Soft law for solid contracts? A comparative analysis of the value of the UNIDROIT principles of international commercial contracts and the principles of European contract law to the process of contract law harmonization.

• Author: Meyer, Lars

1. INTRODUCTION

   The globalization phenomenon constantly confronts legislative bodies all over the world with one urgent question: How to draft new laws and adjust existing rules to secure their effectiveness in times of "global marketplaces" with internationally operating corporations and individuals? The expansions of transnational business interactions, the worldwide accessibility of goods and services over the internet, and the borderless lifestyles and habits of consumers are far ahead of the legal rules created to govern international transactions. Globalization on this sector calls for more international legal coherence and perhaps even the unification of domestic and supranational trade laws. (1)

   Accordingly, there are many "internationalization" efforts that have been and continue to be promoted across various institutional levels covering a number of legal areas, especially in the area of contract law. (2) Harmonizing, i.e. making more congruent, international contract law under various legal forums is the basis of an internationalization of law that arose in response to the eroding importance of borders in today's business world. Two innovative non-legislative contributions to this process have been presented: the UNIDROIT Principles of International Commercial Contracts, (3) provided by the UNIDROIT Institute for the Unification of Private Law, and the Principles of European Contract Law, (4) which were published by the Commission on European Contract Law.

   This article will discuss the legislative motives and political and economic arguments that underlie ongoing activities in contract law harmonization, and it will introduce the major institutions pursuing this goal (section II). This article will then give an overview of and compare the UNIDROIT and European Principles as two of the most extensive non-legislative efforts, examining whether their approach is an effective and favorable alternative to institutional solutions (section III). Finally, the passing of the first 10 years after the first publication of the two sets of Principles and the recent release of an extended version of the UNIDROIT Principles provide an occasion to discuss how effective this soft law has proven towards the harmonizing of international contract law, and whether it makes sense to apply and further develop both sets of Principles in tandem (section IV).

   In some parts of the discussion and analysis, slight emphasis will be placed on the state of affairs in Western Europe. This is due to the comparably high level of synchrony in contract law in the European Union as well as the region's significant share in international trade,

2. HARMONIZATION AND UNIFICATION OF INTERNATIONAL CONTRACT LAW

   1. Why Harmonize International Contract Law?

      The convergence of the ways business is being done in different countries and regions of the world is an almost automatic result of the globalization of deals and markets. Quality standards in manufacturing and services in South East Asia must meet the expectations of European companies that outsource production facilities; business customs in the Arab World must adapt to the ways investors from North America negotiate; young market economies in Eastern Europe must secure a system where parties can rely on investor-friendly, efficient and fair bureaucracies. In this context, the establishment of a legal environment that ensures conditions such as equal protection of intellectual property rights or globally reliable enforcement of foreign judgments is one of many steps necessary to disburden cross-border business interaction.

      A reliable contractual fixation of the relationship between two or more parties doing business with each other poses a crucial condition for the success of any such transaction. This is because, ideally, a contract authoritatively determines the parties' obligations regarding the deal, and it is the evidential basis of any actions taken if the contract fails. (5) Therefore, especially on the international level, where legal uncertainties and linguistic misunderstandings occur frequently, a contract is perhaps the most essential fundament of a successful transaction.

      From a legal perspective, however, international contracts (6) raise specific questions that are a result of their relation to multiple cultural, economic and legal environments. Among these are the following: the question of which languages are to be used in the contract and for any correspondence connected to it; the question of to which currency the contract refers; and the question of which holidays or business hours apply to an employment relationship. Although domestic laws do not offer sufficient solutions for these issues, the respective conflict of law rules, e.g. Private International Law, refers back to them, or to some more practical but rather specialized supranational regulations. (7)

      The practical deficits that arise from the strict application of domestic legal forums are evident--national laws on contracts differ widely, which often leads to legal uncertainty and financial risk in cross-border transactions. As a result, transaction costs are higher because the parties have to rely on increased legal counseling in negotiations or litigation. (8) Also, consumers and smaller businesses are almost always at a disadvantage when dealing with transnational corporations that have better resources for dealing with different legal systems and languages and are often in a position to impose their preference of which shall govern the contract. (9) Under these circumstances, more "neutral" and synchronized options, accessible and comprehensible to all participants, would establish more equal chances and encourage potential participants to venture into the opportunities of today's easily accessible global markets. (10)

      To avoid insufficiencies of domestic laws in global business, "internationalizing" contracts themselves, i.e. drawing from model rules provided by trade organizations or legal professionals, (11) has become one alternative. In many cases, however, parties select a patchwork of rules from different sources to create their individual terms. Such "legal forum shopping" often results in even more confusion and insecurity, higher transaction costs and greater "legal risk". (12) In the worst cases, contractual terms are not equally valid under different domestic laws or domestic courts apply foreign law incorrectly. Facing such legal incongruence and insufficiency of domestic laws in the face of the globalization of business transactions, many commentators have called for an institutional or legislative harmonization of international contract law, or even a "Global Commercial Code." (13)

      In the European Union (upon which the PECL legal systems are based), the harmonization of private law in general and contract law in particular would simplify trade activities between the Member States and benefit the Union's Internal Market. (14) Inconsistency and divergence within European legislation itself and between the Member States' contract law systems is widely considered a non-tariff barrier to trade. (15) A major objective of the European Parliament and the European Commission is the facilitation of inter-European transactions through Directives and Regulations, or even in the form of a possible "European Civil Code" or "European Contract Code." (16) In this context, more congruent laws would be more beneficial because ten new Member States, most former socialist countries providing even more differing "legal origin", joined the Community in 2004. (17) Finally, uniform rules can provide valuable legislative orientation for other countries in Eastern Europe that are preparing to become members of the Union. (18)

      Thus, while acknowledging the eligibility of domestic laws to deal with domestic questions, the EU pursues universal standards for those sectors that immediately impact the Internal Market. Additionally, the establishment of uniform rules that are accessible in a number of languages and that do not expose the "weaker" party to legal uncertainty or risks greater than those faced by a multinational corporation is in line with a substantial part of the Union's legislative efforts to secure consumer protection. (19)

      The same thought pattern also applies on a global level, where borders become increasingly irrelevant in the face of consumer trade in virtual marketplaces and with the spread of the English language among younger generations. Internationally, more compatible or even uniform laws will create more "legal certainty" among businesses, consumers, lawmakers and legal professionals. This will in turn reduce transaction costs and legal risks, enabling and encouraging more participants to step onto terra incognita and benefit from the economic advantages of global business activity.

      Therefore, as one commentator has stated, the focus of any harmonization measure must be "[a]s with any legal scheme regulating commercial contracts, the ultimate aim of [harmonization] is to provide a means by which contracting parties may quickly and fairly arrive at contractual agreement under rules and terms which are understood by and acceptable to all and which render predictable and enforceable outcomes." (20)

   2. Risks and Potential Problems of Contract Law Harmonization

      Some critics of the increasing internationalization of private law, which evidently reduces the relevance of national legislation, (21) have not yet acknowledged a practical need for this development. (22) It is argued that the conditions and customs in international trade, e.g. regarding consumer protection, vary considerably and thus require equal diversity in legal policy. (23) Accordingly, international treaties were only compromises between the demands of each participating nation and are incomplete, often inconsistent and insufficient. (24) In addition, "legal diversity" would create healthy competition among different...