As promised, here is the first post in what I hope will be a short series of posts comparing the new Hague Principles on Choice of Law in International Commercial Contracts and the Restatement (Second) of Conflict of Laws. I had a pleasant surprise after noting the publication of the Principles last month: Marta Pertegás, the First Secretary of the Permanent Bureau of the Hague Conference, took an interest in the idea of the post. From this, Jonathan Levin, an NYU law student who is interning this summer at the Permanent Bureau, independently offered to conduct a comparative study for the purposes of these posts. I’ll publish his report with the last post in the series.

The first point on which we want to compare the Restatement and the new Principles is their scope of application. To what kind of contracts do they apply?

The Restatement

The Restatement applies to contracts, full stop. Comment a to § 186 reads: “The rule of this Section states a principle applicable to all contracts and to all issues in contract.” You can’t get simpler than that. There are no per se exclusions for narital contracts, consumer contracts, or any other kinds of contracts where you might think special rules should apply. That’s not to say, though, that the parties are equally free to choose a governing law in all cases. Mandatory rules of law will prevent them from doing so in many cases. (An employee in State A cannot contract to have his employment governed by the minimum wage law of State B, for example).

You might ask whether the Restatement is a good framework for dealing with international contracts, since most of the cases that cite the Restatement involve contracts where the conflict of laws is between the law of two US states rather than the US and another nation. Maybe a restatement of the law drafted primarily to deal with American conflict of laws cases founded on precedents from the age of railroads and telegraphs is not suited to international commerce in the age of FedEx and the Internet. Jonathan suggests that this question has some oomph behind it, and I’m sure he’s right. Just to play devil’s advocate, I will question whether there is much force to this objection. Perhaps the idea is that the variations in the law among US states is small compared to the variations in the law between countries. No doubt that is true for the most part (though bear in mind that the US and its territories includes civil law jurisdictions, namely Louisiana and Puerto Rico). But I am not sure I see why the magnitude of the differences between the laws of the relevant jurisdictions should bear on the rules that govern how the parties may go about selecting the law that governs. Perhaps the idea is the world is different in the twenty-first century than it was at the time the American common law of conflict of laws was being developed, so different principles are needed. This seems to have more force, though in principle, since the Restatement is just that—a restatement, not a statute—there’s no reason why courts can’t continue to develop the law in the framework of the Restatement to account for technological change.

The Principles

Under Article 1, the Principles apply to choice of law in

international contracts where each party is acting in the exercise of its trade or profession. They do not apply to consumer or employment contracts.

The Principles also expressly disclaim an intention to address the law governing (a) the capacity of natural persons, (b) arbitration and choice of court agreements, (c) “companies or other collective bodies,” and trusts, (d) insolvency, (e) the proprietary effect of contracts, and (f) whether an agent is able to bind a principal to a third party.

The limitation to contracts where the parties are acting in the exercise of their trades or professions is equivalent to excluding other common kinds of contracts that one would not expect to be governed by the Principles, e.g., marriage settlements, residential leases, and so forth.

All contracts are international “unless each party has its establishment in the same State and the relationship of the parties and all other relevant elements, regardless of the chosen law, are connected only with that state.” This method of defining the scope of the Principles should be familiar to US lawyers, since it is similar to how the FAA distinguishes international arbitration from domestic arbitration. 9 U.S.C. § 202 begins by asserting that all agreements to arbitrate in commercial matters fall under the New York Convention, but it then limits this general rule by creating an exception in cases exclusively between US citizens where there is, to put it loosely, no sufficient foreign connection (e.g., a requirement of performance abroad).

Note the use of the word “commercial” in the title of the Principles. This word was quite divisive in the negotiations. Speaking broadly, to many in Europe the use of the word “commercial” excludes consumer and employment contracts, since to them the word “commercial” implies a business deal among parties with roughly equal bargaining power. From the American perspective, on the other hand, the word “commercial” has no such connotation. A contract of adhesion, in the American way of looking at things, may still be “commercial.” But in the end the states participating in the negotiations reached a consensus in light of the fact that the term “commercial” had previously been used in UNIDROIT principles that had received wide support throughout the world.

Conclusion

As we have seen, the Restatement, on its face, has a broader scope of application than the Principles. But because under US law there will be cases in which the parties can’t choose the law as freely as they could in other contexts, I think that this apparently significant difference is conceptual but not necessarily substantive. The Principles prefer to set out their own limitations at the outset, in the manner of a statute. The Restatement sets out a general principle that then gets elucidated and refined by case law developments or in some cases perhaps by statute. That’s just common law 101!

Future posts will cover the substance of the freedom of choice provisions in the two texts, the requirement of a connection of the governing law with the underlying transaction, and most contentious of all (to me at least), the possibility of choosing non-national “rules of law” to govern.