Making Contracts Internationally

Welcome to Making Contracts Internationally. In this topic, you will learn about:

• Comparative law in negotiations
• Generally recognised international principles in commercial law
• National contract law of various nations
• UNIDROIT Principles of International Commercial Contracts.

Australian businesses may wish to enter contracts not just in Australia but also in other countries. There may be opportunities to import or export goods or services or to manufacture a product in another country. Contracts are fundamental to business practice as they establish the rights, duties and obligations of the parties to a contract. In Topic 4, you will consider the type of contracts Australian business may wish to enter internationally and the law that will apply to such contracts.

Parties to a contract can specify in the terms (contents) of the contract, how legal disputes will be resolved and the law of which country will be applied to resolve disputes. Such clauses are referred to as ‘choice of law’ clauses. For example, it may be agreed that the law of Australia will govern contractual disputes. In addition, the parties can agree in a contract term as to the choice of courts to resolve a dispute. Again, the parties may decide that Australian courts be the appropriate forum if litigation is necessary. What happens if there is no statement in the contract regarding choice of law or choice of courts? In this topic we will examine a number of ways in which this issue can be resolved.

In an attempt to encourage international trade a number of international conventions have been created that countries may adopt that removes barriers to international trade. These conventions can also resolve the question as to which law will apply to a particular transaction.

A good example is the UN Convention on the Contracts for International Sale of Goods (CISG). This provides a uniform text of law for international sales of goods. It is also known as the ‘Vienna Convention’. The Convention was prepared by the United Nations Commission on International Trade Law (UNCITRAL) and adopted by a diplomatic conference on 11 April 1980. Australia has adopted this Convention. As many trading agreements involve the sale of goods, the Convention has wide application. In terms of choice of courts, the Hague Convention on the Choice of Courts can assist to resolve the question of which court will resolve a dispute.

The Australian government supports Australian businesses contracting internationally. It has entered into a number of international agreements that reduce the cost for Australian business. These are called ‘Free Trade Agreements’. This topic considers the nature of these agreements and which countries have a free trade agreement with Australia.

Negotiation styles will vary between nations. Language and cultural differences affect the way people approach and conduct the process of negotiations. For example, in Japan, the Confucius philosophy of ‘harmony’ influences negotiations. The Japanese ‘wa’ concept is reflected in the Japanese negotiation style by placing an emphasis on developing a trusting long-term relationship. There is an aversion to litigation and emphasis on contracting parties working out differences amongst themselves and decisions are based on ‘ring-sho’ consensus.

Cross-cultural negotiations

Factors that must be taken into consideration in cross-cultural negotiations include the following list.

• Negotiations lead to a written contract that is enforceable in the countries of both parties.
• Conflicts that result from cross-cultural misunderstandings can be avoided if both parties understand their respective rights and duties.
• Dispute resolution system should be completely and fairly addressed.

The following video takes a light-hearted look at stereotypical negotiation styles in other countries around the world.

Throughout the world, there are recognised principles of commercial law. These include:

• sources of international commercial law
• what is referred to as ‘harmonisation’ of commercial law
• recognising that differences exist between nations.

Let us look at these in more details below.

Sources of international commercial law

The following table describes key sources of international commercial law.

Harmonisation of commercial law

Harmonisation of commercial law refers to the following principles:

• Good faith principles: this refers to the practice of adopting the Nachfrist procedure or notice in which a party may request an extension of additional time.
• Contract interpretation: this refers to ‘reason to know’ and ‘should know’ contractual obligations. This practice is common among nations and attempts to provide judicial interpretation (should know) versus obligation to know on individual basis (reason to know).
• Exculpatory clauses: An exculpatory clause is a contract provision that relieves one party of liability if damages are caused during the execution of the contract. Exculpatory clauses are generally unenforceable among nations if unfair to the contracting party.
• Liquidated damage clause: The liquidated damage clause generally enforceable among nations.

Difference among nations

Recognising that differences exist between nations is a principle of commercial law and 'law in fact' and 'law in action' varies between nations. For example, the Islamic nations use of the Shari’a which is a body of religious principles that governs secular contractual transactions.

Let us study both the differences and similarities between the different contract laws between Russia, China and the European Union.

Russia

Russian civil law is similar to common law contract law:

• Article 158 allows silence in acceptance if prior relationship.
• Article 160 applies Article 2 of UCC in terms of statutes of fraud.
• Section 428 applies common law adhesion provisions.
• Article 162 applies writing requirement for statute of frauds in common law.
• Section 451-material changes circumstances which are similar to common law.

