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1.1 Scope of this Book

With the increasing globalization of markets, cross-border contracts are becoming a common practice for most traders (as well as for the lawyers assisting them). At the same time, however, international contracts are still considered to be a difficult and mysterious subject.

This is especially true for business people, to whom the basic notions of contract law, and particularly those concerning cross-border contracts, are unknown; but also for lawyers who do not have specific experience in cross-border transactions, who may find it difficult to deal with a number of rather sophisticated issues which normally do not arise when dealing with domestic matters. Examples are the choice of the applicable law, the choice of jurisdiction and/or international arbitration, the use of more “international” drafting techniques, etc.

The main purpose of this book is to give the reader a comprehensive view of the principles that govern cross-border contracts, so that he can situate the various issues in their right context and take the most appropriate decisions, possibly with the assistance of a lawyer having specific experience in the field of international contracts.

1.1.1 The addressees: traders and non-specialized lawyers

This book will describe the basic principles of the law of international contracts so that non-specialists (traders or domestic lawyers without expertise in international contract law) can gather a better understanding of the problems they are facing in such a context.

In fact, one of the main difficulties for those who deal with international contracts, without having specific legal expertise in this field, is the lack of information about the rules and principles that govern cross-border contracts. Without the knowledge of a number of basic principles of international trade law, it is very difficult to understand what is going on when certain legal issues are raised and, consequently, to decide which actions should be taken.

This is particularly true for traders, who can avoid a number of pitfalls if they have learned to understand some major issues in international contract law.

A few examples can be helpful to support the above view.

Example 1-1 – Reacting to a claim brought before a foreign court

Mr François Dubois, a French manufacturer of painted tiles, is notified by a Polish customer of a claim before the courts of Warsaw for defectiveness of the goods and pretended damages suffered by the purchaser. The exporter contacts a lawyer from the buyer’s country who advises him to defend himself before the court in the customer’s country. In the course of the proceedings difficulties arise. The seller knows that the alleged defects are not his responsibility, but language and communication problems make it difficult to prove his case before the court. When the court decides against the seller and awards damages to the purchaser, Mr Dubois discovers that he could have objected to the jurisdiction of the Warsaw court and that he lost that possibility by defending himself before this court without raising the exception.

Comment: It is rather common that a local lawyer — not specialized in international trade law — will not consider raising the question of a possible lack of jurisdiction of his country’s courts. If Mr Dubois had known that under the EU jurisdiction rules Regulation No. 1215/2012, infra, § 5.2.1), one must, in principle, claim before the defendant’s courts and that exceptions to this principle are limited, he could have insisted on this point with the local lawyer, or could have requested the advice of an expert.

The above example shows how a better understanding of the basic principles of jurisdiction in the EU would have given the exporter a chance to avoid a wrong decision. Of course, the businessman will not be in a condition to verify (without the advice of a lawyer) if the jurisdiction of the foreign court can actually be avoided in the specific case, and whether this would be the most appropriate solution. But if he knows that this is a critical issue, he will be aware that the strategy proposed by the local lawyer should be verified by an expert.

Example 1-2 – Excluding the indemnity due to a foreign agent

A foreign principal made clear, before appointing an agent in Germany, that he did not want to pay an indemnity when the contract terminated. The German agent convinced the principal to put a clause in the contract stating that German law would govern the relationship, and agreed at the same time in the contract that no compensation would be due in case of termination. The parties signed the contract on the assumption that no goodwill compensation would be due at contract termination. When the case was brought to arbitration, the arbitrator decided that, since German law was applicable, and since under German law the termination indemnity cannot be excluded contractually, the goodwill compensation was due. (ICC arbitration case No. 8161/95).¹

Comment: If the principal had been aware that one cannot exclude the application of mandatory rules of the law that governs the contract (infra, § 2.6.3.1), and that consequently the clause excluding the right to indemnity would be ineffective, he could have looked for a different solution or, if this were impossible, he could have considered the indemnity in the calculation of his costs when negotiating the contract.

This second example shows how important it is for those who negotiate cross-border deals to understand the basic principles of the law of international contracts. Of course, this knowledge will not be sufficient when looking for an alternative solution, for which the assistance of a specialized lawyer will be required. But here too, the businessman will be in a far better position if he has some general ideas about the possible alternatives such as the choice of another law or a change of the economic balance (for instance by reducing the commission), although he will need to verify this with the assistance of an expert.

It can therefore be concluded that it is essential, especially for the non-lawyer who negotiates international contracts, to understand, even if only in general terms, the basic legal principles which apply in such a context. This will allow him to avoid clearly wrong decisions and will help him identify dubious situations where he will need to seek additional advice.

