confirmation of the contract contains additional or different terms, such terms become part of the contract, unless they materially alter the contract or the recipient, without undue delay, objects to the discrepancy. Article 2.1.13

Conclusion of contract dependent on agreement on specific matters or in a particular form

Where in the course of negotiations one of the parties insists that the contract is not concluded until there is agreement on specific matters or in a particular form, no contract is concluded before agreement is reached on those matters or in that form. Article 2.1.14

Contract with terms deliberately left open

(1) If the

parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by one of the parties or by a third person does not prevent a contract from coming into existence.

(2) The

existence of the contract is not affected by the fact that subsequently

(a) the parties (b) the party

reach no agreement on the term;

who is to determine the term does not do so: or

(c) the third

person does not determine the term, provided that there is an alternative means of rendering the term definite that is reasonable in the circumstances, having regard to the intention of the parties.

Article 2.1.15

Negotiations in bad faith

(1) A party

is free to negotiate and is not liable for failure to reach an agreement.

a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party.

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(2) However, (3) It is

bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party.

Article 2.1.16

Duty of confidentiality

Where information is given as confidential by one party in the course of negotiations, the other party is under a duty not to disclose that information or to use it improperly for its own purposes, whether or not a contract is subsequently concluded. Where appropriate, the remedy for breach of that duty may include compensation based on the benefit received by the other party. Article 2.1.17

Merger clauses

A contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing. Article 2.1.18

Modification in a particular form

A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct. Article 2.1.19

Contracting under standard terms

(1) Where

one party or both parties use standard terms in concluding a contract, the general rules on formation apply, subject to Articles 2.1.20 - 2.1.22.

(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.

Article 2.1.20

Surprising terms

(1) No term

contained in standard terms which is of such a character that the other party could not reasonably have expected it, is effective unless it has been expressly accepted by that party.

(2) In determining

whether a term is of such a character regard shall be had to its content, language and presentation.

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 UNIDROIT principles of international commercial contracts 2016 Article 2.1.21

Conflict between standard terms and non-standard terms

In case of conflict between a standard term and a term which is not a standard term the latter prevails. Article 2.1.22

Battle of forms

Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract. Section 2 Authority Article 2.2.1

of agents

Scope of the Section

(1) This

Section governs the authority of a person (“the agent”) to affect the legal relations of another person (“the principal”) by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal.

(2) It governs

only the relations between the principal or the agent on the one hand, and the third party on the other.

(3) It does

not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority.

Article 2.2.2

Establishment and scope of the authority of the agent

(1) The

principal’s grant of authority to an agent may be express or implied.

agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted.

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(2) The

Article 2.2.3

Agency disclosed

(1) Where

an agent acts within the scope of its authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly affect the legal relations between the principal and the third party and no legal relation is created between the agent and the third party.

(2) However,

the acts of the agent shall affect only the relations between the agent and the third party, where the agent with the consent of the principal undertakes to become the party to the contract.

Article 2.2.4

Agency undisclosed

(1) Where

an agent acts within the scope of its authority and the third party neither knew nor ought to have known that the agent was acting as an agent, the acts of the agent shall affect only the relations between the agent and the third party.

(2) However,

where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent.

Article 2.2.5

Agent acting without or exceeding its authority

(1) Where

an agent acts without authority or exceeds its authority, its acts do not affect the legal relations between the principal and the third party.

(2) However,

where the principal causes the third party reasonably to believe that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the lack of authority of the agent.

Article 2.2.6

Liability of agent acting without or exceeding its authority

(1) An agent

that acts without authority or exceeds its authority is, failing ratification by the principal, liable for damages that will place the third party in the same position as if the agent had acted with authority and not exceeded its authority.

(2) However,

the agent is not liable if the third party knew or ought to have known that the agent had no authority or was exceeding its authority.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 2.2.7

Conflict of interests

(1) If a contract

concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to Articles 3.2.9 and 3.2.11 to 3.2.15.

(2) However,

the principal may not avoid the contract

(a) if the principal

had consented to, or knew or ought to have known of, the agent’s involvement in the conflict of interests; or

(b) if the agent

had disclosed the conflict of interests to the principal and the latter had not objected within a reasonable time.

Article 2.2.8

Sub-agency

An agent has implied authority to appoint a sub-agent to perform acts which it is not reasonable to expect the agent to perform itself. The rules of this Section apply to the sub-agency. Article 2.2.9

Ratification

(1) An act

by an agent that acts without authority or exceeds its authority may be ratified by the principal. On ratification the act produces the same effects as if it had initially been carried out with authority.

(2) The

third party may by notice to the principal specify a reasonable period of time for ratification. If the principal does not ratify within that period of time it can no longer do so. the time of the agent’s act, the third party neither knew nor ought to have known of the lack of authority, it may, at any time before ratification, by notice to the principal indicate its refusal to become bound by a ratification.

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(3) If, at

Article 2.2.10

Termination of authority

(1) Termination

of authority is not effective in relation to the third party unless the third party knew or ought to have known of it.

(2) Notwithstanding

the termination of its authority, an agent remains authorised to perform the acts that are necessary to prevent harm to the principal’s interests.

3 Validity Section 1 General Article 3.1.1

provisions

Matters not covered

This Chapter does not deal with lack of capacity. Article 3.1.2

Validity of mere agreement

A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement. Article 3.1.3

Initial impossibility

(1) The

mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract.

(2) The

mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract.

Article 3.1.4

Mandatory character of the provisions

The provisions on fraud, threat, gross disparity and illegality contained in this Chapter are mandatory. Section 2 Grounds Article 3.2.1

for avoidance

Definition of mistake

Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded.

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 UNIDROIT principles of international commercial contracts 2016 Article 3.2.2

Relevant mistake

(1) A party

may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and

(a) the other

party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or

(b) the other

party had not at the time of avoidance reasonably acted in reliance on the contract.

(2) However,

a party may not avoid the contract if

(a) it was grossly

negligent in committing the mistake; or

(b) the mistake

relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.

Article 3.2.3

Error in expression or transmission

An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated. Article 3.2.4

Remedies for non-performance

A party is not entitled to avoid the contract on the ground of mistake if thecircumstances on which that party relies afford, or could have afforded, a remedy fornon-performance.

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Article 3.2.5

Fraud

A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed. Article 3.2.6

Threat

A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract. Article 3.2.7

Gross disparity

(1) A party

may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

(a) the fact

that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill, and

(b) the nature

and purpose of the contract.

(2) Upon

the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing.

(3) A court

may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. Article 3.2.10(2) applies accordingly.

Article 3.2.8

Third persons

(1) Where

fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (2) Where

fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract.

Article 3.2.9

Confirmation

If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded. Article 3.2.10

Loss of right to avoid

(1) If a party

is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has reasonably acted in reliance on a notice of avoidance.

(2) After

such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective.

Article 3.2.11

Notice of avoidance

The right of a party to avoid the contract is exercised by notice to the other party. Article 3.2.12

Time limits

of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely.

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(1) Notice

(2) Where

an individual term of the contract may be avoided by a party under Article 3.2.7, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party.

Article 3.2.13

Partial avoidance

Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract. Article 3.2.14

Retroactive effect of avoidance

Avoidance takes effect retroactively. Article 3.2.15

Restitution

(1) On avoidance

either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that the party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided.

(2) If restitution

in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.

(3) The

recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.

(4) Compensation

may be claimed for expenses reasonably required to preserve or maintain the performance received.

Article 3.2.16

Damages

Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract. Article 3.2.17

Unilateral declarations

The provisions of this Chapter apply with appropriate adaptations to any communication of intention addressed by one party to the other.

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 UNIDROIT principles of international commercial contracts 2016 Section 3 Illegality Article 3.3.1

Contracts infringing mandatory rules

(1) Where

a contract infringes a mandatory rule, whether of national, international or supranational origin, applicable under Article 1.4 of these Principles, the effects of that infringement upon the contract are the effects, if any, expressly prescribed by that mandatory rule.

(2) Where

the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as in the circumstances are reasonable.

(3) In determining

what is reasonable regard is to be had in particular to:

(a) the purpose

of the rule which has been infringed;

(b) the category

of persons for whose protection the rule exists;

(c) any sanction

that may be imposed under the rule infringed;

(d) the seriousness

of the infringement;

(e) whether

one or both parties knew or ought to have known of the infringement;

(f) whether

the performance of the contract necessitates the infringement; and

(g) the parties’ Article 3.3.2

reasonable expectations.

Restitution

(1) Where

there has been performance under a contract infringing a mandatory rule under Article 3.3.1, restitution may be granted where this would be reasonable in the circumstances. what is reasonable, regard is to be had, with the appropriate adaptations, to the criteria referred to in Article 3.3.1(3).

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(2) In determining (3) If restitution

is granted, the rules set out in Article 3.2.15 apply with appropriate

adaptations.

4 Interpretation Article 4.1 Intention

of the parties

(1) A contract

shall be interpreted according to the common intention of the parties.

(2) If such

an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

Article 4.2 Interpretation (1) The

of statements and other conduct

statements and other conduct of a party shall be interpreted according to that party’s intention if the other party knew or could not have been unaware of that intention.

(2) If the

preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.

Article 4.3 Relevant

circumstances

In applying Articles 4.1 and 4.2, regard shall be had to all the circumstances, including (a) preliminary (b) practices

negotiations between the parties;

which the parties have established between themselves;

(c) the conduct (d) the nature

of the parties subsequent to the conclusion of the contract;

and purpose of the contract;

(e) the meaning

commonly given to terms and expressions in the trade concerned;

(f) usages. Article 4.4 Reference

to contract or statement as a whole

Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 4.5 All

terms to be given effect

Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect. Article 4.6 Contra

proferentem rule

If contract terms supplied by one party are unclear, an interpretation against that party is preferred. Article 4.7 Linguistic

discrepancies

Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancy between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up. Article 4.8 Supplying (1) Where

an omitted term

the parties to a contract have not agreed with respect to a term which is important for a determination of their rights and duties, a term which is appropriate in the circumstances shall be supplied.

(2) In determining

what is an appropriate term regard shall be had, among other factors,

to (a) the intention

of the parties;

(b) the nature

and purpose of the contract;

(c) good faith

and fair dealing;

(d) reasonableness.

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5 Content and Third Party Rights Section 1 Content Article 5.1.1

Express and implied obligations

The contractual obligations of the parties may be express or implied. Article 5.1.2

Implied obligations

Implied obligations stem from (a) the nature (b) practices

and purpose of the contract;

established between the parties and usages;

(c) good faith

and fair dealing;

(d) reasonableness. Article 5.1.3

Co-operation between the parties

Each party shall cooperate with the other party when such co-operation may reasonably be expected for the performance of that party’s obligations. Article 5.1.4

Duty to achieve a specific result. Duty of best efforts

(1) To the

extent that an obligation of a party involves a duty to achieve a specific result, that party is bound to achieve that result.

(2) To the

extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.

Article 5.1.5

Determination of kind of duty involved

In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of an activity or a duty to achieve a specific result, regard shall be had, among other factors, to (a) the way

in which the obligation is expressed in the contract;

(b) the contractual (c) the degree (d) the ability

price and other terms of the contract;

of risk normally involved in achieving the expected result;

of the other party to influence the performance of the obligation.

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 UNIDROIT principles of international commercial contracts 2016 Article 5.1.6

Determination of quality of performance

Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances. Article 5.1.7

Price determination

(1) Where

a contract does not fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have made reference to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned or, if no such price is available, to a reasonable price.

(2) Where

the price is to be determined by one party and that determination is manifestly unreasonable, a reasonable price shall be substituted notwithstanding any contract term to the contrary.

(3) Where

the price is to be fixed by one party or a third person, and that party or third person does not do so, the price shall be a reasonable price.

(4) Where

the price is to be fixed by reference to factors which do not exist or have ceased to exist or to be accessible, the nearest equivalent factor shall be treated as a substitute.

Article 5.1.8

Contract for an indefinite period

A contract for an indefinite period may be terminated by either party by giving notice a reasonable time in advance.

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Article 5.1.9

Release by agreement

As to the effects of termination in general, and as to restitution, the provisions in Articles 7.3.5 and 7.3.7 apply. (1) An obligee

may release its right by agreement with the obligor.

(2) An offer

to release a right gratuitously shall be deemed accepted if the obligor does not reject the offer without delay after having become aware of it.

Section 2 Third Article 5.2.1

party rights

Termination of a contract in favour of third parties

(1) The

parties (the “promisor” and the “promisee”) may confer by express or implied agreement a right on a third party (the “beneficiary”).

(2) The

existence and content of the beneficiary’s right against the promisor are determined by the agreement of the parties and are subject to any conditions or other limitations under the agreement.

Article 5.2.2

Third party identifiable

The beneficiary must be identifiable with adequate certainty by the contract but need not be in existence at the time the contract is made. Article 5.2.3

Exclusion and limitation clauses

The conferment of rights in the beneficiary includes the right to invoke a clause in the contract which excludes or limits the liability of the beneficiary. Article 5.2.4

Defences

The promisor may assert against the beneficiary all defences which the promisor could assert against the promisee. Article 5.2.5

Revocation

The parties may modify or revoke the rights conferred by the contract on the beneficiary until the beneficiary has accepted them or reasonably acted in reliance on them. Article 5.2.6

Renunciation

The beneficiary may renounce a right conferred on it.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Section 3 Conditions Article 5.3.1

Types of condition

A contract or a contractual obligation may be made conditional upon the occurrence of a future uncertain event, so that the contract or the contractual obligation only takes effect if the event occurs (suspensive condition) or comes to an end if the event occurs (resolutive condition). Article 5.3.2

Effect of conditions

Unless the parties otherwise agree : (a) the relevant

contract or contractual obligation takes effect upon fulfilment of a suspensive condition;

(b) the relevant

contract or contractual obligation comes to an end upon fulfilment of a resolutive condition.

Article 5.3.3

Interference with conditions

(1) If fulfilment

of a condition is prevented by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the nonfulfilment of the condition.

(2) If fulfilment

of a condition is brought about by a party, contrary to the duty of good faith and fair dealing or the duty of co-operation, that party may not rely on the fulfilment of the condition.

Article 5.3.4

Duty to preserve rights

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Pending fulfilment of a condition, a party may not, contrary to the duty to act in accordance with good faith and fair dealing, act so as to prejudice the other party’s rights in case of fulfilment of the condition. Article 5.3.5

Restitution in case of fulfilment of a resolutive condition

(1) On fulfilment

of a resolutive condition, the rules on restitution set out in Articles 7.3.6 and 7.3.7 apply with appropriate adaptations.

(2) If the

parties have agreed that the resolutive condition is to operate retroactively, the rules on restitution set out in Article 3.2.15 apply with appropriate adaptations.

6 Performance Section 1 Performance Article 6.1.1

in general

Time of performance

A party must perform its obligations: (a) if a time

is fixed by or determinable from the contract, at that time;

(b) if a period

of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the other party is to choose a time;

(c) in any other Article 6.1.2

case, within a reasonable time after the conclusion of the contract.

Performance at one time or in instalments

In cases under Article 6.1.1(b) or (c), a party must perform its obligations at one time if that performance can be rendered at one time and the circumstances do not indicate otherwise. Article 6.1.3

Partial performance

(1) The

obligee may reject an offer to perform in part at the time performance is due, whether or not such offer is coupled with an assurance as to the balance of the performance, unless the obligee has no legitimate interest in so doing.

(2) Additional

expenses caused to the obligee by partial performance are to be borne by the obligor without prejudice to any other remedy.

Article 6.1.4

Order of performance

(1) To the

extent that the performances of the parties can be rendered simultaneously, the parties are bound to render them simultaneously unless the circumstances indicate otherwise.

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 UNIDROIT principles of international commercial contracts 2016 (2) To the

extent that the performance of only one party requires a period of time, that party is bound to render its performance first, unless the circumstances indicate otherwise.

Article 6.1.5

Earlier performance

(1) The

obligee may reject an earlier performance unless it has no legitimate interest in so doing.

(2) Acceptance

by a party of an earlier performance does not affect the time for the performance of its own obligations if that time has been fixed irrespective of the performance of the other party’s obligations.

(3) Additional

expenses caused to the obligee by earlier performance are to be borne by the obligor, without prejudice to any other remedy.

Article 6.1.6

Place of performance

(1) If the

place of performance is neither fixed by, nor determinable from, the contract, a party is to perform:

(a) a monetary (b) any other

obligation, at the obligee’s place of business;

obligation, at its own place of business.

(2) A party

must bear any increase in the expenses incidental to performance which is caused by a change in its place of business subsequent to the conclusion of the contract.

Article 6.1.7

Payment by cheque or other instrument

(1) Payment

may be made in any form used in the ordinary course of business at the place for payment.

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(2) However,

an obligee who accepts, either by virtue of paragraph (1) or voluntarily, a cheque, any other order to pay or a promise to pay, is presumed to do so only on condition that it will be honoured.

Article 6.1.8

Payment by funds transfer

(1) Unless

the obligee has indicated a particular account, payment may be made by a transfer to any of the financial institutions in which the obligee has made it known that it has an account.

(2) In case

of payment by a transfer the obligation of the obligor is discharged when the transfer to the obligee’s financial institution becomes effective.

Article 6.1.9

Currency of payment

(1) If a monetary

obligation is expressed in a currency other than that of the place for payment, it may be paid by the obligor in the currency of the place for payment unless

(a) that currency

is not freely convertible; or

(b) the parties

have agreed that payment should be made only in the currency in which the monetary obligation is expressed.

(2) If it is

impossible for the obligor to make payment in the currency in which the monetary obligation is expressed, the obligee may require payment in the currency of the place for payment, even in the case referred to in paragraph (1)(b).

(3) Payment

in the currency of the place for payment is to be made according to the applicable rate of exchange prevailing there when payment is due.

(4) However,

if the obligor has not paid at the time when payment is due, the obligee may require payment according to the applicable rate of exchange prevailing either when payment is due or at the time of actual payment.

Article 6.1.10

Currency not expressed

Where a monetary obligation is not expressed in a particular currency, payment must be made in the currency of the place where payment is to be made. Article 6.1.11

Costs of performance

Each party shall bear the costs of performance of its obligations.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 6.1.12

Imputation of payments

(1) An obligor

owing several monetary obligations to the same obligee may specify at the time of payment the debt to which it intends the payment to be applied. However, the payment discharges first any expenses, then interest due and finally the principal.

(2) If the

obligor makes no such specification, the obligee may, within a reasonable time after payment, declare to the obligor the obligation to which it imputes the payment, provided that the obligation is due and undisputed.

(3) In the

absence of imputation under paragraphs (1) or (2), payment is imputed to that obligation which satisfies one of the following criteria in the order indicated:

(a) an obligation

which is due or which is the first to fall due;

(b) the obligation

for which the obligee has least security;

(c) the obligation (d) the obligation

which is the most burdensome for the obligor;

which has arisen first.

If none of the preceding criteria applies, payment is imputed to all the obligations proportionally. Article 6.1.13

Imputation of non-monetary obligations

Article 6.1.12 applies with appropriate adaptations to the imputation of performance of non-monetary obligations.

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Article 6.1.14

Application for public permission

Where the law of a State requires a public permission affecting the validity of the contract or its performance and neither that law nor the circumstances indicate otherwise (a) if only one

party has its place of business in that State, that party shall take the measures necessary to obtain the permission;

(b) in any other

case the party whose performance requires permission shall take the necessary measures.

Article 6.1.15

Procedure in applying for permission

(1) The

party required to take the measures necessary to obtain the permission shall do so without undue delay and shall bear any expenses incurred.

(2) That

party shall whenever appropriate give the other party notice of the grant or refusal of such permission without undue delay.

Article 6.1.16

Permission neither granted nor refused

(1) If, notwithstanding

the fact that the party responsible has taken all measures required, permission is neither granted nor refused within an agreed period or, where no period has been agreed, within a reasonable time from the conclusion of the contract, either party is entitled to terminate the contract.

(2) Where

the permission affects some terms only, paragraph (1) does not apply if, having regard to the circumstances, it is reasonable to uphold the remaining contract even if the permission is refused.

Article 6.1.17

Permission refused

(1) The

refusal of a permission affecting the validity of the contract renders the contract void. If the refusal affects the validity of some terms only, only such terms are void if, having regard to the circumstances, it is reasonable to uphold the remaining contract.

(2) Where

the refusal of a permission renders the performance of the contract impossible in whole or in part, the rules on non-performance apply.

Article 6.2.1

Contract to be observed

Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship.

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 UNIDROIT principles of international commercial contracts 2016 Article 6.2.2

Definition of hardship

There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished, and (a) the events

occur or become known to the disadvantaged party after the conclusion of the contract;

(b) the events

could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;

(c) the events (d) the risk Article 6.2.3

are beyond the control of the disadvantaged party; and

of the events was not assumed by the disadvantaged party.

Effects of hardship

(1) In case

of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.

(2) The

request for renegotiation does not in itself entitle the disadvantaged party to withhold performance.

(3) Upon

failure to reach agreement within a reasonable time either party may resort to the court.

(4) If the

court finds hardship it may, if reasonable,

(a) terminate

the contract at a date and on terms to be fixed, or

(b) adapt the

contract with a view to restoring its equilibrium.

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7 Non-Performance Section 1 Non-performance Article 7.1.1

in general

Non-performance defined

Non-performance is failure by a party to perform any of its obligations under the contract, including defective performance or late performance. Article 7.1.2

Interference by the other party

A party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party’s act or omission or by another event for which the first party bears the risk. Article 7.1.3

Withholding performance

(1) Where

the parties are to perform simultaneously, either party may withhold performance until the other party tenders its performance.

(2) Where

the parties are to perform consecutively, the party that is to perform later may withhold its performance until the first party has performed.

Article 7.1.4

Cure by non-performing party

(1) The

non-performing party may, at its own expense, cure any non-performance, provided that

(a) without

undue delay, it gives notice indicating the proposed manner and timing of the cure;

(b) cure is appropriate (c) the aggrieved

party has no legitimate interest in refusing cure; and

(d) cure is effected (2) The

in the circumstances;

promptly.

right to cure is not precluded by notice of termination.

(3) Upon

effective notice of cure, rights of the aggrieved party that are inconsistent with the non-performing party’s performance are suspended until the time for cure has expired.

(4) The

aggrieved party may withhold performance pending cure.

(5) Notwithstanding

cure, the aggrieved party retains the right to claim damages for delay as well as for any harm caused or not prevented by the cure. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 287

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 7.1.5

Additional period for performance

(1) In a

case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance.

(2) During

the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages but may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under this Chapter.

(3) Where

in a case of delay in performance which is not fundamental the aggrieved party has given notice allowing an additional period of time of reasonable length, it may terminate the contract at the end of that period. If the additional period allowed is not of reasonable length it shall be extended to a reasonable length. The aggrieved party may in its notice provide that if the other party fails to perform within the period allowed by the notice the contract shall automatically terminate.

(4) Paragraph

(3) does not apply where the obligation which has not been performed is only a minor part of the contractual obligation of the non-performing party.

Article 7.1.6

Exemption clauses

A clause which limits or excludes one party’s liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract. Article 7.1.7

Force majeure

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(1) Non-performance

by a party is excused if that party proves that the nonperformance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) When

the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.

(3) The

party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such nonreceipt.

(4) Nothing

in this Article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

Section 2 Right Article 7.2.1

to performance

Performance of monetary obligation

Where a party who is obliged to pay money does not do so, the other party may require payment. Article 7.2.2

Performance of non-monetary obligation

Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless (a) performance

is impossible in law or in fact;

(b) performance

or, where relevant, enforcement is unreasonably burdensome or

expensive; (c) the party

entitled to performance may reasonably obtain performance from another source;

(d) performance

is of an exclusively personal character; or

(e) the party

entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the nonperformance.

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 UNIDROIT principles of international commercial contracts 2016 Article 7.2.3

Repair and replacement of defective performance

The right to performance includes in appropriate cases the right to require repair, replacement, or other cure of defective performance. The provisions of Articles 7.2.1 and 7.2.2 apply accordingly. Article 7.2.4

Judicial penalty

(1) Where

the court orders a party to perform, it may also direct that this party pay a penalty if it does not comply with the order.

(2) The

penalty shall be paid to the aggrieved party unless mandatory provisions of the law of the forum provide otherwise. Payment of the penalty to the aggrieved party does not exclude any claim for damages.

Article 7.2.5

Change of remedy

(1) An aggrieved

party who has required performance of a non-monetary obligation and who has not received performance within a period fixed or otherwise within a reasonable period of time may invoke any other remedy.

(2) Where

the decision of a court for performance of a non-monetary obligation cannot be enforced, the aggrieved party may invoke any other remedy.

Section 3 Termination Article 7.3.1

Right to terminate the contract

(1) A party

may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.

(2) In determining

whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether

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(a) the non-performance

substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;

(b) strict compliance

with the obligation which has not been performed is of essence under the contract;

(c) the non-performance

is intentional or reckless;

(d) the non-performance

gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance;

(e) the non-performing

party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated.

(3) In the

case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed it under Article 7.1.5 has expired.

Article 7.3.2

Notice of termination

(1) The

right of a party to terminate the contract is exercised by notice to the other party.

(2) If performance

has been offered late or otherwise does not conform to the contract the aggrieved party will lose its right to terminate the contract unless it gives notice to the other party within a reasonable time after it has or ought to have become aware of the offer or of the non-conforming performance.

Article 7.3.3

Anticipatory non-performance

Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract. Article 7.3.4

Adequate assurance of due performance

A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract. Article 7.3.5

Effects of termination in general

(1) Termination

of the contract releases both parties from their obligation to effect and to receive future performance.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (2) Termination

does not preclude a claim for damages for non-performance.

(3) Termination

does not affect any provision in the contract for the settlement of disputes or any other term of the contract which is to operate even after termination.

Article 7.3.6

Restitution with respect to contracts to be performed at one time

(1) On termination

of a contract to be performed at one time either party may claim restitution of whatever it has supplied under the contract, provided that such party concurrently makes restitution of whatever it has received under the contract.

(2) If restitution

in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.

(3) The

recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.

(4) Compensation

may be claimed for expenses reasonably required to preserve or maintain the performance received.

Article 7.3.7

Restitution with respect to long-term contracts

(1) On termination

of a long-term contract restitution can only be claimed for the period after termination has taken effect, provided the contract is divisible.

(2) As far

as restitution has to be made, the provisions of Article 7.3.6 apply.

Section 4 Damages Article 7.4.1

Right to damages

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Any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with any other remedies except where the nonperformance is excused under these Principles. Article 7.4.2

Full compensation

(1) The

aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm.

(2) Such

harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

Article 7.4.3

Certainty of harm

(1) Compensation

is due only for harm, including future harm, that is established with a reasonable degree of certainty.

(2) Compensation

may be due for the loss of a chance in proportion to the probability of

its occurrence. (3) Where

the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

Article 7.4.4

Foreseeability of harm

The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance. Article 7.4.5

Proof of harm in case of replacement transaction

Where the aggrieved party has terminated the contract and has made a replacement transaction within a reasonable time and in a reasonable manner it may recover the difference between the contract price and the price of the replacement transaction as well as damages for any further harm. Article 7.4.6

Proof of harm by current price

(1) Where

the aggrieved party has terminated the contract and has not made a replacement transaction but there is a current price for the performance contracted for, it may recover the difference between the contract price and the price current at the time the contract is terminated as well as damages for any further harm.

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 UNIDROIT principles of international commercial contracts 2016 (2) Current

price is the price generally charged for goods delivered or services rendered in comparable circumstances at the place where the contract should have been performed or, if there is no current price at that place, the current price at such other place that appears reasonable to take as a reference.

Article 7.4.7

Harm due in part to aggrieved party

Where the harm is due in part to an act or omission of the aggrieved party or to another event for which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties. Article 7.4.8

Mitigation of harm

(1) The

non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps.

(2) The

aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce the harm.

Article 7.4.9

Interest for failure to pay money

(1) If a party

does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum from the time when payment is due to the time of payment whether or not the non-payment is excused. rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment.

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(2) The

In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment. (3) The

aggrieved party is entitled to additional damages if the non-payment caused it a greater harm.

Article 7.4.10

Interest on damages

Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance. Article 7.4.11

Manner of monetary redress

(1) Damages

are to be paid in a lump sum. However, they may be payable in instalments where the nature of the harm makes this appropriate.

(2) Damages Article 7.4.12

to be paid in instalments may be indexed.

Currency in which to assess damages

Damages are to be assessed either in the currency in which the monetary obligation was expressed or in the currency in which the harm was suffered, whichever is more appropriate. Article 7.4.13

Agreed payment for non-performance

(1) Where

the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm.

(2) However,

notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

8 Set-Off Article 8.1 Conditions (1) Where

of set-off

two parties owe each other money or other performances of the same kind, either of them (“the first party”) may set off its obligation against that of its obligee (“the other party”) if at the time of set-off,

(a) the first

party is entitled to perform its obligation;

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (b) the other

party’s obligation is ascertained as to its existence and amount and performance is due.

(2) If the

obligations of both parties arise from the same contract, the first party may also set off its obligation against an obligation of the other party which is not ascertained as to its existence or to its amount.

Article 8.2 Foreign

currency set-off

Where the obligations are to pay money in different currencies, the right of set-off may be exercised, provided that both currencies are freely convertible and the parties have not agreed that the first party shall pay only in a specified currency. Article 8.3 Set-off

by notice

The right of set-off is exercised by notice to the other party. Article 8.4 Content (1) The

of notice

notice must specify the obligations to which it relates.

(2) If the

notice does not specify the obligation against which set-off is exercised, the other party may, within a reasonable time, declare to the first party the obligation to which set-off relates. If no such declaration is made, the set-off will relate to all the obligations proportionally.

