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 DEALING 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, in english 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

ISSUE N. 3 CHOICE OF JURISDICTION Prof. Tommaso Febbrajo

The Jurisdiction in an international contract ü In a transaction with no foreign element involved it will not usually be necessary to specify the courts which have jurisdiction in the event of a dispute. ü However, where there are international aspects to the transaction, it is sensible to set out in the contract the jurisdiction – i. e in which Country’s courts will decide any dispute between the parties. Prof. Tommaso Febbrajo

The Jurisdiction in an international contract ü A jurisdiction clause therefore states that the parties have agreed to the courts of a named country taking jurisdiction over (in other words, having the right to hear) any disputes that may arise. ü Es. "The parties submit all their disputes arising out of or in connection with this Agreement to the exclusive jurisdiction of the Courts of [ ]". Prof. Tommaso Febbrajo

PROBLEMS RELATED TO THE CHOICE OF JURISDICTION I Prof. Tommaso Febbrajo

Enforcement of a foreign judgment • The parties may wish to submit to the exclusive jurisdiction of the courts of one country. • This may not be wise where one party has material assets in another country, or it may be necessary to obtain immediate enforcement of contractual obligations in that other country. Prof. Tommaso Febbrajo

Example An English company signs a contract for the supply of goods to a company in China. The contract is governed by English law and have any dispute decided by the English courts. • If the Chinese company has no assets in England fails to comply with a sentence against it for damages, the English company would then have to try to enforce the English judgment in the Chinese courts. • Prof. Tommaso Febbrajo

Enforcement of a foreign judgment • The enforcement of foreign judgments is the recognition and enforcement in one jurisdiction of judgments rendered in another ("foreign") jurisdiction. • Foreign judgments may be recognized (i. e. accepted) based on bilateral or multilateral treaties or understandings. Prof. Tommaso Febbrajo

Enforcement of a foreign judgment • For exemple, the recognition and enforcement of EU judgments are governed by Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (c. d. Brussels I bis Regulation). • This new Regulation sets out the conditions, based on which a judgement will be recognized and enforced in other Member States. The purpose of the new Regulation is to improve and facilitate the free circulation of judgments and to further enhance access to justice. Prof. Tommaso Febbrajo

Enforcement of a foreign judgment • In the absence of such Treaties, the outcome of the recognition of a foreign ruling remains unpredictable. • Bottom line: In drafting the jurisdiction clause, these aspects have to be considered very carefully. Prof. Tommaso Febbrajo

PROBLEMS RELATED TO THE CHOICE OF JURISDICTION II Prof. Tommaso Febbrajo

The jurisdiction clause is ignored by the Courts • Despite the presence of a jurisdiction clause, there is always a risk that one of the parties will ignore the terms in the contract and start proceedings in another jurisdiction and the Court seized allows action to go ahead. Prof. Tommaso Febbrajo

Example • In the case outlined above, if the Chinese company is unhappy with the quality of goods, it might start an action in the Chinese courts and the judge might decide to allow the case to go ahead even if the contract stipulates that the English courts have jurisdiction. Prof. Tommaso Febbrajo

ISSUE N. 4 HOW RESOLVE DISPUTES BETWEEN PARTIES Prof. Tommaso Febbrajo

Dispute resolution mechanisms • Basically, there are two dispute Arbitration resolution mechanisms: q Litigation q. Arbitration Prof. Tommaso Febbrajo

Litigation • In litigation process, a case (called suit or lawsuit) is brought before a public Court of law suitably empowered (having the jurisdiction) to hear the case, by the parties involved (the litigants) for resolution (the judgment). • Possibility of appeal the judgment. Prof. Tommaso Febbrajo

Arbitration • Is a form of alternative dispute resolution (ADR). • The parties to a dispute refer it to arbitration, which means that the dispute will be decided by one or more persons (the "arbitrators", or "arbitral tribunal"), and the parties agree to be bound by the arbitral decision (the "award"). • An arbitrator is not a professional Judge. Prof. Tommaso Febbrajo

Arbitration clause • In order to have the dispute ruled by arbitrators, a specific clause in the contract is needed: • Es. Any controversy or claim arising out of or relating to this contract, shall be settled by arbitration administered by the [American Arbitration Association/ International Chamber of Commerce] under its rules. The number of arbitrators shall be [one or three]. The place of arbitration shall be [city, state]. [State] law shall apply. Prof. Tommaso Febbrajo

Arbitration Pros • SPEED: Arbitrations tend to follow more specific and defined timelines toward resolving a dispute, and arbitrators do not always face crowded work and caseloads, resulting in quicker final decisions. • FINALITY: It is very difficult to appeal arbitration rulings. This finality can be a positive factor in relation to ending a dispute, one way or the other, and allowing the parties to move on. Prof. Tommaso Febbrajo

Arbitration Pros • SIMPLIFIED PROCEDURES: Litigation can involve a lot of paperwork, multiple hearings, depositions, subpoenas, and similar processes. An arbitration may eliminate some or many of those timeconsuming and expensive tools of litigation. • EXPERTISE OF THE DECISION MAKER: parties can select an arbitrator who has technical knowledge in the field of the dispute, rather than a judge who may not be familiar with the issues. Prof. Tommaso Febbrajo

Arbitration Cons • NO APPEAL: Unlike a court ruling, a binding arbitration ruling can't be appealed. It can be set aside only if a party can prove that the arbitrator was biased (corrupted) or that the arbitrator's decision violated public policy. • COST: Unlike litigation (where judges provide a public service), parties must also pay arbitrators’ fees that can ben very expensive. Prof. Tommaso Febbrajo