New Private International Law Act modernizes rules for international contracts.

On November 17 Uruguay’s Parliament approved the Private International Law Act, stemming from a bill over ten years old. It will be applicable for contracts signed probably as of February or March of 2021, insofar as a 90-day term is provided for entry into effect following its publication in the Official Gazette, which will take place in the coming weeks.

The Act regulates issues relevant for Uruguayan companies engaging in international transactions and for foreign companies investing in Uruguay. In particular, it regulates the law applicable to the contracts executed and finally permits choice of law, as is the case practically worldwide for international trade matters. The new law will be applicable to contracts with companies in the vast majority of countries, including the United States, all of Europe, China, India and the rest of Asia.

The Act also covers other matters such as the law applicable to assets, credit rights, vouchers, checks and shares in corporations, among others. But undoubtedly the possibility of choice of law in international contracts is the most relevant provision.

Uruguay abandons a rigid system and moves to freedom of choice

The rigid and outdated rules set out in Uruguay’s Civil Code are repealed by the new law. Under the old rules—based on a 19th century treaty—applicable law was determined as fixed by the type of contract, depending on whether it was a contract governing “goods,” had a relationship with a particular place or where those goods were found, or where one party to the contract was domiciled. And the parties could not agree to choose any other governing law.

In normal trade transactions those rules were inadequate. In addition to being abandoned criteria—insofar as choice of law by the parties is the rule worldwide—they created confusion in establishing applicable law in contracts more modern than those foreseen in the 19th century. For example, franchise, distribution, technology transfer, intermediation, financing, some construction and services contracts in general, particularly those involving various parties domiciled in different countries or performance in diverse regions. It is often not even possible to identify a contract’s “principal obligation” and tie it to a place or a party as required by the rules in place to date. This uncertainty led at times not only to distrust (reinforced by the lack of local case law to point the way), but also to higher costs and delays in litigating disputes related to these contracts, involving additional pleadings and even making it difficult to know if they could be litigated in Uruguay or elsewhere.  

Arbitration will no longer be the only way to choose governing law

Prior to the recently approved Private International Law Act, the usual way to avoid these problems was to agree to arbitration, together with the clause choosing applicable law. This was possible under Law 19,636 on International Commercial Arbitration of 2018, and before that it was already considered possible based on the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, and other treaties to which Uruguay is a party.

This possibility, and particularly since approval of the Arbitration Law, made even clearer the incongruence of the Uruguayan system that permitted choice of law upon agreeing to arbitration, but not for litigation before ordinary courts. This inconsistency is resolved by the new law. 

What law can be chosen?

The parties are free to choose any national law, even if it has no connection with them or their contract. Also, although it will be less frequent, it makes it possible to choose uniform rules created by international organizations in which Uruguay participates and that reflect international trade usages. For example, the United Nations Commission for International Trade Law (UNCITRAL), the International Institute for the Unification of Private Law (UNIDROIT), and the Hague Conference.

The requirement for choosing a governing law is that the contract must be international, which under the Act is a broad concept. This happens when the parties have their residence or places of business in different countries or when the contract has relevant links to more than one country. The sole exclusion is entirely domestic contracts: transactions in the local market not involving international movement of goods or services, between local companies.   

In addition to choosing the applicable law, the parties can choose the country whose courts they want to litigate before, if the agreement is made in writing.

Contracts excluded

The Act excludes certain contracts for which choice of law does not apply, which will be subject to fixed rules established in this Act or other rules or treaties.

Excluded contracts are:

  • employment contracts (where the worker can choose to apply the law where he or she lives or works, or where the employer resides);
  • consumer contracts (governed either by the law of where the service is provided or contracted or where the consumer lives);
  • leases, sales, exchanges, mortgage, usufruct or similar agreements on real estate in Uruguay, for which local law is applicable;
  • insurance contracts, which are governed by law 19,678 (reinsurance contracts are not excluded);
  • maritime transport contracts, which are governed by a special law, 19,246; and
  • acts under family and succession law, such as wills, partitions, visitation, custody and alimony agreements, and prenuptial agreements.

There are also special rules for negotiable instruments (checks, vouchers, promissory notes) and for securities market trading. Negotiable instruments are governed by the law of their place of issuance and assets traded on securities markets by the law of their place of issuance or other place chosen.