Article 8.5 Effect

of set-off

(1) Set-off

discharges the obligations.

(2) If obligations

differ in amount, set-off discharges the obligations up to the amount of the lesser obligation.

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(3) Set-off

takes effect as from the time of notice.

9 Assignment of Rights, Transfer of Obligations, Assignment of Contracts Section 1 Assignment Article 9.1.1

of rights

Definitions

“Assignment of a right” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”), including transfer by way of security, of the assignor’s right to payment of a monetary sum or other performance from a third person (“the obligor”). Article 9.1.2

Exclusions

This Section does not apply to transfers made under the special rules governing the transfers: (a) of instruments

such as negotiable instruments, documents of title or financial instruments, or

(b) of rights Article 9.1.3

in the course of transferring a business.

Assignability of non-monetary rights

A right to non-monetary performance may be assigned only if the assignment does not render the obligation significantly more burdensome. Article 9.1.4

Partial assignment

(1) A right

to the payment of a monetary sum may be assigned partially.

(2) A right

to other performance may be assigned partially only if it is divisible, and the assignment does not render the obligation significantly more burdensome.

Article 9.1.5

Future rights

A future right is deemed to be transferred at the time of the agreement, provided the right, when it comes into existence, can be identified as the right to which the assignment relates.

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 UNIDROIT principles of international commercial contracts 2016 Article 9.1.6

Rights assigned without individual specification

A number of rights may be assigned without individual specification, provided such rights can be identified as rights to which the assignment relates at the time of the assignment or when they come into existence. Article 9.1.7

Agreement between assignor and assignee sufficient

(1) A right

is assigned by mere agreement between the assignor and the assignee, without notice to the obligor.

(2) The

consent of the obligor is not required unless the obligation in the circumstances is of an essentially personal character.

Article 9.1.8

Obligor’s additional costs

The obligor has a right to be compensated by the assignor or the assignee for any additional costs caused by the assignment. Article 9.1.9

Non-assignment clauses

(1) The

assignment of a right to the payment of a monetary sum is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to the obligor for breach of contract.

(2) The

assignment of a right to other performance is ineffective if it is contrary to an agreement between the assignor and the obligor limiting or prohibiting the assignment. Nevertheless, the assignment is effective if the assignee, at the time of the assignment, neither knew nor ought to have known of the agreement. The assignor may then be liable to the obligor for breach of contract.

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Article 9.1.10

Notice to the obligor

(1) Until

the obligor receives a notice of the assignment from either the assignor or the assignee, it is discharged by paying the assignor.

(2) After Article 9.1.11

the obligor receives such a notice, it is discharged only by paying the assignee.

Successive assignments

If the same right has been assigned by the same assignor to two or more successive assignees, the obligor is discharged by paying according to the order in which the notices were received. Article 9.1.12

Adequate proof of assignment

(1) If notice

of the assignment is given by the assignee, the obligor may request the assignee to provide within a reasonable time adequate proof that the assignment has been made.

(2) Until

adequate proof is provided, the obligor may withhold payment.

(3) Unless

adequate proof is provided, notice is not effective.

(4) Adequate

proof includes, but is not limited to, any writing emanating from the assignor and indicating that the assignment has taken place.

Article 9.1.13

Defences and rights of set-off

(1) The

obligor may assert against the assignee all defences that the obligor could assert against the assignor.

(2) The

obligor may exercise against the assignee any right of set-off available to the obligor against the assignor up to the time notice of assignment was received.

Article 9.1.14

Rights related to the right assigned

The assignment of a right transfers to the assignee: (a) all the assignor’s

rights to payment or other performance under the contract in respect of the right assigned, and

(b) all rights Article 9.1.15

securing performance of the right assigned.

Undertakings of the assignor

The assignor undertakes towards the assignee, except as otherwise disclosed to the assignee, that:

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (a) the assigned

right exists at the time of the assignment, unless the right is a future

right; (b) the assignor

is entitled to assign the right;

(c) the right

has not been previously assigned to another assignee, and it is free from any right or claim from a third party;

(d) the obligor

does not have any defences;

(e) neither the

obligor nor the assignor has given notice of set-off concerning the assigned right and will not give any such notice;

(f) the assignor

will reimburse the assignee for any payment received from the obligor before notice of the assignment was given.

Section 2 Transfer Article 9.2.1

of obligations

Modes of transfer

An obligation to pay money or render other performance may be transferred from one person (the “original obligor”) to another person (the “new obligor”) either (a) by an agreement

between the original obligor and the new obligor subject to

Article 9.2.3, or (b) by an agreement

between the obligee and the new obligor, by which the new obligor assumes the obligation.

Article 9.2.2

Exclusion

This Section does not apply to transfers of obligations made under the special rules governing transfers of obligations in the course of transferring a business.

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Article 9.2.3

Requirement of obligee’s consent to transfer

The transfer of an obligation by an agreement between the original obligor and the new obligor requires the consent of the obligee. Article 9.2.4

Advance consent of obligee

(1) The

obligee may give its consent in advance.

(2) If the

obligee has given its consent in advance, the transfer of the obligation becomes effective when a notice of the transfer is given to the obligee or when the obligee acknowledges it.

Article 9.2.5

Discharge of original obligor

(1) The

obligee may discharge the original obligor.

(2) The

obligee may also retain the original obligor as an obligor in case the new obligor does not perform properly.

(3) Otherwise Article 9.2.6

the original obligor and the new obligor are jointly and severally liable.

Third party performance

(1) Without

the obligee’s consent, the obligor may contract with another person that this person will perform the obligation in place of the obligor, unless the obligation in the circumstances has an essentially personal character.

(2) The Article 9.2.7

obligee retains its claim against the obligor.

Defences and rights of set-off

(1) The

new obligor may assert against the obligee all defences which the original obligor could assert against the obligee.

(2) The

new obligor may not exercise against the obligee any right of set-off available to the original obligor against the obligee.

Article 9.2.8

Rights related to the obligation transferred

(1) The

obligee may assert against the new obligor all its rights to payment or other performance under the contract in respect of the obligation transferred.

(2) If the

original obligor is discharged under Article 9.2.5(1), a security granted by any person other than the new obligor for the performance of the obligation is discharged, unless that other person agrees that it should continue to be available to the obligee.

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 UNIDROIT principles of international commercial contracts 2016 (3) Discharge

of the original obligor also extends to any security of the original obligor given to the obligee for the performance of the obligation, unless the security is over an asset which is transferred as part of a transaction between the original obligor and the new obligor.

Section 3 Assignment Article 9.3.1

of contracts

Definitions

“Assignment of a contract” means the transfer by agreement from one person (the “assignor”) to another person (the “assignee”) of the assignor’s rights and obligations arising out of a contract with another person (the “other party”). Article 9.3.2

Exclusion

This Section does not apply to the assignment of contracts made under the special rules governing transfers of contracts in the course of transferring a business. Article 9.3.3

Requirement of consent of the other party

The assignment of a contract requires the consent of the other party. Article 9.3.4

Advance consent of the other party

(1) The

other party may give its consent in advance.

(2) If the

other party has given its consent in advance, the assignment of the contract becomes effective when a notice of the assignment is given to the other party or when the other party acknowledges it.

Article 9.3.5

Discharge of the assignor

(1) The

other party may discharge the assignor.

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(2) The

other party may also retain the assignor as an obligor in case the assignee does not perform properly.

(3) Otherwise Article 9.3.6

the assignor and the assignee are jointly and severally liable.

Defences and rights of set-off

(1) To the

extent that the assignment of a contract involves an assignment of rights, Article 9.1.13 applies accordingly.

(2) To the

extent that the assignment of a contract involves a transfer of obligations, Article 9.2.7 applies accordingly.

Article 9.3.7

Rights transferred with the contract

(1) To the

extent that the assignment of a contract involves an assignment of rights, Article 9.1.14 applies accordingly.

(2) To the

extent that the assignment of a contract involves a transfer of obligations, Article 9.2.8 applies accordingly.

10 Limitation Periods Article 10.1

Scope of the Chapter

(1) The

exercise of rights governed by the Principles is barred by the expiration of a period of time, referred to as “limitation period”, according to the rules of this Chapter.

(2) This

Chapter does not govern the time within which one party is required under the Principles, as a condition for the acquisition or exercise of its right, to give notice to the other party or to perform any act other than the institution of legal proceedings.

Article 10.2

Limitation periods

(1) The

general limitation period is three years beginning on the day after the day the obligee knows or ought to know the facts as a result of which the obligee’s right can be exercised.

(2) In any

event, the maximum limitation period is ten years beginning on the day after the day the right can be exercised.

Article 10.3

Modification of limitation periods by the parties

(1) The

parties may modify the limitation periods.

(2) However

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS (a) shorten

the general limitation period to less than one year;

(b) shorten

the maximum limitation period to less than four years;

(c) extend the Article 10.4

maximum limitation period to more than fifteen years.

New limitation period by acknowledgement

(1) Where

the obligor before the expiration of the general limitation period acknowledges the right of the obligee, a new general limitation period begins on the day after the day of the acknowledgement.

(2) The

maximum limitation period does not begin to run again, but may be exceeded by the beginning of a new general limitation period under Article 10.2(1).

Article 10.5

Suspension by judicial proceedings

(1) The

running of the limitation period is suspended

(a) when the

obligee performs any act, by commencing judicial proceedings or in judicial proceedings already instituted, that is recognised by the law of the court as asserting the obligee’s right against the obligor;

(b) in the case

of the obligor’s insolvency when the obligee has asserted its rights in the insolvency proceedings; or

(c) in the case

of proceedings for dissolution of the entity which is the obligor when the obligee has asserted its rights in the dissolution proceedings.

(2) Suspension

lasts until a final decision has been issued or until the proceedings have been otherwise terminated.

Article 10.6

Suspension by arbitral proceedings

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(1) The

running of the limitation period is suspended when the obligee performs any act, by commencing arbitral proceedings or in arbitral proceedings already instituted, that is recognised by the law of the arbitral tribunal as asserting the obligee’s right against the obligor. In the absence of regulations for arbitral proceedings or provisions determining the exact date of the commencement of arbitral proceedings, the proceedings are deemed to commence on the date on which a request that the right in dispute should be adjudicated reaches the obligor.

(2) Suspension

lasts until a binding decision has been issued or until the proceedings have been otherwise terminated.

Article 10.7

Alternative dispute resolution

The provisions of Articles 10.5 and 10.6 apply with appropriate modifications to other proceedings whereby the parties request a third person to assist them in their attempt to reach an amicable settlement of their dispute. Article 10.8 Suspension

in case of force majeure, death or incapacity

(1) Where

the obligee has been prevented by an impediment that is beyond its control and that it could neither avoid nor overcome, from causing a limitation period to cease to run under the preceding Articles, the general limitation period is suspended so as not to expire before one year after the relevant impediment has ceased to exist.

(2) Where

the impediment consists of the incapacity or death of the obligee or obligor, suspension ceases when a representative for the incapacitated or deceased party or its estate has been appointed or a successor has inherited the respective party’s position. The additional one-year period under paragraph (1) applies accordingly.

Article 10.9

Effects of expiration of limitation period

(1) The

expiration of the limitation period does not extinguish the right.

(2) For

the expiration of the limitation period to have effect, the obligor must assert it as a defence.

(3) A right

may still be relied on as a defence even though the expiration of the limitation period for that right has been asserted.

Article 10.10

Right of set-off

The obligee may exercise the right of set-off until the obligor has asserted the expiration of the limitation period.

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 UNIDROIT principles of international commercial contracts 2016 Article 10.11

Restitution

Where there has been performance in order to discharge an obligation, there is no right of restitution merely because the limitation period has expired.

11 Plurality of Obligors and of Obligees Section 1 Plurality Article 11.1.1

of obligors

Definitions

When several obligors are bound by the same obligation towards an obligee: (a) the obligations

are joint and several when each obligor is bound for the whole

obligation; (b) the obligations Article 11.1.2

are separate when each obligor is bound only for its share.

Presumption of joint and several obligations

When several obligors are bound by the same obligation towards an obligee, they are presumed to be jointly and severally bound, unless the circumstances indicate otherwise. Article 11.1.3

Obligee’s rights against joint and several obligors

When obligors are jointly and severally bound, the obligee may require performance from any one of them, until full performance has been received.

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Article 11.1.4

Availability of defences and rights of set-off

A joint and several obligor against whom a claim is made by the obligee may assert all the defences and rights of set-off that are personal to it or that are common to all the co-obligors, but may not assert defences or rights of set-off that are personal to one or several of the other co-obligors. Article 11.1.5

Effect of performance or set-off

Performance or set-off by a joint and several obligor or set-off by the obligee against one joint and several obligor discharges the other obligors in relation to the obligee to the extent of the performance or set-off. Article 11.1.6

Effect of release or settlement

(1) Release

of one joint and several obligor, or settlement with one joint and several obligor, discharges all the other obligors for the share of the released or settling obligor, unless the circumstances indicate otherwise.

(2) When

the other obligors are discharged for the share of the released obligor, they no longer have a contributory claim against the released obligor under Article 11.1.10.

Article 11.1.7

Effect of expiration or suspension of limitation period

(1) Expiration

of the limitation period of the obligee’s rights against one joint and several obligor does not affect:

(a) the obligations (b) the rights

to the obligee of the other joint and several obligors; or

of recourse between the joint and several obligors under Article 11.1.10.

(2) If the

obligee initiates proceedings under Articles 10.5, 10.6 or 10.7 against one joint and several obligor, the running of the limitation period is also suspended against the other joint and several obligors.

Article 11.1.8

Effect of judgment

(1) A decision

by a court as to the liability to the obligee of one joint and several obligor does not affect:

(a) the obligations (b) the rights

to the obligee of the other joint and several obligors; or

of recourse between the joint and several obligors under Article 11.1.10.

(2) However,

the other joint and several obligors may rely on such a decision, except if it was based on grounds personal to the obligor concerned. In such a case, the rights of recourse between the joint and several obligors under Article 11.1.10 are affected accordingly.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 11.1.9

Apportionment among joint and several obligors

As among themselves, joint and several obligors are bound in equal shares, unless the circumstances indicate otherwise. Article 11.1.10

Extent of contributory claim

A joint and several obligor who has performed more than its share may claim the excess from any of the other obligors to the extent of each obligor’s unperformed share. Article 11.1.11

Rights of the obligee

(1) A joint

and several obligor to whom Article 11.1.10 applies may also exercise the rights of the obligee, including all rights securing their performance, to recover the excess from all or any of the other obligors to the extent of each obligor’s unperformed share.

(2) An

obligee who has not received full performance retains its rights against the coobligors to the extent of the unperformed part, with precedence over co-obligors exercising contributory claims.

Article 11.1.12

Defences in contributory claims

A joint and several obligor against whom a claim is made by the co-obligor who has performed the obligation : (a) may

raise any common defences and rights of set-off that were available to be asserted by the co-obligor against the obligee ;

(b) may

assert defences which are personal to itself;

(c) may

not assert defences and rights of set-off which are personal to one or several of the other co-obligors.

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Article 11.1.13

Inability to recover

If a joint and several obligor who has performed more than that obligor’s share is unable, despite all reasonable efforts, to recover contribution from another joint and several obligor, the share of the others, including the one who has performed, is increased proportionally. Section 2 Plurality Article 11.2.1

of obligees

Definitions

When several obligees can claim performance of the same obligation from an obligor: (a) the

claims are separate when each obligee can only claim its share;

(b) the

claims are joint and several when each obligee can claim the whole performance;

(c) the claims Article 11.2.2

are joint when all obligees have to claim performance together.

Effects of joint and several claims

Full performance of an obligation in favour of one of the joint and several obligees discharges the obligor towards the other obligees. Article 11.2.3

Availability of defences against joint and several obligees

(1) The

obligor may assert against any of the joint and several obligees all the defences and rights of set-off that are personal to its relationship to that obligee or that it can assert against all the co-obligees, but may not assert defences and rights of set-off that are personal to its relationship to one or several of the other co-obligees.

(2) The

provisions of Articles 11.1.5, 11.1.6, 11.1.7 and 11.1.8 apply, with appropriate adaptations, to joint and several claims.

Article 11.2.4

Allocation between joint and several obligees

(1) As among

themselves, joint and several obligees are entitled to equal shares, unless the circumstances indicate otherwise.

(2) An obligee

who has received more than its share must transfer the excess to the other obligees to the extent of their respective shares.

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Appendix III

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Incoterms® 2010 Wallchart

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Appendix IV

ICC Force Majeure and Hardship Clauses



ICC Force Majeure Clause 2003

Introductory

Note on the Application and General Structure of the Clause

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This clause, known as the “ICC Force Majeure Clause 2003”, is intended to apply to any contract which incorporates it either expressly or by reference. While parties are encouraged to incorporate the Clause into their contracts by its full name, it is anticipated that any reference in a contract to the ‘ICC Force Majeure Clause’ shall, in the absence of evidence to the contrary, be deemed to be a reference to this Clause. The general structure of the Clause is to provide contracting parties both with a general force majeure formula and with an off-the-peg list of force majeure events. The ICC Task Force on Force Majeure and Hardship discussed at length the respective merits of three options open to it. The first was simply to draft a general force majeure formula, as do the main international instruments to which the Task Force had regard, namely the United Nations Convention on Contracts for the International Sale of Goods (CISG), the Principles of European Contract Law, and the UNIDROIT Principles for International Commercial Contracts. The second was to draft a general force majeure formula and to provide a merely illustrative list of force majeure events, as does the previous 1985 ICC Force Majeure Clause. The third was to draft both a general force majeure formula and to provide a list of events the occurrence of which altered the evidential balance in favour of the party invoking the clause. The ICC Task Force on Force Majeure and Hardship has decided to draft the clause on the basis of the third option and this because of the three purposes on which the Clause is based. These three purposes are set out below. First, it is intended that the new clause should assist the largest possible number of users: those who draft neither of such two types of such clauses in their own contracts; those who draft only a general formula but would also like the predictability of an agreed list of events; and finally those who draft only a list of specified events but who wish to invoke an unlisted event as a force majeure event. Secondly, it is intended to give the list of events a function which goes beyond the merely illustrative, such that a party would find it easier to invoke the clause if it could point towards one of the listed events than if it could only use the general force majeure formula. Thirdly and on the other hand, it was important not to afford a party invoking a listed event too much protection: it was definitely regarded as wrong for such a party simply to point towards the mere occurrence of a listed event, the effects of which it could reasonably have avoided or overcome, and to claim relief on that basis from its duty to perform. The Clause seeks to attain these purposes first by providing a general force majeure formula placing the burden of proving the requirements for the application of the clause on the party invoking it. The Clause also provides a list of force majeure events, however, which is subject to the same conditions as established for the general force majeure formula but with evidential advantages for a party invoking the clause through this route. It should be emphasised that even where a party invoking the clause does so by pointing towards a listed event, that party still needs to prove that it could not reasonably have avoided or overcome theeffects of the listed event.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 1 Unless

otherwise agreed in the contract between the parties expressly or impliedly, where a party to a contract fails to perform one or more of its contractual duties, the consequences set out in paragraphs 4 to 9 of this Clause will follow if and to the extent that that party proves:

[a] that its

failure to perform was caused by an impediment beyond its reasonable control; and

[b] that it could

not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract; and

[c] that it could

not reasonably have avoided or overcome the effects of the impediment.

2 Where

a contracting party fails to perform one or more of its contractual duties because of default by a third party whom it has engaged toperform the whole or part of the contract, the consequences set out in paragraphs 4 to 9 of this Clause will only apply to the contracting party:

[a] if and to

the extent that the contracting party establishes the requirements set out in paragraph 1 of this Clause; and

[b] if and to

the extent that the contracting party proves that the same requirements apply to the third party.

3. In the

absence of proof to the contrary and unless otherwise agreed in the contract between the parties expressly or impliedly, a party invoking this Clause shall be presumed to have established the conditions described in paragraph 1[a] and [b] of this Clause in case of the occurrence of one or more of the following impediments:

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[a] war (whether

declared or not), armed conflict or the serious threat of same (including but not limited to hostile attack, blockade, military embargo), hostilities, invasion, act of a foreign enemy, extensive military mobilisation;

[b] civil war,

riot rebellion and revolution, military or usurped power, insurrection, civil commotion or disorder, mob violence, act of civil disobedience;

[c] act of terrorism,

sabotage or piracy;

[d] act of authority

whether lawful or unlawful, compliance with any law or governmental order, rule, regulation or direction, curfew restriction, expropriation, compulsory acquisition, seizure of works, requisition, nationalisation;

[e] act of God,

plague, epidemic, natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought;

[f] explosion,

fire, destruction of machines, equipment, factories and of any kind of installation, prolonged break-down of trans- port, telecommunication or electric current;

[g] general

labour disturbance such as but not limited to boycott, strike and lock-out, go-slow, occupation of factories and premises.

4 A party

successfully invoking this Clause is, subject to paragraph6 below, relieved from its duty to perform its obligations under thecontract from the time at which the impediment causes the failure to perform if notice thereof is given without delay or, if notice thereof is not given without delay, from the time at which notice thereof reaches the other party.

5. A party

successfully invoking this Clause is, subject to paragraph6 below, relieved from any liability in damages or any other contractual remedy for breach of contract from the time indicated in paragraph 4.

6. Where

the effect of the impediment or event invoked is temporary, the consequences set out under paragraphs 4 and 5 above shall apply only insofar, to the extent that and as long as the impediment or the listed event invoked impedes performance by the party invoking this Clause of its contractual duties. Where this paragraph applies, the party invoking this Clause is under an obligation to notify the other party as soon as the impediment or listed event ceases to impede performance of its contractual duties.

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 ICC Force Majeure and Hardship Clauses 7. A party

invoking this Clause is under an obligation to take all reasonable means to limit the effect of the impediment or event invoked upon performance of its contractual duties.

8. Where

the duration of the impediment invoked under paragraph 1 of this Clause or of the listed event invoked under paragraph 3 of this Clause has the effect of substantially depriving either or both of the contracting parties of what they were reasonably entitled to expect under the contract, either party has the right to terminate the contract by notification within a reasonable period to the other party.

9. Where

paragraph 8 above applies and where either contracting party has, by reason of anything done by another contracting party in the performance of the contract, derived a benefit before the termination of the contract, the party deriving such a benefit shall be under a duty to pay to the other party a sum of money equivalent to the value of such benefit.

Notes a) The general

Force Majeure formula in paragraph 1

The general formula triggering the consequences of force majeure set out in paragraph 1 of the Clause amalgamates elements of the previous ICC Force Majeure Clause 1985, CISG article 79, the Principles of European Contract Law section 8:108 and the UNIDROIT Principles for International Commercial Contracts article 7.1.7. The threshold adopted for the invocation of the Clause is considerably lower than impossibility of performance: hence the use of the phrase “beyond its reasonable control” in paragraph 1[a] and “could not reasonably have avoided” in paragraph 1[c].

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b) Force Majeure

and sub-contractors: paragraph 2

Paragraph 2 is designed specifically on the basis of CISG article 79(2) and is intended to make it clear that a contracting party can invoke the Clause where A fails to perform its duties towards its contracting party B because of non-performance by C, a subcontractor in a contract with A. As is the case with CISG, A here must establish the three conditions set out in the general formula in paragraph 1 both in its own regard and in regard to the sub-contractor C. The reason for maintaining this double threshold is that A would otherwise find it too easy in most cases of out- sourcing to invoke force majeure simply by proving that C did not perform its sub-contract. Such a result was felt by the Task Force to be harsh on B, a contracting party with legitimate expectations of performance by A. For the same reason, non-performance by a sub-contractor is not included among the events listed in paragraph 3. c) Force Majeure

and existing impediments

The Clause does not limit the consequences of force majeure to impediments that occur after the time the contract was concluded. The Task Force decided against such a limitation on the ground that a party might wish to invoke the Clause in circumstances where it simply did not know — and could not have known — of the existence of the impediment at that time. If the parties wish to apply the consequences of force majeure solely to events which occur after the contract is concluded, there is nothing in the Clause limiting their ability to do so by special term in their contract. Care should be taken in such circumstances, however, because such a clause would have the effect of excluding the consequences of force majeure where impediments that existed at the time of the conclusion of the contract were unknown to the parties. d) Listed Force

Majeure events: paragraph 3

Paragraph 3 describes a number of events commonly included in force majeure clauses and sets out the evidential presumptions favouring a party invoking the clause who can point to the occurrence of one or more of the listed events rather than simply to the general formula in paragraph 1. A party invoking the Clause by invoking one or more of the events listed is presumed to have established that its failure to perform was caused by an impediment beyond its reasonable control which it could not reasonably have been expected to have taken into account when the contract was made. It is essential to realise, however, that the mere occurrence of the event does not automatically grant relief to the party invoking the Clause. There is still a balance of evidence to be resolved between the parties: on the one hand, the party invoking the INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 303

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Clause still needs to prove that it could not have avoided the effects of the event invoked; and for its part, the other party can still unsettle the presumptions established by the Clause by proving that the event invoked was actually within the control and/or could have been antici- pated at the time of contract by the party invoking the event. e) Events in

the list

The list of events in paragraph 3 follows broadly the same list set out in article 2 of the ICC Clause 1985. The main innovation is the inclusion of acts of terrorism in paragraph 3[c]. The events selected for inclusion are ones broadly accepted as being outside the control and anticipation of most contracting parties: a party invoking one or more of these events still needs to prove, however, that it could not reasonably have avoided the effects of the event upon its ability to perform its contractual duties. It may be, of course, that parties in particular situations may wish to alter the list of events, for example by excluding one or more of the events, say event (d), i.e. “acts of authority etc.” There is nothing in the Clause preventing the parties from doing so, whether by deletion or addition to the events listed. It should also be noted that where a party invoking the Clause is affected by an event which cannot quite be brought within one of the listed events, that party can still invoke the Clause through the general formula established in paragraph 1, unassisted by the presumptions which would otherwise apply through the occurrence of a listed event. Thus, for example, where a party seeks relief because of a labour disturbance affecting only its own enterprise (and therefore comes outside event (g) — general labour disturbance) such a party can still invoke force majeure if it can establish the three requirements set out in paragraph 1.

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f) Self-induced

Force Majeure

The ICC Task Force on Force Majeure and Hardship has chosen not to include an express article excluding from relief events to whose occurrence the party invoking the clause has contributed, i.e. an article similar to CISG article 80, an article which is not repeated, incidentally, either in the Principles of European Contract Law or in the UNIDROIT Principles for International Commercial Contracts. The condition laid down at paragraphs 1(a) and (c) of the Clause dispense with the need for such an article: an event to which a party has contributed in whole or in part cannot be one outside the control of that party or one whose effects he might not reasonably have avoided or overcome. g) Force Majeure

and freedom of contract

It should be emphasised that this Clause is subject, both at paragraph1 and 3, to the contrary agreement of the parties whether express or implied in the terms of the contract. A number of examples of such special clauses have already been given in these Explanatory Notes. Again, for example, the parties may have expressly agreed by special term that the supplier was under a contractual duty to obtain an export licence, in which case it would not be open to it to invoke a governmental order, listed at paragraph 3[d], unless the failure to obtain it was caused by another of the listed events. h) The consequences

of Force Majeure: paragraphs 4 and 5

Paragraphs 4 and 5 of the Clause represent the two consequences suggested by the Task Force as resulting from the invocation of the clause, namely, suspension of performance duties and of remedies in damages for the duration of the impediment or event. i) Force Majeure

leading to termination of the contract: paragraphs 8 and 9

The Task Force was faced with two options regarding the moment at which temporary suspension of the contract through force majeure would last long enough to lead to termination: the first was to establish a fixed period; the second was to provide a formula for calculating that period. The Clause adopts the latter approach because it was felt that it would be difficult to establish a single period, which would be appropriate for all sectors of industry and in all circumstances. The formula used is that employed by CISG article 25, the UNIDROIT Principles for International Commercial

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 ICC Force Majeure and Hardship Clauses

Contracts article 7.3.1 and the Principles of European Contract Law section 8:103, with the caveat, however, that reference to foreseeability has been omitted, this aspect of matters being rendered superfluous by paragraph 1[b] of the Clause. j) Force Majeure

and notice

The giving of notice is referred to in paragraphs 4 and 5, 6 and 8 of the Clause. It is felt that mention of notice in these paragraphs dispenses with the need of a general article on notification, setting out a duty of notice within a reasonable period and the consequences of a failure to notice. The scheme of the Clause makes the consequences of invoking the Clause contingent upon notification without delay, a sufficient incentive to a party wishing to invoke the Clause to give prompt notice to the other party of its intention so to invoke.



ICC Hardship Clause 2003

Introductory

Note on the Application of the Clause

This clause, known as the “ICC Hardship Clause 2003”, is intended to apply to any contract which incorporates it either expressly or by reference. While parties are encouraged to incorporate the clause into their contracts by its full name, it is anticipated that any reference in a contract to the “ICC Hardship Clause” shall, in the absence of evidenceto the contrary, be deemed to be a reference to this clause. 1 A party

to a contract is bound to perform its contractual duties even if events have rendered performance more onerous than could reasonably have been anticipated at the time of the conclusion of the contract.

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2 Notwithstanding

paragraph 1 of this Clause, where a party to a contract proves that:

[a] the continued

performance of its contractual duties has become excessively onerous due to an event beyond its reasonable control which it could not reasonably have been expected to have taken into account at the time of the conclusion of the contract; and that

[b] it could

not reasonably have avoided or overcome the event or its consequences,

the parties are bound, within a reasonable time of the invocation of this Clause, to negotiate alternative contractual terms which reason- ably allow for the consequences of the event. 3. Where

paragraph 2 of this Clause applies, but where alternative contractual terms which reasonably allow for the consequences of the event are not agreed by the other party to the contract as provided in that paragraph, the party invoking this Clause is entitled to termination of the contract.

