International Commercial Contracts

By Cyril Emery

Cyril Emery is a Legal Officer and Librarian for the Secretariat of the United Nations Commission on International Trade Law. The opinions expressed in this article are the author’s own and do not necessarily reflect those of the United Nations. Specific mention of any information products or institutions should not be considered an endorsement of those products or institutions.

Published March 2016

Table of Contents

1.     Introduction

Transactions conducted under international commercial contracts, in particular those related to the sale of goods, are considered to form the backbone of international trade. The goal of this research guide is to provide an overview of the major primary sources of law for international commercial contracts, in particular those related to sales, and the related research resources. The focus is global, and the guide does not cover regionally-focused instruments or economic integration organizations, such as the European Union. The guide also does not focus on the complexities of some contracts related to sales, such as those of carriage, insurance, and financing.

2.     The Nature of International Commercial Contracts

2.1.  Definition

International instruments have identified contracts as “international” when the parties concluding the agreement come from two or more different States (see United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (the “CISG”), Article 1(1); Principles on Choice of Law in International Commercial Contracts (2015) (the “Hague Principles”), Article 1(2)). That said, more flexible definitions are possible, such as contracts with “‘significant connections with more than one State’, ‘involving a choice between the laws of different States’, or ‘affecting the interests of international trade’”.[1]

As described in the Hague Principles, one approach to identifying a contract as “commercial” may be where “each party is acting in the exercise of its trade or profession.” (Hague Principles, Article 1(1)). Another approach is found in the CISG, which limits its scope to commercial matters by excluding, for example, consumer contracts, such as those for “goods bought for personal, family or household use” (CISG, Article 2(a)).

2.2.  Choice of Law and International Commercial Arbitration

When considering an international commercial contract, two questions are of key importance: (1) where will disputes arising under the contract be heard; and (2) what law or rules govern the contract. A typical best practice would be for contractual parties to answer both of these questions by including in the contract a choice-of-forum clause and a choice-of-law clause.

While there are certain exceptions and limitations, the relevant rules in the vast majority of States allow for party autonomy, permitting parties to select both the forum and governing law for their contracts. If parties fail to select an applicable law, a court accepting jurisdiction of the dispute will have to apply the relevant conflict rules of private international law to determine which law is applicable to the contract, including any international instruments that might apply by default (see section 3.1). The rules of private international law are notoriously complex, and this guide will focus on scenarios where parties have chosen the applicable law or an international instrument applies by default.

In international commercial practice, it is common for parties to choose arbitration as the method for resolving the dispute.[2] International commercial arbitration may be particularly popular because, unlike for court judgments, there is a single nearly comprehensive regime for enforcement of foreign arbitral awards (governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”) with 156 State parties).[3]

Arbitral tribunals are governed by the arbitration law at the seat of arbitration. The vast majority of international commercial arbitration laws, many derived from the UNCITRAL Model Law on International Commercial Arbitration, also recognize party autonomy, permitting parties to choose the rules of law applicable to the contract. In addition, arbitral tribunals, unlike most courts and depending on the law at the seat of arbitration, may be authorized to decide cases based on general principles of fairness and justice without applying a specific law or to apply “rules of law,” such as lex mercatoria (see section 3.3.2) and the Unidroit Principles of International Commercial Contracts 2010 (the “Unidroit Principles”) (see section 3.3.1) without reference to any national law.[4]

For more information about arbitration, see the GlobaLex article on international commercial arbitration.

3.     Researching the Applicable Law and Rules

3.1.  Conventions

In some cases, the law applicable to a contract will be provided for in a treaty. The United Nations Commission on International Trade Law (UNCITRAL) has created three treaties that provide the applicable rules governing certain contracts.

3.1.1.     CISG

The United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (the “CISG”) is the most widely adopted treaty providing substantive contract rules. The 84 CISG States account for more than 75% of world trade. The CISG’s provisions cover the treaty’s scope of application, contract formation, obligations of the contractual parties, remedies, passing of risk, damages, etc. The CISG was drafted by UNCITRAL in response to a failed earlier attempt to unify the law of sales through two conventions prepared by the International Institute for the Unification of Private Law (“Unidroit”) and adopted in 1964, one covering the international sale of goods and the other the formation of contracts for the international sale of goods. The conventions were seen as primarily Western European instruments and did not gain widespread support.[5]

Scope of Application:

The CISG’s scope is limited to commercial contracts for the cross-border sale of goods (see CISG, Part I, Articles 1-5). Under its Article 6, contractual parties may opt out of the CISG or any of its provisions, but it will otherwise apply in a variety of situations.

