International commercial contracts are sale transaction agreements made between parties from different countries.
The methods of entering the foreign market, with choice made balancing costs, control and risk, include:
- Export directly.
- Use of foreign agent to sell and distribute.
- Use of foreign distributor to on-sell to local customers.
- Manufacture products in the foreign country by either setting up business or by acquiring a foreign subsidiary.
- Licence to a local producer.
- Enter into a joint venture with a foreign entity.
- Appoint a franchisee in the foreign country.
Convention on the International Sale of Goods
The United Nations Convention on Contracts for the International Sale of Goods (CISG) is the main convention for international sale of goods. Established by UNCITRAL, the Convention governs the conclusion of the sale contract; and buyer and seller obligations, including respective remedies. It is not concerned with the validity or provisions of the contract nor its effect on the property sold.
The importance of CISG is its interpretation. International context, uniformity and observance of good faith must be regarded when interpreting the Convention. Matters not expressly settled by CISG are to be determined according to the general principles of CISG; or in such absence, according to rules of private international law. The UNIDROIT Principles on International Commercial Contracts also provide a ‘gap-filling’ role to supplement CISG, so long as it supports a principle deduced from the Convention.
Contract of carriage of goods
In the carriage of goods by sea, air or land, goods may be lost, damaged or deteriorated. The bill of lading (transport document used almost exclusively for carriage of goods by sea) is a contract of carriage between the consignor, the carrier and consignee that acts as a receipt of transfer of goods and as a negotiable instrument. The bill of lading also determines rights and liabilities agreed between parties to an international sale contract. Also reservations as to the quality and quantity of the goods are marked on the bill when accepting goods so as to stifle any accusations from the consignee of damage in transit. The consignor retains ownership of the goods until the bill of lading is transferred to the consignee. Most bills of lading today are governed by international conventions such as the Hague Rules (International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading); Hague-Visby Rules, which is a revised version of the Hague Rules by a Brussels Protocol in 1968; and Hamburg Rules. These rules impose minimum responsibilities and liabilities that cannot be softened by contract. On the other hand, the United States and the United Kingdom adopted the Carriage of Goods by Sea Act (COGSA).
Title to sue
Where loss or damage to goods is incurred by a party to the contract of carriage, that person may sue directly on that contract. A seller under a CIF (‘cost, insurance, freight’) sale contract will have entered into the contract of carriage directly with the carrier, and can sue as principal. Where loss or damage occurs when risk has passed to the buyer, the buyer may benefit under the contract of carriage with the seller, depending on contract terms between buyer and seller.
Under an FOB (‘free on board’) sale contract the bill of lading determines if either the seller or the buyer is named as the shipper. This will ascertain who has contracted as principal to bring action against the carrier. Where loss or damage occurs before risk passes to the buyer, the seller may benefit under the contract of carriage made with the buyer.
Whom to sue
The party to be sued on a contract of carriage may vary from the shipowner, the charterer or the freight forwarder. A distinction is made between the physical carrier and the legal carrier, the person contractually responsible for the carriage. If the consignee is suing on an implied contract of carriage or there is negligent carriage of goods, it is the physical carrier against whom action is brought.
Insurance in international trade
Insurance against perils is an important aspect of international commercial transactions. In the event of loss or damage to cargo due to hazards during voyage, an insured party will be able to recover losses from the insurer. The type of insurance required depends on the mode of transport agreed between parties to transport the cargo. Such insurance forms include marine, aviation and land.
The type of insurance contract depends on the Incoterm adopted by the parties in a sale contract. A CIF sale contract requires the seller to obtain insurance cover for the voyage. An FOB contract however places no obligation on the buyer or seller to obtain insurance, although it is prudent for the buyer to protect against potential losses. It is not uncommon for the buyer in a FOB contract to request the seller to arrange insurance on an understanding that they will reimburse the insurance costs incurred.
Insurance obtained must cover only those goods that are being sold and stipulated in shipping documents. The insurance must also cover the entire voyage of the sale contract. Where it covers only party of the transit, the buyer will be able to reject the documents upon tender.
Marine insurance contracts may be divided into hull insurance or cargo insurance. There is no uniform law or convention for international marine insurance. However commercial customs, usage and practices in international marine insurance have played a significant role in regulating marine insurance internationally. Thus the marine insurance contract is subject to both general principles of contract law and relevant domestic marine insurance law.
Aviation Insurance contracts may be divided into hull insurance; cargo insurance; airport owners and operators liability; hovercraft insurance; spacecraft insurance; and commercial aircraft insurance. International Conventions applying to the carriage of goods by air include the Warsaw Convention, Rome Convention, Hague Protocol and Montreal Protocol. These conventions together provide guidance to domestic air insurance law.
Payment in international trade
Two broad methods of financing international transactions are direct payment between seller and buyer; or finance through banks. Practically, payment is effected by the following methods:
Cash in Advance: buyer transfers funds to the seller’s account in advance pursuant to the sale contract.
Open Account: arrangement for the buyer to advance funds to an ‘open account’ of the seller on a fixed date or upon the occurrence of a specified event, such as delivery of the goods.
Bills of Exchange: negotiable instrument representing an order to the bank in writing to pay a certain sum of money to the bearer (or specified person) on demand, or at a fixed or determinable future time.
Documentary Bill: seller (drawer) draws a bill of exchange on the buyer (drawee) and attaches it to the bill of lading. The idea is to secure acceptance of the bill of exchange by the buyer; and the buyer is bound to return the bill of lading if he does not honour the bill of exchange.
Documentary Credits: the bank, on behalf of buyer, issues a letter of credit undertaking to pay the price of the sale contract on condition that the seller complies with credit terms. Upon presentation of necessary commercial documents verifying shipment of goods, the bank collects payment for goods on behalf of the seller. In the collection process, the buyer pays for goods in exchange for title documents. Under this method the bank guarantees the buyer’s title to the goods and guarantees payment to the seller.
Harmonisation of international commercial law
This predominantly occurs through legal instruments governing commercial contracts is limited in its scope since it depends upon incorporation into contracts. For any pragmatic effect there must be a degree of uniformity in commercial practice between the contracting parties.
Model Laws promote the unification of international commercial law. Some examples are the UNCITRAL Model Laws on:
- International Commercial Arbitration.
- International Credit Transfers 1992 (largely adopted by the EU).
- Procurement of Goods, Construction and Services 1994.
- Electronic Signatures.
- Electronic Commerce 1996.
International organisations that attempt to harmonise international commercial law include:
- UNCITRAL: Important in the areas of international carriage of goods, international bills of exchange and promissory notes, and international arbitration.
- UNIDROIT: Important in the area of international financial leasing and sale of goods. Notably UNIDROIT has created the ‘Principles of International Commercial Contracts’ which in the future could provide the source of lex mercatoria.
- Hague Conference on Private International Law: The organisation drafts conventions in the field of private international law.
- ICC: Influential in harmonising international contract terms and global arbitration practices.