Notes a) Hardship

and Force Majeure

The ICC Hardship Clause 2003 stands separately from the ICC Force Majeure Clause 2003. This has been done for two reasons. First, clauses providing for the consequences of force majeure events are more commonly used than hardship clauses: it was felt that making both clauses operate automatically by incorporation might discourage the use of the force majeure clause. Secondly, the two clauses operate in different circumstances and have different effects; they ought therefore to be kept separate. Having said that, ICC puts forward both clauses as fair allocations of risk in circumstances of force majeure and hardship and both clauses can, of course, be incorporated into the same contract. b) The origins

of the Clause

The Clause differs markedly from the ICC 1985 Hardship provisions, which gave four alternative options for adoption by contracting parties. The Clause now provides one formulation with clear alternative conse- quences, negotiation or termination, the latter of which would in most cases provide an incentive towards the former. The Clause amalgamates elements of article 1467 of the Italian Civil Code and of article 6.2.2 of the UNIDROIT Principles of International Commercial Contracts.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS c) The parties

should perform their duties: paragraph 1

The Clause, taken largely from article 6.2.1 of the UNIDROIT Principles, starts with the principle that contractual duties should normally be performed, otherwise known as the principle “pacta sunt servanda”. On one view, this paragraph is unnecessary, in that hardship could only be invoked if the rigorous tests of paragraph 2 are satisfied, and this would be the case whether or not there is a paragraph 1. On the other hand, it was felt that the explicit expression of the “pacta sunt servanda” principle gives tribunals a clear indication that paragraph 2 is only to be invoked where its conditions are very strictly satisfied, it being an exception to the usual requirement of performance. It is with this in mind that the phrase “more onerous than anticipated at the time of the conclusion of the contract” is used in paragraph 1 (in which case duties must be performed) and the more demanding phrase “excessively onerous” in paragraph 2(a) (in which case there might be relief from performance.)

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d) Hardship

and existing impediments

As with the ICC Force Majeure Clause 2003, this Clause is not limited to situations where the events rendering performance excessively onerous occurred after the time the contract was concluded. Here too, the Task Force decided against such a limitation on the ground that a party might wish to invoke the Clause in circumstances where it simply did not know — and could not have known — of the existence of the event at the time of the conclusion of the contract. Again here, however, if the parties wish to apply the consequences of the Hardship Clause solely to events which occur after the contract is concluded, there is nothing in the Clause limiting their ability to do so by special term in their contract. Care should be taken in such circumstances, however, because such a clause would have the effect of excluding the consequences of the Clause where events rendering performance excessively onerous existed at the time of the conclusion of the contract but were unknown to the parties. e) Hardship

and the duty to negotiate: paragraph 2

The Clause places upon the parties the duty to negotiate alternative reasonable terms without expressly referring the matter to a court, as is done in article 6.2.3 of the UNIDROIT Principles. It was felt that the ICC Hardship Clause should encourage the parties to work out their own solutions through a general dispute resolution clause in their contract, rather than expressly stipulating for a limited reference to a tribunal for re-negotiation in a hardship situation. A “special” dispute resolution provision for hardship cases co-existing with a general dispute resolution clause might cause unnecessary and undesirable confusion. Thus, where paragraph 3 does not work, either because the performing party fails to offer alternative terms or because the non-performing party fails unreasonably to accept them, then the likelihood is that a claim will be made, either for termination brought by the party invoking the Clause or for breach of contract brought by the other party. That claim would go to arbitration or litigation under the general dispute resolution terms in the contract, for example by reference to any of the dispute resolution services provided by ICC.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Appendix V

ICC Arbitration and Mediation Rules



Rules of Arbitration of the International Chamber of Commerce in Force as from 1 March 2017

Introductory Article 1 International

Provisions

Court of Arbitration

1 The International

Court of Arbitration (the “Court”) of the International Chamber of Commerce (the “ICC”) is the independent arbitration body of the ICC. The statutes of the Court are set forth in Appendix I.

2 The Court

does not itself resolve disputes. It administers the resolution of disputes by arbitral tribunals, in accordance with the Rules of Arbitration of the ICC (the “Rules”). The Court is the only body authorized to administer arbitrations under the Rules, including the scrutiny and approval of awards rendered in accordance with the Rules. It draws up its own internal rules, which are set forth in Appendix II (the “Internal Rules”).

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3 The President

of the Court (the “President”) or, in the President’s absence or otherwise at the President’s request, one of its Vice-Presidents shall have the power to take urgent decisions on behalf of the Court, provided that any such decision is reported to the Court at its next session.

4 As provided

for in the Internal Rules, the Court may delegate to one or more committees composed of its members the power to take certain decisions, provided that any such decision is reported to the Court at its next session.

5 The Court

is assisted in its work by the Secretariat of the Court (the “Secretariat”) under the direction of its Secretary General (the “Secretary General”).

Article 2 Definitions

In the Rules: (i) “arbitral

tribunal” includes one or more arbitrators;

(ii) “claimant”

includes one or more claimants, “respondent” includes one or more respondents, and “additional party” includes one or more additional parties;

(iii) “party”

or “parties” include claimants, respondents or additional parties;

(iv) “claim”

or “claims” include any claim by any party against any other party;

(v) “award” Article 3 Written

includes, inter alia, an interim, partial or final award. Notifications or Communications; Time Limits

1 All pleadings

and other written communications submitted by any party, as well as all documents annexed thereto, shall be supplied in a number of copies sufficient to provide one copy for each party, plus one for each arbitrator, and one for the Secretariat. A copy of any notification or communication from the arbitral tribunal to the parties shall be sent to the Secretariat.

2 All notifications

or communications from the Secretariat and the arbitral tribunal shall be made to the last address of the party or its representative for whom the same are intended, as notified either by the party in question or by the other party. Such notification or communication may be made by delivery against receipt, registered post, courier, email, or any other means of telecommunication that provides a record of the sending thereof.

3 A notification

or communication shall be deemed to have been made on the day it was received by the party itself or by its representative, or would have been received if made in accordance with Article 3(2). INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 307

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4 Periods

of time specified in or fixed under the Rules shall start to run on the day following the date a notification or communication is deemed to have been made in accordance with Article 3(3). When the day next following such date is an official holiday, or a non-business day in the country where the notification or communication is deemed to have been made, the period of time shall commence on the first following business day. Official holidays and non-business days are included in the calculation of the period of time. If the last day of the relevant period of time granted is an official holiday or a non-business day in the country where the notification or communication is deemed to have been made, the period of time shall expire at the end of the first following business day.

COMMENCING Article 4 Request 1 A party

THE ARBITRATION

for Arbitration

wishing to have recourse to arbitration under the Rules shall submit its Request for Arbitration (the “Request”) to the Secretariat at any of the offices specified in the Internal Rules. The Secretariat shall notify the claimant and respondent of the receipt of the Request and the date of such receipt.

2 The date

on which the Request is received by the Secretariat shall, for all purposes, be deemed to be the date of the commencement of the arbitration.

3 The Request

shall contain the following information:

a) the name

in full, description, address and other contact details of each of the

parties; b) the name

in full, address and other contact details of any person(s) representing the claimant in the arbitration;

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c) a description

of the nature and circumstances of the dispute giving rise to the claims and of the basis upon which the claims are made;

d) a statement

of the relief sought, together with the amounts of any quantified claims and, to the extent possible, an estimate of the monetary value of any other claims;

e) any relevant

agreements and, in particular, the arbitration agreement(s);

f) where claims

are made under more than one arbitration agreement, an indication of the arbitration agreement under which each claim is made;

g) all relevant

particulars and any observations or proposals concerning the number of arbitrators and their choice in accordance with the provisions of Articles 12 and 13, and any nomination of an arbitrator required thereby; and

h) all relevant

particulars and any observations or proposals as to the place of the arbitration, the applicable rules of law and the language of the arbitration.

The claimant may submit such other documents or information with the Request as it considers appropriate or as may contribute to the efficient resolution of the dispute. 4 Together

with the Request, the claimant shall:

a) submit the

number of copies thereof required by Article 3(1); and

b) make payment

of the filing fee required by Appendix III (“Arbitration Costs and Fees”) in force on the date the Request is submitted.

In the event that the claimant fails to comply with either of these requirements, the Secretariat may fix a time limit within which the claimant must comply, failing which the file shall be closed without prejudice to the claimant’s right to submit the same claims at a later date in another Request. 5 The Secretariat

shall transmit a copy of the Request and the documents annexed thereto to the respondent for its Answer to the Request once the Secretariat has sufficient copies of the Request and the required filing fee.

Article 5 Answer 1 Within

to the Request; Counterclaims

30 days from the receipt of the Request from the Secretariat, the respondent shall submit an Answer (the “Answer”) which shall contain the following information:

a) its name

in full, description, address and other contact details;

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 ICC Arbitration and Mediation Rules b) the name

in full, address and other contact details of any person(s) representing the respondent in the arbitration;

c) its comments

as to the nature and circumstances of the dispute giving rise to the claims and the basis upon which the claims are made;

d) its response

to the relief sought;

e) any observations

or proposals concerning the number of arbitrators and their choice in light of the claimant’s proposals and in accordance with the provisions of Articles 12 and 13, and any nomination of an arbitrator required thereby; and

f) any observations

or proposals as to the place of the arbitration, the applicable rules of law and the language of the arbitration.

The respondent may submit such other documents or information with the Answer as it considers appropriate or as may contribute to the efficient resolution of the dispute. 2 The Secretariat

may grant the respondent an extension of the time for submitting the Answer, provided the application for such an extension contains the respondent’s observations or proposals concerning the number of arbitrators and their choice and, where required by Articles 12 and 13, the nomination of an arbitrator. If the respondent fails to do so, the Court shall proceed in accordance with the Rules.

3 The Answer

shall be submitted to the Secretariat in the number of copies specified by

Article 3(1). 4 The Secretariat

shall communicate the Answer and the documents annexed thereto to all other parties.

5 Any counterclaims

made by the respondent shall be submitted with the Answer and

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shall provide: a) a description

of the nature and circumstances of the dispute giving rise to the counterclaims and of the basis upon which the counterclaims are made;

b) a statement

of the relief sought together with the amounts of any quantified counterclaims and, to the extent possible, an estimate of the monetary value of any other counterclaims;

c) any relevant

agreements and, in particular, the arbitration agreement(s); and

d) where counterclaims

are made under more than one arbitration agreement, an indication of the arbitration agreement under which each counterclaim is made.

The respondent may submit such other documents or information with the counterclaims as it considers appropriate or as may contribute to the efficient resolution of the dispute. 6 The claimant

shall submit a reply to any counterclaim within 30 days from the date of receipt of the counterclaims communicated by the Secretariat. Prior to the transmission of the file to the arbitral tribunal, the Secretariat may grant the claimant an extension of time for submitting the reply.

Article 6 Effect

of the Arbitration Agreement

1 Where

the parties have agreed to submit to arbitration under the Rules, they shall be deemed to have submitted ipso facto to the Rules in effect on the date of commencement of the arbitration, unless they have agreed to submit to the Rules in effect on the date of their arbitration agreement.

2 By agreeing

to arbitration under the Rules, the parties have accepted that the arbitration shall be administered by the Court.

3 If any

party against which a claim has been made does not submit an Answer, or if any party raises one or more pleas concerning the existence, validity or scope of the arbitration agreement or concerning whether all of the claims made in the arbitration may be determined together in a single arbitration, the arbitration shall proceed and any question of jurisdiction or of whether the claims may be determined together in that arbitration shall be decided directly by the arbitral tribunal, unless the Secretary General refers the matter to the Court for its decision pursuant to Article 6(4).

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4 In all

cases referred to the Court under Article 6(3), the Court shall decide whether and to what extent the arbitration shall proceed. The arbitration shall proceed if and to the extent that the Court is prima facie satisfied that an arbitration agreement under the Rules may exist. In particular:

(i) where there

are more than two parties to the arbitration, the arbitration shall proceed between those of the parties, including any additional parties joined pursuant to Article 7, with respect to which the Court is prima facie satisfied that an arbitration agreement under the Rules that binds them all may exist; and

(ii) where claims

pursuant to Article 9 are made under more than one arbitration agreement, the arbitration shall proceed as to those claims with respect to which the Court is prima facie satisfied (a) that the arbitration agreements under which those claims are made may be compatible, and (b) that all parties to the arbitration may have agreed that those claims can be determined together in a single arbitration.

The Court’s decision pursuant to Article 6(4) is without prejudice to the admissibility or merits of any party’s plea or pleas. 5 In all

matters decided by the Court under Article 6(4), any decision as to the jurisdiction of the arbitral tribunal, except as to parties or claims with respect to which the Court decides that the arbitration cannot proceed, shall then be taken by the arbitral tribunal itself. the parties are notified of the Court’s decision pursuant to Article 6(4) that the arbitration cannot proceed in respect of some or all of them, any party retains the right to ask any court having jurisdiction whether or not, and in respect of which of them, there is a binding arbitration agreement.

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6 Where

7 Where

the Court has decided pursuant to Article 6(4) that the arbitration cannot proceed in respect of any of the claims, such decision shall not prevent a party from reintroducing the same claim at a later date in other proceedings.

8 If any

of the parties refuses or fails to take part in the arbitration or any stage thereof, the arbitration shall proceed notwithstanding such refusal or failure.

9 Unless

otherwise agreed, the arbitral tribunal shall not cease to have jurisdiction by reason of any allegation that the contract is non-existent or null and void, provided that the arbitral tribunal upholds the validity of the arbitration agreement. The arbitral tribunal shall continue to have jurisdiction to determine the parties’ respective rights and to decide their claims and pleas even though the contract itself may be nonexistent or null and void.

MULTIPLE Article 7 Joinder

1 A party

PARTIES, MULTIPLE CONTRACTS AND CONSOLIDATION

of Additional Parties

wishing to join an additional party to the arbitration shall submit its request for arbitration against the additional party (the “Request for Joinder”) to the Secretariat. The date on which the Request for Joinder is received by the Secretariat shall, for all purposes, be deemed to be the date of the commencement of arbitration against the additional party. Any such joinder shall be subject to the provisions of Articles 6(3)– 6(7) and 9. No additional party may be joined after the confirmation or appointment of any arbitrator, unless all parties, including the additional party, otherwise agree. The Secretariat may fix a time limit for the submission of a Request for Joinder.

2 The Request a) the case

for Joinder shall contain the following information: reference of the existing arbitration;

b) the name

in full, description, address and other contact details of each of the parties, including the additional party; and

c) the information

specified in Article 4(3), subparagraphs c), d), e) and f).

The party filing the Request for Joinder may submit therewith such other documents or information as it considers appropriate or as may contribute to the efficient resolution of the dispute. 3 The provisions

of Articles 4(4) and 4(5) shall apply, mutatis mutandis, to the Request

for Joinder. 310 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 ICC Arbitration and Mediation Rules 4 The additional

party shall submit an Answer in accordance, mutatis mutandis, with the provisions of Articles 5(1)–5(4). The additional party may make claims against any other party in accordance with the provisions of Article 8.

Article 8 Claims 1 In an

Between Multiple Parties

arbitration with multiple parties, claims may be made by any party against any other party, subject to the provisions of Articles 6(3)–6(7) and 9 and provided that no new claims may be made after the Terms of Reference are signed or approved by the Court without the authorization of the arbitral tribunal pursuant to Article 23(4).

2 Any party

making a claim pursuant to Article 8(1) shall provide the information specified in Article 4(3), subparagraphs c), d), e) and f).

3 Before

the Secretariat transmits the file to the arbitral tribunal in accordance with Article 16, the following provisions shall apply, mutatis mutandis, to any claim made: Article 4(4) subparagraph a); Article 4(5); Article 5(1) except for subparagraphs a), b), e) and f); Article 5(2); Article 5(3) and Article 5(4). Thereafter, the arbitral tribunal shall determine the procedure for making a claim.

Article 9 Multiple

Contracts

Subject to the provisions of Articles 6(3)–6(7) and 23(4), claims arising out of or in connection with more than one contract may be made in a single arbitration, irrespective of whether such claims are made under one or more than one arbitration agreement under the Rules. Article 10 Consolidation

of Arbitrations

The Court may, at the request of a party, consolidate two or more arbitrations pending under the Rules into a single arbitration, where:

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a) the parties b) all of

have agreed to consolidation; or

the claims in the arbitrations are made under the same arbitration agreement; or

c) where

the claims in the arbitrations are made under more than one arbitration agreement, the arbitrations are between the same parties, the disputes in the arbitrations arise in connection with the same legal relationship, and the Court finds the arbitration agreements to be compatible. In deciding whether to consolidate, the Court may take into account any circumstances it considers to be relevant, including whether one or more arbitrators have been confirmed or appointed in more than one of the arbitrations and, if so, whether the same or different persons have been confirmed or appointed. When arbitrations are consolidated, they shall be consolidated into the arbitration that commenced first, unless otherwise agreed by all parties.

THE ARBITRAL Article 11 General 1 Every

TRIBUNAL

Provisions

arbitrator must be and remain impartial and independent of the parties involved in the arbitration.

2 Before

appointment or confirmation, a prospective arbitrator shall sign a statement of acceptance, availability, impartiality and independence. The prospective arbitrator shall disclose in writing to the Secretariat any facts or circumstances which might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator’s impartiality. The Secretariat shall provide such information to the parties in writing and fix a time limit for any comments from them.

3 An arbitrator

shall immediately disclose in writing to the Secretariat and to the parties any facts or circumstances of a similar nature to those referred to in Article 11(2) concerning the arbitrator’s impartiality or independence which may arise during the arbitration.

4 The decisions

of the Court as to the appointment, confirmation, challenge or replacement of an arbitrator shall be final.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 5 By accepting

to serve, arbitrators undertake to carry out their responsibilities in accordance with the Rules.

6 Insofar

as the parties have not provided otherwise, the arbitral tribunal shall be constituted in accordance with the provisions of Articles 12 and 13.

Article 12 Constitution

of the Arbitral Tribunal

 Number of Arbitrators 1 The disputes

shall be decided by a sole arbitrator or by three arbitrators.

2 Where

the parties have not agreed upon the number of arbitrators, the Court shall appoint a sole arbitrator, save where it appears to the Court that the dispute is such as to warrant the appointment of three arbitrators. In such case, the claimant shall nominate an arbitrator within a period of 15 days from the receipt of the notification of the decision of the Court, and the respondent shall nominate an arbitrator within a period of 15 days from the receipt of the notification of the nomination made by the claimant. If a party fails to nominate an arbitrator, the appointment shall be made by the Court.

 Sole Arbitrator 3 Where

the parties have agreed that the dispute shall be resolved by a sole arbitrator, they may, by agreement, nominate the sole arbitrator for confirmation. If the parties fail to nominate a sole arbitrator within 30 days from the date when the claimant’s Request for Arbitration has been received by the other party, or within such additional time as may be allowed by the Secretariat, the sole arbitrator shall be appointed by the Court.

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 Three Arbitrators 4 Where

the parties have agreed that the dispute shall be resolved by three arbitrators, each party shall nominate in the Request and the Answer, respectively, one arbitrator for confirmation. If a party fails to nominate an arbitrator, the appointment shall be made by the Court.

5 Where

the dispute is to be referred to three arbitrators, the third arbitrator, who will act as president of the arbitral tribunal, shall be appointed by the Court, unless the parties have agreed upon another procedure for such appointment, in which case the nomination will be subject to confirmation pursuant to Article 13. Should such procedure not result in a nomination within 30 days from the confirmation or appointment of the co‑arbitrators or any other time limit agreed by the parties or fixed by the Court, the third arbitrator shall be appointed by the Court.

6 Where

there are multiple claimants or multiple respondents, and where the dispute is to be referred to three arbitrators, the multiple claimants, jointly, and the multiple respondents, jointly, shall nominate an arbitrator for confirmation pursuant to Article 13.

7 Where

an additional party has been joined, and where the dispute is to be referred to three arbitrators, the additional party may, jointly with the claimant(s) or with the respondent(s), nominate an arbitrator for confirmation pursuant to Article 13.

8 In the

absence of a joint nomination pursuant to Articles 12(6) or 12(7) and where all parties are unable to agree to a method for the constitution of the arbitral tribunal, the Court may appoint each member of the arbitral tribunal and shall designate one of them to act as president. In such case, the Court shall be at liberty to choose any person it regards as suitable to act as arbitrator, applying Article 13 when it considers this appropriate.

Article 13 Appointment

1 In confirming

and Confirmation of the Arbitrators

or appointing arbitrators, the Court shall consider the prospective arbitrator’s nationality, residence and other relationships with the countries of which the parties or the other arbitrators are nationals and the prospective arbitrator’s availability and ability to conduct the arbitration in accordance with the Rules. The same shall apply where the Secretary General confirms arbitrators pursuant to Article 13(2).

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 ICC Arbitration and Mediation Rules 2 The Secretary

General may confirm as co‑arbitrators, sole arbitrators and presidents of arbitral tribunals persons nominated by the parties or pursuant to their particular agreements, provided that the statement they have submitted contains no qualification regarding impartiality or independence or that a qualified statement regarding impartiality or independence has not given rise to objections. Such confirmation shall be reported to the Court at its next session. If the Secretary General considers that a co-arbitrator, sole arbitrator or president of an arbitral tribunal should not be confirmed, the matter shall be submitted to the Court.

3 Where

the Court is to appoint an arbitrator, it shall make the appointment upon proposal of a National Committee or Group of the ICC that it considers to be appropriate. If the Court does not accept the proposal made, or if the National Committee or Group fails to make the proposal requested within the time limit fixed by the Court, the Court may repeat its request, request a proposal from another National Committee or Group that it considers to be appropriate, or appoint directly any person whom it regards as suitable.

4 The Court

may also appoint directly to act as arbitrator any person whom it regards as suitable where:

a) one or more

of the parties is a state or may be considered to be a state entity;

b) the Court

considers that it would be appropriate to appoint an arbitrator from a country or territory where there is no National Committee or Group; or

c) the President

certifies to the Court that circumstances exist which, in the President’s opinion, make a direct appointment necessary and appropriate.

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5 The sole

arbitrator or the president of the arbitral tribunal shall be of a nationality other than those of the parties. However, in suitable circumstances and provided that none of the parties objects within the time limit fixed by the Court, the sole arbitrator or the president of the arbitral tribunal may be chosen from a country of which any of the parties is a national.

Article 14 Challenge

of Arbitrators

1 A challenge

of an arbitrator, whether for an alleged lack of impartiality or independence, or otherwise, shall be made by the submission to the Secretariat of a written statement specifying the facts and circumstances on which the challenge is based.

2 For a

challenge to be admissible, it must be submitted by a party either within 30 days from receipt by that party of the notification of the appointment or confirmation of the arbitrator, or within 30 days from the date when the party making the challenge was informed of the facts and circumstances on which the challenge is based if such date is subsequent to the receipt of such notification.

3 The Court

shall decide on the admissibility and, at the same time, if necessary, on the merits of a challenge after the Secretariat has afforded an opportunity for the arbitrator concerned, the other party or parties and any other members of the arbitral tribunal to comment in writing within a suitable period of time. Such comments shall be communicated to the parties and to the arbitrators.

Article 15 Replacement

1 An arbitrator

of Arbitrators

shall be replaced upon death, upon acceptance by the Court of the arbitrator’s resignation, upon acceptance by the Court of a challenge, or upon acceptance by the Court of a request of all the parties.

2 An arbitrator

shall also be replaced on the Court’s own initiative when it decides that the arbitrator is prevented de jure or de facto from fulfilling the arbitrator’s functions, or that the arbitrator is not fulfilling those functions in accordance with the Rules or within the prescribed time limits.

3 When,

on the basis of information that has come to its attention, the Court considers applying Article 15(2), it shall decide on the matter after the arbitrator concerned, the parties and any other members of the arbitral tribunal have had an opportunity to comment in writing within a suitable period of time. Such comments shall be communicated to the parties and to the arbitrators.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4 When

an arbitrator is to be replaced, the Court has discretion to decide whether or not to follow the original nominating process. Once reconstituted, and after having invited the parties to comment, the arbitral tribunal shall determine if and to what extent prior proceedings shall be repeated before the reconstituted arbitral tribunal.

5 Subsequent

to the closing of the proceedings, instead of replacing an arbitrator who has died or been removed by the Court pursuant to Articles 15(1) or 15(2), the Court may decide, when it considers it appropriate, that the remaining arbitrators shall continue the arbitration. In making such determination, the Court shall take into account the views of the remaining arbitrators and of the parties and such other matters that it considers appropriate in the circumstances.

THE ARBITRAL Article 16 Transmission

PROCEEDINGS

of the File to the Arbitral Tribunal

The Secretariat shall transmit the file to the arbitral tribunal as soon as it has been constituted, provided the advance on costs requested by the Secretariat at this stage has been paid. Article 17 Proof

of Authority

At any time after the commencement of the arbitration, the arbitral tribunal or the Secretariat may require proof of the authority of any party representatives. Article 18 Place

of the Arbitration

1 The place

of the arbitration shall be fixed by the Court, unless agreed upon by the

parties.

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2 The arbitral

tribunal may, after consultation with the parties, conduct hearings and meetings at any location it considers appropriate, unless otherwise agreed by the parties.

3 The arbitral Article 19 Rules

tribunal may deliberate at any location it considers appropriate.

Governing the Proceedings

The proceedings before the arbitral tribunal shall be governed by the Rules and, where the Rules are silent, by any rules which the parties or, failing them, the arbitral tribunal may settle on, whether or not reference is thereby made to the rules of procedure of a national law to be applied to the arbitration. Article 20 Language

of the Arbitration

In the absence of an agreement by the parties, the arbitral tribunal shall determine the language or languages of the arbitration, due regard being given to all relevant circumstances, including the language of the contract. Article 21 Applicable

Rules of Law

1 The parties

shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate.

2 The arbitral

tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages.

3 The arbitral

tribunal shall assume the powers of an amiable compositeur or decide ex aequo et bono only if the parties have agreed to give it such powers.

Article 22 Conduct

of the Arbitration

1 The arbitral

tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.

2 In order

to ensure effective case management, the arbitral tribunal, after consulting the parties, may adopt such procedural measures as it considers appropriate, provided that they are not contrary to any agreement of the parties.

3 Upon

the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.

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 ICC Arbitration and Mediation Rules 4 In all

cases, the arbitral tribunal shall act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.

5 The parties Article 23 Terms

undertake to comply with any order made by the arbitral tribunal.

of Reference

1 As soon

as it has received the file from the Secretariat, the arbitral tribunal shall draw up, on the basis of documents or in the presence of the parties and in the light of their most recent submissions, a document defining its Terms of Reference. This document shall include the following particulars:

a) the names

in full, description, address and other contact details of each of the parties and of any person(s) representing a party in the arbitration;

b) the addresses

to which notifications and communications arising in the course of the arbitration may be made;

c) a summary

of the parties’ respective claims and of the relief sought by each party, together with the amounts of any quantified claims and, to the extent possible, an estimate of the monetary value of any other claims;

d) unless the

arbitral tribunal considers it inappropriate, a list of issues to be determined;

e) the names f) the place

in full, address and other contact details of each of the arbitrators;

of the arbitration; and

g) particulars

of the applicable procedural rules and, if such is the case, reference to the power conferred upon the arbitral tribunal to act as amiable compositeur or to decide ex aequo et bono.

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2 The Terms

of Reference shall be signed by the parties and the arbitral tribunal. Within 30 days of the date on which the file has been transmitted to it, the arbitral tribunal shall transmit to the Court the Terms of Reference signed by it and by the parties. The Court may extend this time limit pursuant to a reasoned request from the arbitral tribunal or on its own initiative if it decides it is necessary to do so.

3 If any

of the parties refuses to take part in the drawing up of the Terms of Reference or to sign the same, they shall be submitted to the Court for approval. When the Terms of Reference have been signed in accordance with Article 23(2) or approved by the Court, the arbitration shall proceed.

4 After

the Terms of Reference have been signed or approved by the Court, no party shall make new claims which fall outside the limits of the Terms of Reference unless it has been authorized to do so by the arbitral tribunal, which shall consider the nature of such new claims, the stage of the arbitration and other relevant circumstances.

Article 24 Case

Management Conference and Procedural Timetable

1 When

drawing up the Terms of Reference or as soon as possible thereafter, the arbitral tribunal shall convene a case management conference to consult the parties on procedural measures that may be adopted pursuant to Article 22(2). Such measures may include one or more of the case management techniques described in Appendix IV.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 During

or following such conference, the arbitral tribunal shall establish the procedural timetable that it intends to follow for the conduct of the arbitration. The procedural timetable and any modifications thereto shall be communicated to the Court and the parties.

3 To ensure

continued effective case management, the arbitral tribunal, after consulting the parties by means of a further case management conference or otherwise, may adopt further procedural measures or modify the procedural timetable.

4 Case

management conferences may be conducted through a meeting in person, by videoconference, telephone or similar means of communication. In the absence of an agreement of the parties, the arbitral tribunal shall determine the means by which the conference will be conducted. The arbitral tribunal may request the parties to submit case management proposals in advance of a case management conference and may request the attendance at any case management conference of the parties in person or through an internal representative.

Article 25 Establishing 1 The arbitral

the Facts of the Case

tribunal shall proceed within as short a time as possible to establish the facts of the case by all appropriate means.

2 After

studying the written submissions of the parties and all documents relied upon, the arbitral tribunal shall hear the parties together in person if any of them so requests or, failing such a request, it may of its own motion decide to hear them.

3 The arbitral

tribunal may decide to hear witnesses, experts appointed by the parties or any other person, in the presence of the parties, or in their absence provided they have been duly summoned.

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4 The arbitral

tribunal, after having consulted the parties, may appoint one or more experts, define their terms of reference and receive their reports. At the request of a party, the parties shall be given the opportunity to question at a hearing any such expert.