1.1.2 Issues not covered

This book deals with the legal aspects of negotiating and drafting international commercial contracts and related matters (such as jurisdiction and arbitration).

It does not cover other aspects of the law of international trade, such as the commercial relations between states (GATT, WTO, anti-dumping, etc.), rules regarding transport of goods, international financing, foreign investments, etc. For a more comprehensive view of the various issues relating to export trade, see ICC Guide to Export-Import Basics, ICC Publication 641.

1.2 International and Domestic Contracts: Main Differences

In the case of contracts between companies from the same country (domestic contracts) the rules governing the contract are those contained in the national law of the parties and the courts having jurisdiction in case of a dispute will be those of that country. But when the contract is “international”, the situation becomes much more complicated.

Which law will apply to the contract? The domestic law of one of the parties? The law of another country? International conventions? Trade usages? Transnational rules of law not belonging to a domestic legal system?

Moreover, in case of a dispute, which court will have jurisdiction? The courts of the seat of the claimant? Or those of the defendant? Or an arbitral tribunal?

These and other problems, which do not arise (or are less critical) in a domestic context, are typical of the issues which must be dealt with in cross-border contracts. While in domestic trade there is a clear legal framework applicable to the contract, in international trade the rules to be applied will be different from case to case, according to the laws that have a connection to the specific case.

Thus, the absence of a uniform and foreseeable legal framework makes the negotiation of international contracts considerably more complicated: when drafting a cross-border contract, a variety of alternatives must be taken into account which need not be considered within a purely domestic framework.

Of course, the problem of dealing with these issues is not new; international trade has existed for centuries, and traders have always been obliged to deal with them. However, while in the past the problems had to be faced by a relatively small group of specialized undertakings involved in international trade, who had developed specific skills in the field, in recent times cross-border transactions have become the day-to-day business for a growing number of companies. This is particularly the case in the European Union, where goods and services circulate freely within a common market while the rules governing contracts are still contained in domestic laws that differ from country to country.

This is why the law of international contracts has become more important, both for traders and their lawyers.

1.3 The Basic Issues: Applicable Law and Jurisdiction

As noted, the two main issues arising with respect to cross-border contracts are those regarding the applicable law and jurisdiction. These arise due to the absence of an adequate legal framework for cross-border transactions.

While traders of the same country can make reference to the rules of their domestic law, known by both of them (or at least by their lawyers), and to a court system for resolving possible disputes they are familiar with, parties from different countries cannot count upon a common legal framework.

There is at present no law of cross-border contracts placed above the domestic legal systems, to be applied when a contract is international, nor is there a common judicial system for international trade as an alternative to the domestic courts.

All of this gives rise to an unsatisfactory situation, which the parties try to overcome through a number of devices that characterize the law of international contracts.

1.3.1 Applicable law

In principle, international contracts are governed by the domestic rules² (national law) of one of the countries involved.³

• Such rules — normally intended to govern domestic relations — will often be inappropriate for an international transaction: they normally reflect a “local” view of the relevant legal issues which does not necessarily correspond with the way the same problem is seen in the context of international commerce.

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• Moreover, the application of a national law — which will almost always be the law of the country of one of the parties — tends to create an unbalanced situation by giving one party the advantage of applying its own rules.
• Finally, if the parties have not made an express choice of the applicable law in their contract, it may be difficult to foresee which law will actually apply, since the rules that determine which law is the proper law of the contract rarely provide clear and definite answers.

1.3.2 Jurisdiction

In case of a dispute, the parties must in principle (unless they choose international arbitration) have recourse to the domestic courts of one of the countries involved and, if the judgment must be enforced in another country, they must obtain its recognition in that country. The courts will apply rules of procedure peculiar to their own country, which will often be surprising to a foreign party; the judges will all be nationals of the country of the court, and the only admissible language will be that of this country.

All of this makes litigation more difficult and onerous, particularly for the party that needs to appear before a foreign court; and if a party is able to bring the claim before its own courts, it will thereafter need to enforce the judgment before the courts of the other party’s country, which implies a double proceeding.

1.3.3 Conclusion

The above problems would not exist if there were a special legal system for international contracts with uniform rules automatically applicable to all cross-border contracts and supra-national courts having jurisdiction over cross-border disputes and whose judgments would be effective all over the world. Although businesspeople at times wrongly assume that such a supra-national legal system exists (because they cannot believe that such a logical solution has not yet been put in place), this is unfortunately not the case.

