One of the most important subjects in international trade is drafting international commercial contracts. International commercial contracts include 3 expressions: contract, commercial, and international. Contract means an agreement which provides the relations between 2 or more parties. These relations can be in different fields such as sales and purchase of goods, lease, mortgage, guarantee, or granting financial facilities. A commercial contract is a charter entered into for business purposes and commercial needs.
An international contract implies that the parties to the contract trade in foreign countries and/or the contract is to be enforced in foreign countries.
There are various kinds of international commercial contracts such as: transport contracts, insurance, finance, commercial agency, international distribution, license, technical and production cooperation, joint venture, build- operate- transfer (BOT), and different kinds of counter-trade contracts.
Governing Law of Contract
Conflict of Laws
International contracts contrary to local contracts are related to more than one national legal systems and whereas a single contract cannot be governed by different national legal systems, conflict of laws occurs. If the states have the same conflict of laws rules, governing law of a contract can be chosen easily. Attempts have internationally been made to unify the conflict of laws rules of the countries.3 examples of these efforts are as follows: The first and most successful attempt is Convention on the Law Applicable to Contractual Obligations (Rome Convention 1980).The second one is Convention on the Law Applicable to International Sales of Goods(The Hague 1955) and the third one is an Inter-American Convention on Conflict of Laws Concerning Checks(1975).
Another activity is to unify the substantive rules governing the subjects of international trade. When the laws and rules of all states concerning one subject are uniform, it doesn’t matter which state’s law governs the contract.
Determination of Applicable Law
In principle since the national legal systems have no uniform rules, a single contract may lead into different rights, obligations and consequences in different legal systems. The international merchants seriously wish to determine their contract rights and obligations safely and assuredly not vaguely. Determination of the applicable law of contract makes it possible for the parties to predict the contract effects more safely and avoid unfavourable and unexpected consequences.
Main Points in Drafting Contracts
There are many points in drafting international contracts which shall be taken into consideration. Some of these points are as follows:
Preparation of Primary Draft
The first step in drafting international contracts is determination of the purposes and how to achieve them. At first, to achieve a contract’s ends must be planned and then based on which, contractual conditions must be drafted. When the contract general framework was determined, usually one of the parties undertakes to prepare the primary draft of the contract for the future negotiations. In preparation of primary draft, the previous contracts entered into concerning the same or similar contract subject are very important. The model contract specially those prepared by international organizations or famous companies are very useful. However, to make the use of the standard and sample contracts must be precisely adapted to present conditions.
In daily and usual transactions, negotiations and drafting the contract are basically performed simultaneously. However, there are several cases in economic and social relations where the parties can’t for some reasons finalize and draft their considered contract promptly and it’s necessary to provide preliminaries before entering into the contract and/or conduct negotiations to reach the mutual agreement concerning their accepted conditions.
Preliminary agreements are a set of letters of promise, contracts, memoranda of agreement, memoranda of understanding, protocols and so on denoting the parties’ intention on conducting negotiations and/or finalizing one or more contracts in the future. There are different phrases or expressions for preliminary agreements and contracts in English language such as “contract to contract”, “contract to bargain”, “agreement to agree”, “contract to negotiate”, “preliminary contracts”, “letter of intent (LOI)”, “letter of understanding(LOU)”, “heads of agreement(HOA)”, “memorandum of understanding(MOU), “protocol”, “memorandum of intent(MOI)”, and “agreement in principles”.
International contracts may be entered into in different forms. An international contract may be formed orally and/or by letters, fax, or e-mail. In important contracts, at first, the text of contract is negotiated and then signed by the parties. But the merchants who trade with each other for the years may make their orders only on the phone. However, almost all international contracts are in writing.
A Contract Text: Brief or Detailed
A contract may be formed in detail or briefly. A detailed contract provides the subjects including rights and obligations of the parties, contract termination, rewards and penalties, dispute settlement, governing law and other details. The less brief a contract, the more interference of governing law to interpret and supplement the contract provisions. The more contract price or the longer contract term, or the more complicated the contract subject, the more details must be predicted in the contract.
A contract text: Simple or Complicated
A principle in drafting a contract is that the contract provisions must be transparent and precise as much as possible to express the parties’ intention clearly. Transparency in a contract avoids the future disputes and in case of disputes, the dispute settlement authorities can interpret the contract simpler and more definite. If the usual meaning of the words and expressions are not clear, it is suggested to make clear the meaning of those words in definition section of the contract. When a phrase is defined in a contract, it must be identified in what part of the contract those words and phrases are used in their defined meaning and in what part in their usual meaning. In English contracts, the defined words and phrases are usually written in capital letters.
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
(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. 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. 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).
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.
Researching the Applicable Law and Rules
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.
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.
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.
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. Finally, in certain cases, an arbitral tribunal may apply the CISG on its own initiative, for example, as part of the lex mercatoria.
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.
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. 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.