5 At any

time during the proceedings, the arbitral tribunal may summon any party to provide additional evidence.

6 The arbitral

tribunal may decide the case solely on the documents submitted by the parties unless any of the parties requests a hearing.

Article 26 Hearings 1 When

a hearing is to be held, the arbitral tribunal, giving reasonable notice, shall summon the parties to appear before it on the day and at the place fixed by it.

2 If any

of the parties, although duly summoned, fails to appear without valid excuse, the arbitral tribunal shall have the power to proceed with the hearing.

3 The arbitral

tribunal shall be in full charge of the hearings, at which all the parties shall be entitled to be present. Save with the approval of the arbitral tribunal and the parties, persons not involved in the proceedings shall not be admitted.

4 The parties

may appear in person or through duly authorized representatives. In addition, they may be assisted by advisers.

Article 27 Closing

of the Proceedings and Date for Submission of Draft Awards

As soon as possible after the last hearing concerning matters to be decided in an award or the filing of the last authorized submissions concerning such matters, whichever is later, the arbitral tribunal shall: a) declare

the proceedings closed with respect to the matters to be decided in the award;

and b) inform

the Secretariat and the parties of the date by which it expects to submit its draft award to the Court for approval pursuant to Article 34. After the proceedings are closed, no further submission or argument may be made, or evidence produced, with respect to the matters to be decided in the award, unless requested or authorized by the arbitral tribunal.

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 ICC Arbitration and Mediation Rules Article 28 Conservatory 1 Unless

and Interim Measures

the parties have otherwise agreed, as soon as the file has been transmitted to it, the arbitral tribunal may, at the request of a party, order any interim or conservatory measure it deems appropriate. The arbitral tribunal may make the granting of any such measure subject to appropriate security being furnished by the requesting party. Any such measure shall take the form of an order, giving reasons, or of an award, as the arbitral tribunal considers appropriate.

2 Before

the file is transmitted to the arbitral tribunal, and in appropriate circumstances even thereafter, the parties may apply to any competent judicial authority for interim or conservatory measures. The application of a party to a judicial authority for such measures or for the implementation of any such measures ordered by an arbitral tribunal shall not be deemed to be an infringement or a waiver of the arbitration agreement and shall not affect the relevant powers reserved to the arbitral tribunal. Any such application and any measures taken by the judicial authority must be notified without delay to the Secretariat. The Secretariat shall inform the arbitral tribunal thereof.

Article 29 Emergency 1 A party

Arbitrator

that needs urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal (“Emergency Measures”) may make an application for such measures pursuant to the Emergency Arbitrator Rules in Appendix V. Any such application shall be accepted only if it is received by the Secretariat prior to the transmission of the file to the arbitral tribunal pursuant to Article 16 and irrespective of whether the party making the application has already submitted its Request for Arbitration.

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2 The emergency

arbitrator’s decision shall take the form of an order. The parties undertake to comply with any order made by the emergency arbitrator.

3 The emergency

arbitrator’s order shall not bind the arbitral tribunal with respect to any question, issue or dispute determined in the order. The arbitral tribunal may modify, terminate or annul the order or any modification thereto made by the emergency arbitrator.

4 The arbitral

tribunal shall decide upon any party’s requests or claims related to the emergency arbitrator proceedings, including the reallocation of the costs of such proceedings and any claims arising out of or in connection with the compliance or non-compliance with the order.

5 Articles

29(1)–29(4) and the Emergency Arbitrator Rules set forth in Appendix V (collectively the “Emergency Arbitrator Provisions”) shall apply only to parties that are either signatories of the arbitration agreement under the Rules that is relied upon for the application or successors to such signatories.

6 The Emergency

Arbitrator Provisions shall not apply if:

a) the arbitration b) the parties

agreement under the Rules was concluded before 1 January 2012;

have agreed to opt out of the Emergency Arbitrator Provisions; or

c) the parties

have agreed to another pre-arbitral procedure that provides for the granting of conservatory, interim or similar measures.

7 The Emergency

Arbitrator Provisions are not intended to prevent any party from seeking urgent interim or conservatory measures from a competent judicial authority at any time prior to making an application for such measures, and in appropriate circumstances even thereafter, pursuant to the Rules. Any application for such measures from a competent judicial authority shall not be deemed to be an infringement or a waiver of the arbitration agreement. Any such application and any measures taken by the judicial authority must be notified without delay to the Secretariat.

Article 30 Expedited

Procedure

1 By agreeing

to arbitration under the Rules, the parties agree that this Article 30 and the Expedited Procedure Rules set forth in Appendix VI (collectively the “Expedited Procedure Provisions”) shall take precedence over any contrary terms of the arbitration agreement. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 317

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 The Expedited

Procedure Rules set forth in Appendix VI shall apply if:

a) the amount

in dispute does not exceed the limit set out in Article 1(2) of Appendix VI at the time of the communication referred to in Article 1(3) of that Appendix; or

b) the parties 3 The Expedited

so agree. Procedure Provisions shall not apply if:

a) the arbitration

agreement under the Rules was concluded before the date on which the Expedited Procedure Provisions came into force;

b) the parties

have agreed to opt out of the Expedited Procedure Provisions; or

c) the Court,

upon the request of a party before the constitution of the arbitral tribunal or on its own motion, determines that it is inappropriate in the circumstances to apply the Expedited Procedure Provisions.

AWARDS Article 31 Time

Limit for the Final Award

1 The time

limit within which the arbitral tribunal must render its final award is six months. Such time limit shall start to run from the date of the last signature by the arbitral tribunal or by the parties of the Terms of Reference or, in the case of application of Article 23(3), the date of the notification to the arbitral tribunal by the Secretariat of the approval of the Terms of Reference by the Court. The Court may fix a different time limit based upon the procedural timetable established pursuant to Article 24(2).

2 The Court

may extend the time limit pursuant to a reasoned request from the arbitral tribunal or on its own initiative if it decides it is necessary to do so.

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Article 32 Making 1 When

of the Award

the arbitral tribunal is composed of more than one arbitrator, an award is made by a majority decision. If there is no majority, the award shall be made by the president of the arbitral tribunal alone.

2 The award

shall state the reasons upon which it is based.

3 The award

shall be deemed to be made at the place of the arbitration and on the date stated therein.

Article 33 Award

by Consent

If the parties reach a settlement after the file has been transmitted to the arbitral tribunal in accordance with Article 16, the settlement shall be recorded in the form of an award made by consent of the parties, if so requested by the parties and if the arbitral tribunal agrees to do so. Article 34 Scrutiny

of the Award by the Court

Before signing any award, the arbitral tribunal shall submit it in draft form to the Court. The Court may lay down modifications as to the form of the award and, without affecting the arbitral tribunal’s liberty of decision, may also draw its attention to points of substance. No award shall be rendered by the arbitral tribunal until it has been approved by the Court as to its form. Article 35 Notification, 1 Once

Deposit and Enforceability of the Award

an award has been made, the Secretariat shall notify to the parties the text signed by the arbitral tribunal, provided always that the costs of the arbitration have been fully paid to the ICC by the parties or by one of them.

2 Additional

copies certified true by the Secretary General shall be made available on request and at any time to the parties, but to no one else.

3 By virtue

of the notification made in accordance with Article 35(1), the parties waive any other form of notification or deposit on the part of the arbitral tribunal.

4 An original

of each award made in accordance with the Rules shall be deposited with the Secretariat.

5 The arbitral

tribunal and the Secretariat shall assist the parties in complying with whatever further formalities may be necessary.

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 ICC Arbitration and Mediation Rules 6 Every

award shall be binding on the parties. By submitting the dispute to arbitration under the Rules, the parties undertake to carry out any award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.

Article 36 Correction 1 On its

and Interpretation of the Award; Remission of Awards

own initiative, the arbitral tribunal may correct a clerical, computational or typographical error, or any errors of similar nature contained in an award, provided such correction is submitted for approval to the Court within 30 days of the date of such award.

2 Any application

of a party for the correction of an error of the kind referred to in Article 36(1), or for the interpretation of an award, must be made to the Secretariat within 30 days of the receipt of the award by such party, in a number of copies as stated in Article 3(1). After transmittal of the application to the arbitral tribunal, the latter shall grant the other party a short time limit, normally not exceeding 30 days, from the receipt of the application by that party, to submit any comments thereon. The arbitral tribunal shall submit its decision on the application in draft form to the Court not later than 30 days following the expiration of the time limit for the receipt of any comments from the other party or within such other period as the Court may decide.

3 A decision

to correct or to interpret the award shall take the form of an addendum and shall constitute part of the award. The provisions of Articles 32, 34 and 35 shall apply mutatis mutandis.

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4 Where

a court remits an award to the arbitral tribunal, the provisions of Articles 32, 34, 35 and this Article 36 shall apply mutatis mutandis to any addendum or award made pursuant to the terms of such remission. The Court may take any steps as may be necessary to enable the arbitral tribunal to comply with the terms of such remission and may fix an advance to cover any additional fees and expenses of the arbitral tribunal and any additional ICC administrative expenses.

COSTS Article 37 Advance 1 After

to Cover the Costs of the Arbitration

receipt of the Request, the Secretary General may request the claimant to pay a provisional advance in an amount intended to cover the costs of the arbitration

a) until the

Terms of Reference have been drawn up; or

b) when the

Expedited Procedure Provisions apply, until the case management conference.

Any provisional advance paid will be considered as a partial payment by the claimant of any advance on costs fixed by the Court pursuant to this Article 37. 2 As soon

as practicable, the Court shall fix the advance on costs in an amount likely to cover the fees and expenses of the arbitrators and the ICC administrative expenses for the claims which have been referred to it by the parties, unless any claims are made under Article 7 or 8 in which case Article 37(4) shall apply. The advance on costs fixed by the Court pursuant to this Article 37(2) shall be payable in equal shares by the claimant and the respondent.

3 Where

counterclaims are submitted by the respondent under Article 5 or otherwise, the Court may fix separate advances on costs for the claims and the counterclaims. When the Court has fixed separate advances on costs, each of the parties shall pay the advance on costs corresponding to its claims.

4 Where

claims are made under Article 7 or 8, the Court shall fix one or more advances on costs that shall be payable by the parties as decided by the Court. Where the Court has previously fixed any advance on costs pursuant to this Article 37, any such advance shall be replaced by the advance(s) fixed pursuant to this Article 37(4), and the amount of any advance previously paid by any party will be considered as a partial payment by such party of its share of the advance(s) on costs as fixed by the Court pursuant to this Article 37(4).

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 5 The amount

of any advance on costs fixed by the Court pursuant to this Article 37 may be subject to readjustment at any time during the arbitration. In all cases, any party shall be free to pay any other party’s share of any advance on costs should such other party fail to pay its share.

6 When

a request for an advance on costs has not been complied with, and after consultation with the arbitral tribunal, the Secretary General may direct the arbitral tribunal to suspend its work and set a time limit, which must be not less than 15 days, on the expiry of which the relevant claims shall be considered as withdrawn. Should the party in question wish to object to this measure, it must make a request within the aforementioned period for the matter to be decided by the Court. Such party shall not be prevented, on the ground of such withdrawal, from reintroducing the same claims at a later date in another proceeding.

7 If one

of the parties claims a right to a set-off with regard to any claim, such set-off shall be taken into account in determining the advance to cover the costs of the arbitration in the same way as a separate claim insofar as it may require the arbitral tribunal to consider additional matters.

Article 38 Decision

as to the Costs of the Arbitration

1 The costs

of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scales in force at the time of the commencement of the arbitration, as well as the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties for the arbitration. may fix the fees of the arbitrators at a figure higher or lower than that which would result from the application of the relevant scale should this be deemed necessary due to the exceptional circumstances of the case.

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2 The Court

3 At any

time during the arbitral proceedings, the arbitral tribunal may make decisions on costs, other than those to be fixed by the Court, and order payment.

4 The final

award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

5 In making

decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.

6 In the

event of the withdrawal of all claims or the termination of the arbitration before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses. If the parties have not agreed upon the allocation of the costs of the arbitration or other relevant issues with respect to costs, such matters shall be decided by the arbitral tribunal. If the arbitral tribunal has not been constituted at the time of such withdrawal or termination, any party may request the Court to proceed with the constitution of the arbitral tribunal in accordance with the Rules so that the arbitral tribunal may make decisions as to costs.

MISCELLANEOUS Article 39 Modified

Time Limits

1 The parties

may agree to shorten the various time limits set out in the Rules. Any such agreement entered into subsequent to the constitution of an arbitral tribunal shall become effective only upon the approval of the arbitral tribunal.

2 The Court,

on its own initiative, may extend any time limit which has been modified pursuant to Article 39(1) if it decides that it is necessary to do so in order that the arbitral tribunal and the Court may fulfil their responsibilities in accordance with the Rules.

Article 40 Waiver

A party which proceeds with the arbitration without raising its objection to a failure to comply with any provision of the Rules, or of any other rules applicable to the proceedings, any direction given by the arbitral tribunal, or any requirement under the arbitration agreement relating to the constitution of the arbitral tribunal or the conduct of the proceedings, shall be deemed to have waived its right to object.

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 ICC Arbitration and Mediation Rules Article 41 Limitation

of Liability

The arbitrators, any person appointed by the arbitral tribunal, the emergency arbitrator, the Court and its members, the ICC and its employees, and the ICC National Committees and Groups and their employees and representatives shall not be liable to any person for any act or omission in connection with the arbitration, except to the extent such limitation of liability is prohibited by applicable law. Article 42 General

Rule

In all matters not expressly provided for in the Rules, the Court and the arbitral tribunal shall act in the spirit of the Rules and shall make every effort to make sure that the award is enforceable at law. APPENDIX I

STATUTES OF THE INTERNATIONAL COURT OF ARBITRATION

Article 1 Function

1 The function

of the International Court of Arbitration of the International Chamber of Commerce (the “Court”) is to ensure the application of the Rules of Arbitration of the International Chamber of Commerce, and it has all the necessary powers for that purpose.

2 As an

autonomous body, it carries out these functions in complete independence from the ICC and its organs.

3 Its members Article 2 Composition

are independent from the ICC National Committees and Groups. of the Court

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The Court shall consist of a President, Vice-Presidents, and members and alternate members (collectively designated as members). In its work it is assisted by its Secretariat (Secretariat of the Court). Article 3 Appointment

1 The President

is elected by the ICC World Council upon the recommendation of the Executive Board of the ICC.

2 The ICC

World Council appoints the Vice-Presidents of the Court from among the members of the Court or otherwise.

3 Its members

are appointed by the ICC World Council on the proposal of National Committees or Groups, one member for each National Committee or Group.

4 On the

proposal of the President of the Court, the World Council may appoint alternate members.

5 The term

of office of all members, including, for the purposes of this paragraph, the President and Vice-Presidents, is three years. If a member is no longer in a position to exercise the member’s functions, a successor is appointed by the World Council for the remainder of the term. Upon the recommendation of the Executive Board, the duration of the term of office of any member may be extended beyond three years if the World Council so decides.

Article 4 Plenary

Session of the Court

The Plenary Sessions of the Court are presided over by the President or, in the President’s absence, by one of the Vice-Presidents designated by the President. The deliberations shall be valid when at least six members are present. Decisions are taken by a majority vote, the President or Vice-President, as the case may be, having a casting vote in the event of a tie. Article 5 Committees

The Court may set up one or more Committees and establish the functions and organization of such Committees. Article 6 Confidentiality

The work of the Court is of a confidential nature which must be respected by everyone who participates in that work in whatever capacity. The Court lays down the rules regarding the persons who can attend the meetings of the Court and its Committees and who are entitled to have access to materials related to the work of the Court and its Secretariat. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 321

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS Article 7 Modification

of the Rules of Arbitration

Any proposal of the Court for a modification of the Rules is laid before the Commission on Arbitration and ADR before submission to the Executive Board of the ICC for approval, provided, however, that the Court, in order to take account of developments in information technology, may propose to modify or supplement the provisions of Article 3 of the Rules or any related provisions in the Rules without laying any such proposal before the Commission. APPENDIX II

Internal rules of the International Court of Arbitration

Article 1 Confidential 1 For the

Character of the Work of the International Court of Arbitration

purposes of this Appendix, members of the Court include the President and Vice-Presidents of the Court.

2 The sessions

of the Court, whether plenary or those of a Committee of the Court, are open only to its members and to the Secretariat.

3 However,

in exceptional circumstances, the President of the Court may invite other persons to attend. Such persons must respect the confidential nature of the work of the Court.

4 The documents

submitted to the Court, or drawn up by it or the Secretariat in the course of the Court’s proceedings, are communicated only to the members of the Court and to the Secretariat and to persons authorized by the President to attend Court sessions.

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5 The President

or the Secretary General of the Court may authorize researchers undertaking work of an academic nature to acquaint themselves with awards and other documents of general interest, with the exception of memoranda, notes, statements and documents remitted by the parties within the framework of arbitration proceedings.

6 Such

authorization shall not be given unless the beneficiary has undertaken to respect the confidential character of the documents made available and to refrain from publishing anything based upon information contained therein without having previously submitted the text for approval to the Secretary General of the Court.

7 The Secretariat

will in each case submitted to arbitration under the Rules retain in the archives of the Court all awards, Terms of Reference and decisions of the Court, as well as copies of the pertinent correspondence of the Secretariat.

8 Any documents,

communications or correspondence submitted by the parties or the arbitrators may be destroyed unless a party or an arbitrator requests in writing within a period fixed by the Secretariat the return of such documents, communications or correspondence. All related costs and expenses for the return of those documents shall be paid by such party or arbitrator.

Article 2 Participation

of Members of the International Court of Arbitration in ICC Arbitration

1 The President

and the members of the Secretariat of the Court may not act as arbitrators or as counsel in cases submitted to ICC arbitration.

2 The Court

shall not appoint Vice-Presidents or members of the Court as arbitrators. They may, however, be proposed for such duties by one or more of the parties, or pursuant to any other procedure agreed upon by the parties, subject to confirmation.

3 When

the President, a Vice-President or a member of the Court or of the Secretariat is involved in any capacity whatsoever in proceedings pending before the Court, such person must inform the Secretary General of the Court upon becoming aware of such involvement.

4 Such

person must be absent from the Court session whenever the matter is considered by the Court and shall not participate in the discussions or in the decisions of the Court.

5 Such

person will not receive any material documentation or information pertaining to such proceedings.

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 ICC Arbitration and Mediation Rules Article 3 Relations

Between the Members of the Court and the ICC National Committees and

Groups

1 By virtue

of their capacity, the members of the Court are independent of the ICC National Committees and Groups which proposed them for appointment by the ICC World Council.

2 Furthermore,

they must regard as confidential, vis‑à‑vis the said National Committees and Groups, any information concerning individual cases with which they have become acquainted in their capacity as members of the Court, except when they have been requested by the President of the Court, by a Vice-President of the Court authorized by the President of the Court, or by the Court’s Secretary General to communicate specific information to their respective National Committees or Groups.

Article 4 Committee

of the Court

1 In accordance

with the provisions of Article 1(4) of the Rules and Article 5 of Appendix I, the Court hereby establishes a Committee of the Court.

2 The members

of the Committee consist of a president and at least two other members. The President of the Court acts as the president of the Committee. In the President’s absence or otherwise at the President’s request, a Vice-President of the Court or, in exceptional circumstances, another member of the Court may act as president of the Committee.

3 The other

two members of the Committee are appointed by the Court from among the Vice-Presidents or the other members of the Court. At each Plenary Session the Court appoints the members who are to attend the meetings of the Committee to be held before the next Plenary Session.

4 The Committee

meets when convened by its president. Two members constitute a

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quorum.

5 (a) The

Court shall determine the decisions that may be taken by the Committee.

(b) The decisions

of the Committee are taken unanimously.

(c) When the

Committee cannot reach a decision or deems it preferable to abstain, it transfers the case to the next Plenary Session, making any suggestions it deems appropriate.

(d) The Committee’s

decisions are brought to the notice of the Court at its next

Plenary Session. For the purpose of expedited procedures and in accordance with the provisions of Article 1(4) of the Rules and Article 5 of Appendix I, the Court may exceptionally establish a Committee consisting of one member. Articles 4(2), 4(3), 4(4), 4(5), subparagraphs b) and c), of this Appendix II shall not apply. Article 5 Court

1 In the

Secretariat

Secretary General’s absence or otherwise at the Secretary General’s request, the Deputy Secretary General and/or the General Counsel shall have the authority to refer matters to the Court, confirm arbitrators, certify true copies of awards and request the payment of a provisional advance, respectively provided for in Articles 6(3), 13(2), 35(2) and 37(1) of the Rule, as well as to take the measure provided for in Article 37(6).

2 The Secretariat

may, with the approval of the Court, issue notes and other documents for the information of the parties and the arbitrators, or as necessary for the proper conduct of the arbitral proceedings.

3 Offices

of the Secretariat may be established outside the headquarters of the ICC. The Secretariat shall keep a list of offices designated by the Secretary General. Requests for Arbitration may be submitted to the Secretariat at any of its offices, and the Secretariat’s functions under the Rules may be carried out from any of its offices, as instructed by the Secretary General, Deputy Secretary General or General Counsel.

Article 6 Scrutiny

of Arbitral Awards

When the Court scrutinizes draft awards in accordance with Article 34 of the Rules, it considers, to the extent practicable, the requirements of mandatory law at the place of the arbitration.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS APPENDIX III

Arbitration Costs and Fees

Article 1 Advance 1 Each

on Costs

request to commence an arbitration pursuant to the Rules must be accompanied by a filing fee of US$ 5,000. Such payment is non-refundable and shall be credited to the claimant’s portion of the advance on costs.

2 The provisional

advance fixed by the Secretary General according to Article 37(1) of the Rules shall normally not exceed the amount obtained by adding together the ICC administrative expenses, the minimum of the fees (as set out in the scales hereinafter) based upon the amount of the claim and the expected reimbursable expenses of the arbitral tribunal incurred with respect to the drafting of the Terms of Reference. If such amount is not quantified, the provisional advance shall be fixed at the discretion of the Secretary General. Payment by the claimant shall be credited to its share of the advance on costs fixed by the Court.

3 In general,

the arbitral tribunal shall, in accordance with Article 37(6) of the Rules, proceed only with respect to those claims or counterclaims in regard to which the whole of the advance on costs has been paid.

4 The advance

on costs fixed by the Court according to Articles 37(2) or 37(4) of the Rules comprises the fees of the arbitrator or arbitrators (hereinafter referred to as “arbitrator”), any arbitration-related expenses of the arbitrator and the ICC administrative expenses.

5 Each

party shall pay its share of the total advance on costs in cash. However, if a party’s share of the advance on costs is greater than US$ 500,000 (the “Threshold Amount”), such party may post a bank guarantee for any amount above the Threshold Amount. The Court may modify the Threshold Amount at any time at its discretion. may authorize the payment of advances on costs, or any party’s share thereof, in instalments, subject to such conditions as the Court thinks fit, including the payment of additional ICC administrative expenses.

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6 The Court

7 A party

that has already paid in full its share of the advance on costs fixed by the Court may, in accordance with Article 37(5) of the Rules, pay the unpaid portion of the advance owed by the defaulting party by posting a bank guarantee.

8 When

the Court has fixed separate advances on costs pursuant to Article 37(3) of the Rules, the Secretariat shall invite each party to pay the amount of the advance corresponding to its respective claim(s).

9 When,

as a result of the fixing of separate advances on costs, the separate advance fixed for the claim of either party exceeds one half of such global advance as was previously fixed (in respect of the same claims and counterclaims that are the subject of separate advances), a bank guarantee may be posted to cover any such excess amount. In the event that the amount of the separate advance is subsequently increased, at least one half of the increase shall be paid in cash.

10 The

Secretariat shall establish the terms governing all bank guarantees which the parties may post pursuant to the above provisions.

11 As provided

in Article 37(5) of the Rules, the advance on costs may be subject to readjustment at any time during the arbitration, in particular to take into account fluctuations in the amount in dispute, changes in the amount of the estimated expenses of the arbitrator, or the evolving difficulty or complexity of arbitration proceedings.

12 Before

any expertise ordered by the arbitral tribunal can be commenced, the parties, or one of them, shall pay an advance on costs fixed by the arbitral tribunal sufficient to cover the expected fees and expenses of the expert as determined by the arbitral tribunal. The arbitral tribunal shall be responsible for ensuring the payment by the parties of such fees and expenses.



13 The amounts paid as advances on costs do not yield interest for the parties or the arbitrator.

Article 2 Costs

and Fees

1 Subject

to Article 38(2) of the Rules, the Court shall fix the fees of the arbitrator in accordance with the scales hereinafter set out or, where the amount in dispute is not stated, at its discretion.

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 ICC Arbitration and Mediation Rules 2 In setting

the arbitrator’s fees, the Court shall take into consideration the diligence and efficiency of the arbitrator, the time spent, the rapidity of the proceedings, the complexity of the dispute and the timeliness of the submission of the draft award, so as to arrive at a figure within the limits specified or, in exceptional circumstances (Article 38(2) of the Rules), at a figure higher or lower than those limits.

3 When

a case is submitted to more than one arbitrator, the Court, at its discretion, shall have the right to increase the total fees up to a maximum which shall normally not exceed three times the fees of one arbitrator.

4 The arbitrator’s

fees and expenses shall be fixed exclusively by the Court as required by the Rules. Separate fee arrangements between the parties and the arbitrator are contrary to the Rules.

5 The Court

shall fix the ICC administrative expenses of each arbitration in accordance with the scales hereinafter set out or, where the amount in dispute is not stated, at its discretion. Where the parties have agreed upon additional services, or in exceptional circumstances, the Court may fix the ICC administrative expenses at a lower or higher figure than that which would result from the application of such scale, provided that such expenses shall normally not exceed the maximum amount of the scale.

6 At any

time during the arbitration, the Court may fix as payable a portion of the ICC administrative expenses corresponding to services that have already been performed by the Court and the Secretariat.

7 The Court

may require the payment of administrative expenses in addition to those provided in the scale of administrative expenses as a condition for holding an arbitration in abeyance at the request of the parties or of one of them with the acquiescence of the other.

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8 If an

arbitration terminates before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses at its discretion, taking into account the stage attained by the arbitral proceedings and any other relevant circumstances.

9 Any amount

paid by the parties as an advance on costs exceeding the costs of the arbitration fixed by the Court shall be reimbursed to the parties having regard to the amounts paid.

10 In the

case of an application under Article 36(2) of the Rules or of a remission pursuant to Article 36(4) of the Rules, the Court may fix an advance to cover additional fees and expenses of the arbitral tribunal and additional ICC administrative expenses and may make the transmission of such application to the arbitral tribunal subject to the prior cash payment in full to the ICC of such advance. The Court shall fix at its discretion the costs of the procedure following an application or a remission, which shall include any possible fees of the arbitrator and ICC administrative expenses, when approving the decision of the arbitral tribunal.

11 The

Secretariat may require the payment of administrative expenses in addition to those provided in the scale of administrative expenses for any expenses arising in relation to a request pursuant to Article 35(5) of the Rules.

12 When

an arbitration is preceded by proceedings under the ICC Mediation Rules, one half of the ICC administrative expenses paid for such proceedings shall be credited to the ICC administrative expenses of the arbitration.

13 Amounts

paid to the arbitrator do not include any possible value added tax (VAT) or other taxes or charges and imposts applicable to the arbitrator’s fees. Parties have a duty to pay any such taxes or charges; however, the recovery of any such charges or taxes is a matter solely between the arbitrator and the parties.

14 Any

ICC administrative expenses may be subject to value added tax (VAT) or charges of a similar nature at the prevailing rate.

Article 3 Scales

of Administrative Expenses and Arbitrator’s Fees

1 The scales

of administrative expenses and arbitrator’s fees set forth below shall be effective as of 1 January 2017 in respect of all arbitrations commenced on or after such date, irrespective of the version of the Rules applying to such arbitrations.

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 325

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 To calculate

the ICC administrative expenses and the arbitrator’s fees, the amounts calculated for each successive tranche of the amount in dispute must be added together, except that where the amount in dispute is over US$ 500 million, a flat amount of US$ 150,000 shall constitute the entirety of the ICC administrative expenses.

3 The scales

of administrative expenses and arbitrator’s fees for the expedited procedure set forth below shall be effective as of 1 March 2017 in respect of all arbitrations commenced on or after such date, irrespective of the version of the Rules applying to such arbitrations. When parties have agreed to the expedited procedure pursuant to Article 30(2), subparagraph b), the scales for the expedited procedure will apply.

4 All amounts

fixed by the Court or pursuant to any of the appendices to the Rules are payable in US$ except where prohibited by law or decided otherwise by the Court, in which case the ICC may apply a different scale and fee arrangement in another currency.

Scales of

Administrative Expenses and Arbitrator’s Fees

Amount in dispute (in US Dollars)

Table of Contents

up to 50,000

A Administrative Expenses

B Arbitrator’s Fees

Administrative expenses*

Fees**  minimum

$5,000

maximum

$3,000

18.0200%

from 50,001 to 100,000

1.53%

2.6500%

13.5680%

from 100,001 to 200,000

2.72%

1.4310%

7.6850%

from 200,001 to 500,000

2.25%

1.3670%

6.8370%

from 500,001 to 1,000,000

1.62%

0.9540%

4.0280%

from 1,000,001 to 2,000,000

0.788%

0.6890%

3.6040%

from 2,000,001 to 5,000,000

0.46%

0.3750%

1.3910%

from 5,000,001 to 10,000,000

0.25%

0.1280%

0.9100%

from 10,000,001 to 30,000,000

0.10%

0.0640%

0.2410%

from 30,000,001 to 50,000,000

0.09%

0.0590%

0.2280%

from 50,000,001 to 80,000,000

0.01%

0.0330%

0.1570%

from 80,000,001 to 100,000,000

0.0210%

0.1150%

from100,000,001 to 500,000,000

0.0110%

0.0580%

0.0100%

0.0400%

from 80,000,001 to 500,000,000

over 500,000,000

0.0123%

$150,000

*  For illustrative purposes only, the table on page 57 indicates the resulting administrative expenses in US$ when the proper calculations have been made. ** For illustrative purposes only, the table on page 58 indicates the resulting range of fees in US$ when the proper calculations have been made.