Primarily, it will apply to contracts concluded by parties from two or more CISG States (CISG, Article 1(1)(a)). In addition, the CISG will govern contracts between parties from two or more States where the rules of private international law point to the application of the law of a CISG State (CISG, Article 1(1)(b)), including, for example, in most cases where parties have chosen the law of a CISG State to govern the contract.[6]

If contractual parties have selected arbitration to settle disputes, the CISG will also apply in the above cases. In a potential slight difference from some State courts, however, and depending on the law at the seat of arbitration, arbitral tribunals may also apply the CISG where parties have chosen it on its own and without reference to any State law.[7] Finally, in certain cases, an arbitral tribunal may apply the CISG on its own initiative, for example, as part of the lex mercatoria (see section 3.3.2).

Uniform Interpretation:

Successful implementation of the CISG requires more than countries to adopt it and parties to use it. Courts and arbitral tribunals must interpret the CISG in a uniform manner and not through the lens of domestic laws. If not, they will create divergent precedents, and the benefits of a harmonized regime will not be realized as parties will incur transaction costs through the need for endless assessment of how each jurisdiction interprets the Convention.[8]

CISG, Article 7, addresses this issue by creating a public international law obligation for States, via their courts, to interpret the Convention with regard “to its international character and the need to promote uniformity in its application”. This obligation requires courts to interpret the CISG autonomously, without regard to the national law, and taking into account foreign case law and scholarly writings.[9] For many courts, this is a novel approach as it is not typical to consider foreign case law instead of, for example, domestic judicial precedent or legislation. As provided below, the UNCITRAL Secretariat and others have created several mechanisms to assist in this endeavor.

Uniform interpretation may also be aided through reference to the CISG’s travaux préparatoires, or negotiating history.

Research Resources:

Case Law:

·       Albert H. Kritzer CISG Database (the “Pace CISG Database”): The largest collection of CISG case law, with over 3000 decisions and awards, many with full-text translated into English, and a variety of other resources.

·       Case Law on UNCITRAL Texts (CLOUT): Official case law system created by UNCITRAL to facilitate uniform interpretation.

·       UNILEX on CISG & Unidroit Principles: Database of case law on CISG and the Unidroit Principles.

·       National case law databases: A number of databases focusing on CISG jurisprudence in a single jurisdiction have been established, the Pace CISG Database provides links to many of these databases.

·       CISG Digest: In light of the large number of CISG-related cases, UNCITRAL has created the UNCITRAL Digest of Case Law on the United Nations Convention on Contracts for the International Sale of Goods (the “CISG Digest”), which provides article-by-article synopses of CISG case law.

Scholarly Writings:

·       Commentaries: of the huge body of academic work on the CISG, the most useful resources for researchers may be article-by-article commentaries. Some of the major commentaries available in English include:

o   C.M. Bianca & M.J. Bonell, Commentary on the International Sales Law: The 1980 Vienna Sales Convention (1987);

o   Commentary on the UN Convention on the International Sale of Goods (CISG) (Ingeborg Schwenzer ed., 3d ed., 2010);

o   Fritz Enderlein & Dietrich Maskow, International Sales Law (1992);

o   John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (3d ed. 1999);

o   UN Convention on Contracts for the International Sale of Goods (CISG): Commentary (Stefan Kröll et al. eds., 2011).

·       CISG Advisory Council (the “CISG-AC”): The CISG-AC, which is not an UNCITRAL body, prepares influential academic opinions and declarations on the CISG designed to promote its uniform interpretation.

·       Other works: For references to other important academic works, consider the bibliography available from the Pace CISG Database and UNILEX, as well as UNCITRAL’s bibliography on international sale of goods.

Travaux Préparatoires:

·       Online: UNCITRAL offers online travaux préparatoires for the CISG, and the Pace CISG Database’s legislative history for the Convention includes a useful article-by-article guide.

·       Print: John O. Honnold, Documentary History of the Uniform Law for International Sales (1989).

3.1.2.     Limitation Convention

The Convention on the Limitation Period in the International Sale of Goods (the “Limitation Convention”) is a sister treaty to the CISG. Originally adopted in 1974, it was amended in 1980 in order to operate seamlessly with the CISG.[10] The Limitation Convention applies to the same types of international sales contracts as the CISG with the same scope of application (see Limitation Convention, Articles 1-6), but its substantive provisions deal solely with limitation or prescription, providing a sort of statute of limitations for international sales disputes. The general period of limitation provided in the Limitation Convention is four years (Limitation Convention, Article 8).

To date, the Limitation Convention has 30 State parties, many fewer than the CISG’s 84. As is the case with the CISG, parties may opt out of its provisions (Limitation Convention, Article 3(2)). The rules of uniform interpretation for the Limitation Convention generally mirror those found in the CISG (Limitation Convention, Article 7). For this reason, the same general categories of research resources are relevant.

Research Resources:

Case Law:

·       CLOUT: Official case law system created by UNCITRAL to facilitate uniform interpretation.

