INTERNATIONAL CONTRACT LAW Prof Tommaso Febbrajo t febbrajounimc

INTERNATIONAL CONTRACT LAW Prof. Tommaso Febbrajo t. febbrajo@unimc. it Prof. Tommaso Febbrajo

Chapter II DRAFTING INTERNATONAL CONTRACTS Prof. Tommaso Febbrajo

INTRODUCTION Prof. Tommaso Febbrajo

INTERNATIONAL CONTRACT: DEFINITION • A transaction will qualify to be international if elements of more than one country are involved • International contract law concerns the legal rules relating to cross-border agreements. Prof. Tommaso Febbrajo

The importance of contracts in international transactions • The absence of a contract continues to be a regrettably common state of affairs. Companies, believing themselves to be protected by a longterm commercial relationship based on mutual trust, make no provision for a written statement of each party’s obligations. • The contract may be incomplete or imprecise; in other words, one or more essential clauses relating to matters such as payment deadlines and methods, the applicable law or the court of jurisdiction may have been omitted. Prof. Tommaso Febbrajo

The importance of contracts in international transactions • Whethere is no contract or an incomplete contract, the consequences can be very serious, possibly even compromising commercial relations between the parties as well as having significant financial consequences. • Contracts are essential means of guaranteeing compliance with obligations and ensuring acceptance of them by both parties. Prof. Tommaso Febbrajo

ISSUE N. 1 Deal with various legal systems Prof. Tommaso Febbrajo

The legal systems: international framework

How to deal with the various legal system üThe English common-law tradition is tending to prevail in international transactions. Prof. Tommaso Febbrajo

Common law vs Civil law 1. Source of law Common law Civil law • Mainly from case law from previous judgments (Judgments of the Courts are binding- stare decisis) • Mostly based on codified legislation. Case law are not binding • Statutes are detailed with definitions and contain lengthy enumeration of specific applications and exceptions • Codes are concised and set out mainly broad principles Prof. Tommaso Febbrajo

Common law vs Civil law 2. Interpretation of contract Common law • Full respect of freedom of contract – “Sanctity of contract” • Primary focus on the written words in the contract • Parol evidence rule – Prevent a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of the contracts that appears to be whole Civil law • Relevance of good faith and fairness rules against freedom of contract • Primary focus on the wider context and intentions of the parties • Not limited to literal meaning of the words. Evidence of negotiation is admissible Prof. Tommaso Febbrajo

How to deal with the various legal system ü In a civil law system rights and obligations arise from a statute book constructed in the form of codes, which comprise general concepts that are subsequently interpreted by courts or administrative authorities. ü Common law is a casuistic system, in which norms are established on a caseby-case basis. Prof. Tommaso Febbrajo

How to deal with the various legal system: civil law ü Contracts usually contain a preamble of statements describing the process by which the parties arrived at the agreement. It may serve as a means of interpreting the obligations set out in the body of the contract. Prof. Tommaso Febbrajo

Example: Civil law sales agreement Sales agreement Mr. Bean, _____ And Mr. Brown, _____ Premises (Recitals) • Whereas, Mr. Brown is the owner of an old Fiat 500 which no longer needs. • Whereas, Mr. Bean needs a car to go to work Therefore, parties agree as follow: • Mr. Brown sells his fiat 500 to Mr. Bean for the price of € 1000. • …. Prof. Tommaso Febbrajo

Premises (Recitals) • Its purpose is to state information that forms the foundation or background for the contract. Prof. Tommaso Febbrajo

How to deal with the various legal system: common law ü Common law contracts tend not to insert preambles, and indeed the content of a preamble is null and void. ü The practice of English courts, however, is based on “literal interpretation”, which means that each word of each clause has its own significance. ü In order to clarify the terms used by the parties and to facilitate the administration of the contract, authors of English contracts insert a set of definitions. Prof. Tommaso Febbrajo

ISSUE N. 2 WHICH LAW APPLIES TO THE CONTRACT? Prof. Tommaso Febbrajo

The governing law: introduction ü Every (national or international) contract must have a governing law ü The governing law sets forth the necessary rules on contract formation: when (and under which prerequisites) will a contract come into existence? Prof. Tommaso Febbrajo