Amount in Dispute (in US Dollars)

A Administrative Expenses* (in US Dollars)

up to

50,000

5,000

from

50,001 to 100,000

5,000

+ 1.53% of amt. over 50,000

from

100,001 to 200,000

5,765

+ 2.72% of amt. over 100,000

from

200,001 to 500,000

8,485

+ 2.25% of amt. over 200,000

from

500,001 to 1,000,000

15,235

+ 1.62% of amt. over 500,000

from

1,000,001 to 2,000,000

23,335

+ 0.788% of amt. over 1,000,000

from

2,000,001 to 5,000,000

31,215

+ 0.46% of amt. over 2,000,000

from

5,000,001 to 10,000,000

45,015

+ 0.25% of amt. over 5,000,000

from

10,000,001 to 30,000,000

57,515

+ 0.10% of amt. over 10,000,000

from

30,000,001 to 50,000,000

77,515

+ 0.09% of amt. over 30,000,000

from

50,000,001 to 80,000,000

95,515

+ 0.01% of amt. over 50,000,000

from

80,000,001 to 500,000,000

98,515

+ 0.0123% of amt. over 80,000,000

over

500,000,000

* See page 56.

326 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

150,000

 ICC Arbitration and Mediation Rules

Amount in Dispute (in US Dollars)

B Arbitrator’s Fees** (in US Dollars) Minimum

Maximum

up to

50,000

3,000

18.0200% of amount in dispute

from

50,001 to 100,000

3,000

+ 2.6500% of amt. over 50,000

9,010

+ 13.5680% of amt. over 50,000

from

100,001 to 200,000

4,325

+ 1.4310% of amt. over 100,000

15,794

+ 7.6850% of amt. over 100,000

from

200,001 to 500,000

5,756

+ 1.3670% of amt. over 200,000

23,479

+ 6.8370% of amt. over 200,000

from

500,001 to 1,000,000

9,857

+ 0.9540% of amt. over 500,000

43,990

+ 4.0280% of amt. over 500,000

from

1,000,001 to 2,000,000

14,627

+ 0.6890% of amt. over 1,000,000

64,130

+ 3.6040% of amt. over 1,000,000

from

2,000,001 to 5,000,000

21,517

+ 0.3750% of amt. over 2,000,000

100,170

+ 1.3910% of amt. over 2,000,000

from

5,000,001 to 10,000,000

32,767

+ 0.1280% of amt. over 5,000,000

141,900

+ 0.9100% of amt. over 5,000,000

from

10,000,001 to 30,000,000

39,167

+ 0.0640% of amt. over 10,000,000

187,400

+ 0.2410% of amt. over 10,000,000

from

30,000,001 to 50,000,000

51,967

+ 0.0590% of amt. over 30,000,000

235,600

+ 0.2280% of amt. over 30,000,000

from

50,000,001 to 80,000,000

63,767

+ 0.0330% of amt. over 50,000,000

281,200

+ 0.1570% of amt. over 50,000,000

from

80,000,001 to 100,000,000

73,667

+ 0.0210% of amt. over 80,000,000

328,300

+ 0.1150% of amt. over 80,000,000

from

100,000,001 to 500,000,000

77,867

+ 0.0110% of amt. over 100,000,000

351,300

+ 0.0580% of amt. over 100,000,000

over

500,000,000

121,867

+ 0.0100% of amt. over 500,000,000

583,300

+ 0.0400% of amt. over 500,000,000

** See page 56.

Scales of

Administrative Expenses and Arbitrator’s Fees for the Expedited Procedure

Table of Contents

Amount in dispute (in US Dollars) up to 50,000

A Administrative Expenses

B Arbitrator’s Fees

Administrative expenses*

Fees**  minimum

$5,000

maximum

$2,400

14.4160%

2.1200%

10.8544%

from 50,001 to 100,000

1.53%

from 100,001 to 200,000

2.72%

1.1448%

6.1480%

from 200,001 to 500,000

2.25%

1.0936%

5.4696%

from 500,001 to 1,000,000

1.62%

0.7632%

3.2224%

from 1,000,001 to 2,000,000

0.788%

0.5512%

2.8832%

from 2,000,001 to 5,000,000

0.46%

0.3000%

1.1128%

from 5,000,001 to 10,000,000

0.25%

0.1024%

0.7280%

from 10,000,001 to 30,000,000

0.10%

0.0512%

0.1928%

from 30,000,001 to 50,000,000

0.09%

0.0472%

0.1824%

from 50,000,001 to 80,000,000

0.01%

0.0264%

0.1256%

from 80,000,001 to 500,000,000

0.0123%

from 80,000,001 to 100,000,000

0.0168%

0.0920%

from100,000,001 to 500,000,000

0.0088%

0.0464%

0.0080%

0.0320%

over 500,000,000

$150,000

* For illustrative purposes only, the table on page 60 indicates the resulting administrative expenses in US$ when the proper calculations have been made ** For illustrative purposes only, the table on page 61 indicates the resulting range of fees in US$ when the proper calculations have been made

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Amount in Dispute (in US Dollars)

A Administrative Expenses* (in US Dollars)

up to

50,000

5,000

from

50,001 to 100,000

5,000

+ 1.53% of amt. over 50,000

from

100,001 to 200,000

5,765

+ 2.72% of amt. over 100,000

from

200,001 to 500,000

8,485

+ 2.25% of amt. over 200,000

from

500,001 to 1,000,000

15,235

+ 1.62% of amt. over 500,000

from

1,000,001 to 2,000,000

23,335

+ 0.788% of amt. over 1,000,000

from

2,000,001 to 5,000,000

31,215

+ 0.46% of amt. over 2,000,000

from

5,000,001 to 10,000,000

45,015

+ 0.25% of amt. over 5,000,000

from

10,000,001 to 30,000,000

57,515

+ 0.10% of amt. over 10,000,000

from

30,000,001 to 50,000,000

77,515

+ 0.09% of amt. over 30,000,000

from

50,000,001 to 80,000,000

95,515

+ 0.01% of amt. over 50,000,000

from

80,000,001 to 500,000,000

98,515

+ 0.0123% of amt. over 80,000,000

over

500,000,000

150,000

* See page 59.

Amount in Dispute (in US Dollars)

B Arbitrator’s Fees** (in US Dollars)

Table of Contents

Minimum

Maximum

up to

50,000

2,400

from

50,001 to 100,000

2,400

+ 2.1200% of amt. over 50,000

14.4160% of amount in dispute 7,208

+ 10.8544% of amt. over 50,000

from

100,001 to 200,000

3,460

+ 1.1448% of amt. over 100,000

12,635

+ 6.1480% of amt. over 100,000

from

200,001 to 500,000

4,605

+ 1.0936% of amt. over 200,000

18,783

+ 5.4696% of amt. over 200,000

from

500,001 to 1,000,000

7,886

+ 0.7632% of amt. over 500,000

35,192

+ 3.2224% of amt. over 500,000

from

1,000,001 to 2,000,000

11,702

+ 0.5512% of amt. over 1,000,000

51,304

+ 2.8832% of amt. over 1,000,000

from

2,000,001 to 5,000,000

17,214

+ 0.3000% of amt. over 2,000,000

80,136

+ 1.1128% of amt. over 2,000,000

from

5,000,001 to 10,000,000

26,214

+ 0.1024% of amt. over 5,000,000

113,520

+ 0.7280% of amt. over 5,000,000

from

10,000,001 to 30,000,000

31,334

+ 0.0512% of amt. over 10,000,000

149,920

+ 0.1928% of amt. over 10,000,000

from

30,000,001 to 50,000,000

41,574

+ 0.0472% of amt. over 30,000,000

188,480

+ 0.1824% of amt. over 30,000,000

from

50,000,001 to 80,000,000

51,014

+ 0.0264% of amt. over 50,000,000

224,960

+ 0.1256% of amt. over 50,000,000

from

80,000,001 to 100,000,000

58,934

+ 0.0168% of amt. over 80,000,000

262,640

+ 0.0920% of amt. over 80,000,000

from

100,000,001 to 500,000,000

62,294

+ 0.0088% of amt. over 100,000,000

281,040

+ 0.0464% of amt. over 100,000,000

over

500,000,000

97,494

+ 0.0080% of amt. over 500,000,000

466,640

+ 0.0320% of amt. over 500,000,000

** See page 59.

APPENDIX IV

Case Management Techniques The following are examples of case management techniques that can be used by the arbitral tribunal and the parties for controlling time and cost. Appropriate control of time and cost is important in all cases. In cases of low complexity and low value, it is particularly important to ensure that time and costs are proportionate to what is at stake in the dispute.

a) Bifurcating

the proceedings or rendering one or more partial awards on key issues, when doing so may genuinely be expected to result in a more efficient resolution of the case.

b) Identifying

issues that can be resolved by agreement between the parties or their

experts. c) Identifying

issues to be decided solely on the basis of documents rather than through oral evidence or legal argument at a hearing.

d) Production

of documentary evidence:

(i) requiring

the parties to produce with their submissions the documents on which

they rely; (ii) avoiding

requests for document production when appropriate in order to control time and cost;

328 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 ICC Arbitration and Mediation Rules (iii) in those

cases where requests for document production are considered appropriate, limiting such requests to documents or categories of documents that are relevant and material to the outcome of the case;

(iv) establishing

reasonable time limits for the production of documents;

(v) using a

schedule of document production to facilitate the resolution of issues in relation to the production of documents.

e) Limiting

the length and scope of written submissions and written and oral witness evidence (both fact witnesses and experts) so as to avoid repetition and maintain a focus on key issues.

f) Using

telephone or video conferencing for procedural and other hearings where attendance in person is not essential and use of IT that enables online communication among the parties, the arbitral tribunal and the Secretariat of the Court.

g) Organizing

a pre-hearing conference with the arbitral tribunal at which arrangements for a hearing can be discussed and agreed and the arbitral tribunal can indicate to the parties issues on which it would like the parties to focus at the hearing.

h) Settlement

of disputes:

(i) informing

the parties that they are free to settle all or part of the dispute either by negotiation or through any form of amicable dispute resolution methods such as, for example, mediation under the ICC Mediation Rules;

(ii) where agreed

between the parties and the arbitral tribunal, the arbitral tribunal may take steps to facilitate settlement of the dispute, provided that every effort is made to ensure that any subsequent award is enforceable at law.

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Additional techniques are described in the ICC publication entitled “Controlling Time and Costs in Arbitration”. APPENDIX V

Emergency Arbitrator Rules

Article 1 Application 1 A party

for Emergency Measures

wishing to have recourse to an emergency arbitrator pursuant to Article 29 of the Rules of Arbitration of the ICC (the “Rules”) shall submit its Application for Emergency Measures (the “Application”) to the Secretariat at any of the offices specified in the Internal Rules of the Court in Appendix II to the Rules.

2 The Application

shall be supplied in a number of copies sufficient to provide one copy for each party, plus one for the emergency arbitrator, and one for the Secretariat.

3 The Application a) the name

shall contain the following information:

in full, description, address and other contact details of each of the

parties; b) the name

in full, address and other contact details of any person(s) representing the applicant;

c) a description

of the circumstances giving rise to the Application and of the underlying dispute referred or to be referred to arbitration;

d) a statement

of the Emergency Measures sought;

e) the reasons

why the applicant needs urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal;

f) any relevant

agreements and, in particular, the arbitration agreement;

g) any agreement

as to the place of the arbitration, the applicable rules of law or the language of the arbitration;

h) proof of

payment of the amount referred to in Article 7(1) of this Appendix; and

i) any Request

for Arbitration and any other submissions in connection with the underlying dispute, which have been filed with the Secretariat by any of the parties to the emergency arbitrator proceedings prior to the making of the Application.

The Application may contain such other documents or information as the applicant considers appropriate or as may contribute to the efficient examination of the Application.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4 The Application

shall be drawn up in the language of the arbitration if agreed upon by the parties or, in the absence of any such agreement, in the language of the arbitration agreement.

5 If and

to the extent that the President of the Court (the “President”) considers, on the basis of the information contained in the Application, that the Emergency Arbitrator Provisions apply with reference to Article 29(5) and Article 29(6) of the Rules, the Secretariat shall transmit a copy of the Application and the documents annexed thereto to the responding party. If and to the extent that the President considers otherwise, the Secretariat shall inform the parties that the emergency arbitrator proceedings shall not take place with respect to some or all of the parties and shall transmit a copy of the Application to them for information.

6 The President

shall terminate the emergency arbitrator proceedings if a Request for Arbitration has not been received by the Secretariat from the applicant within 10 days of the Secretariat’s receipt of the Application, unless the emergency arbitrator determines that a longer period of time is necessary.

Article 2 Appointment

of the Emergency Arbitrator; Transmission of the File

1 The President

shall appoint an emergency arbitrator within as short a time as possible, normally within two days from the Secretariat’s receipt of the Application.

2 No emergency

arbitrator shall be appointed after the file has been transmitted to the arbitral tribunal pursuant to Article 16 of the Rules. An emergency arbitrator appointed prior thereto shall retain the power to make an order within the time limit permitted by Article 6(4) of this Appendix.

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3 Once

the emergency arbitrator has been appointed, the Secretariat shall so notify the parties and shall transmit the file to the emergency arbitrator. Thereafter, all written communications from the parties shall be submitted directly to the emergency arbitrator with a copy to the other party and the Secretariat. A copy of any written communications from the emergency arbitrator to the parties shall be submitted to the Secretariat.

4 Every

emergency arbitrator shall be and remain impartial and independent of the parties involved in the dispute.

5 Before

being appointed, a prospective emergency arbitrator shall sign a statement of acceptance, availability, impartiality and independence. The Secretariat shall provide a copy of such statement to the parties.

6 An emergency

arbitrator shall not act as an arbitrator in any arbitration relating to the dispute that gave rise to the Application.

Article 3 Challenge

of an Emergency Arbitrator

1 A challenge

against the emergency arbitrator must be made within three days from receipt by the party making the challenge of the notification of the appointment or from the date when that party was informed of the facts and circumstances on which the challenge is based if such date is subsequent to the receipt of such notification.

2 The challenge

shall be decided by the Court after the Secretariat has afforded an opportunity for the emergency arbitrator and the other party or parties to provide comments in writing within a suitable period of time.

Article 4 Place 1 If the

of the Emergency Arbitrator Proceedings

parties have agreed upon the place of the arbitration, such place shall be the place of the emergency arbitrator proceedings. In the absence of such agreement, the President shall fix the place of the emergency arbitrator proceedings, without prejudice to the determination of the place of the arbitration pursuant to Article 18(1) of the Rules.

2 Any meetings

with the emergency arbitrator may be conducted through a meeting in person at any location the emergency arbitrator considers appropriate or by videoconference, telephone or similar means of communication.

330 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 ICC Arbitration and Mediation Rules Article 5 Proceedings

1 The emergency

arbitrator shall establish a procedural timetable for the emergency arbitrator proceedings within as short a time as possible, normally within two days from the transmission of the file to the emergency arbitrator pursuant to Article 2(3) of this Appendix.

2 The emergency

arbitrator shall conduct the proceedings in the manner which the emergency arbitrator considers to be appropriate, taking into account the nature and the urgency of the Application. In all cases, the emergency arbitrator shall act fairly and impartially and ensure that each party has a reasonable opportunity to present its case.

Article 6 Order

1 Pursuant

to Article 29(2) of the Rules, the emergency arbitrator’s decision shall take the form of an order (the “Order”).

2 In the

Order, the emergency arbitrator shall determine whether the Application is admissible pursuant to Article 29(1) of the Rules and whether the emergency arbitrator has jurisdiction to order Emergency Measures.

3 The Order

shall be made in writing and shall state the reasons upon which it is based. It shall be dated and signed by the emergency arbitrator.

4 The Order

shall be made no later than 15 days from the date on which the file was transmitted to the emergency arbitrator pursuant to Article 2(3) of this Appendix. The President may extend the time limit pursuant to a reasoned request from the emergency arbitrator or on the President’s own initiative if the President decides it is necessary to do so.

Table of Contents

5 Within

the time limit established pursuant to Article 6(4) of this Appendix, the emergency arbitrator shall send the Order to the parties, with a copy to the Secretariat, by any of the means of communication permitted by Article 3(2) of the Rules that the emergency arbitrator considers will ensure prompt receipt.

6 The Order

shall cease to be binding on the parties upon:

a) the President’s

termination of the emergency arbitrator proceedings pursuant to Article 1(6) of this Appendix;

b) the acceptance

by the Court of a challenge against the emergency arbitrator pursuant to Article 3 of this Appendix;

c) the arbitral

tribunal’s final award, unless the arbitral tribunal expressly decides otherwise; or

d) the withdrawal

of all claims or the termination of the arbitration before the rendering of a final award.

7 The emergency

arbitrator may make the Order subject to such conditions as the emergency arbitrator thinks fit, including requiring the provision of appropriate security.

8 Upon

a reasoned request by a party made prior to the transmission of the file to the arbitral tribunal pursuant to Article 16 of the Rules, the emergency arbitrator may modify, terminate or annul the Order.

Article 7 Costs

of the Emergency Arbitrator Proceedings

1 The applicant

must pay an amount of US$ 40,000, consisting of US$ 10,000 for ICC administrative expenses and US$ 30,000 for the emergency arbitrator’s fees and expenses. Notwithstanding Article 1(5) of this Appendix, the Application shall not be notified until the payment of US$ 40,000 is received by the Secretariat.

2 The President

may, at any time during the emergency arbitrator proceedings, decide to increase the emergency arbitrator’s fees or the ICC administrative expenses taking into account, inter alia, the nature of the case and the nature and amount of work performed by the emergency arbitrator, the Court, the President and the Secretariat. If the party which submitted the Application fails to pay the increased costs within the time limit fixed by the Secretariat, the Application shall be considered as withdrawn.

3 The emergency arbitrator’s Order shall fix the costs of the emergency arbitrator proceedings and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 4 The costs

of the emergency arbitrator proceedings include the ICC administrative expenses, the emergency arbitrator’s fees and expenses and the reasonable legal and other costs incurred by the parties for the emergency arbitrator proceedings.

5 In the

event that the emergency arbitrator proceedings do not take place pursuant to Article 1(5) of this Appendix or are otherwise terminated prior to the making of an Order, the President shall determine the amount to be reimbursed to the applicant, if any. An amount of US$ 5,000 for ICC administrative expenses is non-refundable in all cases.

Article 8 General

Rule

1 The President

shall have the power to decide, at the President’s discretion, all matters relating to the administration of the emergency arbitrator proceedings not expressly provided for in this Appendix.

2 In the

President’s absence or otherwise at the President’s request, any of the VicePresidents of the Court shall have the power to take decisions on behalf of the President.

3 In all

matters concerning emergency arbitrator proceedings not expressly provided for in this Appendix, the Court, the President and the emergency arbitrator shall act in the spirit of the Rules and this Appendix.

APPENDIX VI

EXPEDITED PROCEDURE RULES

Article 1 Application 1 Insofar

of the Expedited Procedure Rules

as Article 30 of the Rules of Arbitration of the ICC (the “Rules”) and this Appendix VI do not provide otherwise, the Rules shall apply to an arbitration under the Expedited Procedure Rules.

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2 The amount

referred to in Article 30(2), subparagraph a), of the Rules is US$

2,000,000. 3 Upon

receipt of the Answer to the Request pursuant to Article 5 of the Rules, or upon expiry of the time limit for the Answer or at any relevant time thereafter and subject to Article 30(3) of the Rules, the Secretariat will inform the parties that the Expedited Procedure Provisions shall apply in the case.

4 The Court

may, at any time during the arbitral proceedings, on its own motion or upon the request of a party, and after consultation with the arbitral tribunal and the parties, decide that the Expedited Procedure Provisions shall no longer apply to the case. In such case, unless the Court considers that it is appropriate to replace and/or reconstitute the arbitral tribunal, the arbitral tribunal shall remain in place.

Article 2 Constitution 1 The Court

of the Arbitral Tribunal

may, notwithstanding any contrary provision of the arbitration agreement, appoint a sole arbitrator.

2 The parties

may nominate the sole arbitrator within a time limit to be fixed by the Secretariat. In the absence of such nomination, the sole arbitrator shall be appointed by the Court within as short a time as possible.

Article 3 Proceedings 1 Article

23 of the Rules shall not apply to an arbitration under the Expedited Procedure

Rules. 2 After

the arbitral tribunal has been constituted, no party shall make new claims, unless it has been authorized to do so by the arbitral tribunal, which shall consider the nature of such new claims, the stage of the arbitration, any cost implications and any other relevant circumstances.

3 The case

management conference convened pursuant to Article 24 of the Rules shall take place no later than 15 days after the date on which the file was transmitted to the arbitral tribunal. The Court may extend this time limit pursuant to a reasoned request from the arbitral tribunal or on its own initiative if it decides it is necessary to do so.

4 The arbitral

tribunal shall have discretion to adopt such procedural measures as it considers appropriate. In particular, the arbitral tribunal may, after consultation with

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 ICC Arbitration and Mediation Rules

the parties, decide not to allow requests for document production or to limit the number, length and scope of written submissions and written witness evidence (both fact witnesses and experts). 5 The arbitral

tribunal may, after consulting the parties, decide the dispute solely on the basis of the documents submitted by the parties, with no hearing and no examination of witnesses or experts. When a hearing is to be held, the arbitral tribunal may conduct it by videoconference, telephone or similar means of communication.

Article 4 Award

1 The time

limit within which the arbitral tribunal must render its final award is six months from the date of the case management conference. The Court may extend the time limit pursuant to Article 31(2) of the Rules.

2 The fees

of the arbitral tribunal shall be fixed according to the scales of administrative expenses and arbitrator’s fees for the expedited procedure set out in Appendix III.

Article 5 General

Rule

In all matters concerning the expedited procedure not expressly provided for in this Appendix, the Court and the arbitral tribunal shall act in the spirit of the Rules and this Appendix.



ICC Arbitration Clauses It is recommended that parties wishing to make reference to ICC arbitration in their contracts use the standard clause below.

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Standard

ICC Arbitration Clause

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

Parties are free to adapt the clause to their particular circumstances. For instance, they may wish to stipulate the number of arbitrators, given that the ICC Arbitration Rules contain a presumption in favour of a sole arbitrator. Also, it may be desirable for them to stipulate the place and language of the arbitration and the law applicable to the merits. The ICC Arbitration Rules do not limit the parties’ free choice of the place and language of the arbitration or the law governing the contract. When adapting the clause, care must be taken to avoid any risk of ambiguity. Unclear wording in the clause will cause uncertainty and delay and can hinder or even compromise the dispute resolution process. Parties should also take account of any factors that may affect the enforceability of the clause under applicable law. These include any mandatory requirements that may exist at the place of arbitration and the expected place or places of enforcement. ICC Arbitration

Without Emergency Arbitrator

If the parties wish to exclude any recourse to the Emergency Arbitrator Provisions, they must expressly opt out by adding the following wording to the clause above: The Emergency Arbitrator Provisions shall not apply. Expedited

Arbitration

The ICC Arbitration Rules provide for use of an expedited procedure in lower-value cases. If parties wish to exclude the application of the Expedited Procedure Provisions, they must expressly opt out by adding the following wording to the clause above: The Expedited Procedure Provisions shall not apply.

Parties wishing to avail themselves of the expedited procedure in higher-value cases should expressly opt in by adding the following wording to the clause above:

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The parties agree, pursuant to Article 30(2)(b) of the Rules of Arbitration of the International Chamber of Commerce, that the Expedited Procedure Rules shall apply irrespective of the amount in dispute.

If parties wish the ceiling for the application of the Expedited Procedure Rules to be higher than that specified in those Rules, the following wording should be added to the clause above: The parties agree, pursuant to Article 30(2)(b) of the Rules of Arbitration of the International Chamber of Commerce, that the Expedited Procedure Rules shall apply, provided the amount in dispute does not exceed US$ [specify amount] at the time of the communication referred to in Article 1(3) of the Expedited Procedure Rules. Multi-Tiered

Clauses

ICC arbitration may be used as the forum for final determination of a dispute following an attempt at settlement by other means such as mediation. Parties wishing to include in their contracts a tiered dispute resolution clause combining ICC arbitration with ICC mediation should refer to the standard clauses relating to the ICC Mediation Rules (see pages 96-99). Other combinations of services are also possible. For instance, arbitration may be used as a fallback to expertise or dispute boards. Also, parties who resort to ICC arbitration may wish to provide for recourse to the ICC International Centre for ADR for the proposal of an expert if an expert opinion is required in the course of the arbitration.

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Standard clauses for these and other combinations of services are available in several languages at www.iccarbitration.org.



ICC Mediation Rules

Article 1 Introductory

Provisions

1 The Mediation

Rules (the “Rules”) of the International Chamber of Commerce (the “ICC”) are administered by the ICC International Centre for ADR (the “Centre”), which is a separate administrative body within the ICC.

2 The Rules

provide for the appointment of a neutral third party (the “Mediator”) to assist the parties in settling their dispute.

3 Mediation

shall be used under the Rules unless, prior to the confirmation or appointment of the Mediator or with the agreement of the Mediator, the parties agree upon a different settlement procedure or a combination of settlement procedures. The term “mediation” as used in the Rules shall be deemed to cover such settlement procedure or procedures and the term “Mediator” shall be deemed to cover the neutral who conducts such settlement procedure or procedures. Whatever settlement procedure is used, the term “Proceedings” as used in the Rules refers to the process beginning with its commencement and ending with its termination pursuant to the Rules.

4 All of

the parties may agree to modify any of the provisions of the Rules, provided, however, that the Centre may decide not to administer the Proceedings if, in its discretion, it considers that any such modification is not in the spirit of the Rules. At any time after the confirmation or appointment of the Mediator, any agreement to modify the provisions of the Rules shall also be subject to the approval of the Mediator.

5 The Centre

is the only body authorized to administer Proceedings under the Rules.

Article 2 Commencement 1 Where

Where there is an Agreement to Refer to the Rules

there is an agreement between the parties to refer their dispute to the Rules, any party or parties wishing to commence mediation pursuant to the Rules shall file a written Request for Mediation (the “Request”) with the Centre. The Request shall include:

a) the names,

addresses, telephone numbers, email addresses and any other contact details of the parties to the dispute and of any person(s) representing the parties in the Proceedings;

b) a description

of the dispute including, if possible, an assessment of its value;

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 ICC Arbitration and Mediation Rules c) any agreement

to use a settlement procedure other than mediation, or, in the absence thereof, any proposal for such other settlement procedure that the party filing the Request may wish to make;

d) any agreement

as to time limits for conducting the mediation, or, in the absence thereof, any proposal with respect thereto;

e) any agreement

as to the language(s) of the mediation, or, in the absence thereof, any proposal as to such language(s);

f) any agreement

as to the location of any physical meetings, or, in the absence thereof, any proposal as to such location;

g) any joint

nomination by all of the parties of a Mediator or any agreement of all of the parties as to the attributes of a Mediator to be appointed by the Centre where no joint nomination has been made, or, in the absence of any such agreement, any proposal as to the attributes of a Mediator;

h) a copy of

any written agreement under which the Request is made.

2 Together

with the Request, the party or parties filing the Request shall pay the filing fee required by the Appendix hereto in force on the date the Request is filed.

3 The party

or parties filing the Request shall simultaneously send a copy of the Request to all other parties, unless the Request has been filed jointly by all parties.

4 The Centre

shall acknowledge receipt of the Request and of the filing fee in writing to

the parties. 5 Where

there is an agreement to refer to the Rules, the date on which the Request is received by the Centre shall, for all purposes, be deemed to be the date of the commencement of the Proceedings.

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6 Where

the parties have agreed that a time limit for settling the dispute pursuant to the Rules shall start running from the filing of a Request, such filing, for the exclusive purpose of determining the starting point of the time limit, shall be deemed to have been made on the date the Centre acknowledges receipt of the Request or of the filing fee, whichever is later.

Article 3 Commencement 1 In the

Where there is No Prior Agreement to Refer to the Rules

absence of an agreement of the parties to refer their dispute to the Rules, any party that wishes to propose referring the dispute to the Rules to another party may do so by sending a written Request to the Centre containing the information specified in Article 2(1), subparagraphs a)-g). Upon receipt of such Request, the Centre will inform all other parties of the proposal and may assist the parties in considering the proposal.

2 Together

with the Request, the party or parties filing the Request shall pay the filing fee required by the Appendix hereto in force on the date the Request is filed.

3 Where

the parties reach an agreement to refer their dispute to the Rules, the Proceedings shall commence on the date on which the Centre sends written confirmation to the parties that such an agreement has been reached.

4 Where

the parties do not reach an agreement to refer their dispute to the Rules within 15 days from the date of the receipt of the Request by the Centre or within such additional time as may be reasonably determined by the Centre, the Proceedings shall not commence.

Article 4 Place

1 In the

and Language(s) of the Mediation

absence of an agreement of the parties, the Centre may determine the location of any physical meeting of the Mediator and the parties or may invite the Mediator to do so after the Mediator has been confirmed or appointed.

2 In the

absence of an agreement of the parties, the Centre may determine the language(s) in which the mediation shall be conducted or may invite the Mediator to do so after the Mediator has been confirmed or appointed.

Article 5 Selection

of the Mediator

1 The parties

may jointly nominate a Mediator for confirmation by the Centre.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 In the

absence of a joint nomination of a Mediator by the parties, the Centre shall, after consulting the parties, either appoint a Mediator or propose a list of Mediators to the parties. All of the parties may jointly nominate a Mediator from the said list for confirmation by the Centre, failing which the Centre shall appoint a Mediator.