As discussed later, some important attempts have been made to overcome these problems, for example by creating uniform laws on certain international contracts,⁴ by facilitating the recognition and enforcement of foreign judgments⁵ and especially by favouring in various ways international arbitration.⁶

In any case, the above efforts are not sufficient, and the fact remains that the present legal framework, based on a variety of diverging domestic systems of law, does not offer an adequate environment for international contracts, and consequently obliges traders (and their legal advisors) to look for solutions that can nevertheless provide a reasonable degree of certainty and predictability.

1.4 The Central Role of the Contract

If businesspeople engaged in international trade (and the lawyers assisting them) have been able to overcome, to a great extent, the difficulties described above, this is mainly because they have found a way to fill the gaps in the system through recourse to party autonomy, i.e. to the freedom to establish the rules governing their relations, a freedom recognized in most modern systems of law.

In other words, in the absence of a uniform and foreseeable legal environment, parties tend to create such a framework by making an extensive use of their freedom of contract.

1.4.1 The various aspects of party autonomy (contractual freedom)

Since the legal framework of international contracts is uncertain, parties will, as far as possible, work out contractual solutions that can increase certainty and [Page15:]predictability by choosing the applicable law, by determining in advance the way to solve possible disputes and by defining in detail in the contract their rights and obligations.

The main aspects of party autonomy relevant for international contracts are the following:

• the parties can choose the domestic law (or, in certain cases, a system of “a-national” rules) governing their contract;
• the parties can decide which institution (arbitral tribunal or state court) will deal with possible disputes arising between them;
• the parties can determine the specific contents (clauses) of their contracts and so establish a set of rules appropriate to their needs.

Through these means, the parties can overcome many of the obstacles arising from the absence of a uniform and global legal environment: they will try to submit the contract to a system of law acceptable to both of them; they will negotiate “neutral” solutions for solving possible disputes; they will work out contracts that reflect the standards used by business in the global market more than those typical of a specific country.

1.4.2 The parties’ contractual freedom is not unlimited

However, the parties’ freedom of contract is not absolute. In all legal systems there are mandatory rules that limit the parties’ autonomy in order to prevent the exercise of their contractual freedom from conflicting with other interests at stake.

As discussed in detail later, a choice of law which would deprive a party of the protection granted by its domestic law may, under certain circumstances, be ineffective;⁷ or it may be that the jurisdiction of a given court cannot be lawfully excluded through the choice of other courts; or that certain contractual provisions agreed by the parties are not effective because they conflict with mandatory rules of the applicable law.

Among the main issues one must consider when negotiating and drafting international contracts are precisely those regarding the use of party autonomy and its limits, which implies the need to:

(1) identify the sphere within which party autonomy can be effectively exercised in the specific case when choosing the applicable law or jurisdiction and when determining the contents of the contract, and

(2) identify the contractual solutions appropriate for the best protection of the interests of each party.

The first issue is concerned with the main points dealt with in this book, i.e. the extent of the parties’ freedom:

• to choose the applicable law (see Chapter 2);
• to determine the jurisdiction of national courts or arbitration (see Chapters 3-5); and
• to identify the various limits that parties encounter when determining the contents of their contract.⁸

The second issue, i.e. the identification of the most appropriate contractual solutions, which combines legal and “business” considerations, will be examined in the context of the various types of contracts (Chapter 7).

1.5 The Role of the Lawyer Dealing with International Contracts

As noted before, in the context of international contracts the focus is placed mainly on contractual solutions (e.g. choice of law and jurisdiction, setting up of clauses regulating the various substantial issues) to be decided and worked out by the parties [Page16:](and their lawyers). This implies that the lawyer dealing with international contracts must be prepared to play a role that is not the usual one (at least not in jurisdictions where lawyers act mainly as litigators).⁹

While the traditional lawyer (and particularly the lawyer specialized in litigation) is used to dealing with pre-defined situations (the facts giving rise to a dispute), and his task is mainly to search for rules and arguments which can solve the dispute to the advantage of the party he is representing, the lawyer who has to draft and negotiate a contract (particularly an international contract) has a more creative function. His main role is to propose and work out contractual solutions that can suit the interest of the party he represents and which, at the same time, must be effective under the laws that may apply to the contract. This has two important consequences.

First, the task of the “contract lawyer” is to create legal rules (by working out contractual clauses) rather than to develop arguments in support of a certain legal thesis. In other words, the “contract lawyer” has to draft his own rules instead of arguing about existing rules (as the “litigation lawyer” normally does). This implies recourse to techniques — the drafting of contractual provisions — that are less developed in countries where lawyers mainly deal with litigation.

