Party Autonomy in International Commercial Contracts

Shreyashi Tiwari is a final year student at NUSRL, Ranchi.

Private International Law stretches over a wide range of topics including the likes of family law, law of property, dispute resolution, law of insolvency, consumer law, judicial cooperation and commercial law. All of these laws for proper implementation require recognition or creation of such rights which can be made enforceable in courts by the private parties without necessitating a resort to governmental intervention and approval. Contracts under private international law serve this very purpose. With the growth of trade and commerce in the world and after the era of globalisation, transactions involving sale and purchase, borrowing, etc. became commonplace thus there being an increase in transnational commercial transactions consequently leading to requirement of laws regulating conflicts which arise with respect to the various agreements and contracts entered into between various parties. Thus, follows that a system of law must govern the resolution of disputes that arise from the contracts. Transnational Commercial Law is the products of various means such as international conventions, model laws, international restatements, legislative or judicial parallelism, which also includes, contractually incorporated rules. When international contracts are entered into between parties belonging to different nationalities, in case a dispute arises, the applicable law to such disputes have to be determined by the competent courts and tribunals to resolve such dispute. The capacity of the parties to determine such laws contractually is known as party autonomy. However, sometimes some clauses in such commercial contracts act as handcuffs thus limiting the very scope of party autonomy itself. The freedom of parties to choose a law that regulates commercial contracts and their performance as well as dispute resolution under private international law is recognised by most of the countries as ‘party autonomy’. However, the extent of this autonomy has been controversial thus leading to placing of several limitations on such autonomy. Thus there arises the problem of determination of applicable law to such dispute resolution mechanism but also the acceptance and enforceability of such law and final award being accepted by the parties where such final decisions are not rebuttable.

As far one could trace a common system of laws which governed international trade and commerce across the countries concerning the contract of sale and other immovable properties, ‘the law of merchants’ regulating the same comes into the picture. Since every commercial activity is ordinarily preceded by a contract, the main problem of private international always determining the governing laws of the contract.[1] In the modern private international law of most of the countries, the most daunting question has been whether the same law should apply to the formation of the contract as well as the effect of the contract. It has been increasingly advocated that to all aspects of the formation of contract as well as to the effect of the contract the proper law of the contract should be applied.

Over a period of time, several attempts have been made to develope a uniform system of law applicable to all international commercial contracts but the same has failed to render any substantial result. The first attempt was made in 1939 by Institute of International Law, Rome leading to preparation of a ‘Draft relating to the contracts for the sale and purchase of movable property.’ Further attempts were made in the Hague Conferences which took place over the period of time but these international agreements touch the problem only on the fringe, and therefore solution to the problem of conflict of laws in commercial contracts has to be found by private international law of each individual country. For instance, the 1951 Hague Conference prepared ‘Drafts on Unification of Law Relating to Sale and Purchase of Movable Property’ for which no final adoption was done. The 1956 Hague Conference merely studied  International Contracts relating to sale and purchase of tangible movables but no conclusion reached. It was the 1964 Hague Conference where Convention Relating to International Sale and Purchase of Goods was passed and the UNIDROIT[2] attempts at unification of private international law brought some clarity to commercial contract law. Most recently, the Hague Conference on Private International Law has sought to create some consistency in approach to choice of law in international contracts. The draft Hague Principles on International Commercial Contracts and their accompanying Commentary, developed principally by a Working Group, seek to harmonize certain rules of private international law applicable to international commercial contracts.[3]

Coming to commercial contracts, party autonomy is nothing but the entitlement of parties to select the law under which their contractual terms will be interpreted and in case any dispute arises, the jurisdiction in which those terms will be enforced.[4] Party autonomy is considered to be the most practical solution for conflict of laws in international contracts[5], especially considering the differences in approach in practice leading to two fora being confronted by the same dispute over the same contract, recognising and circumscribing the parties’ choice to different degrees which naturally affects the outcome of the dispute and encourages parties into forum shopping for the best result by selecting a forum that the parties anticipate will apply its conflict of laws rules favourably.[6] Party Autonomy, as a conflict rule, trumps all other conflict rules and prevails over other conflicts rules which are denigrated to mere default rules[7] as it carries with itself advantages which make it a preferred choice of conflict of law for determining applicable law. For instance, party autonomy enables parties to predict the applicable law to their contracts. This means that the governing law of a contract is not left to circumstances outside the reach of the parties and consequently persons of different nationalities or regions are able to enter into a contract without the fear that the law of the country of one party will ‘override’ the other.[8] In case of commercial contracts, party autonomy plays a major role as it promotes internationalisation of choice of law rules thus enabling parties are able to choose a ‘neutral law”’that has no connection with their contract. To achieve commercial convenience in an international contract, there is a need for flexibility in the choice of law rules. Party autonomy ensures that parties enjoy flexibility in their choice of law rules, such that they can satisfy their peculiar transactional needs by choosing the best applicable choice of law rule most suited to their transactions.  Moreover, such beforehand choices by the parties also lessens the burden of making decisions on the applicable law from the court to parties. The judge himself iterated in one of the cases that “Instead of viewing the parties as usurping the legislative function, it seems more realistic to regard them as relieving the courts of the problem of resolving a question of conflict of laws.[9] Lastly and most importantly, party autonomy as a clause in a contract already-present, helps in saving the time and energy of the parties to an extent whereby in most of the scenarios the clause is a result of a negotiation already undergone between the parties.