3 Before

appointment or confirmation, a prospective Mediator shall sign a statement of acceptance, availability, impartiality and independence. The prospective Mediator shall disclose in writing to the Centre any facts or circumstances which might be of such a nature as to call into question the Mediator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the Mediator’s impartiality. The Centre shall provide such information to the parties in writing and shall fix a time limit for any comments from them.

4 When

confirming or appointing a Mediator, the Centre shall consider the prospective Mediator’s attributes, including but not limited to nationality, language skills, training, qualifications and experience, and the prospective Mediator’s availability and ability to conduct the mediation in accordance with the Rules.

5 Where

the Centre appoints a Mediator, it shall do so either on the basis of a proposal by an ICC National Committee or Group, or otherwise. The Centre shall make all reasonable efforts to appoint a Mediator having the attributes, if any, which have been agreed upon by all of the parties. If any party objects to the Mediator appointed by the Centre and notifies the Centre and all other parties in writing, stating the reasons for such objection, within 15 days of receipt of notification of the appointment, the Centre shall appoint another Mediator.

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6 Upon

agreement of all of the parties, the parties may nominate more than one Mediator or request the Centre to appoint more than one Mediator, in accordance with the provisions of the Rules. In appropriate circumstances, the Centre may propose to the parties that there be more than one Mediator.

Article 6 Fees

and Costs

1 The party

or parties filing a Request shall include with the Request the non-refundable filing fee required by Article 2(2) or Article 3(2) of the Rules, as set out in the Appendix hereto. No Request shall be processed unless accompanied by the filing fee.

2 Following

the receipt of a Request pursuant to Article 3, the Centre may request that the party filing the Request pay a deposit to cover the administrative expenses of the Centre.

3 Following

the commencement of the Proceedings, the Centre shall request the parties to pay one or more deposits to cover the administrative expenses of the Centre and the fees and expenses of the Mediator, as set out in the Appendix hereto.

4 The Centre

may stay or terminate the Proceedings under the Rules if any requested deposit is not paid.

5 Upon

termination of the Proceedings, the Centre shall fix the total costs of the Proceedings and shall, as the case may be, reimburse the parties for any excess payment or bill the parties for any balance required pursuant to the Rules.

6 With

respect to Proceedings that have commenced under the Rules, all deposits requested and costs fixed shall be borne in equal shares by the parties, unless they agree otherwise in writing. However, any party shall be free to pay the unpaid balance of such deposits and costs should another party fail to pay its share.

7 A party’s

other expenditure shall remain the responsibility of that party, unless otherwise agreed by the parties.

Article 7 Conduct

of the Mediation

1 The Mediator

and the parties shall promptly discuss the manner in which the mediation shall be conducted.

2 After

such discussion, the Mediator shall promptly provide the parties with a written note informing them of the manner in which the mediation shall be conducted. Each party, by agreeing to refer a dispute to the Rules, agrees to participate in the Proceedings at least until receipt of such note from the Mediator or earlier termination of the Proceedings pursuant to Article 8(1) of the Rules.

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 ICC Arbitration and Mediation Rules 3 In establishing

and conducting the mediation, the Mediator shall be guided by the wishes of the parties and shall treat them with fairness and impartiality.

4 Each

party shall act in good faith throughout the mediation.

Article 8 Termination

of the Proceedings

1 Proceedings

which have been commenced pursuant to the Rules shall terminate upon written confirmation of termination by the Centre to the parties after the occurrence of the earliest of:

a) the signing

by the parties of a settlement agreement;

b) the notification

in writing made to the Mediator by any party, at any time after it has received the Mediator’s note referred to in Article 7(2), that such party has decided no longer to pursue the mediation;

c) the notification

in writing by the Mediator to the parties that the mediation has been completed;

d) the notification

in writing by the Mediator to the parties that, in the Mediator’s opinion, the mediation will not resolve the dispute between the parties;

e) the notification

in writing by the Centre to the parties that any time limit set for the Proceedings, including any extension thereof, has expired;

f) the notification

in writing by the Centre to the parties, not less than seven days after the due date for any payment by one or more parties pursuant to the Rules, that such payment has not been made; or in writing by the Centre to the parties that, in the judgment of the Centre, there has been a failure to nominate a Mediator or that it has not been reasonably possible to appoint a Mediator.

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g) the notification

2 The Mediator

shall promptly notify the Centre of the signing of a settlement agreement by the parties or of any notification given to or by the Mediator pursuant to Article 8(1), subparagraphs b)–d), and shall provide the Centre with a copy of any such notification.

Article 9 Confidentiality 1 In the

absence of any agreement of the parties to the contrary and unless prohibited by applicable law:

a) the Proceedings,

but not the fact that they are taking place, have taken place or will take place, are private and confidential;

b) any settlement

agreement between the parties shall be kept confidential, except that a party shall have the right to disclose it to the extent that such disclosure is required by applicable law or necessary for purposes of its implementation or enforcement.

2 Unless

required to do so by applicable law and in the absence of any agreement of the parties to the contrary, a party shall not in any manner produce as evidence in any judicial, arbitral or similar proceedings:

a) any documents,

statements or communications which are submitted by another party or by the Mediator in or for the Proceedings, unless they can be obtained independently by the party seeking to produce them in the judicial, arbitral or similar proceedings;

b) any views

expressed or suggestions made by any party within the Proceedings with regard to the dispute or the possible settlement of the dispute;

c) any admissions d) any views

made by another party within the Proceedings;

or proposals put forward by the Mediator within the Proceedings; or

e) the fact

that any party indicated within the Proceedings that it was ready to accept a proposal for a settlement.

Article 10 General 1 Where,

Provisions

prior to the date of the entry into force of the Rules, the parties have agreed to refer their dispute to the ICC ADR Rules, they shall be deemed to have referred their dispute to the ICC Mediation Rules, unless any of the parties objects thereto, in which case the ICC ADR Rules shall apply. INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 337

DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS 2 Unless

all of the parties have agreed otherwise in writing or unless prohibited by applicable law, the parties may commence or continue any judicial, arbitral or similar proceedings in respect of the dispute, notwithstanding the Proceedings under the Rules.

3 Unless

all of the parties agree otherwise in writing, a Mediator shall not act nor shall have acted in any judicial, arbitral or similar proceedings relating to the dispute which is or was the subject of the Proceedings under the Rules, whether as a judge, an arbitrator, an expert or a representative or advisor of a party.

4 Unless

required by applicable law or unless all of the parties and the Mediator agree otherwise in writing, the Mediator shall not give testimony in any judicial, arbitral or similar proceedings concerning any aspect of the Proceedings under the Rules.

5 The Mediator,

the Centre, the ICC and its employees, the ICC National Committees and Groups and their employees and representatives shall not be liable to any person for any act or omission in connection with the Proceedings, except to the extent such limitation of liability is prohibited by applicable law.

6 In all

matters not expressly provided for in the Rules, the Centre and the Mediator shall act in the spirit of the Rules.

APPENDIX FEES

AND COSTS

Filing Fee

Each Request pursuant to the Rules must be accompanied by a filing fee of US$ 2,000. The filing fee is non-refundable and shall be credited towards the deposit of the party or parties having filed the Request.

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Article 2 Administrative

Expenses

1 The administrative

expenses of the ICC for the proceedings shall be fixed at the Centre’s discretion depending on the tasks carried out by the Centre and shall normally not exceed the following: ­US$ 5,000

for amounts in dispute up to and including US$ 200,000

­US$ 10,000

for amounts in dispute between US$ 200,001 and US$ 2,000,000

­US$ 15,000

for amounts in dispute between US$ 2,000,001 and US$ 10,000,000

US$ 20,000

for amounts in dispute between US$ 10,000,001 and US$ 50,000,000

US$ 25,000

for amounts in dispute between US$ 50,000,001 and US$ 100,000,000

US$ 30,000

for amounts in dispute over US$ 100,000,000

2 Where

the amount in dispute is not stated, the administrative expenses may be fixed by the Centre at its discretion, taking into account all the circumstances of the case, including indications regarding the value of the dispute, but they shall normally not exceed US$ 20,000.

3 In exceptional

circumstances, the Centre may fix the administrative expenses at a higher figure than that which would result from the application of the above scale, provided that the Centre shall inform the parties of such possibility beforehand and shall normally not exceed the maximum amount for administrative expenses foreseen in the scale.

4 The Centre

may require the payment of administrative expenses in addition to those provided in the scale described in Article 2(1) of this Appendix as a condition for holding the proceedings in abeyance at the request of the parties or of one of them with the acquiescence of the other. Such abeyance fee shall normally not exceed US$ 1,000 per party per year.

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 ICC Arbitration and Mediation Rules Article 3 Mediator’s 1 Unless

Fees and Expenses

otherwise agreed by the parties and the Mediator, the fees of the Mediator shall be calculated on the basis of the time reasonably spent by the Mediator in the proceedings. These fees shall be based on an hourly rate fixed by the Centre when appointing or confirming the Mediator and after having consulted the Mediator and the parties. The hourly rate shall be reasonable in amount and shall be determined in light of the complexity of the dispute and any other relevant circumstances.

2 If agreed

by the parties and the Mediator, the Centre may fix the Mediator’s fees on the basis of a single fixed fee for the whole proceedings, rather than an hourly rate. The single fixed fee shall be reasonable in amount and shall be determined in light of the complexity of the dispute, the amount of work that the parties and the Mediator anticipate will be required of the Mediator, and any other relevant circumstances. The Centre, at its discretion, may increase or decrease the amount of the single fixed fee based upon a reasoned request of a party or the Mediator. Prior to increasing or decreasing the single fixed fee, the Centre shall invite observations from all parties and the Mediator.

3 The amount

of reasonable expenses of the Mediator shall be fixed by the Centre.

4 The Mediator’s

fees and expenses shall be fixed exclusively by the Centre as required by the Rules. Separate fee arrangements between the parties and the Mediator are not permitted by the Rules.

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Article 4 Prior

ICC Arbitration

When a mediation is preceded by the submission of a request for arbitration pursuant to the ICC Rules of Arbitration concerning the same parties and the same or parts of the same dispute, the filing fee paid for such arbitration proceedings shall be credited to the administrative expenses of the mediation, if the total administrative expenses paid with respect to the arbitration exceed US$ 7,500. Article 5 Currency,

VAT and Scope

1 All amounts

fixed by the Centre or pursuant to any Appendix to the Rules are payable in US$ except where prohibited by law, in which case the ICC may apply a different scale and fee arrangement in another currency.

2 Amounts

paid to the Mediator do not include any possible value added tax (VAT) or other taxes or charges and imposts applicable to the Mediator’s fees. Parties have a duty to pay any such taxes or charges; however, the recovery of any such taxes or charges is a matter solely between the Mediator and the parties.

3 Any ICC

administrative expenses may be subject to value added tax (VAT) or charges of a similar nature at the prevailing rate.

4 The above

provisions on the costs of proceedings shall be effective as of 1 January 2014 in respect of all proceedings commenced on or after such date under the present Rules or the ICC ADR Rules.

Article 6 ICC

as Appointing Authority

Any request received for an authority of the ICC to appoint a Mediator will be treated in accordance with the ICC Rules for the Appointment of Experts and Neutrals and shall be accompanied by a non-refundable filing fee of US$ 2,000 per Mediator. No request shall be processed unless accompanied by the said filing fee. For additional services, the ICC may at its discretion fix ICC administrative expenses, which shall be commensurate with the services provided and shall normally not exceed the maximum amount of US$ 10,000.



ICC Mediation Clauses Parties wishing to use proceedings under the ICC Mediation Rules should consider choosing one of the clauses below, which cover different situations and needs. Parties are free to adapt the chosen clause to their particular circumstances. For instance, they may wish to specify the use of a settlement procedure other than mediation. Further, they may wish to stipulate the language and place of any mediation and/or arbitration proceedings.

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The notes below each clause are intended to help parties select the clause that best meets their specific requirements. At all times, care must be taken to avoid any risk of ambiguity in the drafting of the clause. Unclear wording causes uncertainty and delay and can hinder or even compromise the dispute resolution process. When incorporating any of these clauses in their contracts, parties are advised to take account of any factors that may affect their enforceability under applicable law. Clause A Option

to Use the ICC Mediation Rules The parties may at any time, without prejudice to any other proceedings, seek to settle any dispute arising out of or in connection with the present contract in accordance with the ICC Mediation Rules.

Notes: By including this clause, the parties acknowledge that proceedings under the ICC Mediation Rules are available to them at any time. This clause does not commit the parties to do anything, but the presence of the clause is designed to remind them of the possibility of using mediation or some other settlement procedure at any time. In addition, it can provide a basis for one party to propose mediation to the other party. One or more parties may also ask the ICC International Centre for ADR for its assistance in this process. to Consider the ICC Mediation Rules In the event of any dispute arising out of or in connection with the present contract, the parties agree in the first instance to discuss and consider referring the dispute to the ICC Mediation Rules.

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Clause B Obligation

Notes: This clause goes a step further than Clause A and requires the parties, when a dispute arises, to discuss and consider together referring the dispute to proceedings under the ICC Mediation Rules. One or more parties may ask the ICC International Centre for ADR for its assistance in this process. This clause may be appropriate where the parties do not wish to commit to referring a dispute to proceedings under the Rules at the outset but prefer to retain flexibility as to whether to use mediation to try and settle a dispute. Clause C Obligation

to Refer Dispute to the ICC Mediation Rules While Permitting Parallel Arbitration Proceedings if Required (x) In the event of any dispute arising out of or in connection with the present contract, the parties shall first refer the dispute to proceedings under the ICC Mediation Rules. The commencement of proceedings under the ICC Mediation Rules shall not prevent any party from commencing arbitration in accordance with sub-clause y below. (y)

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

Notes: This clause creates an obligation to refer a dispute to proceedings under the ICC Mediation Rules. It is designed to ensure that when a dispute arises, the parties will attempt to settle the dispute using proceedings under the Rules. The clause also makes it clear that the parties do not need to conclude the proceedings under the ICC Mediation Rules, or wait for an agreed period of time, before commencing arbitration proceedings. This is also the default position under Article 10(2) of the Rules. The clause provides for ICC arbitration as the forum for final determination of the dispute. If desired, the clause can be adapted to provide instead for a different form of arbitration, or for judicial or other similar proceedings. Clause D Obligation

to Refer Dispute to the ICC Mediation Rules, Followed by Arbitration if Required In the event of any dispute arising out of or in connection with the present contract, the parties shall first refer the dispute to proceedings under the ICC Mediation Rules. If the dispute has not been settled pursuant to the said Rules

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 ICC Arbitration and Mediation Rules

within [45] days following the filing of a Request for Mediation or within such other period as the parties may agree in writing, such dispute shall thereafter be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules of Arbitration.

Notes: Like Clause C, this clause creates an obligation to refer a dispute to proceedings under the ICC Mediation Rules. Unlike Clause C, this clause provides that arbitration proceedings may not be commenced until an agreed period has elapsed following the filing of a Request for Mediation. The lapse of time suggested in the model clause is 45 days, but parties should select a period that they consider to be appropriate for the contract in question. Clause D changes the default position under Article 10(2) of the ICC Mediation Rules allowing judicial, arbitral or similar proceedings to be commenced in parallel with proceedings under the ICC Mediation Rules. Like Clause C, Clause D provides for ICC arbitration as the forum for final determination of the dispute. If desired, the clause can be adapted to provide instead for a different form of arbitration, or for judicial or other similar proceedings. Specific Issues

Concerning the Emergency Arbitrator Provisions

The parties should determine whether they wish to have recourse to the Emergency Arbitrator Provisions under Clauses C and D.

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Clauses C

and D

If the parties wish to exclude any recourse to the Emergency Arbitrator Provisions, the following wording should be added to Clause C or D as applicable: The Emergency Arbitrator Provisions shall not apply. Clause D 1 If the

parties wish to have recourse to the Emergency Arbitrator Provisions, and want that recourse expressly to be available prior to expiry of the 45-day or other agreed period following filing of the Request for Mediation, the following wording should be added to Clause D: The requirement to wait [45] days, or any other agreed period, following the filing of a Request for Mediation, before referring a dispute to arbitration shall not prevent the parties from making an application, prior to expiry of those [45] days or other agreed period, for Emergency Measures under the Emergency Arbitrator Provisions in the Rules of Arbitration of the International Chamber of Commerce.

2 If the

parties wish to have recourse to the Emergency Arbitrator Provisions, but only after expiry of the 45-day or other agreed period following filing of the Request for Mediation, the following wording should be added to Clause D: The parties shall not have the right to make an application for Emergency Measures under the Emergency Arbitrator Provisions in the Rules of Arbitration of the International Chamber of Commerce prior to expiry of the [45] days or other agreed period following the filing of a Request for Mediation.

For further information on drafting clauses providing for ICC arbitration, see pages 76–77 above.

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Appendix VI

Developing Neutral Legal Standards for ­International Contracts

A-national rules as the applicable law in international commercial contracts with particular reference to the ICC Model Contracts



Foreword When choosing the applicable law, parties may wish to agree on neutral solutions, instead of submitting the contract to the domestic law of one of the parties. When this is the case they may opt for the law of a third country or they may decide to submit their contract to a-national rules of law, such as «principles of law generally recognized in international trade», «UNIDROIT Principles on International Commercial Contracts», or

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other transnational rules. ICC has followed this second approach in several of its model contracts by providing optional choice-of-law clauses referring to «principles of law generally recognized in international trade» in conjunction with the UNIDROIT Principles. The Task Force which has prepared this study has been created, within the ICC Commission on Commercial Law and Practice, with the purpose of exploring the pro’s and con’s of choice-of-law clauses based on general principles of law and the UNIDROIT Principles and of clarifying the practical use that can be made of such solution in order to construe choice of law clauses which may help parties to escape the rigid alternative between «my law» or «your law». The Task Force was chaired by Fabio Bortolotti (Italy) and Franco Silvano Toni di Cigoli (Italy) and has benefited from the active participation of the following Task Force members: Stefano Catelani (Switzerland), Bruce Collins (Australia), Gaby El Hakim (Bahrain), Richard Gwynne (UK), Philip Landolt (Switzerland), and Galyah NatanEpstein (Israel). ICC Secretariat oversight was provided by ICC Senior Policy Manager, Emily O’Connor (France).

1 Introduction 1.1 The growing

importance of transnational rules in international contracts

Parties negotiating international contracts will often feel the need to submit their agreement to neutral rules which do not favor either of the parties. A traditional compromise solution, which is frequently used in international trade, consists in submitting the contract to the law of a third country, as for instance Swiss law, English law or Swedish law. This solution is certainly more balanced than the choice of the law of the country of one of the two parties, since it will give neither of them the advantage of having recourse to its own law. In fact, both parties will be in the same condition, i.e. both will need to deal with a law with which they are not familiar. Since it is rare that parties have a good knowledge of the chosen law of a third country (and since they will typically not have the time to verify whether the contract fully complies with such law), it may emerge later (especially in case of dispute) that some

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provisions of the contract do not comply with the applicable third-country law or that some of the gaps inevitably left will be filled by provisions which give rise to unexpected results. Moreover, in case of controversy, both parties will need to retain a lawyer of the third country whose law has been chosen, which will often imply substantial costs and additional complications. This is why businesspeople and their legal advisors are increasingly interested in transnational rules which can help them to create an alternative neutral legal framework for their international contracts. In order to obtain this result two different approaches can be taken:  the first, more traditional, approach is to remain within the framework of domestic laws and to refer, within such framework, to rules designed specially for international transactions, like uniform laws (such as, for instance the UN Convention on Contracts for the International Sale of Goods: CISG) or «private» rules drafted by non-state organizations (such as the Incoterms® rules of the ICC or the UNIDROIT Principles);  the second, more «revolutionary», approach is to assume the existence of an auto- nomous legal system (the so-called lex mercatoria) that can govern international contracts instead of domestic laws, and to develop tailor-made solutions within such framework. We will examine in more detail these two possible approaches in the following paragraphs.

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1.2 The traditional

approach to transnational rules

The traditional approach consists mainly of referring to rules for international commerce which have been established within the framework of national (domestic) legal systems. Thus, several international conventions have established uniform rules which can be incorporated into the domestic laws. The most important example of this approach is the UN Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980), in force in more than 70 countries. Through this solution the uniform rules in the Vienna Convention (which can be considered “transnational” as to their contents) are incorporated into the domestic law of a ratifying country so that all the countries that have adopted the Convention have common (domestic) rules governing international sales. Through this mechanism parties in states which have ratified the Convention are put in a situation where their international contract is governed by the same rules whichever of the two parties’ domestic laws are applicable (as long as it is of a CISG state party). The limit of this system is that the few international conventions which have introduced uniform laws (see, in addition to the CISG, the UNIDROIT conventions on financial leasing and international factoring) cover only a very limited number of contract types and furthermore do not apply to all countries of the world (for example, the 1980 Vienna Convention has not been ratified by the United Kingdom). Moreover, the uniform rules governing a specific type of contract deal mainly with the issues regarding that contract, but do not include all rules on contracts in general. This means that some more general issues (like for instance the validity of penalty clauses in contracts of sale) remain governed by the applicable national law, which can be very different from country to country. A further important contribution to the creation of transnational rules is that of establishing “private” sets of rules for international transactions which may be incorporated by reference in the parties’ contracts. Examples of this approach are general rules on international contracts such as the UNIDROIT Principles or the Lando Principles, or rules dealing with more specific issues, such as ICC rules including Incoterms® 2010, UCP 600, etc.

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As we will see hereafter, general sets of rules governing contracts (such as the UNIDROIT Principles) can be applied within the context of a domestic law (infra, § 3.3) or autonomously, as «the applicable law» (infra, § 2.4) or within the context of the lex mercatoria (infra, § 2.3). 1.3 The theory

of lex mercatoria

An alternative response to the demand to have international contracts governed by transnational rules is offered by the theory of lex mercatoria. According to this theory, international contracts can be ruled by an «a-national» system of principles and rules generally accepted in international commerce, the so-called new lex mercatoria or law merchant, which can be applied instead of national law systems. Parties engaged in international commerce can thus refer — according to this theory — to a system of transnational rules, capable of constituting an alternative legal frame- work for their transactions, closer to their needs and expectations than most domestic laws.

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The theory of lex mercatoria was developed in the second half of the twentieth century by a number of authors1 who sustained that this system of transnational rules, which could replace or integrate the domestic laws, was gradually emerging from international business practice. These rules could be found in the uniform practice of contracts and clauses commonly used in international commerce and in the general principles of law developed in international law. This theory offered arbitrators a means for «delocalizing» international disputes and escaping the narrow limits of domestic laws, by directly applying autonomous rules of international commerce. And, in fact, in the 1970’s we encounter some arbitral awards applying «principes généralement admis»2 or «principes généraux largement admis régissant le droit commercial international»3, followed later by awards which take the further step to formally use the term lex mercatoria4. Thanks to this arbitral jurisprudence and to the fact that it resisted the attacks brought against it before the domestic courts (which refused to set aside awards applying the lex mercatoria5), the principle was gradually established that arbitrators have the right to apply general principles of the lex mercatoria instead of a domestic law. At present in most jurisdictions the decision by arbitrators to apply lex mercatoria will not be questioned by national courts. Consequently, recourse to the lex mercatoria as the governing law of an international contract is an option which is lawful and effective, at least when any possible disputes are submitted to arbitration (see infra, § 3.3). This means that opting for this “a-national legal system”, instead of a national law, can constitute a workable legal framework, provided its rather general principles are integrated by additional and more specific rules, such as the UNIDROIT Principles, as we will see in more detail hereafter (infra, § 2.3). 1.4 The increasing

acceptance of transnational rules

In principle, systems of private international law tend to refuse the possibility of applying transnational rules, and in particular the lex mercatoria, as the law governing 1 See, inter alia, GOLDMAN, Frontières du droit et «lex mercatoria», in Archives de Philosophie du Droit, 1964, p. 177 et seq.; la lex mercatoria dans les contrats et l’arbitrage internationaux, in JDI, 1979, p. 475 ss.); GOLDSTAJN, The New Law Merchant, in J. Bus. L., 1961, p. 12 et seq..; SCHMITTHOFF, The Law of International Trade, its Growth, Formulation and Operation, in The Sources of the Law of International Trade, London, 1964, p. 3 et seq.. 2 ICC award § 2152 mentioned by DERAINS in his comment to the award 1641/69, in JARVIN, DERAINS, ICC Awards 1974-1985, p. 190. 3 ICC award § 3267 of 14 June 1979, in JARVIN, DERAINS, ICC Awards 1974-1985, p. 376 et seq.. 4 See for instance: ICC award § 3131 of 26 October 1979 in the case Pabalk Ticaret Limited Sirketi c. Norsolor S.A., in Rev. arb., 1983, p. 525 ss.; ICC award § 3540/80, in JARVIN, DERAINS, ICC Awards 1974-1985, p. 399 et seq.; ICC award § 5953 of 1° September 1988, Primary Coal c. Compañía Valenciana de Cementos Portland, in Rev. arb., 1990, p. 701 et seq. 5 See infra, § 3.3.

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an international contract. According to this view, the applicable rules of law should be those of a domestic legal system; rules which are not part of a domestic legal system may apply, but only within the framework of the applicable domestic law, for example if they have been incorporated by reference into the agreement of the parties or if they can be qualified as a trade usage. There have been attempts in recent years to soften this approach by recognizing a more important role for transnational rules. During discussions within the European Union on the revision of the Rome Convention of 1980, which would have become Regulation 593/2008 (Rome I Regulation), the issue whether a “non-state body of law” could be chosen by the parties as the applicable law was debated. The proposal submitted by the European Commission in 2005, stated that: The parties may also choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community. However, questions relating to matters governed by such principles or rules which are not expressly settled by them shall be governed by the general principles underlying them or, failing such principles, in accordance with the law applicable in the absence of a choice under this Regulation.

Nevertheless, at the end this proposal was rejected and the final version of Article 3 “Freedom of choice” clearly states that “a contract shall be governed by the law chosen by the parties”, where the use of the term “law” is normally understood to mean that it must be a state law.

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Paragraph 13 of the recitals of the Rome I Regulation says that this Regulation does not preclude the parties from incorporating by reference into their contract a non-State body of law or an international convention,

the notion of incorporation meaning that the non-state law in question would have the value of a contractual clause to be applied and interpreted within the context of the national law applicable to the contract. This confirms that the European rules of private international law applicable to obligations do not in principle recognize lex mercatoria and, more generally, transnational rules, as rules that can govern an international contract instead of a specific national law. A more flexible approach has been taken recently by the draft “Hague Principles on the Choice of Law in International Contracts” approved in November 2012 by the Special Commission of the Hague Conference on Private International Law. Article 3 of the draft Hague Principles recognizes the possibility of applying a-national rules under certain conditions by stating the following: In these Principles, a reference to law includes 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.

Also the Inter-american Convention on the Law Applicable to International Contracts (Mexico 17 March 1994) considers principles of international commercial law, by stating the following in Article 10: In addition to the provisions in the foregoing articles, the guidelines, customs, and principles of international commercial law as well as commercial usage and practices generally accepted shall apply in order to discharge the requirements of justice and equity in the particular case.

Furthermore, several domestic laws on arbitration recognize that arbitrators may apply “rules of law” (see: infra, § 4.1 for further details). This implies a recognition of the arbitrators’ right to apply transnational rules instead of a domestic law. Finally, it may be interesting to mention that the standard conditions of the United Nations for the provisions of goods and services provide in clause 17.2 that possible decisions of the arbitral tribunal shall be based on «general principles of international commercial law».

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All this shows that there is a trend towards a gradual recognition of the possibility of applying transnational rules, particularly within the framework of international arbitration. 1.5 The purpose

of this study

Since the appearance of the lex mercatoria theory as a possible alternative to the traditional approach based on application of a specific domestic law, determined by the rules of private international law, many lawyers have shown great scepticism concerning this solution. We will not discuss here the theoretical foundation of lex mercatoria.6

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It is sufficient to say that this theory has been successful in the sense that it is generally admitted that — provided possible disputes are brought before international arbitrators — the parties can lawfully submit their contracts to “general rules and principles regarding international commercial contractual obligations enjoying a wide international consensus”7 instead of national laws, and that such choice will be effective, i.e. the arbitrators will apply such rules, and the awards applying lex mercatoria will normally be recognized by national courts (for further details, see § 3.3). In other words, the main purpose of this study is to deal with the issue of the lex mercatoria and/or general principles of law a s a contractual solution for the choice of the governing law which can be used when no agreement on a domestic law is possible or appropriate. At the same time this study is intended to help users of ICC model contracts (many of which contain this type of solution: see in particular the clauses mentioned in § 2.3, hereunder) to better understand the actual meaning of the lex mercatoria approach and to evaluate the pro’s and con’s of this solution as opposed to the traditional one, consisting in submitting the contract to a national law.

