Importance of ICC Model Contracts as Part of Soft Law
Introduction
By definition, soft law refers to generally established legal rules and principles that are not positive and not judicially binding. Soft law instruments are of a normative nature, and applied by voluntary acceptance. Within the framework of international commercial law, soft law instruments are observed within the sources of lex mercatoria which generally comprise, among others, the general principles of international contract law, trade usages and practices, international conventions, model laws, uniform rules, standard contract forms and clauses, codes of conduct and arbitral awards. Among these, many codified soft law instruments can be listed, such as Trans-Lex Principles, Unidroit Principles of International Commercial Contracts, UNCITRAL Model Law on International Commercial Arbitration, UN Convention on International Sales of Goods (“CISG”), INCOTERMS, URDG and, finally, International Chamber of Commerce (“ICC”) Model Contracts.
In the last decade, the ICC has conducted the drafting of various model contracts (“ICC Model Contracts”) for the purpose of adopting rules that reflect market practices, and provide user-friendly and balanced templates for users. Below, I will first briefly explain the concept of soft law as used in international commercial law, and then analyze the position of ICC Model Contracts therein.
The Concept of Soft Law under International Commercial Law
Definition. As defined above, soft law refers to a set of rules and principles that are non-binding, and whose normativity stems from their public acceptance. Generally, model laws, codification of custom and usage promulgated by international nongovernmental organizations, international trade terms, model forms and contracts, restatements by scholars and experts and international conventions, are instruments of soft law[i]. They become positive law either by courts, arbitral tribunals or legislatures adopting them, or the parties adopting them in their agreements. The international conventions will gain a binding character when the states ratify them.
History. Soft law has developed in three eras, the first of which is the Roman ius gentium, defined as the formally autonomous source of law regulating the economic relations between Roman citizens and foreigners[ii]. The second era of the soft law appeared in 11th century when lex mercatoria was deemed a body of merchant customs and practices[iii]. The last and third era began at late 20th century under the name of “the new lex mercatoria.”[iv] In this era, the global business community took over the legislative function (lex mercatoria) and the adjudicative function (international commercial arbitration)[v].
Sources and Features. The new lex mercatoria is more cosmopolitan and more diverse since it was created by wide variety of entities, such as public bodies or intergovernmental agencies and organizations (e.g. UNCITRAL, UNIDROIT, IMO), as well as private bodies representing the global business community. The ICC is one of the best examples in the global business community through its contributions to the development of lex mercatoria. The instruments put forward by the ICC fulfills two functions of the lex mercatoria, referred to, above: (i) the legislative function is achieved through instruments such as ICC Model Contracts, URDG, UCP 600, (ii) the adjudicative function comes in to play through arbitral awards given by the ICC Court of International Arbitration where the ICC Arbitration Rules are applied.
In general terms, the law is applied by the coercive power of the state. However, soft law poses a situation where such coercive power is nonexistent. Nevertheless, soft law possesses relative degrees of normative power. Such normativity has different sources[vi]:
- Voluntary development of doing business (usage, practice and norms) by merchants which are self-referential and self-enforcing
- Recognition of trade usages in court and arbitral decisions
- More universally accepted trade usage such as INCOTERMS 2010 and UCP 600
- Arbitral tribunals acting as users and developers of soft law
In order to promote their wide use, the drafting of specific types of contracts should be done in a neutral way, ideally by neutral business organizations like the ICC. The success behind the INCOTERMS and UCP lies within the fact that they were drafted in a neutral manner.
Ways of Use. Soft law instruments may be utilized in a number of ways, since they pose advantages over positive law instruments in terms of harmonization, and the lack of need for ratification. Among these, three are of particular significance. Firstly, the soft law instruments may be used to constitute a basis for further work, such as model laws. These model laws are intended to be the basis of adoption by individual jurisdictions (e.g. UNCITRAL Model Law on Arbitration or UNCITRAL Model Law on Electronic Commerce) and to set standards for legislation. These instruments are drafted to conform to the structural requirements of a treaty or a convention, in order to facilitate their transposition to legislation. On the other hand, certain soft law instruments are not intended for adoption by individual jurisdictions, such as the Unidroit Principles of International Commercial Contracts. These are drafted without any structural limitations[vii].
