6. Contract Lex design. Questions of commonweal

The virtues of freedom of contract are acknowledged in this paper in that they allow the international business community to structure their business relationships to suit their requirements, and as such reflect the needs and working of the market economy. However, it is instructive also to explore the limits of the principles: freedom of contract, pacta sunt servanda and caveat subscriptor. These principles are based on free market arguments that parties best understand their interests, and that the contract they arrive at will be an optimum compromise between their competing interests. It not being for an outsider to regulate or evaluate what a party of their own free will and volition has gained from electing to contract on those terms. This approach to contract is adversarial, based on the conflicting wills of the parties, achieving a meeting of minds. It imposes no duty of good faith and fair dealing or of loyalty (including the disclosure of material facts) upon the contracting parties to one another, who are to protect their own interests. However, in international commerce, this demand can be more costly, and may have a negative and restrictive effect. Also, although claimed to be neutral in making no judgement as to the contents of a contract, this claim can be misleading.

6.1. The neutrality of contract law and information cost

The information problem is a general one that needs to be recognised in its various forms where it arises and addressed where possible.

Adherents to the caveat subscriptor model, point to the fact that parties have conflicting interests, and should look out for their own interests. However information presents particular problems which are exacerbated in international commerce. ³⁹ As Michael Trebilcock put it: “Even the most committed proponents of free markets and freedom of contract recognise that certain information preconditions must be met for a given exchange to possess Pareto superior qualities.” ⁴⁰ Compared with domestic transactions, the contracting parties are less likely to possess information about each other or of what material facts there may be within the other party's knowledge, and will find it more difficult and costly to acquire. With resource inequalities, some parties will be in a much better position to determine and access what they need to know, the more so as the more information one already has, the less it costs to identify and to obtain any additional information that is required. ⁴¹ The converse lot of the financially weaker party, makes their problem of high information costs (both actual and relative), near insurmountable. Ignorance may even become a rational choice, as the marginal cost of information remains higher than its marginal benefit. “This, in fact is the economic rationale for the failure to fully specify all contingencies in a contract.” ⁴² The argument is tied to transaction cost and further elucidates a general role played by underlying default rules and principles. It also extends further to the value of immutable principles that may help mitigate the problem in some circumstances. More general arguments are presented below.

6.2. Justifying mandatory loyalty principles

Given the ability to create alternative solutions and even an independent lex a question that arises is as to what limits if any should be imposed upon freedom of contract? What protective principles are required? Should protective principles be default rules that can be excluded? Should they be mandatory? Should mandatory law only exist at the level of municipal law?

A kernel of mandatory protective principles with regard to loyalty may be justified, as beneficial, and even necessary for “IoL” to be acceptable in international commerce, in that they (on the balance) reflect the collective needs of the international business community. The present author is of the opinion that the duties of good faith and fair dealing and loyalty (or an acceptable equivalent) should be a necessary part of any attempt at the self-legislation or institutional legislation of any contract regime that is based on “rules and principles” (rather than a national legal order). If absent a requirement for them should be imposed by mandatory international law. Such protective provisions are to be found within the PICC and PECL. ⁴³ As regards PICC *(a)* The loyalty (and other protective) principles help bring about confidence and foster relations between parties. They provide an assurance in the international arena where parties are less likely to know each other and may have more difficulty in finding out about each other. *(b)* They better reflect the focus of the international business community on a business relationship from which both sides seek to gain. *(c)* They result in wider acceptability of the principles within both governments and the business community in the pluralistic international community. These protective principles may be regarded as enabling the PICC to better represent the needs of the commonweal. *(d)* Good faith and fair dealing ⁴⁴ are fundamental underlying principles of international commercial relations. *(e)* Reliance only on the varied mandatory law protections of various States does not engender uniformity, which is also desirable with regard to that which can be counted upon as immutable. (Not that it is avoidable, given that mandatory State law remains overriding.) More generally, freedom of contract benefits from these protective principles that need immutable protection from contractual freedom to effectively serve their function. In seeking a transnational or non-national regime to govern contractual relations, one might suggest this to be the minimum price of freedom of contract that should be insisted upon by mandatory international law, as the limitation which hinders the misuse by one party of unlimited contractual freedom. They appear to be an essential basis for acceptability of the autonomous contract (non-national contract, based on agreed rules and principles/ “IoL”). As immutable principles they (hopefully and this is to be encouraged) become the default standard for the conduct of international business and as such may be looked upon as “common property.” Unless immutable they suffer a fate somewhat analogous to that of “the tragedy of the commons.” ⁴⁵ It should be recognised that argument over the loyalty principles should be of degree, as the concept must not be compromised, and needs to be protected (even if they come at the price of a degree of uncertainty), especially against particularly strong parties who are most likely to argue against their necessity.