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Choice of non-State Law in International Commercial Contracts: A New Zealand Perspective

By Jeanne-Marie Bonnet (LLB student at the University of Otago)

In early 2015, Members of the Hague Conference on Private International Law formally adopted their Principles on Choice of Law in International Commercial Contracts (the “Hague Principles”), a normative soft-law instrument designed to promote party autonomy in contracting relationships. As a normative instrument, the Hague Principles provide a blueprint approach to the proper law of contract through codifying general global practice and effectively equating arbitration and litigation proceedings. The Hague Principles propose pragmatic solutions to conflict of law issues through codifying international “best practice” for commercial contracts (see the foreword to the Hague Principles at 7).

Nevertheless, “best practice” may well be a judgment call with a distinctly European flavour (see Gilles Lhuilier “Les Principes sur le Choix de la Loi applicable aux Contrats Commerciaux Internationaux de la Conférence de La Haye: L’Emergence des ‘Best Practices‘” (2016) Int’l Bus. L.J. 103 at 103). The Hague Principles present an unprecedented approach to the selection of non-State law as the proper law in litigation. This approach has been heavily criticised for being uncertain, as well as creating potentially inconsistent outcomes when interacting with tacit choice of law and dépeçage (see Brooke Marshall “The Hague Choice of Law Principles, CISG, and PICC: A Hard Look at a Choice of Soft Law” (2018) 66 Am. J. Comp. L. 175 at 196-202). This post will focus generally on whether the possibility of selecting non-State law would be a worthwhile change to the New Zealand approach to the conflict of laws. It suggests that maintaining the status quo is likely the most desirable response in this case, given the novelty of the Hague Principles and the lack of precedent that exists regarding their interpretation and application.

1 Selection of non-State law
The New Zealand approach to proper law is summed up in Vita Foods Products Inc v Unus Shipping Co Ltd [1939] AC 277 (PC). Where party intention as to the proper law is bona fide and legal, and there are no public policy concerns as to the choice of law, the selected law shall govern the contract. Additionally, New Zealand has some overriding mandatory rules which curb party autonomy in choosing the proper law, such as s 137 of the Credit Contracts and Consumer Finance Act 2003.

Selection of non-State law as the proper law for litigation is globally unprecedented (see Marta Pertegás and Brooke Adele Marshall “Party Autonomy and its Limits: Convergence through the New Hague Principles on Choice of Law in International Commercial Contracts (2014) 39 Brook. J. Int’l L. 975 at 996). New Zealand recognises the ability of parties to select non-State law in cases of arbitration under the Arbitration Act, and also party ability to incorporate non-State rules into a bargain (see CMV Clarkson and Jonathan Hill The Conflict of Laws (4th ed, Oxford University Press, Oxford, 2006) at 209). Nevertheless, New Zealand shares in the global reluctance to recognise non-State rules as the proper law in litigation. This reluctance still exists, and is evident in the drafters of the Rome I Regulation rejecting non-State law as possible proper law to be selected by parties (compare Article 3 of the Rome I Proposal to Article 3 of the Regulation eventually adopted).

2 Article 3 of the Hague Principles
Article 3 proposes broader party autonomy in permitting the selection of non-State rules or principles as the proper law, effectively giving equal status to codified domestic law (“hard law”) and non-State law for the first time in cases of litigation

While there has been criticism that this broad drafting could lead to the selection of non-neutral laws such as sharia or halakha as the proper law, in my opinion this is unlikely given their continual rejection in current arbitration (see Michael Douglas and Nicholas Loadsman “The Impact of the Hague Principles on Choice of Law in International Commercial Contracts” (2017) 19(1) Melbourne Journal of International Law 1 at 9; Brooke Marshall “Reconsidering the Proper Law of the Contract” (2012) 13 Melbourne Journal of International Law 505 at 536; and Clarkson and Hill at 209). Furthermore, these laws may be too vague to fall within Article 3 requirements of being “generally accepted.”

Choice of codified soft law
The commentary to the Hague Principles gives examples of potential non-State law selections as including the United Nations Convention on Contracts for the International Sale of Goods (the CISG) and the UNIDROIT Principles of International Commercial Contracts (the UPICC). New Zealand, as a party to the Vienna Convention, adopted the CISG in 1995. Obligations under the Convention have already been domestically incorporated through schedule 4 of the Contract and Commercial Law Act (previously through the Sale of Goods (United Nations Convention) Act 1994), meaning that parties are already able to select the CISG as the proper law in commercial contracts. As such, this essay will focus on parties’ new options for selection of non-State law, in particular using the example of the UPICC. In my opinion, the main barrier to using instruments like the UPICC as the proper law is lack of precedent when interpreting and applying its principles.