The governing law: introduction ü A purely domestic contract (ex. between two italian firms) is governed by the respective national law: a choice of foreign law is not permitted. ü The choice of the governing law of a contract becomes in particular relevant on the international level. Whenever a contract has links to more than one legal order, courts in charge of resolving a contractual dispute must determine which law will govern the contract. Prof. Tommaso Febbrajo

The governing law: introduction ü Example: A German company concludes a commercial contract with a Dutch company. In the event of a contractual dispute, courts must decide whether German or Dutch substantive laws apply. Prof. Tommaso Febbrajo

ISSUE N. 2 WHICH ROLE HAS THE APPLICABILE LAW? Prof. Tommaso Febbrajo

The role of governing law ü Starting point: Assume two companies, that are domiciled in different countries, conclude an international sales contract Prof. Tommaso Febbrajo

The role of governing law Typical provisions in an international sales contract: • Description of the contractual goods • Contract price • Delivery terms • Payment terms • Warranty periods • Available remedies in case of breach • Governing law of the contract (Choice of Law) /Jurisdiction Agreement or Arbitration Agreement Prof. Tommaso Febbrajo

The role of governing law What is left for the governing law once the contract is concluded? Prof. Tommaso Febbrajo

The roles of governing law: a) gap filler ü The governing law operates as a “gap filler”: legal issues arising out of a contractual relationship that are not addressed by the contract must be resolved by the governing law ü As a consequence, the governing law becomes less important once the parties have extensively dealt with duties, rights and possible legal consequences in case of any breach. ü The more the contract is complete, the less governing law is important Prof. Tommaso Febbrajo

The role of governing law: “gap filler” ü Governing law will, in the absence of contractual provisions, determine: üthe scope of contractual obligations üthe applicable remedies in case of a contract breach (and their preconditions) üthe extent and duration of liability of the parties in case of breach. Prof. Tommaso Febbrajo

The roles of governing law: a) gap filler. Case Study I The English company E orders certain production machinery from the German manufacturing company D. The order submitted to D indicates the type of the equipment, the contract price, the requested delivery dates and contains also a choice of law provision as follows: “This order and the sales contract concluded hereunder shall be governed by English law". D confirms the order towards E without any further reservation. However, due to problems with the sourcing of necessary raw materials, D fails to deliver the contractual goods on time. As a consequence, E terminates the contract without granting Prof. Tommaso Febbrajo a grace period and claims damages.

Case Study I. Solution English law does in principle permit the termination of a (sales) contract in case of any (even a short) delay in delivery. Contrary to Dutch or German law, the buyer is accordingly (in the absence of a contract provision stipulating otherwise) not required to set a “grace period” (a further period of time in wich is still possibile to fulfill obligations) as a condition precedent for a withdrawal from the contract A breach of contract governed by English law does (contrary to other legal systems in Europe) not require Prof. Tommaso Febbrajo fault on part of the party in breach.

The role of governing law: a) gap filler. Case Study II • The Dutch distributor D buys certain products from the UK manufacturer E. The contract contains only a description of the contract goods and the agreed contract price. • The contractual goods delivered by E are defective. D demands the delivery of substutite products or the repair of the delivered products. • E refuses to make good the defect. • Can D enforce perfomance claims in front of a court that has jurisdiction for the case? Prof. Tommaso Febbrajo

Case Study II. Solution • Prof. Tommaso Febbrajo

Private international law National courts must apply the Private International laws of their State to determine the applicable law of the contract in case of an internationa dispute. Prof. Tommaso Febbrajo

Private international law, also called conflict of laws, consists of legal norms that determine three types of issues: 1) which state court has jurisdiction in private matters having cross - border implications, 2) which state law is applicablein such matters and 3) under which conditions may a foreign decision be recognised and enforced in another country. Each state has its own private international law system A global civil code does not exist Prof. Tommaso Febbrajo

Harmonization of international law However, different laws has been harmonized on the international level: - On the European level From 18 December 2009 onwards, Private Internationa law is harmonized also in relation to (international) contractual relationships. Every court residing within the EU must apply the Rome I Regulation. Prof. Tommaso Febbrajo