Scholarly Writings:

·       Commentaries: Commentary on the UN Convention on the International Sale of Goods (CISG) 1200-1270 (Ingeborg Schwenzer ed., 3d ed., 2010); Fritz Enderlein & Dietrich Maskow, International Sales Law 393-454 (1992).

·       Other works: For references to other important academic works, consider the resources found in the UNCITRAL Law Library.

Travaux Préparatoires:

·       UNCITRAL offers online travaux préparatoires for the Limitation Convention.

3.1.3.     Electronic Communications Convention

The United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005) (the “Electronic Communications Convention”) is a much more recent treaty than the CISG or Limitation Convention. Adopted in 2005, it currently has seven State parties. The purpose of the treaty is to remove any legal obstacles to the use of electronic communications in international contracting, creating certainty for contractual parties that contracts and other communications exchanged electronically are as valid and enforceable as their traditional paper-based equivalents.

The scope of the Electronic Communications Convention is broader than that of the other UNCITRAL treaties in that it is not limited to sales contracts, although it is still aimed at only commercial contracts. Contractual parties may, of course, opt out of its provisions (Electronic Communications Convention, Article 3). Like the Limitation Convention, the rules of uniform interpretation for the Electronic Communications Convention mirror those found in the CISG (Electronic Communications Convention, Article 5), making the same general categories of research resources relevant.

Research Resources:

Case Law:

·       CLOUT: Official case law system created by UNCITRAL to facilitate uniform interpretation. As of yet, only one case on the Electronic Communications Convention has been reported. Given substantial substantive overlap, however, case law in CLOUT on the UNCITRAL Model Law on Electronic Commerce (1996) and the UNCITRAL Model Law on Electronic Signatures (2001) may also be relevant.

Scholarly Writings:

·       For references to academic works, consider the resources found in the UNCITRAL Law Library. In addition, substantial substantive overlap between UNCITRAL texts on electronic commerce may make the entire UNCITRAL bibliography on electronic commerce relevant.

Travaux Préparatoires:

·       UNCITRAL offers very brief travaux préparatoires for the Electronic Communications Convention.

3.2.  National Laws

Parties may also choose national laws to apply to their international commercial contracts. The party with greater bargaining power may insist on its national law, or parties may instead choose the law of a third State, usually one considered to have a well-developed law with regards to commercial transactions.

A first step to researching the relevant national law might be to consult the relevant GlobaLex article on foreign law. A 2010 survey on choice of law in arbitration found that English law, New York law (and other US state laws), and Swiss law were particularly popular.[11] English law is frequently used in international transactions, in particular with reference to reinsurance, charter parties, and sea trade, among other areas.[12] Parties may select Swiss law because of the perception that Switzerland’s political neutrality makes this a neutral law. Nonetheless, political neutrality may not always be the best guide as to the suitability of a chosen law for a specific transaction.[13] The ICC International Court of Arbitration 2013 Statistical Report mirrors the 2010 survey mentioned above and also indicates frequent choice of German and French law.[14] When considering these types of surveys, it is important to recall that, generally, the choice of law of any CISG State will also include the CISG unless the Convention’s application is clearly excluded by the parties.[15]

3.3.  Soft Law and Trade Usages

There are many international texts and standards that may be chosen by traders to govern their contracts. These rules may be referred to variably as “rules of law,” “soft law” or “trade usages,”[16] but they are connected by their use in international contracting and potential direct application by arbitral tribunals. Even otherwise binding texts, such as the CISG, may fall into this category when chosen by parties to apply to their contracts without reference to a specific State law (see section 3.1.1). Like arbitral tribunals (see section 2.2), State courts may recognize and apply these rules, but, depending on the relevant domestic law, they may do so simply as a set of rules that are considered to be part of the contract and not overriding any mandatory law.[17] The Hague Principles, where followed, may serve to further legitimize some of these sources. The Hague Principles, in Article 3, allow for the law chosen by contracting parties to be “rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise,” specifically naming the CISG, the Unidroit Principles, and the Principles of European Contract Law (PECL) in the accompanying commentary. A few of the more prominent texts and standards generally discussed in this category of “rules of law,” “soft law” or “trade usages” are as follows:

3.3.1.     Unidroit Principles

The Unidroit Principles of International Commercial Contracts (the “Unidroit Principles”) were first finalized by Unidroit in 1994 and revised in 2004 and 2010. Unidroit continues to revise the Principles as appropriate, currently considering revisions meant to deal with specific aspects of long-term contracts. While following the CISG’s approach in many instances, the Unidroit Principles are a set of general rules for international commercial contracts and thus have a broader scope than the CISG, which is limited to sales contracts. In addition, they are able to cover areas that the drafters of the CISG were not able to agree upon, such as validity, agency, and assignment, among others. Also unlike the CISG, the Unidroit Principles are not a binding text and will generally only be applied where chosen by the parties or through application by an arbitral tribunal with the authority to do so.[18]

Significantly, the Unidroit Principles contain rules of interpretation almost identical to CISG, Article 7, (Unidroit Principles, Article 1.6) making case law and academic writings of great use in interpreting the Principles. In addition, the Unidroit Principles have a built-in commentary that gives detailed guidance.