Secondly, soft law instruments may be used to guide arbitral tribunals. Principles and restatements are widely used as a basis for forging new legal rules or interpreting existing ones. Moreover, arbitral tribunals, which are generally not bound by domestic choices of law, often adopt legal rules, such as the Unidroit Principles of International Commercial Contracts, because of the presumed neutrality of these rules. Moreover, soft law is often a basis for gap fillers when the otherwise applicable international or domestic law does not address a specific question[viii].
Thirdly, parties may choose to adopt specific rules of non-binding instruments that become part of the parties’ agreements by express or implicit adoption. The reasoning behind this is that the parties believe that the rules provide a better reflection of their business relationship, that they are more neutral, and that soft law offers more predictability when compared to the parties’ domestic laws[ix].
ICC Model Contracts
Definition. As part of the legislative function of lex mercatoria as referred to, above, the ICC has drafted a number of model contracts in contribution to lex mercatoria. These Model Contracts are listed, below:
- ICC Model International Sale Contract; ICC publication no. 556;
- ICC Model International Franchising Contract; ICC publication no. 557;
- ICC Model Occasional Intermediary Contract; ICC publication no. 619;
- ICC Short Form Model Contract International Commercial Agency - Distributorship; ICC publication no. 634;
- ICC Model Commercial Agency Contract; ICC publication no. 644;
- ICC Model Distributorship Contract ; ICC publication no. 646;
- ICC Model Contract for the Turnkey Supply of an Industrial Plant; ICC publication no. 653;
- ICC Model Mergers and Acquisitions Contract I – Share Purchase Agreement”; ICC publication no. 656;
- ICC Model Selective Distributorship Contract; ICC publication no. 657;
- ICC Model Confidentiality Contract; ICC publication no. 664;
- ICC Model Turnkey Contract for Major Projects, ICC publication no. 659;
- ICC Model International Trademark License; ICC publication no. 673;
- ICC Model International Transfer of Technology Contract; ICC publication no. 674;
- ICC Model Subcontract; ICC publication no. 706;
- ICC Model Consortium Contract; ICC publication no. 779;
- ICC Model International Consultancy Services Contract, (in publication).
The most outstanding feature of the ICC Model Contracts is that they are not drafted to be imposed by one of the parties to the other party in a manner to restrict the freedom of will principle - they adopt the rules that reflect the market place. Thus, they must be distinguished from other contracts where one of the parties is economically and socially more powerful and manipulating the other party to its detriment. In this vein, the ICC Model Contracts are intended to help parties with equal bargaining power to negotiate a fair contract[x].
Features. ICC Model Contracts are drafted with a purpose to replace the choice between differing national legislations, which are often not adapted to the needs of international trade, by a detailed set of contractual provisions. Firstly, ICC Model Contracts are not based on a particular national law, but reflect the general principles of law and the trade usages. They give priority to the transaction and not to industry, meaning that they are not directed to parties who look for accommodating the specifics of their trade[xi]. Moreover, they are suitable for use in business to business (B2B) transactions, rather than business to consumer (B2C) transactions. To the extent necessary, the users are warned that for some specific issues, national laws may provide different solutions under their “protection of consumers regulations” applicable to the relevant type of contractual relations[xii]. Further, ICC Model Contracts are designed for international transactions, and the users are advised to take into account international character when used domestically.
Secondly, ICC Model Contracts eliminate the risk of application of insufficient national provisions. Many domestic laws lack rules for certain type of contracts (e.g. sole distribution, franchise, consultancy, etc.); therefore, ICC Model Contracts fill in this gap with the products of some of the finest legal minds in the field of international commercial law. Thus, inconvenience, or insufficiency of domestic rules for international transactions, ceases to be a problem. Moreover, they are drafted in a balanced way without favoring one or the other side of the transaction. It would be improper for the ICC, which represents all parties of international trade, to take sides. They are drafted to be fully altered and adapted to meet the situation in hand[xiii].