Second, drafting contract clauses necessarily involves the need to consider the commercial implications of a given solution, as well as the legal ones. A clause in a contract cannot be considered to be good or bad from a strictly legal point of view without considering, at the same time, its commercial implications. And often the best possible clause will be a compromise between the requirements of legal safety and commercial feasibility. But this necessarily implies that the lawyer cannot do a good job without understanding the commercial background, and that he needs to work in close cooperation with those who have to take the business decisions.

All of this has led lawyers dealing with international contracts to develop a different attitude towards their clients (or the company they work for, if they are in-house lawyers). They are far more interested in understanding the commercial framework of the contract and cooperating closely with the persons responsible for the business decisions in order to work out contractual solutions that address, as much as possible, the business needs of their clients. And when the solution required by the management conflicts with legal rules, the lawyer — who should be involved from the very beginning — will not limit himself to saying that the proposed solution is unlawful, but will try to find out if there are alternative options whereby the same result (or a similar result) can be obtained without breaching the law.

1.6 Main Organizations Active in International Commercial Law

Before approaching the specific issues regarding the negotiation and drafting of cross-border contracts, it may be useful to conclude this introductory chapter by giving a short overview of some of the main institutions active in the field of international commercial law. Considering the subject matter of this book, I will concentrate on the organizations that play a significant role in establishing legal rules applicable to international contracts.

1.6.1 The United Nations Commission on International Trade Law (UNCITRAL)

The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly of the United Nations in 1966. The Secretariat of UNCITRAL is in Vienna, Austria, www.UNCITRAL.org.

The main purpose of UNCITRAL is to reduce and remove obstacles to international trade resulting from disparities in national laws by furthering the progressive harmonization and unification of the law of international trade.

UNCITRAL has played a substantial role in preparing the United Nations Convention on Contracts for the International Sale of Goods – CISG (Vienna 1980), the Convention on [Page17:]the Limitation Period in the International Sale of Goods (New York, 1974) and the United Nations Convention on the Carriage of Goods by Sea, 1978 (the “Hamburg Rules”).UNCITRAL has also been actively involved in the field of arbitration and conciliation. In 1976, it approved the UNCITRAL Arbitration Rules, a set of rules frequently used in the context of ad hoc arbitration. A new, revised version, has been published in 2010. In 1980 UNCITRAL established a set of conciliation rules for parties wishing to settle their commercial disputes amicably.

Another important achievement in this field is the UNCITRAL Model Law on International Commercial Arbitration, designed to assist states in reforming and modernizing their laws on arbitral procedure to take into account the particular features and needs of international commercial arbitration. The Model Law has been enacted into law by a large number of countries. UNCITRAL is also promoting the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

UNCITRAL’s other fields of activity include public procurement and infrastructure development, construction contracts, international payments, electronic commerce and cross-border insolvency.

UNCITRAL has also established a system for collecting court decisions and arbitral awards relating to the conventions and model laws it has worked out thus facilitating the circulation of case law regarding international uniform rules.

1.6.2 The International Chamber of Commerce

The International Chamber of Commerce (www.iccwbo.org), founded in 1919, is the principal organization representing the interests of business worldwide.

ICC plays an important role in establishing rules and standards for international trade. These rules, which have no binding force as such, have nevertheless become international standards due to their wide acceptance by the business world. They include, for example, the following:

• Incoterms® 2010, a set of international trade definitions (FOB, CIF, CCP, etc.) which have become the standard in international trade, used all around the world;¹⁰
• The ICC Uniform Customs and Practice for Documentary Credits (UCP 600), the rules generally applied by banks dealing with documentary credits;
• The ICC Force Majeure Clause 2003 and the ICC Hardship Clause 2003.

ICC has also drawn up and published several model contracts for use in international trade, some of which can be found in Chapter 7.

ICC also offers dispute resolution services through the International Court of Arbitration (www.iccarbitration.org/), the leading organization in the field of international commercial arbitration (see § 4.2.4).

1.6.3 The International Institute for the Unification of Private Law (UNIDROIT)

The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization with its seat in Rome. Its purpose is to study needs and methods for modernizing, harmonizing and coordinating private and commercial law between states.

UNIDROIT has drawn up several international conventions establishing uniform laws of great importance for the law of international contracts, for example:

• The 1964 Hague Conventions on the International Sale of Goods and on the Formation of Contracts of Sale. These two conventions have been the basis for the United Nations Convention on the International Sales of Goods, which has replaced them.
• The 1988 UNIDROIT Convention on International Financial Leasing (Ottawa).
• The 1988 UNIDROIT Convention on International Factoring (Ottawa).

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A very important achievement of UNIDROIT is the set of Principles on International Commercial Contracts (UNIDROIT Principles), a “restatement” of the law on contracts, which is becoming a powerful instrument for the development of international commercial law, as we will see hereafter (infra, § 2.8.2).

