European Contract Law- Historical Development, Content and Practical Application in International Arbitration

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- Content

The aim of the non binding compilation of principles is to serve as a foundation for future European Legislation, as interpretation tools for international instruments, as guidance for private parties when they are drafting their contracts, as guidance for courts or arbitral tribunals when they are assessing international usages and practice, or (if the parties to the contract have elected so) as substitutes for the governing law and even to become a basis for a future European Contract Law. Another purpose of the principles is to enable parties in different countries to incorporate them in their contracts.

These Principles are divided in three parts and they have been published between 1995 (Part I and II, revision in 1998) and 2002 (Part III in 2002). The first part of the work was done between 1982 and 1990 and eventually published in 1995. It consisted of four Chapters: 1. General provisions; 2. Terms and Performance of the Contract; 3. Non-performance and Remedies in general; 4. Particular Remedies for Non- Performance. In 1990 the commision embarked on Part 2 which covers ‘Formation”, “Authority of Agents”, “Validity”, “Interpretation”, “Contents and Effect”. The Chapters from part 1 and 2 were renumbered and the combined parts were published in 2000. In 2002, Part 3 was published which added “Plurality of Parties”, “Assignment of Claims”, “Substitution of New Debtor : Transfer of Contract”, “Set-off”, “Prescription”, “Illegality”, “Conditions”, “Capitalisation of Interest”.

The structure of the Revised Principles of European Contract has changed. Although Chapters 2 (‘Formation’), 3 (‘Authority of Agents;) and 5 (‘Interpretation’) retain their titles, by contrast, Chapter 4 (‘Validity’) and Chapter 15 (‘Illegality’) are combined in the body of Chapter 4, which is newly titled (‘Invalidity’). Chapter 6 (‘Contents and Effects’) is divided in two: a Chapter 6 ‘Content’ and a Chapter 7 ‘Effects’. Chapter 7 is renumbered as Chapter 8 (‘Performance’) also including in its content the provisions of Chapter 16 (‘Conditions’). The former Chapter 8 (‘Nonperformance and Remedies in General’) has become Chapter 9 and the former Chapter 9 (‘Particular Remedies for Non-Performance’) has become Chapter 10. Finally a Chapter 11 has been created ‘Substitution of Parties’).

The civil systems and the trans-national systems require taking into consideration the surrounding circumstances for interpreting contracts, such as the conduct of the parties during negotiations or even after the signature of the contract. Some systems can in the process of interpretation attach considerable weight to the principles of fair dealing and good faith.

The PECL contain a series of articles regulating the interpretation of contracts, primarily articles 5:101 to 5:107. Under the Principles the interpreter has to establish the common intention of the parties. It is worthy to point out that the (subjective and objective) intention of the parties has to be assessed on the basis of the criteria set forth in article 5:102: preliminary negotiations and circumstances of the conclusion of the contract, conduct of the parties, even subsequent of the conclusion of the contract, nature and purpose of the contract, practices established between the parties, usages, good faith and fair dealing. In the process of interpretation, any gaps may be filled according to the criteria set forth in article 6:102: intention of the parties, nature and purpose of the contract, good faith and fair dealing.

- Practical Application in International Arbitration

In the case of arbitration, arbitrators are not bound (or not completely bound) by national laws, and especially not by the rules of private international law of the country of arbitration.The reasoning in the international literature is as follows: since parites can instruct arbitrators to decide a dispute ex aequo et bono, it must also be possible for them to instruct the arbitrator to decide a dispute by reference to The Principles.

This also demonstrates that the Principles have advantage over international conventions. When the latter must be adopted prior to being used, application of the Principles remains independent from their legislative status. This provides an opportunity for the Principles to be less of a compromise between interests of different countries, which is always necessary to ensure ratification by a sufficient number of significant nations. Moreover, the Principles are far more flexible and amenable to modification in response to new, innovative trends and experiences than legislative or other instruments.

Article 1:101(3) opening statement and (b) PECL provides that “These principles may be applied when parties […] have not chosen any system of rules of law to govern their contract.” According to the drafters “the justification for such application is the comparative preparation and international discussion which is reflected by the Principles. For the adjudecation of an international contract the Principles may furnish a more appropiate basis than any specific system of national contract law”[3]

In the absence of a choice of law by the parties, however, judges are bound in international cases to not be able to apply the Principles. More can be expected ofr arbitrator in this connection since they are not bound to national law, which would therefore bring the Principles in the frame.

Finally, the methodology upon which the PECL are based provides sufficient reason to consider them a "neutral" and profound alternative rather than disguised as specific interests and a rigid product of compromise. The PECL provide a wide range of applications, of which some surely will be more relevant than others, as well as a ready-to-adopt structure that makes them valuable contributions to the harmonization process. This is also why parties may rely on the Principles as trustworthy and fair if they cannot agree upon a certain legal system to govern a contract.

From the view of a bussinessman, the PECL represent a neutral, non-national set of rules -- a saving choice of law that can be the method of compromise when neither party appears to be willing to accept the law of the other’s country. This choice of law can aid a lawyer to avoid unforseen details and uncertain nuances when applying foreign law, as well as obtaining a huge benefit when redacting a transnational contract. When negotiating, the PECL can be used as a checklist of issues that need to be addressed in the contract and could appeal to the parties to apply European Principles as a fair, reasonable,