Furthermore, in Russia preliminary contracts are not enforceable. The contract must be complete to be enforceable. Section 469 implied warranties of merchantability and particular purpose are applied along with a price reduction remedy.

China

China’s foreign economic contract law has specific characteristics:

• The law divides contract law into general provisions, formation, performance and remedies, transfer and assignments, modification and miscellaneous provisions.
• All contracts must be in writing under Chinese law.
• The Foreign Contract Law of China provides that the statute of limitation is four years.
• Article 17 is a version of the American concepts of anticipatory repudiation and adequate assurance.
• Article 19 adopts Hadley v. Baxendale limitation on damages.*
• Article 20 is similar to the American law on liquidated damages.
• Article 22 adopts common law’s principle of mitigation of damages.
• Article 24 and 25 recognizes excuse of force majeure.
• Article 32 requires that recission and modification be in writing.
• Article 12 requires the certainty of terms in the offer.
• Article 37 recommends the alternative disputes resolution system of arbitration and mediation.

Note: *The Hadley v. Baxendale (1854) is a leading English contract law case. It sets the leading rule to determine consequential damages from a breach of contract: damages are limited to those that arise naturally from a breach and those that are reasonably contemplated by the parties at the time of contracting (Case Briefs, 2020).

The European Union

The European Union’s Commission on Contract published the ‘Principles of European Contract Law’ which includes the following characteristics:

• They are similar to the common law of contracts and the Uniform Commercial Code (UCC) in the United States.
• Contractual existence may be proven by any means including testimony of witnesses.
• Modifications must be in writing.
• Merger clauses are similar to the UCC.
• Notice is effective when it reaches offeror.
• Advertisement could constitute an offer if certain information included.
• Firm offers are irrevocable for an extended time.
• The Mail Box Rule rejected.*
• Additional Terms of the Acceptance are quite similar to Article 2 of the (UCC) in the United States.
• Pre-contractual liability is applicable in the European Union. Parties have a general duty to negotiate in good faith. Failure to do so can result in pre-contractual liability (this is not applicable in the United States).
• Each party has an affirmative duty not to disclose confidential information.
• There is an obligation of contracting parties to disclose agency relationship.
• Each party has right to avoid contract due to mistake, fraud, unfair advantage and unconscionability.
• Adopts principle of nachfrist notice and extension of time to perform.
• Recognises unforeseeable impediments that may excuse performance.
• Specific performance is a remedy.
• Reduction in price is an available remedy.

Note: * The Mail Box Rule: The mailbox rule applies when a valid offer is sent by mail, email or fax machine to the offeree within an established timeframe rather than when that acceptance is received by the person who offered the contract  (the Mailbox Rule and Contract Law, _© Study.com) 

You may have watched this video previously. If not, watch it now. It provides a light-hearted interpretation of what can go wrong when an offer and acceptance is incorrectly interpreted by one party.

According to the UNIDROIT website, The UNIDROIT Principles of International Commercial Contracts are a set of rules that have been adapted to suit modern international commercial practice and designed for use throughout the world, irrespective of the legal traditions and the economic and political conditions of the countries in which they are to be applied. The principles have also been used as a model for domestic legal reforms and other law-harmonisation initiatives.

Recommended Principles on International Contract Law

The UNIDROIT recommended Principles on International Contract Law are similar to the Uniform Commercial Code of United States and include the following characteristics:

• Open terms in offer
• Pre-contractual liability
• Hardship excuses for performance
• Promissory Estopple applied to pre-contractual liability*
• Failure to negotiate in good faith can lead to pre-contractual liability.
• Party may recover damages and incidental expenses associated with pre-contractual liability.

Note: * Estopple refers to a judicial device in common law legal systems where a court may prevent or ‘estop’ a person from making assertions or from going back on his or her word (Study.com, 2003-2020).

The following short video elaborates on the points raised above using a case study from Belgium.

Have a look at the DFAT fact sheets for countries and regions which that an Australia business may wish to trade with. Note, the General Information regarding the country, Economic Indicators and Australia’s Trade and Investment Relationship with this country. This reading will be very helpful for Assessment 1 and Assessment 2. It is suggested that you search your chosen country for Assessment 1 as this will provide a good overview of Australia’s trade relationship. The Fact Sheets for each country indicate in detail the goods and services being exported and imported i.e. the nature of contracts entered. This may give you some inspiration for Assessment 2 when choosing the nature of business that you will operate for the purpose of this assessment.