1.6.4 The Hague Conference on Private International Law

The Hague Conference on Private International Law is an intergovernmental organization whose purpose is to work for the progressive unification of the rules of private international law. Its principal activity is to draft multilateral conventions in the different fields of private international law.

The Hague Conference has adopted several conventions in the field of private international law. Among those of particular interest for international contracts, the following should be mentioned:

• The Convention of June 1955 on the Law Applicable to International Sales of Goods;
• The Convention of 14 March 1978 on the Law Applicable to Agency;
• The Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters.

On 30 June 2005, the Hague Conference adopted the Convention on Choice of Court Agreements which, if ratified by many countries, is likely to become an instrument of substantial importance for facilitating international trade. The aim of the convention (which will be examined in more detail in § 5.2.3) is to make exclusive choice of forum agreements as effective as possible and to warrant recognition and enforcement of judgments made by the courts agreed upon by the parties. At present the Convention has been ratified by the EU, Mexico and Singapore.

The Hague Conference has approved on 19 March 2015 the “Hague Principles on the Choice of Law in International Commercial Contracts”, a non-binding instrument aiming at promoting the acceptance of the principle of party autonomy for choice of law in international contracts.

Ar present the Hague Conference is working on a Convention on the Recognition and Enforcement of Foreign Judgments, which would have a wider scope than the 2005 Convention on Choice of Court Agreements.¹¹

1.6.5 Other organizations

Finally, there are other organizations less involved in establishing rules governing international contracts, though some of them may be more important in their scope than those examined above.

1.6.5.1 The World Trade Organization (WTO)

The World Trade Organization (WTO), established in Geneva (www.wto.org), administers the WTO trade agreements. The main agreement reached under the WTO regarding international contracts is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which establishes minimum levels of protection that each government has to accord the intellectual property of fellow WTO members.

1.6.5.2 The World Intellectual Property Organization (WIPO)

The World Intellectual Property Organization (WIPO), with headquarters in Geneva (www.wipo.int), is a specialized agency of the United Nations dedicated to promoting the use and protection of intellectual property rights. It administers the principal international conventions on intellectual property.

1.6.5.3 The United Nations Conference on Trade and Development (UNCTAD)

The United Nations Conference on Trade and Development (UNCTAD) promotes the development-friendly integration of developing countries into the world economy in the fields of investment, finance, technology, enterprise development and sustainable development.

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1.6.5.4 The International Trade Centre (ITC)

The International Trade Centre (ITC), Geneva, (www.intracen.org) is the technical cooperation agency of the United Nations Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO) for operational, enterprise-oriented aspects of trade development. ITC has drafted a model contract for the international commercial sale of perishable goods and a contractual joint venture model agreement.

1.7 The Structure of this Book

Following this short introduction, this book will first deal with two fundamental issues, which must be known and understood before approaching the negotiation of an international contract: the law applicable to the contract (Chapter 2) and the methods for resolving disputes between parties from different countries: arbitration (Chapter 4) and national courts (Chapter 5).

Thereafter, it will examine how international contracts are negotiated, the drafting techniques and clauses frequently used and problems related to the conclusion of the contract (Chapter 6).

Chapter 7 highlights the basic issues arising from some kinds of contracts frequently used in international trade and presents the most frequently used ICC model contracts (sales, agency, distributorship).

Finally, you will find the text of a number of documents that may be useful for those who draft international contracts at the end of this publication.

1.8 The Presentation Method

In writing this book, I have tried to make it as easy as possible to approach the rather complex issues that arise in the context of international contracts.

One of the most useful means of clarifying complicated issues is to start with a practical illustration. Examples based on situations that currently arise in international trade make it possible, on the one hand, to show the real importance of the legal issues being considered, and on the other to better understand them.

Examples are easier to read and to remember if they refer to a specific situation, i.e. the contract between the German company Schulze AG and its French distributor, Mr Leblanc. The reference to specific countries can also be important where the solution of the problem depends on the legal situation existing in these countries. For instance, it may be relevant that both countries have ratified an international convention that is to be applied in a particular case, or that one of the countries has special rules that have consequences in that case.

Of course, there are several examples where one of the parties is not behaving correctly, a situation rather common in international (and domestic) trade. These are cases where a dispute will arise and where the legal issues will become more important.

When choosing the countries where “correct” parties and, respectively, the “less correct” parties are located, I have tried to distribute “good” and “bad” traders internationally, without privileging any country. This reflects the common experience that “correct” as well as “less correct” traders can be found everywhere.

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