RESTRICTIONS TO PARTY AUTONOMY

The party autonomy rule suffers from a fundamental defect that they do not promote the objectives of the choice of law theory which include certainty and uniformity of decisions.[10] The application of these rules, except the party autonomy rule, sometimes, produces uncertainty and arbitrary results; hence the preference for the party autonomy rule.[11] However desirable party autonomy may be, it cannot be absolute. While individuals and enterprises ought to be free to select any law they please, they should not be able to abuse that freedom to the detriment of one of the contracting parties or society at large.[12]

Following concepts limit and restrict the scope of Party Autonomy:-

  • Handcuff Clauses: Handcuffs clauses share one characteristic feature with other types of contractual clauses that there can be immense number of ways to formulate them. An example of a handcuff clause would be when the remedies agreed upon in a contract are exclusive and do not permit the parties to recur, for the enforcement of their contractual rights, on remedies regulated outside of this contract in any statutory or non statutory rule of the proper law of contract. It is mostly evident that whenever a handcuffs clause is invoked by a party, a reliance on that clause usually provokes a conflict with the choice of law clause that, within the contract, appears on equal footing with the handcuffs clause.
  • Public Policy of Countries: States, in order to protect their policies, limit the will of the parties to choose the applicable law.[13] These policies seek to protect the interest of the public, third party interests, or even the interests of the parties themselves. For example, the insurance laws of most countries contain provisions that protect the national interests, such that parties cannot evade the application of these laws to their contracts. Complete prohibition of party autonomy is also provided in some circumstances such as public policy expressed in the form of mandatory rules may dictate the legality or otherwise of a contract.
  • Unequal Bargaining Power: Sometimes, a party is unable to exercise the freedom to choose the applicable law, because the other party possesses overwhelming bargaining power.[14] For example, in adhesion contracts which include loan agreements, franchise etc., the freewill of the adhering party is either completely removed or fundamentally restricted. Thus, unequal bargaining power prevents it from being recognised as a fundamental principle in commercial contracts.

International Commercial Transactions between countries is a fundamental occurrence in today’s world as basic as the very act of sleeping and eating. As a choice of law rule, party autonomy would encourage transnational trade or commerce in 21st century business persons who engage in trans-border trade are certain of their contractual choices and would be encouraged to carry on business if they get to choose laws governing their contracts. Such certainty and uniformity promotes trade and hence economic efficiency. However, problems such as contradiction to public policy leading to gaining of few individuals at public expense and lack of uniformity in applying party autonomy as a principle has led to the principle being restricted and limited. There have been attempts such as the Hague Convention which provide certain legal principles and rules to provide the much needed uniformity and certainty as well as acceptance in various national (municipal) jurisdictions of various countries thus making the final decisions recognisable and acceptable by the parties. While Hague’s attempt at such unification is laudatory, the reason it being so recent in nature leaves an ample scope of its working to still be seen. Hence, in conclusion, the possible implementation and subsequent impact of such common international standards around the world will have to be monitored.

[1] Paras Diwan, Private International Law, Page no. 504, Edition : 4th ISBN 8171000495, 9788171000494 (1998), Delhi.

[2] UNIDROIT Principles [Available at: https://www.unidroit.org/index.php option=com_content&view=article&id=1485&catid=281&lang=en]

[3] Hague Conference on Private International Law, COUNCIL ON GENERAL AFFAIRS AND POLICY OF THE CONFERENCE, Conclusions and Recommendations adopted by the Council, April 8-10, 2014, para.2 (2014), available at http://www.hcch.net/upload/wop/genaff2014concl_en.pdf.

[4] Fluer Johns, “Performing Party Autonomy” (2008) 71:3 Law & Contemp Probs 243 at 249

[5]Andrew Dickinson, Third–Country Mandatory Rules in the Law Appli- cable to Contractual Obligations: So Long, Farewell, Auf Wiedersehen, Adieu?, 3 J. PRIVATE INT’L L. 53, 59 (2007)

[6] Andrew S. Bell, Forum Shopping and Venue in Transnational Litigation 15 (2003)

[7]Supra at 3

[8]Gilles Cuniberti, “The International Market for Contracts: The Most Attractive Contract Laws” (2014) 34:3 Nw J Intl L & Bus 455 at 466.

[9] Siegelman v. Cunard White Star Limited, 221 F.2d 189, 1955 U.S. Appellate Court

[10]Louis C James, “Effects of the Autonomy of the Parties on Conflict of Laws Contracts” (1959) 36:1 Chicago-Kent L Rev 34 at 45.

[11] Helena Carlquist, Party Autonomy and the Choice of Substantive Law in International Commercial Arbitration (LLM Thesis, Góteborg University, 2006) [unpublished] at 21.

[12]Friedrich Juenger’s letter to Harry C Sigman, reproduced in Patrick Borchers, “The Internationalization of Contractual Conflicts Law” (1995) 28 Vand J Transnat’l L 421 at 448.

[13] Maria Hook, The Choice of Law Contract (Oxford: Hart Publishing Co, 2016) at 45.

[14]Pamela Edwards, “Into the Abyss: How Party Autonomy Supports Overreaching Through the Exercise of Unequal Bargaining Power” (2003) 36:2 John Marshall L Rev 421 at 455.

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