The traditional regulatory system is replaced by soft law

International business, finance and other business transactions are increasingly conducted effectively under soft law rules, and non state rules may be ambitious or reflect best practices, but have not yet been legally enforced. Some believe that the traditional regulatory system is gradually being replaced by soft law. Part of the appeal of soft law is that it does not require government confirmation or consent, thus providing rules of conduct when treaty making fails.

However, the impossibility of soft law enforcement will bring uncertainty. In order to improve predictability, I recently proposed innovative use of soft law in article leangues: as a set of rules to choose all or part of the governing law as a commercial contract. If respected, this use of soft law would be transformative, allowing it to be enforced by the parties and providing flexible and practical options for treaty making.

As mentioned below, whether the parties should have the contractual right to choose soft law as the governing law is largely a matter of first impression. This paper uses the language that most legal scholars and lawyers should be able to use to analyze this right and avoid accumulating opaque legal choice jargon over time.

Historically, the contract right to choose soft law as the governing law is confined to arbitration in a narrow sense The Uniform Commercial Code (UCC) provides the closest non arbitration precedent to the United States, allowing the parties to change their provisions by selecting soft laws or trade codes (such as uniform customs and Practice for documentary credits) issued by intergovernmental bodies (such as UNCITRAL or UNIDROIT) The Hague principles of choice of law in international commercial contracts also support the right of parties to choose soft law rules, which are generally regarded as a neutral and balanced set of rules at the international, supranational or regional level. But these precedents are very limited The language of UCC is at best ambiguous and covers the choice of law, while the Hague principle itself is only expressed as non binding soft law. In addition, these precedents strictly limit the origin of soft law (the Rome I regulation, which established the EU conflict of laws rules, initially proposed that parties should choose some limited, internationally recognized soft law rules as governing law; however, the proposal was not adopted in the end.)

The analysis starts from examining the basic basis of legal choice, which focuses on the autonomy of political parties. It also studies the right to choose soft law from a broader perspective of contract freedom. Finally, it asked whether the government’s interest in ensuring legal enforcement should limit the right to choose soft law. The conclusion of this analysis is that if the following conditions are met, mature parties to commercial contracts should have the right to choose soft law as their governing law in whole or in part: (a) choosing soft law will not produce significant externalities or social welfare. This choice may go beyond these externalities; (b) soft law is clear and understandable; and (c) soft law has legitimacy because it is generally accepted, promulgated or apparently fair by respected independent and impartial organizations.

The clause then considers another analytical framework: the incorporation of soft law into business contracts by reference only. Incorporation by reference is not a choice of law rule, but shorthand cut and paste drawing technology. The article holds that if, in addition to selecting the conditions for the legality of soft law, a party to a commercial contract that meets the mature conditions should have the right to incorporate soft law into its contract by reference.

Therefore, it is much easier to incorporate the soft law into the contract by reference than to choose the soft law as the governing law. However, in theory, because incorporation by reference must comply with the mandatory rules applicable to local laws, its effect is not as effective as the choice of law. However, the article shows that the choice of law itself is subject to mandatory rules of local law and that there is usually no difference between these categories. In addition, parties to a business contract may not want to violate any of the mandatory rules for reputation and other reasons.

Finally, the article applies its legal choice and reference consolidation framework to the model law on sovereign debt restructuring issued by independent nonpartisan think tanks as an example of soft law. The application showed that the inclusion of the model law as a reference in a new sovereign debt contract should be as effective as the choice of the model law as the governing law for the contract, and might be easier to implement. However, there may be problems in incorporating the model law by reference into existing sovereign debt contracts, as the vast majority of votes in the model law would violate contracts requiring unanimous agreement to change key terms such as principal, interest rate and term. Although the issue of interpretation of the contract is ultimately involved, a unanimous vote of the parties is likely to be required to modify the consensus requirement for incorporation by reference into the model law. On the contrary, the parties to existing sovereign debt contracts can choose the model law as part of the contract with the governing law by any necessary majority (i.e. non unanimous) vote, usually allowing changes to the governing law.

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