The UPICC contain imprecise and abstract terms such as “reasonableness” and “good faith.” While not uncommon in contracts, there is no precedent as to how these terms (or any of the other rules contained in the UPICC) should be interpreted as the proper law in the context of litigated disputes. The uncertainty as to the meaning of these terms may well be part of the reason why the express example of allowing selection of the UPICC was rejected at the drafting stage of the Rome I Regulation, although it was left open for parties to incorporate some of these elements into their contracts (see Clarkson and Hill at 209).

A further issue with many of these terms is that they are previously unknown to, or not usually employed in, common law jurisdictions (or even non-French jurisdictions in general – see Michael Bonell “The Law Governing International Commercial Contracts and the Actual Role of the UNIDROIT Principles” (2018) 23(1) Uniform Law Review 15 at 22; and Ingeborg Schwenzer “Global Unification of Contract Law” (2016) 21 Rev. dr. unif. 60 at 67). In fact, the UPICC may not be a good fit with common law jurisprudence per se and have generally not been warmly accepted in the UK. For example, according to Hoffmann LJ in Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38 at [39], the UPICC rules are a reflection of the French philosophy of contract law rather than English (and therefore common law) values. Moreover, even the drafting style of the UPICC is a reflection of civil law rather than common law codes.

The use of UPICC as the proper law of a contract may therefore not align with the New Zealand common law context or ideals upheld in the domestic approach to the law of contract. The public policy exception will likely not be able to remedy unsatisfactory situations when New Zealand values are not given effect to in these cases, as the terms parties choose to govern themselves are unlikely to “shock the conscience” of a reasonable New Zealander (according to the test laid down in Reeves v OneWorld Challenge LLC [2006] 2 NZLR 184 at [67] and affirmed in New Zealand Basing Ltd v Brown [2017] NZLR 93 (CA) at [62]).

Furthermore, New Zealand courts would have limited access to precedent or interpretive resources since New Zealand is not a part of the UNIDROIT organisation and has not acceded to the UPICC. Even if New Zealand were a part of all the relevant organisations, if the UPICC were chosen as the proper law necessary precedent does not exist for New Zealand to look to in complex cases (see Geneviève Saumier “The Hague Principles and the Choice of Non-State Rules of Law to Govern an International Commercial Contract” 40 Brook. J. Int’l L. 1 at 26). Generally, the UPICC are used to orientate courts as to admissible practices in international commercial contracts. The New Zealand view on the UPICC is likely summed up in Hideo Yoshimoto v Canterbury Golf International Limited [2001] 1 NZLR 523 (CA), where they are viewed as simply a restatement of global practice and an interpretive tool for international commercial law instruments such as the CISG (see the comments of Thomas J at [89]). The UPICC were never intended to be anything more than a codification of the best approach to international contract law, and are therefore not equipped to act as the operative proper law. While a useful normative instrument (for example when reforming and drafting legislation) the UPICC are not suited to governing contracts.

Choice of non-codified soft law
The issues of precedent and interpretation are magnified in the context of non-codified non-State law. Despite the Hague Principles expressly giving examples of codified non-State law in the commentary to Article 3, the possibility remains for non-codified rules to be chosen by parties. Prima facie, a set of non-codified rules of law such as the lex mercatoria can meet the requirements of Article 3 through being a “neutral and balanced sets of rules” which are “generally recognised” in certain regions. However, in a New Zealand context this will likely be a step too far into legal uncertainty.

According to Roy Goode (in “Usage and its Reception in Transnational Commercial Law” (1997) 46 ICLQ 1 at 2), the lex mercatoria is “by nature uncodified, non-statutory and non-conventional.” Uncodified rules are necessarily less certain than codified non-State rules, since principles are difficult to clearly articulate and will likely vary in interpretation between jurisdictions. The difficulty with principles such as these is that they do not represent the commitment of institutions to promulgate specific, unambiguous and desirable behaviours or norms (Goode at 5). Codified rules find success through uniformity of approach. For example, the success of the CISG as a global instrument is largely due to global efforts and vigilance in maintaining uniformity of interpretation and application (see Larry DiMatteo “The Scholarly Response to the Harmonization of International Sales Law” (2012) 30 J.L & Com. 1 at 21). In contrast, non-codified soft law often develops spontaneously in an ad hoc manner. In my opinion, these characteristics make non-codified soft law too uncertain. They pose a great risk of producing inconsistent and unsatisfactory results. This risk is likely why even under the broad freedoms afforded by legislation such as the Rome I Regulation, parties are prohibited from selecting uncodified principles such as the lex mercatoria.