Thirdly, ICC Model Contracts are drafted in the most user-friendly manner. They all have a detailed “Introduction” part explaining to the users several important issues and characteristics of the contract. The “Body” of ICC Model Contracts invites the parties to agree to one of the stated alternatives, either by filling in a blank space on the contract, or by simply ticking a box. Such alternative solutions are presented side by side under the letters A and B, in order to point out that only one of them can apply. However, they also provide default solutions: If the parties do not make a choice by canceling one alternative, one of them will automatically apply. The appendices contain useful information, such as indications on national laws for a particular topic.
Important Provisions. There are several common provisions that are included in most of the ICC Model Contracts, such as notices, assignments, amendments, previous agreements, entire agreement, severability, etc. Moreover, ICC Model Contracts provide for a “Good Faith and Fair Dealing” provision, and a “Force Majeure” clause. Sometimes criticized for showing the obvious, I believe that the “Good Faith and Fair Dealing” provision reminds the parties of good faith and, therefore, is useful[xiv]. The “Force Majeure” clause is not provided for in all of the ICC Model Contracts; however, when it is provided, it is based on the ICC Force Majeure Clause, with the exception of the ICC Model International Sale Contract, which adopts a similar solution to the CISG. ICC Model Contracts offer either arbitration or jurisdiction of national courts as a method of dispute resolution. ICC arbitration is the default solution in the absence of choice, and the Model Contracts drafted after 2002 also provide for ADR in their dispute resolution clause. As for governing law, the parties are encouraged to refer to a-national rules. More recent models provide an applicable law cascade in the following order: the contract, the general principles of law, trade usages and Unidroit Principles. They also contain a warning for the mandatory or directly applicable provisions of the national laws.
Contribution to Lex Mercatoria and Soft Law. One of the main goals of the drafting of Model Contracts by the ICC is to contribute to the development of lex mercatoria. ICC Model Contracts form a uniform system of rules that are capable of becoming a further source for the lex mercatoria. Since frequent use of a ICC Model Contract could indicate a common understanding within the community of international merchants that certain standards have to be accepted for certain transactions, there is no doubt that the development of lex mercatoria would benefit greatly from it[xv]. Further, ICC Model Contracts contribute to the wider use of other forms of soft law instruments, such as Unidroit Principles, by promoting them to be chosen as governing laws.
Conclusion
It is an undisputed fact that ICC Model Contracts are part of the soft law. The ICC has been one of the forerunners among international nongovernmental organizations that aims to develop lex mercatoria through soft law instruments. Among many of these soft law instruments put forward by the ICC, ICC Model Contracts hold an important place with their well-balanced, user-friendly format, and their capability to reflect international practice.
[i] Gabriel, Henry Deeb, The Advantages of Soft Law in International Commercial Law: The Role of Unidroit, Uncitral, and the Hague Conference; Brook Journal of International Law, Vol. 34:3, p. 658.
[ii] Di Robiliant, Anna, Genealogies of Soft Law, the American Journal of Comparative Law, Vol. 54, No. 3, s. 518.
[iii] Di Robiliant, p. 519.
[iv] DiMatteo, Larry A, Soft Law and the Principle of Fair and Equitable Decision-making in International Contract Arbitration, The Chinese Journal of Comparative Law, 2013, p. 6.
[v] Di Robiliant, p. 524.
[vi] DiMatteo, p. 8.
[vii] Gabriel, p. 665-667.
[viii] Gabriel, p. 668.
[ix] Gabriel, p. 669.
[x] Erdem, H. Ercüment, ICC Model Contracts, Milletlerarası Ticaret Hukuku İle İlgili Makaleler, İstanbul 2008, p. 514.
[xi] Erdem, p. 516.
[xii] Erdem, p. 517.
[xiii] Erdem, p. 518.
[xiv] Erdem, p. 521.
[xv] Erdem, p. 517.
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