The Convention for the International Sale of Goods (CISG) was created in 1980 and is also known as the Vienna Convention. The CISG emerged from two laws, the:

1. Uniform Law for the International Sale of Goods (ULIS)
2. Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF)

CISG has become the law of international contracts and adopted by most countries as part of their commercial law. It has been in effect since January 1988.

Applying CISG

The application of CISG for the international sale of goods requires that the buyer and seller must have their places of business in different states. In addition, either:

• both states must be contracting parties to the convention, or
• the law of either of the contracting state apply.

CISG may apply even if the buyer and seller's places of business are not in a contracting state. There is an exception. The final provisions of the Convention allow a ratifying state, if it wishes, to declare that it will apply the CISG only when the buyer and seller are both from contracting states.

Opting in and out of CISG

The parties to a contract may exclude or modify the CISG’s application by a ‘choice of law’ clause. Whether parties can exclude a domestic law and adopt the CISG in its place depends on the rules of the state.

Sale and goods: CISG definition

CISG does not directly define a sale and goods. However, the implied definition is:

• the delivery of the goods and their supporting documentation by the seller and the payment of their price by the buyer
• CISG only applies to goods that are movable and tangible.

CISG does not deal with:

• the legality of the contract
• the competency of the parties
• the rights of third parties
• liability for death or personal injury.

Conformity of goods

Conformity refers to the expectation that a seller must deliver goods that are of the quantity, quality, and description required by the contract, and which are contained or packaged in the manner required by the contract. To determine conformity, rules agreed to by the parties are applied. Otherwise, the goods do not conform to the contract unless they are fit for the ordinary purposes of such goods.

For more information on CISG read the article To exclude or not to exclude the 'Vienna Convention'? The article also explains clearly when and how the convention applies to international sales contracts providing practical examples. There is also a discussion of whether parties to a contract should adopt or exclude the operation of the convention.

Conformity of goods is an expectation of consumers for global products and an important consideration for Australian importers and exporters. Visit the DFAT webpage for export markets. This is a great resource for Australian companies who wish to export. Scroll down the page to browse the markets of numerous countries. Choose a country from the alphabetical list. This opens a webpage on this country and provides a market profile, news, insights and business opportunities in this country. It also details applicable laws, tariffs and regulations. Please spend some time exploring this site as it will provide invaluable research for your Assessments.

Australia’s free trade agreements

The Australian Government’s Department of Foreign Affairs and Trade (DFAT) define a free trade agreement as:

The purpose of negotiating an free trade agreement (FTA) is to benefit Australian exporters, importers, producers, and investors by reducing and eliminating certain barriers to international trade and investment. According to the Australian Government’s Department of Foreign Affairs and Trade (DFAT) website Australia currently has free trade agreements with a range of countries including New Zealand, Singapore, United States, Thailand, Chile and many more.

Watch the following video which explains the concept of a free trade agreement and identifies the countries that Australia has free trade agreements with. Note the discussion that these agreements do not just benefit businesses who are selling goods but equally benefit businesses who wish to offer services in other countries. The video explains how the agreements specifically benefit businesses. Note, the comments from an Australian company doing business internationally, Moo Brew.

Additional activity

This additional activity will allow you to familiarise yourself with the provisions of the CISG. You will need to print off a copy of the United Nations Convention on Contracts for the International Sale of Goods (CISG) E.10.V14 or have it open in a browser window on your computer as you answer the questions.

End of topic forum

The forum activity for Topic 4 asks you to share resources you have found regarding the law of contract for your chosen country in Assessment 1. These resources will assist you to prepare for Assessment 2. Select the ‘Forum’ at the end of your module (which can be found within your navigation menu) and follow the instructions for each question pertaining to Topic 4 within the forum.

Interpreting Exclusion clauses – General Wording does not work.

This article from Clayton Utz argues that deciding whether a type of loss is an 'indirect' or 'consequential' loss must be done in the context of the contract in question and uses an Australian Supreme Court decision to illustrate.

United Nations Convention on Contracts for the International Sale of Goods (CISG).

This is the full text of the Convention that was discussed in the preceding resource. If this Convention applies then this resource provides the terms of the contract between parties. It is important to note that if parties to a contract are bound by this Convention, then this document can be referred to in order to clarify contract terms and resolve any contractual disputes.