Saumier (at 28-29) argues that there is minimal risk in adopting this broader freedom for party autonomy, and that courts will be well-equipped to deal with this additional aspect in contracting disputes. This argument may well be stronger in a common law context, where courts frequently deal with uncodified principles of law. However, despite New Zealand courts often dealing with unwritten rules, in my opinion they are not well-placed to deal with principles such as the lex mercatoria. Principles such as the lex mercatoria develop less gradually or predictably than case law precedent, meaning that experience in interpreting an evolving common law is not directly applicable or helpful. Selection of non-codified non-State law would therefore be an added complication to the complexity of conflict of law disputes which New Zealand may not be well-suited to deal with.

3 General fit within New Zealand conflict of laws
In order for adoption of the Hague Principles to be worthwhile, the potential uncertainty that Article 3 would introduce into the legal system must be offset by advantages. Besides giving greater effect to party autonomy, in my opinion it is difficult to see any benefit this selection of proper law would bring to the New Zealand jurisdiction. New Zealand would likely only adopt the Hague Principles in order to bring the domestic approach to conflict of laws into alignment with that of other nations, and as such any inconsistencies with the selection of non-State law would be counter-balanced with benefits of a global harmonised approach to private international law.

However, in my opinion there is little reason to believe that this harmonisation would occur. In the short term, New Zealand’s law will only be analogous with that of Paraguay (Paraguay is the only country that has yet adopted the Hague Principles, using them largely unchanged as a basis for their new law on international contracts: see Ley No. 5393 sobre el derecho aplicable a los contratos internacionales, enero 20, 2015, GACETA OFICIAL DE LA REPUBLICA DEL PARAGUAY [G.O.] 13 (2015)).

In the longer term, even if the Hague Principles were to be widely adopted, in my opinion complete harmonisation is unlikely to occur. As already mentioned, part of the success of the CISG is that the Convention’s application and interpretation is vigilantly watched over by various bodies to maintain consistency and uniformity. This is only possible because of the CISG’s status as a convention (see Schwenzer at 74). The Hague Principles were never designed to have this status since their purpose is only to provide a blueprint of desirable commercial practice. Therefore, over time if States were to domestically adopt parts of the Hague Principles, this incorporation would only result in a harmonised approach across jurisdictions for a very brief and limited time. Eventually, divergence in interpretation and application would occur, since there is no mechanism for ensuring a consistent, rigid and unified approach to and application of the Hague Principles. The Hague Principles would be subtly changed by State courts through continual interpretation within existing jurisdictional and structural norms, leading to greater fragmentation of international contract law rather than harmonisation (see Schwenzer at 70-71).

Allowing selection of non-State law as the proper law would also mean that New Zealand must abandon well-established conflict of laws precedents in the area of contract law. New Zealand already derives much of its approach to issues of private international law from its common law neighbours. Given that New Zealand has never been a pioneer in this area, in my opinion adoption of the Hague Principles’ broad approach to party autonomy is likely a step too far into legal uncertainty.

4 Conclusion
Currently, selection of proper law in New Zealand must be legitimate, in good faith and legal. At first glance, the Hague Principles’ promulgation of the ability to select non-State law as the proper law does not undermine these principles. Non-State law can be all these things. However, the ability to select non-State law as the proper law introduces great uncertainty into the New Zealand conflict of laws setting.

The step towards allowing non-State law to govern litigated disputes will force New Zealand to develop precedent, given the absence of available interpretive resources and sources of authority to draw on. Moreover, given that New Zealand is not often a forerunner in the field of private international law, it may not be beneficial for New Zealand to adopt this approach and “fly blind” into the judicial future. In fact, in light of the judicial tendency noted by Petra Butler (in “CISG and International Arbitration – A Fruitful Marriage?” (2014) 17 Int’l Trade & Bus. L. Rev. 322 at 356) of courts to ignore the international element in uncertain or difficult cases and favour domestic law, blindly attempting to navigate the unchartered waters of the Hague Principles without precedential guide may lead to undesirable developments in the New Zealand conflict of laws context. This is a real risk given that the Hague Principles are so new and there is almost no precedent as to their use, scope and interpretation.

Given the increased internationalisation of global commerce, the goal of the Hague Principles in harmonising international commercial contracting is likely necessary and appropriate. However, for New Zealand, Article 3 presents a stark change to the proper law’s status quo. Moving forward, the most appropriate response is likely a cautious one. In my opinion, it would be best to observe the adoption of the Hague Principles in other common law jurisdictions before following suit.

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