2 THE CONTENTS OF THE LEX MERCATORIA AND ITS COMBINATION WITH THE UNIDROIT PRINCIPLES 2.1 The basic

contents of the lex mercatoria

The contents of the lex mercatoria are mainly principles of law generally recognized in international trade. Such principles, which have been applied by international arbitration tribunals and which are generally considered — by the supporters of the lex mercatoria theory — to be part of the lex mercatoria,8 include:  Parties are bound to respect the terms of the contract (Pacta sunt servanda), unless there is a significant change of circumstances (rebus sic stantibus).  Parties must perform the contract in good faith.  Parties may be liable for not respecting good faith during negotiations (culpa in contrahendo).  A contract obtained by bribes is void, or at least unenforceable.  A party can refuse to perform its obligations if the other has committed a substantial breach (inadiplenti non est adimplendum).  Damages for breach of contract are limited to the foreseeable consequences of the breach and include actual loss and loss of profit.  A party which has suffered a breach of contract must take reasonable steps to mitigate the damage. 6 For a general overview of the different opinions, see Berger, The Creeping Codification of the Lex Mercatoria, 1999, p. 32 et seq. 7 See arbitral award ICC § 7110/95, in ICA Bull., 2/1999, p. 40 et seq., p. 53. 8 For more details, see LEW, MISTELIS, KRÖLL, Comparative International Commercial Arbitration, Kluwer Law International, 2003, p. 458-460. See also the list of 20 principles compiled by Lord Mustill (MUSTILL, The New Lex Mercatoria: the First Twenty-Five Years, in 4 Arbitration International, 1986, p. 109 et seq.) and the list of 78 principles mentioned by Berger (BERGER, The Creeping Codification of the Lex Mercatoria, 1999, p. 210-211).

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A very exhaustive list of 130 general principles of the New Lex Mercatoria, together with thousands of full text comparative references, the “TransLex-Principles”, is published on «TransLex”, the online platform on transnational commercial law, operated by the Center for Transnational Law (Central) at Cologne University Faculty of Law (www.trans-lex.org). It is undeniable that these very general principles, which may not always answer the specific questions that arise in a dispute, leave much latitude to the discretion of the arbitrators, and may not warrant the foreseeability of the possible outcome of a dispute, which the parties normally expect. At the same time, it should be remembered that the contents of the lex mercatoria are gradually becoming more precise.9 Many lawyers tend to refuse a priori the choice of the lex mercatoria as the applicable law, because of the lack of sufficiently detailed rules. However, this objection can be overcome by incorporating in the agreement, within the framework of the lex mercatoria, a set of rules specially designed for international contracts, such as the UNIDROIT Principles (or other similar rules), which can warrant a sufficient certainty and predictability, as we will see in the following paragraphs. In other words, what is proposed here is to use the lex mercatoria theory for establishing a general alternative framework to be integrated by further transnational rules (like the UNIDROIT Principles) with the purpose of setting up a system of rules which are independent from the domestic laws and at the same time sufficiently structured to answer the parties’ need for certainty and foreseeability.

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2.2 The UNIDROIT

Principles

The Principles of International Commercial Contracts (hereafter “UNIDROIT Principles”) were published by UNIDROIT in 1994. A third edition, which covers several new issues was published in 2010. The comment to the preamble,10 states that the UNIDROIT Principles … represent a system of principles and rules of contract law which are common to existing national systems or best adapted to the special requirements of international commercial transactions. 2.2.1 General characteristics

The Principles deal with most legal issues of a general nature concerning contracts (such as formation, validity, performance, non-performance, damages, etc.). By submitting a contract to the Principles, parties can establish a neutral legal framework which is, at the same time, certain and adapted to the needs of international trade. The Principles are proposed to the business world mainly as a set of “private” rules that parties may incorporate by reference into their contract. The preamble11 states that: … they shall be applied when the parties have agreed that their contract be governed by them.

The “normal” situation in which the Principles are to be applied is, therefore, when the parties have expressly submitted their contract to them, by an express reference in the contract itself. However, the Principles may also be applied, absent a choice by the parties to incorporate them into their contract, as part of the general principles of law within lex mercatoria. For example in the ICC case 711012 concerning several contracts, which made reference to “natural justice”, the arbitrators came to the conclusion that the parties intended to have their contracts governed by rules other than their respective domestic laws, and thus by general rules and principles: 9 For more details see the Translex website mentioned above. 10 UNIDROIT, UNIDROIT Principles of International Commercial Contracts, UNIDROIT, Rome 2010, p. 3. 11 UNIDROIT, UNIDROIT Principles of International Commercial Contracts, UNIDROIT, Rome 2010, p. 1. 12 Three partial awards in 1995, 1998 and 1999, published in ICA Bull. 2/1999, p. 40.

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… which, though not necessarily enshrined in any specific national legal system, are specially adapted to the needs of international transactions like the Contracts and enjoy wide international consensus. And thereafter the arbitrators came to the conclusion that these rules could be found in the UNIDROIT Principles, by stating that: …this Tribunal finds that general legal rules and principles enjoying wide international consensus, applicable to international contractual obligations and relevant to the Contracts, are primarily reflected by the Principles of International Commercial Contracts adopted by UNIDROIT […]. In consequence, without prejudice to taking into account the provisions of the Contracts and relevant trade usages, this Tribunal finds that the Contracts are governed by, and shall be interpreted in accordance [with], the UNIDROIT Principles with respect to all matters falling within the scope of such principles, and for all other matters, by such other general legal rules and principles applicable to international contractual obligations enjoying wide international consensus, which would be found relevant for deciding controverted issues falling under the present arbitration.

In other cases, arbitrators have applied the UNIDROIT Principles as trade usages,13 considering them to be “the latest codification of international commercial trade usages”.14

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It can therefore be said that the choice of lex mercatoria as the applicable law may by itself include the UNIDROIT Principles and consequently make it possible to overcome the lack of certainty of the general principles of the lex mercatoria. However, since the automatic inclusion of the UNIDROIT Principles in the lex mercatoria is a theory which may or may not be followed in a specific case, it is safer for the parties to expressly incorporate the UNIDROIT Principles in their agreement, within the framework of the lex mercatoria as the applicable law, as we will see later in more detail in § 2.3. 2.2.2 Precautions to be taken when incorporating the UNIDROIT Principles

The UNIDROIT Principles have been worked out with the purpose of producing a “restatement” of the law of international commercial contracts and should therefore be in line with the standards generally accepted by business people engaged in international trade. However, this does not mean that the Principles reflect the “common core” of the various national systems. In fact, the intention of the drafters was not to choose the solutions which prevail in most legal systems, but to select those which had the most persuasive value and/or appeared to be particularly well-suited for cross-border transactions. In other words, the drafters of the Principles, although taking into account the prevailing rules and practice, made a choice in favor of what they considered to be the “best” rules for cross-border contracts, particularly as concerns the need to protect parties against unfairness.15 The result of this approach is that there may be, in certain cases, a substantial gap between the UNIDROIT Principles and the rules or general principles that companies engaged in international trade would consider to be the appropriate rules to govern their contracts. Let us take, for instance, Article 3.2.7(1) of the UNIDROIT Principles 2010 (Article 3.10 in the previous version of the Principles) on gross disparity, according to which: … a party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

13 See, for instance: ICC Award § 10021 of 2000 published in www.unilex.info; ICC award 9479 of 1999, in ICA Bull. 2001/2, p. 67 et seq. 14 ICC award § 10022, in ICA Bull., 2001/2, p. 100. 15 See BONELL, “Policing” the Contract Against Unfairness under the UNIDROIT Principles for International Commercial Contracts, in Dir. comm. intern., 1994, p. 251 et seq..

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the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and

(b)

the nature and the purpose of the contract.

While the basic principle that a contract can be avoided in extreme cases — where a party has taken an unfair advantage of the other party’s dependence, economic distress or urgent need — can be considered to be generally acceptable, no businessperson engaged in international trade would accept the idea that its counterpart may put forward its own “improvidence, ignorance, inexperience or lack of bargaining skill” as a reason for requesting the avoidance of the contract.16

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In fact, unless engaged in negotiation with a counterpart having an extraordinary high level of fairness, no responsible lawyer would take the risk that a counterpart may use its pretended ignorance, inexperience or lack of bargaining skill for the purpose of avoiding a contract (or even a contract clause)17 it dislikes. One may, of course, object that Article 3.2.7 requires an excessive and unfair advantage, which would normally prevent the above principle from being applied too widely. However, even admitting that an experienced arbitrator would not take too seriously the position of a businessperson who claims to have made a bad deal because of inexperience or lack of bargaining skill,18 the simple fact that the rule exists and that the counterpart can invoke it, remains a danger and makes Article 3.2.7 in its present wording unacceptable for international trade. In order to overcome this problem, it would be sufficient to exclude the words “or of its improvidence, ignorance, inexperience or lack of bargaining skill” in the last sentence of Article 3.2.7(1)(a). Another example of rules that go beyond the solutions normally accepted in international trade are the provisions on hardship contained in Articles 6.2.1–6.2.3. These rules state that where the occurrence of events which fundamentally alter the equilibrium of the contract (and provided such events become known after the conclusion of the contract, are unforeseeable, are out of the control of the disadvantaged party, and the disadvantaged party did not assume their risk), the disadvantaged party may request renegotiation of the contract and, if renegotiation fails, resort to the court, which may terminate the contract or adapt it with a view to restoring its equilibrium. Now, this solution is much broader (in protecting the disadvantaged party) than most domestic laws existing in this field19 and does not at all correspond with contractual practice. In fact, hardship clauses are normally not drafted in general terms, but tend to limit their operation to specific situations and to provide specific solutions (which almost never imply adaptation by a third party) in case of the occurrence of hardship. The reason for this caution is obvious: traders perceive the adaptation of the contract terms by a third party to be a great danger, and are not willing, except in very exceptional circumstances, to accept such a risk. This is why the model hardship clause established by ICC (ICC Hardship Clause 2003)20 does not provide, in case of failure of the renegotiation, for the adaptation of the contract, but only for its termination. This result can be obtained by incorporating in the contract the model ICC Hardship Clause or by deleting letter (b) of Article 6.2.3(4) of the UNIDROIT Principles. We can therefore conclude that, when choosing the UNIDROIT Principles as applicable rules, it is recommended to add some words to the clause that incorporate the UNIDROIT Principles by reference, in order to expressly exclude the incorporation of some specific articles which may not correspond to the expectations of parties engaged in international trade. 16 See for example HILL, A Businessman’s View of the UNIDROIT Principles, in Journ. Int’l Arb., 1996, p. 163, 165-166. 17 Which is, of course, far more dangerous, since it gives the counterpart the possibility of requesting the avoidance of the part of the contract it dislikes, while maintaining the rest of it. 18 Also on the basis of the generally recognized principle that business people must know what they do and cannot claim inexperience. In considering all of this, it is difficult to understand how the drafters of the UNIDROIT 19 In fact, many national systems do not consider hardship at all (but only situations more close to impossibility of performance, such as force majeure or frustration). 20 The ICC Hardship Clause is available for download free of charge from the ICC Business Bookstore at: http://store.iccwbo.org/t/ICC%20Force%20Majeure%20Hardship%20Clause

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The parties should also check whether the limitation periods provided for in Chapter 10 of the Principles are suitable for them or if they prefer to shorten or to extend these periods. Principles could include in a set of rules made for business-to-business trade a rule that would have been more appropriate for consumer contracts. 2.3 The combination

of lex mercatoria and UNIDROIT Principles

For those who wish to submit their contract to transnational rules in order to avoid the problems of conflicting domestic laws, and at the same time to establish a reasonably predictable legal framework for their contract, the choice of submitting the contract to the lex mercatoria together with the UNIDROIT Principles should be seriously considered. This kind of solution has been provided for in several ICC models. The first model contract containing an express reference to the UNIDROIT Principles was the ICC Model International Franchising Contract (ICC Publication No. 557, now replaced by a new version published as Publication No. 712),21 which, in Article 32 A, contained the following clause as an alternative to the choice of a domestic law provided for in Article 32 Clause 1 – ICC Franchising Model (lex mercatoria + UNIDROIT Principles)

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This Agreement is governed by the rules and principles of law generally recognized in international trade together with the UNIDROIT principles on International Commercial Contracts.

A more complex clause was subsequently drawn up and included in several models published in the following years.22 In the second edition of the Model Distributorship Contract,23 for example, the following clause is found in Article 24 as an alternative to the clause containing the choice of a domestic law: Clause 2 – ICC Distributorship Model (lex mercatoria + UNIDROIT Principles) Any questions relating to this Agreement which are not expressly or implicitly settled by the provisions contained in this Agreement shall be governed, in the following order: 1)

by the principles of law generally recognized in international trade as applicable to international distributorship contracts,

2)

by the relevant trade usages, and

3)

by the UNIDROIT Principles of International Commercial Contracts, with the exclusion — subject to Article 18.2. hereunder — of national laws.

The above clause aims to create the following hierarchy of rules: first, the contract clauses; second, the general principles; third, the trade usages and finally the UNIDROIT Principles, with the aim of clarifying that the UNIDROIT Principles will apply only to the extent they conform to the general principles (lex mercatoria) and the trade usages. The main reason for this solution is to give arbitrators the possibility of excluding the application of rules contained in the UNIDROIT Principles which they may consider not to be in accordance with the reasonable expectations of business, such as those mentioned above in § 2.2.2. Another possible solution is to expressly mention the Articles of the UNIDROIT Principles that should be excluded.

21 The ICC Model International Franchising Contract is available for sale from the ICC Business Bookstore at: http://store.iccwbo.org/icc-model-international-franchising-contract 22 ICC Model Agency Contract, 2nd ed. (ICC Publication 644); ICC Model Distributorship Contract (sole importer- distributor), 2nd ed. (ICC Publication 646); ICC Model M&A Contract I: Share Purchase Agreement (ICC Publication 656); ICC Model Selective Distributorship Contract (ICC Publication 657); ICC Model Contract for the Turnkey Supply of an Industrial Plant (ICC Publication 653). The wording of the clause is slightly different in the latter model. 23 The ICC Model Distributorship Contract is available for sale from the ICC Business Bookstore at: http://www.iccbooks.com/Product/ProductInfo.aspx?id=430

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Clause 3 – Choice of law: lex mercatoria and UNIDROIT Principles This contract is governed by general principles of law generally recognized in international trade (lex mercatoria) together with the UNIDROIT Principles of International Commercial Contracts (except for Articles 2.20, 3.2.7 and 6.2.1). 2.4 The choice

of the UNIDROIT Principles as the governing law: the UNIDROIT Model Clauses Another possible option, which has been proposed in the Model Clauses for the use of the UNIDROIT Principles, published by UNIDROIT,24 consists of submitting a contract directly to the UNIDROIT Principles, as provided in the following model clause, proposed by UNIDROIT. Clause 4 – UNIDROIT Model Clause 1.1(a) This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010)

This clause expressly indicates the UNIDROIT Principles as the applicable law, without any reference to general principles of law or lex mercatoria. The difference with respect to the approach followed in the ICC models is that there is no reference to a system of law (be it the alternative system of the lex mercatoria or a domestic law): the UNIDROIT Principles standing alone are the applicable law.

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This may cause some problems if one needs to fill possible gaps. In fact, if in case of dispute issues arise which are not covered by the UNIDROIT Principles, it is likely that arbitrators will have to refer to the applicable domestic law, while under the ICC model clauses it is clear that one must refer to the general principles of law generally recognized in that particular trade.25 In any case, this issue has been taken into account in the UNIDROIT Model clauses, which provide, with respect to issues not covered by the Principles, the possibility to refer to a domestic law (clause 5) or to general principles of law (clause 6). Clause 5 – UNIDROIT Model Clause 1.2(a) This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by the law of [State X] Clause 6 – UNIDROIT Model Clause 1.3(a) This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by generally accepted principles of international commercial law.

Actually, this last model clause is very similar to the clauses of the ICC model contracts, the main difference being that in the ICC clauses the principles generally recognized in international trade prevail over the UNIDROIT Principles and not vice-versa. 2.5 Conclusion:

choice-of-law clauses referring to a-national rules can provide an adequate legal framework One of the main objections to choice-of-law clauses which refer to a-national rules is that they do not offer sufficient certainty and foreseeability and that consequently, the choice of a national law as the governing law is always a more appropriate solution. This study does not intend to show that «a-national» solutions are better than the choice of a domestic law. On the contrary, in many cases the latter solution may be preferable.

24 UNIDROIT, Model Clauses for the Use of the UNIDROIT Principles of International Commercial Contracts, UNIDROIT, Rome, 2013. 25 Another advantage of the reference to general principles and usages as provided in the ICC standard clause (Clause 2) is that the arbitrators will be led to give greater consideration to contractual practice developed within certain types of contracts, for instance when it comes to interpret clauses which have a precise meaning in that type of contract.

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What we want to clarify is simply that the option to submit the contract to an a-national system of rules (whatever its name: lex mercatoria, general principles, principles of natural justice, etc.) should be considered with an open mind as one of the possible alternatives that an experienced negotiator may consider. It is also important to stress that we are not proposing the option of simply submitting a contract to general principles of law (or lex mercatoria). What we are suggesting in the ICC model contracts is to use the lex mercatoria a s an alternative legal framework and to include, within this framework, a set of rules on contracts, such as the UNIDROIT Principles, together with a very precise set of contractual provisions provided in the specific model contract. In doing so, it is possible to create a rather precise and foreseeable legal framework which may guarantee in many cases as much certainty and predictability as a national law. In fact, the assumption that a domestic law is always the best solution, which many lawyers uncritically accept as indisputable dogma, is not always true. First, those who support the absolute superiority of domestic laws almost always have in mind their own national law, which — of course — appears to them to be the clearest and most predictable legal framework. However, they forget that, in many cases, the outcome of a negotiation may be the acceptance of a foreign law, the contents of which, although in theory predictable, will normally be difficult to determine.

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Experienced lawyers know how difficult it is to really understand a foreign law (even when it is easy to access its sources, which is not always the case). Therefore, when the outcome is to have a foreign law as the governing law of the contract, this is not necessarily the better alternative. This is particularly the case for companies in developing countries and, more generally, for small and medium-sized companies which may not have the necessary resources for specialized advice on a foreign law. Second, in most domestic laws a number of contracts commonly used in international trade (distribution agreements, licensing agreements, franchising, joint ventures, transfer of technology agreements, only to mention some examples) are not governed by specific rules, but only by principles — if any — established by the courts, which may not be easy to determine. This means that for many widely used contracts, international practice — as reflected for instance in the ICC model contracts — can give at least as much guidance as the rules of a national legal system. Third, in many cases the domestic rules on specific contracts are not appropriate for international relations, because they are meant to govern other types of situations. Let us imagine, for example, what can happen if a contract with an occasional intermediary engaged in international trade must comply with domestic laws on brokers (e.g. rules enacted with real estate brokers in mind). Finally, the reference to “principles generally recognized in international trade” may induce the arbitrators to remain close to commercial reality and to give consideration to the current practice in international trade, for instance with respect to the interpretation and application of contractual provisions. This may be very important where certain terms and/or clauses have acquired a specific meaning in a given business or for a specific type of agreement. It can therefore be concluded that the recourse to lex mercatoria in connection with the UNIDROIT Principles or similar rules, should be taken into serious consideration as a possible alternative, particularly in cases where the choice of a domestic law appears to be inappropriate or difficult to agree upon. It is on the basis of this assumption that it has been decided to propose in most ICC model contracts the lex mercatoria together with the UNIDROIT Principles as an alternative solution to the traditional choice of a national law.

3

Lex Mercatoria and National (Domestic) Courts As regards the relation between lex mercatoria and national courts there are mainly two issues to be considered.

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The first one is whether a domestic court would accept the idea that a contract can be governed by transnational rules instead of a national legal system; the second issue is whether a national court should refuse to recognize and enforce an international award which applied lex mercatoria instead of a national law. We will examine these two aspects in the following paragraphs. 3.1 National

courts do not in principle recognize lex mercatoria as a possible “applicable law” National courts determine the applicable law (and the lawfulness of a possible choice made by the parties) on the basis of their own rules of private international law, i.e. by applying the conflict of laws rules of the forum. Now, since at present almost all systems of private international law only recognize state laws as possible rules governing a contract, it is very unlikely that a national court may accept a choice of law clause in favor of the lex mercatoria. A possible reference to general principles of law is likely to be understood by a national court as a reference to transnational rules to be applied within the framework of the domestic law and not as an alternative legal system which governs the contract instead of a domestic law.

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In other words, the state judge will normally be unable to consider a possible choice of “general principles of international trade law”, “transnational rules”, or “lex mercatoria” as a choice of the applicable law, since the applicable rules of private international law normally only admit the choice of a domestic legal system. Thus, for example, we have seen in § 1.4 that EC Regulation no. 593/2008 of 23 June 2008 regarding the law applicable to contractual obligations (Rome I regulation), and its predecessor, the Rome Convention of 19th June 1980, do not consider the lex mercatoria as a possible “applicable law”. 3.2 Lex mercatoria

is not an appropriate solution when disputes are to be submitted to domestic courts Considering what has been said above, it appears clearly that a possible reference to lex mercatoria or general principles of law as the law governing the contract would not be considered by a domestic court as a valid choice of the applicable law, but would be viewed as only a reference to rules to be applied within the legal system applicable on the basis of the private international law rules of the forum. This is why the possible option of submitting the contract to the lex mercatoria instead of a domestic law is not recommended when the parties wish to have their disputes decided by national courts. When possible disputes must be decided by domestic courts, and the parties wish to have recourse to transnational rules, the only way is to incorporate such rules by reference and remain within the framework of a national law, as shown in the next paragraph.

3.3 The possible

national law

application of transnational rules within the context of a

If a dispute is to be decided by national courts, the only way to warrant a more “transnational” framework is to incorporate transnational rules, such as the UNIDROIT Principles or the ICC force majeure or confidentiality clauses,26 by reference into the contract. In this case the above rules will be considered as contractual clauses to be applied and interpreted according to the applicable (domestic) law. This implies two main differences with respect to the situation where the transnational rules are to be applied within the framework of the lex mercatoria instead of the framework of domestic law. 26 The ICC Model Force Majeure Clause is available for free download on the ICC Business Bookstore at: http://store.iccwbo.org/t/ICC%20Force%20Majeure%20Hardship%20Clause, and the ICC Model Confidentiality ­Agreement and Clause are available for sale through the ICC Business Bookstore at: http://www.iccbooks.com/Product/ProductInfo.aspx?id=442

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First, if the contract is governed by a domestic law, its provisions (including possible sets of rules incorporated by reference) must conform to the mandatory rules of the applicable domestic law. In case of conflict, the mandatory provisions of the governing law will prevail. Second, the transnational rules incorporated by reference into the contract must be coordinated with those of the applicable law. Now, if we take a set of rules on contracts, such as the UNIDROIT Principles, such coordination may not always be easy, since the two sets of rules tend to treat the same (or partially overlapping) issues in different ways, for instance with respect to force majeure. This being said, the possible option of referring to the UNIDROIT Principles within the context of the choice of a national law should not be disregarded, especially when the application of a given domestic law is a non-negotiable issue. Leaving aside the solution mentioned in clause 5 (where the UNIDROIT Principles are the governing law, but a domestic law applies to issues not covered by the Principles), it is possible to simply incorporate the UNIDROIT Principles into the contract, as proposed in clause 3 of the UNIDROIT Model Clauses. Clause 7 – UNIDROIT Model Clause 3 The UNIDROIT Principles of International Commercial Contracts (2010) are incorporated in this contract to the extent that they are not inconsistent with the other terms of the contract.

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By choosing this option the provisions of the contract will prevail over the UNIDROIT Principles (even with respect to clauses which are mandatory under the Principles) and the applicable law (chosen by the parties or determined by the adjudicating body in absence of such a choice) will govern the contract. This means that mandatory rules of the governing law will prevail over the UNIDROIT Principles. An even «softer» approach could be that of referring to the UNIDROIT Principles as a means for interpreting and supplementing the applicable domestic law, which option is proposed in the UNIDROIT Model clauses under § 4, which states the following. Clause 8 – UNIDROIT Model Clause 4 This contract shall be governed by the law of [State X] interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2010). 3.4 Domestic

courts will normally recognize and enforce arbitral awards which apply lex mercatoria The fact that domestic courts do not recognize lex mercatoria as a system of rules which may govern a contractual relationship does not mean that they will not recognize and enforce arbitral awards which apply lex mercatoria or general principles of law. In fact, when a domestic court is called to give effect to a foreign arbitral award, such court is not entitled to judge the merits of the case and can refuse recognition only in the presence of the strict conditions stated in Article V of the New York Convention of 15 June 1958.27 In other words, the fact that the arbitrators have applied transnational rules instead of a domestic law which would have been otherwise applicable is not a reason for refusing to recognize the award, unless it is shown that this amounts to a violation of the public order of the country where enforcement is requested or in case of a violation of other conditions of Article V of the New York Convention.

27

http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/arbitration/NYConvention.html

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Now, it is true that with respect to the first cases in which the lex mercatoria was applied by arbitrators, the objection was raised that this would have implied that the arbitrators decided the dispute ex aequo et bono (instead of applying rules of law) without having been authorized by the parties to do so. However, this objection was rejected by the courts, because it was considered that, by applying general principles of the lex mercatoria, the arbitrators in fact applied rules of law.28 Thereafter, in most cases where the question of the lawfulness of arbitral awards which applied the lex mercatoria instead of a domestic legal system has been brought before national courts, the courts have upheld the arbitral award.29 We can therefore conclude that the choice of the lex mercatoria or general principles of law as the applicable law by the contracting or disputing parties will normally be effective: the arbitral tribunal will respect this choice and the award delivered in accordance with such transnational rules shall be recognized and enforced by the national courts.30

4

Lex Mercatoria and Arbitration We will now examine the position taken by arbitral tribunals with respect to a possible application of the lex mercatoria as the law governing the contract in dispute.

4.1 Arbitral

tribunals will normally respect a decision of the parties to submit the contract to lex mercatoria

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Cases where the parties have expressly chosen the lex mercatoria as the applicable law are rather exceptional,31 such choice being made more frequently in the course of the arbitration proceedings.32 Where the parties have made an express choice of the lex mercatoria or general principles of law, this choice will in principle be respected by the arbitrators.33 In fact, while private international law rules tend to exclude a possible choice of transnational rules as the applicable law, national rules governing arbitration tend to recognize the freedom of the parties to have their disputes decided in accordance with general principles of law. See for example, Article 1511 of the French Code of civil procedure (Decree No. 2011-48 of 13 January 2011): Le tribunal arbitral tranche le litige conformément aux règles de droit que les parties ont choisies ou, à défaut, conformément à celles qu’il estime appropriées 28 See: Cassation (France), 9 December 1981, Fougerolle, in Rev. arb. 1982. p. 183; Cassation (France), 9 October 1984, Norsolor, in Rev. arb. 1985. p. 431; Cassation (France), 22 October 1991, Valenciana, in Rev. arb. 1992. p. 457; Oberster Gerichtshof (Austria) 18 November 1982, Norsolor c. Pabalk, in Rev. arb. 1983. p. 513. 29 See, for instance, Tribunal de Grande Instance of Paris, 4 March 1981, Norsolor v. Pabalk Tikaret, in Rev. arb., 1983, p. 469; Cass. (France), 9 December 1981, S.N.C.T. Fougerolle v. Banque du Proche Orient S.A.I., in Rev. arb., 1982, p. 183. Cass. (France) 22 October 1991, Compañía Valenciana de Cementos Portland v. Primary Coal Inc., in Rev. arb. 1990, p. 663; Court of Appeal (England), 24 March 1987, Deutsche Schachtbau- und Tiefbohrgesellschaft mbH c. Ras Al Khaimah National Oil, in Yearbook, XIII-1988, p. 522; US District Court, S.D. California, 7 December 1998, Ministry of Defense of the Islamic Republic of Iran v. Cubic Defense Systems, in Uniform Law Review, 1999, p. 799. 30 Of course, this does not exclude that a court wishing to find a pretext for not enforcing a foreign award might use the choice of the lex mercatoria (as well as any other argument implying a review on the merits) as a reason for refusing enforcement, but this is another, and more general, problem. 31 See, for instance the arbitral award of 5 November of the «International Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation» (summarized in in www.unilex.info), concerning a contract between a Russian and a German company providing that possible disputes should be decided in conformity with the lex mercatoria while providing in another clause the application of German and Russian law; arbitral award of 22 December 2004 of the «Tribunal of International Commercial Arbitration at the Ukrainian Chamber of Commerce and Trade» (summarized in www.unilex.info), concerning a sales contract, submitted to the Vienna convention on the international sale of goods, the lex mercatoria and the UNIDROIT Principles. 32 See, for instance, ICC award 4761/85, in JARVIN, DERAINS, ARNALDEZ, ICC Awards 1986-1990, p. 302; ICC award 5904/89, in JARVIN, DERAINS, ARNALDEZ, ICC Awards 1986-1990, p. 387 et seq.; ICC award 8264/97, in ICC ICArb. Bull., 2/1999, p. 63 et seq.. 33 To our knowledge, only in the case decided by the «Tribunal of International Commercial Arbitration at the Ukrainian Chamber of Commerce and Trade», mentioned above in footnote 26, the arbitral tribunal disregarded the choice made by the parties and applied Ukrainian law.

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where the reference to “rules of law” means that the arbitrators may apply non-state law. See also: Article 187 § 1 Federal Statute on Private International Law (Switzerland); Article 28 § 1 of the UNCITRAL model law. Furthermore, the rules of arbitration of the major arbitration institutions also recognize that arbitrators can apply «rules of law». Thus, for example, Article 21(1) of the ICC arbitration rules states the following: Applicable rules of law The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate. 4.2 Arbitral

tribunals will not apply lex mercatoria if the parties have expressly chosen a domestic (national) law If the parties expressly choose to submit their agreement to a national law, arbitrators will have to apply that law, even if such law appears to be inappropriate in the case of an international transaction.