Research Resources:

Case Law:

·       UNILEX on CISG & Unidroit Principles: Database of case law on CISG and the Unidroit Principles.

Scholarly Writings:

·       Commentaries: A key article-by-article commentary on the Unidroit Principles is Stefan Vogenauer, Commentary on the Unidroit Principles of International Commercial Contracts (PICC) (2d ed. 2015).

·       Other works: UNILEX provides a bibliography of academic writing on the Unidroit Principles.

3.3.2.     Lex mercatoria

The lex mercatoria has been described as “a synthesis of generally held and generally accepted commercial principles that may be expected to be applied to contracts among the major trading nations.”[19] There is controversy surrounding the lex mercatoria and, in particular, the specifics of its content,[20] but arbitral tribunals can, nonetheless, where authorized, apply these principles.[21] Certainly, the content of the lex mercatoria may be informed by or, in fact, contain the content of international instruments, such as the CISG and the Unidroit Principles.[22] For an example of a contract clause containing choice of such broad principles, consider the United Nations General Conditions of Contract, which state, with regard to dispute settlement, that “[t]he decisions of the arbitral tribunal shall be based on general principles of international commercial law.”

Research Resources:

·       Trans-Lex Principles: An excellent resources aimed to codify the lex mercatoria and supporting its identification of lex mercatoria principles with arbitral awards, court decisions, academic commentary, and more. This project is under the leadership of Professor Dr. Klaus Peter Berger who briefly spoke about Trans-Lex in a 2010 podcast and who also authored a book on the same topic titled Creeping Codification of the Lex Mercatoria (2d ed. 2010).

3.3.3.     Incoterms

In the specific area of delivery of goods, the International Chamber of Commerce (ICC) has developed a set of rules governing trade terms that describe the obligations of buyers and sellers and supplement any other rules governing the contract. The terms are three letter combinations. One example is FOB, standing for “Free on Board”, and the Incoterms rules cover who bears the risks and obligations when the seller has contracted to deliver goods in this way, namely “on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.”[23] The Incoterms come with instructions as to how parties can incorporate them in their contracts. There have been many versions of the rules, and the most recent are the Incoterms 2010.

Research Resources:

·       Incoterms 2010: ICC Rules for the Use of Domestic and International Trade Terms (2010)

·       Jan Ramberg, ICC Guide to Incoterms 2010: Understanding and Practical Use (2011)

·       International Chamber of Commerce Incoterms 2010 Rules website

3.3.4.     UCP 600

Another ICC product, the ICC Uniform Customs and Practice for Documentary Credits, 2007 revision (the “UCP 600”), is the standard soft-law instrument for regulating letters of credit, a common payment method in international sales transactions. For the UCP 600 to apply, the credit document itself should indicate that it is subject to the UCP 600. The UCP 600 also contains rules specifically for electronic records.

Research Resources:

·       ICC Uniform Customs and Practice for Documentary Credits, 2007 revision (2006)

·       James E. Byrne, UCP 600: An Analytical Commentary (2010)

·       Commentary on UCP 600: Article-by-Article Analysis by the UCP 600 Drafting Group (2007)

·       Announcement: ICC’s New Rules on Documentary Credits Now Available

4.     Model Contracts and Clauses

Model contracts are particularly useful for preparing international business transactions, but they are often expensive.

The International Trade Centre offers for free online its Model Contracts for Small Firms: Legal Guidance for Doing International Business. It is a collection of model joint venture, sales, distribution, service, and agency contracts, among others.

The ICC offers (for purchase) an array of model contracts for international transactions, including an influential model for sales contracts.

Arbitration institutions and rules typically offer model clauses that can be useful for incorporating an arbitration clause in a contract. For example, the UNCITRAL Arbitration Rules (in the 2010 and 2013 versions) contain an annex with a model arbitration clause. For arbitration institutions, consider, for example, among many, the model clauses of the Arbitration Institute of the Stockholm Chamber of Commerce, the LCIA, and the International Centre for Dispute Resolution.

Choice of law clauses can be found in the model contracts mentioned above, but there are also other sources. Unidroit, for example, has prepared Model Clauses for the Use of the Unidroit Principles of International Commercial Contracts. Some arbitration institutions also offer model choice of law clauses. Consider, for example, the clauses from the Chinese European Arbitration Centre.

 

---