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There is nevertheless some space for «correcting» or «integrating» inadequate domestic laws through the reference to general principles, UNIDROIT Principles, trade usages, but only to the extent this is admissible under the applicable domestic law. If the parties have chosen a domestic law as the applicable law together with transnational rules (such as, for instance, the UNIDROIT Principles), arbitrators will in principle face the same problems described above in § 3.3. However, since arbitrators are not bound to respect a specific system of private international law, they will have a greater discretion when deciding on possible conflicts between the transnational rules and the applicable law. 4.3 Arbitrators

may, in exceptional cases, apply the lex mercatoria instead of a domestic law when the parties have made no choice of the applicable law If the parties have made no choice, the arbitrators will in most cases apply a domestic law determined on the basis of the principles of private international law or by a direct choice. Only in rather exceptional cases have arbitrators applied the lex mercatoria in the absence of a choice by the parties in favor of this solution. A very famous case of this kind is the Norsolor case,34 where the arbitrators applied the lex mercatoria in a dispute regarding the termination of a contract between a French principal and a Turkish agent. The agent claimed to be indemnified for the goodwill developed during the contract, but the right to receive this type of indemnification was recognized only by French law (and not by Turkish law). The arbitrators argued that, in the case in question, the conflict of law rules did not warrant an unequivocal solution and consequently decided as follows: Faced with the difficulty of choosing a national law the application of which is sufficiently compelling, the Tribunal considered that it was appropriate, given the international nature of the agreement, to leave aside any compelling reference to a specific legislation, be it Turkish or French, and to apply the international lex mercatoria.

In the context of the lex mercatoria the tribunal applied the principle of good faith and awarded on this basis damages to the agent.

34 ICC arbitral award 3131/1979, Pabalk Tikaret Limited Sirketi c. Norsolor S.A, in JARVIN, DERAINS, ICC Awards 19741985, p. 122 et seq.

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In several other cases the arbitrators applied lex mercatoria or general principles of law (including in certain cases the UNIDROIT Principles as part of the lex mercatoria) when it appeared that neither party wanted to apply the other party’s law35 or when the parties expressed the desire to have the dispute decided on the basis of non-state rules, for instance through a reference to international law,36 or «according to the laws of natural justice».37 Another interesting example is the Arthur Andersen case,38 where the arbitration clause provided, with respect to the applicable law, the following: The arbitrator shall decide in accordance with the terms of this Agreement and of the Articles and Bylaws of Andersen S.C. In interpreting the provisions of this Agreement, the arbitrator shall not be bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble of this Agreement and the Articles and Bylaws of Andersen, S.C., taking into account general principles of equity […].

The sole arbitrator decided to apply «the general principles of law and the general principles of equity commonly accepted by the legal systems of most countries», and in particular the UNIDROIT Principles, qualified as a «reliable source of international commercial law in international arbitration».

5 Recommendations and Conclusions 5.1 In what

circumstances is the choice of lex mercatoria + UNIDROIT Principles appropriate?

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Choosing lex mercatoria (in conjunction with the UNIDROIT Principles) may be appropriate in the following situations: 1. Where

there is no space for choosing a national law which the negotiating party considers appropriate, in particular when the other party insists on the choice of a national law which is not acceptable (e.g. because it is impossible or difficult to have sufficient knowledge of that law).

2. Where

the type of contract is not regulated by national laws, and a common drafting practice has been developed in business, as for example with respect to joint venture or licensing agreements. In this case a well drafted contract submitted to general principles of law and the UNIDROIT Principles may often offer a better legal framework than a national law. Moreover, when applying general principles recognized in the specific trade, arbitrators will have more space for filling possible gaps with solutions taken from the practice commonly followed within such type of contract. Of course, this implies the need to have possible disputes decided by arbitrators having specific experience in that type of contract.

3. When

the parties need to use a standard contract in several jurisdictions and there is no space for submitting it to their own national law. In this case lex mercatoria may be a good compromise solution.

5.2 In what

circumstances should lex mercatoria not be chosen?

35 See for instance the Valenciana case (partial award on the applicable law of 1 September 1988, Primary Coal c. Compañía Valenciana de Cementos Portland, in Rev. arb., 1990, p. 701 et seq.; ICC award 7375 of 5 June 1996 in The Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran c. Westinghouse Electric Corporation, in Mealey’s International Arbitration Report, vol. 11, 12/1996, A-1 et seq..; ICC award in case 10422/2001, in JDI 2003, p. 1142 et seq. 36 See, for instance ICC award 8365/96 (in JDI, 1997, p. 1078) where, with reference to a guarantee, the parties agreed that « … cette garantie est régie par le droit international». The arbitral tribunal decided that «les parties ont fait un choix implicite de la loi applicable, à savoir les usages du commerce international et les principes généraux du droit (lex mercatoria)». See also ICC award 12111 del 6 gennaio 2003 (in www.unilex.info), concerning a clause according to which «This contract is governed by international law (…)». 37 ICC case 7110, which has resulted in several partial awards in 1995, 1998 e 1999, published in ICC ICArb. Bull., 2/1999, p. 40 et seq. The dispute concerned several connected contracts which made reference to the principles of natural justice: the arbitral tribunal decided to apply general principles of law, including the UNIDROIT Principles.. 38 ICC award 9797 of 28 July 2000 in the dispute between the Andersen Consulting Business Unit Member Firms on one side, and the Arthur Andersen Business Unit Member Firm and the Andersen Worlwide Société coopérative, on the other side, in Dir. comm. int., 2001, p. 211 ss.

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Lex mercatoria is not an appropriate solution when possible disputes are to be decided by state courts, because national courts will in principle not recognize such a choice (see, supra, Chapter 3, § 3.3). Thus, contracts of sale where each individual transaction is for a limited amount of money will normally not provide for arbitration for possible disputes, and in this case lex mercatoria is not an appropriate solution. The parties may of course refer to transnational rules within the framework of a national law, as we have seen in § 3.3. The choice of a domestic legal system as the applicable law will also be preferable when the parties can agree on a national law which is acceptable to both of them. This will be in particular the case where a party is able to negotiate the choice of its own law, or where the parties can agree on a law of a third country which they consider appropriate. 5.3 In case

of choice of the lex mercatoria, should the parties incorporate the UNIDROIT Principles in their contract? In principle yes, since the principles of law commonly considered to be part of the lex mercatoria are too vague and general and do not offer enough guidance and foreseeability in case of dispute. When incorporating the UNIDROIT Principles, parties should check whether certain provisions should be excluded: see above § 2.2.2.

5.4 How should

the clause be worded?

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See the examples of clauses in Chapter 6. 5.5 If the parties

submit their contract to the lex mercatoria, can the arbitrators refuse to follow such indication ? Arbitrators are in principle bound to respect the choice made by the parties. If the clause which submits the contract to lex mercatoria is clear, there is in principle no reason to fear that arbitrators will not follow the choice made by the parties. If the clause is unclear, arbitrators may consider the choice non-effective and apply a domestic law, but this outcome is unlikely, especially where it appears that the parties did not want any domestic laws to apply.

5.6 Is there

a risk that arbitrators will make unforeseeable decisions under the lex mercatoria? It should be said at the outset that such a risk exists before any court or arbitral tribunal, whatever the applicable rules of law. This risk can be minimized by choosing competent and independent arbitrators and by submitting the contract to specific rules, thus limiting their discretion. By choosing lex mercatoria in conjunction with the UNIDROIT Principles, the parties establish a reasonably complete and foreseeable legal framework with respect to the general contract issues (formation, validity, interpretation, performance, non performance, limitation periods, etc.). However, when choosing this option there will be no specific rules on the particular type of contract in question, as are found in several national laws with respect to «named» contracts, like sales, agency, lease, etc. This means that for certain contracts a domestic law containing detailed provisions and case law may warrant greater foreseeability (although the parties may overcome, at least in part, this problem by providing detailed rules in the contract itself). With respect to «unnamed» contracts, as are used in most transactions in international trade (e.g. distribution, franchising, joint venture agreements, trademark and patent licenses, know-how contracts, transfer of technology, turnkey contracts, etc.), most domestic laws do not contain specific rules.

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In these cases general principles together with the UNIDROIT Principles and a detailed contract may in most cases give as much certainty and foreseeability as a national law. 5.7 Does the

choice of lex mercatoria exclude the application of domestic laws?

This depends first of all on the wording of the clause. If the reference to general principles and/or to the UNIDROIT Principles is worded in such a way that no intention to replace national laws appears, the clause may be interpreted to mean that the parties wished to apply transnational rules within the framework of a domestic law (expressly chosen by the parties or determined on the basis of the rules of private international law). This situation may in particular arise where the parties choose general principles or UNIDROIT Principles together with an express reference to a national law. It is therefore recommended that the parties, once they decide to apply the lex mercatoria, make a clear choice in this direction by expressly excluding the application of domestic legal systems. 5.8 To what

extent will the exclusion of national laws be effective?

It is generally recognized that by submitting a contract to the lex mercatoria or general principles of law, with the exclusion of national laws, possible mandatory rules of domestic laws are excluded.

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However, this principle only applies to «simply» mandatory rules. As regards «internationally» mandatory rules (also called “overriding provisions”, “lois de police”, “norme di applicazione necessaria”: see Article 9, Regulation 593/2008 on the law applicable to contractual obligations - Rome I), such rules will in principle prevail over the lex mercatoria, to the extent the arbitrators consider them to be applicable to the dispute.39 This means also that an arbitral award based on lex mercatoria which does not comply with internationally mandatory rules of the country where recognition is sought, may not be recognized by the courts of such country. 5.9 Is there

a risk that a domestic court will refuse recognition and enforcement of an award which applies lex mercatoria ? In the past the objection has been raised that by applying general principles of law, arbitrators would actually have decided ex aequo et bono, and that recognition of the award should be refused if the parties had not given the arbitrators such power. However this theory has been rejected and it has been recognized that, by applying the lex mercatoria, arbitrators are in any case applying «rules of law». This means that a national court will recognize arbitral awards which apply lex mercatoria, even where such court would not itself respect such choice. To our knowledge, there are no cases where courts have denied recognition to foreign awards because such awards applied lex mercatoria. Of course this does not exclude that recognition and enforcement may be denied for other reasons, e.g. because the award which applied lex mercatoria did not comply with internationally mandatory rules of the country where recognition is sought.

39 See for instance ICC award § 6500/1992, in ARNALDEZ, DERAINS, HASCHER, ICC Awards 1991-1995, p. 452 et seq. where it is said (page 454) ..« … lorsque la lex mercatoria est applicable — comme toute autre «proper law» du contrat — le juge ou l’arbitre devrait tenir compte d’une norme d’application immédiate ou d’ordre public appartenant à un autre système, lorsqu’il y a de bonnes et justes raisons de le faire …». See also BERGER, The Creeping Codification of the Lex Mercatoria, 1999, p. 75-78.

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6 Examples of Clauses 6.1 Lex mercatoria

+ UNIDROIT Principles

Clause 6.1 Any questions relating to this Agreement which are not expressly or implicitly settled by the provisions contained in this Agreement shall be governed, in the following order: 1)

by the principles of law generally recognized in international trade as applicable to international [type of contract: e.g. distributorship, licence] contracts,

2)

by the relevant trade usages, and

3)

by the UNIDROIT Principles of International Commercial Contracts, with the exclusion of national laws.

This clause, which is the most frequently used clause within the ICC model contracts, states that the contract shall be governed by the lex mercatoria and the UNIDROIT Principles and provides at the same time the following hierarchical order: 1. Contract 2. general 3. trade

provisions,

principles of law applicable to the particular type of contract in question,

usages,

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4. UNIDROIT

Principles.

First of all, the clause expressly states that the contract is submitted to an alternative legal system, with the exclusion of national laws. This clarification may be important in order to avoid any possible overlapping with a domestic legal system. Furthermore, the clause makes clear that the UNIDROIT Principles apply only to the extent that they do not contradict the contract provisions, general principles of law and trade usages. The purpose of this wording is to give arbitrators the possibility of disregarding rules contained in the UNIDROIT Principles which are contrary to the contractual provisions agreed by the parties and/or which may contradict the reasonable expectations of parties engaged in a given trade (such as, for instance, the rule on gross disparity: see above, § 2.2.2). 6.2 Lex mercatoria

+ UNIDROIT Principles (with exclusions)

Clause 6.2 This contract is governed by general principles of law generally recognized in international trade (lex mercatoria) together with the UNIDROIT Principles of International Commercial Contracts [2010] (except for Articles 2.20, 3.2.7 and 6.2.1.) with the exclusion of national laws.

This clause places the general principles and the UNIDROIT Principles at the same level, but at the same time expressly excludes the application of a number of provisions contained in the Principles which the parties consider not to be appropriate. Of course, the choice of the Articles which are to be excluded is left to the discretion of the negotiators: one could for instance, maintain the Article on gross disparity and cancel only the words «or of its improvidence, ignorance, inexperience or lack of bargaining skill». Also with respect to the provisions on hardship, it would be sufficient to delete Article 6.2.3(4)(b) which gives the court the right to «adapt the contract with a view to restoring its equilibrium» and to leave only the possibility of contract termination. One could also incorporate by reference the ICC Hardship Clause 2003, which does not provide, in case of failure of the renegotiation, for the adaptation of the contract, but only for its termination.

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 Developing Neutral Legal Standards for ­International Contracts 6.3 UNIDROIT

Principles (with exclusions) + Lex mercatoria

Clause 6.3 Any questions relating to this Agreement which are not expressly or implicitly settled by the provisions contained in this Agreement shall be governed, in the following order: 1)

by the UNIDROIT Principles of International Commercial Contracts [2010] (except for Articles 2.20, 3.2.7 and 6.2.1.),

2)

by the principles of law generally recognized in international trade as applicable to international [type of contract: e.g. distributorship, licence] contracts,

3)

by the relevant trade usages, and with the exclusion of national laws.”

This clause expressly excludes a number of provisions of the Principles, as in clause 6.2 hereabove. However, while clause 6.2 puts the the lex mercatoria and the UNIDROIT principles at the same level, this clause puts the UNIDROIT Principles in the first place after the contract clauses and before the lex mercatoria and trade usages. This clause has the advantage over clause 6.2 of clearly providing a hierarchy of the various sources of law. 6.4 UNIDROIT

Principles (without exclusions) + lex mercatoria

Clause 6.4

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This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by generally accepted principles of international commercial law.

This clause, (clause 1.3(a) of the UNIDROIT Model Clauses), puts the Principles in the first place and invokes the general principles (lex mercatoria) only for filling the gaps. Since it does not mention the contractual provisions, the issue whether the contract clauses prevail over the UNIDROIT Principles40 is not expressly answered. 6.5 UNIDROIT

Principles as the applicable law

Clause 6.5 This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010)

This clause (clause 1.1(a) of the UNIDROIT Model Clauses) consists in choosing the UNIDROIT Principles as the rules of law governing the contract without reference to any other legal sources. The clause does not expressly answer the question whether the principles should apply as the applicable law (instead of the otherwise applicable domestic law), or if they should apply together with the applicable national law; and, in the second case, if they should be considered as rules of law or as contractual provisions. 6.6 UNIDROIT

Principles + domestic law

Clause 6.6 This contract shall be governed by the UNIDROIT Principles of International Commercial Contracts (2010) and, with respect to issues not covered by such Principles, by the law of [State X]

This clause (clause 1.2(a) of the UNIDROIT Model Clauses) consists in choosing the UNIDROIT Principles as the governing law of the contract together with a national law chosen by the parties, which is to rule on all issues not dealt with in the UNIDROIT Principles. This means that all issues regarding the specific contract in question will be governed by the domestic law indicated by the parties and that mandatory rules of such law will prevail over the contractual stipulations of the parties. 40 In fact, since the Principles are incorporated by contractual agreement between the parties, it may be disputed whether they can prevail over contractual provisions which contradict the Principles

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Principles as a means for interpreting and supplementing the applicable law Clause 6.7 This contract shall be governed by the law of [State X] interpreted and supplemented by the UNIDROIT Principles of International Commercial Contracts (2010).

The purpose of this clause is much more limited than the clauses examined above: it simply intends to ensure that interpretation and supplementation of the applicable domestic law will be in accordance with the internationally accepted principles and rules set forth in the UNIDROIT Principles.

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Such a clause can be useful when there is no way to avoid the application of the law of one of the parties, by choosing a more neutral solution, and the other party would like to make sure that, when applying such law, internationally accepted principles will be given due consideration.

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DRAFTING AND NEGOTIATING INTERNATIONAL COMMERCIAL CONTRACTS

Appendix VII

ICC principles to facilitate ­commercial negotiation



Introduction Business in an integrated world economy brings together negotiating partners from very different cultures and business traditions, with different interests and a wide range of negotiating styles and experience. While this rich variety is a foundation of today’s vibrant trading community, it also increases the chances for costly misunderstandings that impede the smooth flow of business.

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In keeping with its mission to promote efficient and effective global trade, ICC has consulted with negotiators from businesses large and small, across sectors and around the world, to develop the following set of principles to help facilitate the process of commercial negotiations. The ICC Principles to Facilitate Commercial Negotiation are based on the idea that the best deals are struck between negotiating partners that not only want or need to collaborate, but also respect and trust one another. Business increasingly involves sustainable partnerships and business arrangements that may need to evolve over time — in such situations, a respectful, communicative relationship with your negotiating partner can be an invaluable outcome in its own right. The ICC Principles provide the direction for creating or enhancing a productive working relationship, for transactions of any size or length. Every deal and set of negotiating parties is different, and the ICC Principles may be useful in different ways for different deals. The Principles may be used as:  a checklist of considerations for a party to take into account during preparation for and conduct of negotiations  a basic set of guidelines the parties can agree to use as a reference point for the conduct of negotiations1  a benchmark for guiding a party’s own conduct during negotiations Where the ICC Principles are used in the context of negotiating and drafting an agreement, parties may wish to consult the range of relevant ICC tools — including a variety of model contracts; the Incoterms® rules; ICC rules on documentary credits (UCP) and guarantees (URDG); and the ICC Rules on Arbitration and ADR — which reflect international trade practice and are accepted worldwide.

1 Prepare carefully  Engage the right people within your organization, define your objectives clearly, and review any history of dealings with your counterparty  Learn all you can about your negotiating partners and the reality of the commercial context in which they operate. Imagine their likely interests, priorities, limitations and scope of authority  Be ready to explore with your counterparty the various legal rules available to govern your deal

2 Take cultural differences into account  Educate yourself on the local business practices  of your negotiating partner 1 The ICC Principles are not intended to impose a legally binding obligation on the parties.

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 Be sensitive to your own culturally-rooted habits and assumptions about how to conduct business  Develop a practice that encourages you continually to question your assumptions and probe for assumptions your negotiating partner may be making about you  Keep in mind the value of being able to deal well with difference

3 Make early agreements with a negotiating partner about a process to guide the logistics of the negotiation, which paves the way for ­making agreements about more substantive topics  Decide early on with your negotiating partner on procedural questions such as timeline, venues and agendas for meetings, language of proceedings, attendees at meetings and drafting responsibilities

4 Allocate appropriate human and technical resources to a negotiation  Anticipate the people you’ll need to have in the room or on standby to support negotiations, such as people with decision-making authority on issues at hand, specialized technical experts, translators, legal drafters, tax advisors, and local counsel  Aim to maintain consistency on the negotiating team — avoid presenting a revolving cast of characters

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5 Aim to develop an open and reliable working relationship with a negotiating partner  Deals are often on-going commitments that evolve over time as circumstances change. A good working relationship between the parties will make it easier to address both sides’ future needs efficiently and effectively  Acting with transparency and the genuine desire to understand and find solutions can help focus discussions on substance  Negotiation partners need not be friends to create  a productive working environment

6 Behave with integrity  You don’t need to reveal everything, but everything you say should be true  Lying or misleading imperils the deal, the working relationship at hand and your reputation in the trading community, and may ultimately lead to legal sanctions  Your willingness to bring your values and integrity to the table is a signal to your negotiating partner of how seriously you are approaching the negotiation

7 Manage your emotions  Act rather than react — modeling that you are acting independently of a counterparty’s provocation is powerful  A counterparty that views you as reasonable may ask for help, allowing you to collaborate on a solution, rather than hiding information out of pride or fear, which may lead to an unrealizable agreement or no agreement at all

8 Be flexible  Be open to thinking creatively with your negotiating partner about how your interests may complement each other and be satisfied without diminishing value for either party  Only a mutually beneficial deal will be sustainable over time — if one party receives disproportionate benefit, the other party may be unable to implement the agreement 364 |  INTERNATIONAL CHAMBER OF COMMERCE (ICC)

 ICC principles to facilitate ­commercial negotiation

 Understanding the difficulties your negotiating partner may be facing is an important element in building a realistic, durable deal

9 Make realistic commitments

 Agree to only those things you genuinely intend to undertake, as you would expect your negotiating partner to do  Clarify your negotiating partner’s scope of authority: people may overstate their authority and make commitments they can’t make or keep  Know your alternatives, and know when to leave the table because you can find a more suitable deal elsewhere

10 Confirm the agreement to ensure a common understanding  Review carefully what was agreed with your negotiating partner at the end of a negotiating session, resolving any details on which your views diverge

11 Be ready for the case where negotiations do not succeed  Negotiations may not reach conclusion for a variety of reasons, either within or beyond the control of the parties

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 Anticipate such situations, prepare and be ready to discuss alternative options with your negotiating partner

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About the Author For more than 40 years Fabio Bortolotti has been dealing with international contracts, not only as professor of International Commercial Law at the University of Torino, but also as counsel assisting companies in negotiating and drafting international transactions and in dealing with possible disputes before courts and arbitral tribunals. He is founding partner of the law firm Buffa, Bortolotti & Mathis, Torino. He has acted and is at present engaged as arbitrator or counsel in several international and domestic arbitrations. He is an accredited mediator, Center for Dispute Resolution (CEDR).

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Fabio Bortolotti is co-chair of the Commission on Commercial Law and Practice (CLP) of the International Chamber of Commerce and has chaired various task forces which have drafted the major ICC model contracts (e.g. commercial agency, distributorship, sale, occasional intermediaries, turnkey, M&A, trademark license). He is member of the council of the ICC Institute of World Business Law, of the ICC Commission on International Arbitration, of the ICC Commission on Competition and vice-chair of ICC Italy. He is member of various associations: “Associazione Italiana per l’Arbitrato (AIA), “Deutsche Institution für Schiedsgerichtsbarkeit E.V.” (DIS); “Union Internationale des Avocat” (U.I.A.); “Association Suisse de l’Arbitrage” (A.S.A.). He is founder and chairman of the International Distribution Institute. He is the author of numerous books and articles in the field of the international commercial contracts, contract law, distribution law, conflict of laws, international litigation and arbitration.

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ICC Publications ICC Model Contract | Consortium Agreement ICC Pub. No. 779E, €69 (2016 edition) Companies of all sizes wanting to cooperate on major projects, whether international or domestic, require solid and balanced terms and conditions for such cooperation. The new ICC Model Contract | Consortium Agreement addresses these needs by providing a unique, balanced platform that is fair to all parties. The model accommodates the desire of all parties for a solid unanimous decision making process, a clear allocation of participation and provision of resources, the need for swift and effective dispute resolution, and the need for complete and informed allocation of risks.

ICC Model Contract | Commercial Agency ICC Pub. No. 766E, €69 Also available bilingual English-French

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Updated in 2015 to take into account recent developments in the law of agency, this model contract addresses questions of sales through the Internet, indemnity, arbitration and the principles of law generally applicable to agency contract (“lex mercatoria”).

ICC Model Contract | Distributorship ICC Pub. No. 776E, €69 Updated in 2016, the ICC model distributorship contract is an invaluable tool for traders negotiating international distribution agreements. It includes the uniform contractual rules and their application in a simple and general form to assure equal balance for both parties.

ICC Model Contract | Selective Distribution ICC Pub. No. No. 773E, €69 (2016 edition) This title in the series of ICC model contracts covers a particular category of distribution agreements. Selective distribution agreements allow the exporter to better control the way his products are marketed by creating a direct link between the exporter and the retailers who sell his products to the final consumer. The model provides a sound legal basis upon which parties can quickly establish an even-handed agreement acceptable to both sides. It saves resources for companies and their legal advisers. This ICC model contract takes account of all these specifics and contains enough flexibility for the parties to work out special situations for themselves.

ICC Model International Sale Contract ICC Pub. No. 738E, €69 (2013 edition) Also available in bilingual English-French This updated version of ICC’s most successful Model Contract takes into account recent developments in International business and trade finance. It incorporates the latest trade rules, ICC’s Incoterms® 2010, as well as the new Bank Payment Obligation (BPO) rules developed jointly by the ICC Banking Commission and SWIFT. PLUS: The CD-Rom containing the text of the contract is now even easier to use with check and choose boxes, and alerts when important fields are not filled in. Titles marked with a

include a USB key

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ICC Model Contract | Occasional Intermediary (Non-circumvention and Non-disclosure) ICC Pub. No. 769E, €69 Updated in 2015, the model provides a unique and balanced legal platform that takes into account the interest of all parties involved in non-circumvention and nondisclosure agreement and minimizes the risks of fraud and misunderstanding. It includes a definition of the services to be provided by the intermediary and a description of the exclusive rights of the intermediary. PLUS: Includes a USB key presenting the model contract in a user friendly and fully editable format.

ICC Short Form Model Contracts ICC Pub. No. 791E, €62 (e-Book) 2017 edition Practice has shown that companies and businesses involved in international trade frequently use commercial agency and distributorship contracts to distribute their products abroad.  The publication ICC Short Form Model Contracts is a simplified contract intended for parties who do not want a detailed commercial agency contract or distributorship contract, but prefer a shorter simpler form covering only the most essential issues. The contract is provided in a fully editable format (both pdf or word) permitting you to easily adapt the contract to your specific case. 

ICC Model Confidentiality Agreement Table of Contents

ICC Pub. No. 774E, €69 (2016 edition) The ICC Model Confidentiality Agreement and its stand-alone model confidentiality clause are designed to assist business people and lawyers in business transactions across all borders. Both models allow parties to tailor the provisions to their transactions, providing alternative language for situations having more than one solution.

ICC Model International Franchising Contract ICC Pub. No. 712E, €69 This model responds to a growing need for a simple and user-friendly model contract that reflects the diversity of franchising contracts. An expanded introduction and a helpful commentary offer invaluable explanations and alternative drafting solutions.

ICC Model Subcontract ICC Pub. No. 706E, €69 Mainly designed for major turnkey projects, this model is flexible enough to be used as a subcontract to other standard forms as well. It is the answer for all those who seek one reliable and balanced standard contract to keep their desk free from unnecessary paperwork.

ICC Model Contract for the Turnkey Supply of an Industrial Plant ICC Pub. No. 653E, €67.50 (e-book) This ICC model covers the type of turnkey contract that is limited to the plant or production line and does not extend to items which “surround” the plant, such as buildings, supply of energy, etc. Generally governed by the rules on sale contracts, it has special characteristics: the supplier’s main obligation is to supply the equipment and assist the purchaser during erection and start-up; the supplier performs its obligations within facilities that are under the purchaser’s control. The contract takes account of these specifics and contains enough flexibility for the parties to work out special situations for themselves.

Titles marked with a

include a USB key

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 ICC Publications

ICC Guide to Incoterms® 2010 By Prof. Jan Ramberg ICC Pub. No. 720E, €59 The Guide analyzes in detail each of the 11 Incoterms® rules. Diagrams and illustrations facilitate their understanding while also explaining the history of these ground-breaking international commercial terms. This ICC Guide will help importers and exporters avoid costly misunderstandings by clearly defining the responsibilities of sellers and buyers for the delivery of goods.

ICC Guide on Transport and the Incoterms® 2010 Rules ICC Pub. No. 775E, €49 Also available in French: €49

A new handbook providing clarity and practical support to those in the transport sector working on transactions involving the Incoterms® rules.The guide covers each of the 11 rules and reflects both types of sales when the buyer contracts for carriage and when the seller does so. The full text of the Incoterms ® 2010 rules is also included in the book.

INCOTERMS® 2010 Q&A Questions & expert ICC guidance on the Incoterms® 2010 rules

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ICC Pub. No. 744E, €59 This publication is the latest in a series of bestselling books helping users understand and benefit from ICC’s world famous Incoterms® rules. This practical one-stop shop for traders and those that advise them, features a host of practical tools to help you choose the correct Incoterms® 2010 rule for your deal and avoid costly mistakes.

Making Money with Incoterms® 2010 Strategic Use of Incoterms® Rules in Purchases and Sales

By Arthur O’Meara ICC Pub. No. 984E, €49 This book addresses the strategy and tactics of negotiating the minimization of landed cost and the maximization of profit for both international and domestic transactions, from the perspective of both purchasing and sales. Making Money with Incoterms® 2010 will appeal to the largest group of importers and exporters: those who sell goods either as LCL, or in full containers.

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About the International Chamber of Commerce (ICC) The International Chamber of Commerce (ICC) is the world’s largest business organization with a network of over 6 million members in more than 100 countries. We work to promote international trade, responsible business conduct and a global approach to regulation through a unique mix of advocacy and standard setting activities—together with market-leading dispute resolution services. Our members include many of the world’s largest companies, SMEs, business associations and local chambers of commerce.

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www.iccwbo.org

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International Commercial Contracts A practical guide, with ICC model contracts

This invaluable guide clarifies the issues surrounding international contracts and will help lawyers and business people avoid the most common pitfalls. It provides practical examples and a comprehensive view of the principles that govern cross-border contracts, so that you can situate the various issues in their right context and take the most appropriate decisions. Further, this volume offers insights into the basic requirements of a well-drafted contract and analyses in depth the negotiating process. It concludes with an incisive commentary on the model contracts developed by the International Chamber of Commerce (ICC), Incoterms 2010® and the 2016 Unidroit Principles. This resource is an invaluable tool for practitioners and students who wish to understand and prepare for the main issues they will face when dealing with international contracts.

Drafting and Negotiating International Commercial Contracts

With the increasing globalization of markets, more and more businesses draft cross-border contracts on a regular basis. However, international contracts are much more complex than domestic ones.

THIRD EDITION

Drafting and Negotiating

THIRD EDITION

Drafting and Negotiating International Commercial Contracts A practical guide, with ICC model contracts

ICC Publication: 788E ISBN: 978-92-842-0467-0 ICC Store www.storeiccwbo.org

by Fabio Bortolotti