International commercial law
International Commercial Law is a body of legal rules, conventions, treaties, domestic legislation and commercial customs or usages, that governs international commercial or business transactionsal sale transactions. A transaction will qualify to be international if elements of more than one country are involved.
Lex mercatoria refers to that part of international commercial law which is unwritten, including customary commercial law; customary rules of evidence and procedure; and general principles of commercial law.
- 1 International commercial contracts
- 2 Convention on the International Sale of Goods
- 3 Incoterms 2010
- 4 Contract of carriage of goods
- 5 Title to sue
- 6 Who to sue
- 7 Insurance in international trade
- 8 Payment in international trade
- 9 World Trade Organization (WTO)
- 10 Regional trade blocs
- 11 Anti-dumping and countervailing measures
- 12 International contracts relating to intellectual property (IP)
- 13 International commercial litigation and conflict of laws
- 14 Conflict of laws rules in relation to private commercial disputes
- 15 International trade fraud
- 16 Harmonisation of international commercial law
- 17 See also
- 18 References
- 19 Further reading
- 20 External links
International commercial contracts
International commercial contracts are sale transaction agreements made between parties from different countries.
- 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.
While Incoterms were first published in 1936, it has been revised every 10 years. Incoterms inform sales contract by defining respective obligations, costs, and risks invovled in the delivery of goods from seller to buyer. Incoterms 2010, the 8th revision, refers to the newest collection of essential international commercial and trade terms with 11 rules. Incoterm 2010 was effective on and from January 1, 2011. The terms were devised in recognition of non-uniform standard trade usages between various States. When incorporated into a sale contract, the Incoterm code provides a detailed interpretation of rights and obligations between parties.
Any given Incoterm, in most jurisdictions, will not be incorporated into a contract without express or implied reference to it being an Incoterm. They are standardised and published, available for incorporation into international sale contracts at the parties’ discretion. Parties should specifically refer to the Incoterms in the sale contract to indicate incorporation. The International Chamber of Commerce (ICC) is responsible for revising Incoterms periodically to reflect changing practices in international trade.
The Incoterms are classified in 4 different classes:
- Ex (ExW);
- Free (FOB, FAS, FCA);
- Cost (CPT, CIP, CFR, CIF);
- Delivery (DAP, DAT, DDP).
The 11 terms can also be classified into two different categories depending on its contents:
- Rules for any modes of transport: ExW, FCA, CPT, CIP, DAT, DAP, DDP;
- Rules for sea and inland waterway transport: FAS, FOB, CFR, CIF.
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 .
Who 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.
World Trade Organization (WTO)
The World Trade Organization supersedes the General Agreement on Tariffs and Trade (GATT) as the organisation dealing with international trade; and provides a common institutional framework for trade relations between contracting parties. It represents a crucial aspect of international commercial law through its objectives of facilitating global trade flow; liberalising trade barriers; and providing an effective dispute settlement mechanism.
Major functions of the WTO include to:
- Implement and administer the WTO and its annexes.
- Provide a forum for negotiating trade-related issues; and issues arising from the WTO Agreement.
- Provide a dispute settlement mechanism pursuant to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU)./>
- Administer the Trade Policy Review Mechanism (TPRM) which examines the trade policies of members.
- Cooperate with the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).
GATT 1994 is incorporated into the WTO Agreement, and contains three important basic principles in the context of international commercial law:
Most-favoured nation principle (MFN): expresses that any advantage to a product originating or destined for another country shall be treated in accordance with a like product originating in or destined for the contracting country . Each GATT member must treat all trading partners as well as its most favoured trading partner.
''National treatment principle''': prohibits discrimination between imported and like domestic products, other than through the imposition of tariffs. The WTO panels consider tariff classifications, product nature, intended use, commercial value, price and sustainability.
Reciprocity principle: encourages negotiations between contracting parties on a reciprocal and mutually advantageous basis, directed towards the reduction of tariffs and other charges on imports and exports.
Regional trade blocs
Regional trade blocs are arrangements between States to enable parties to benefit from greater access to each other’s markets. Regional trade initiatives and economic integration is integral to international commercial law through its impact on commercial transactions. In particular, by the creation of free-trade and preferential trading areas; economic and monetary unions; and common markets. Some examples include the European Union, North American Free Trade Agreement and Mercosur.
GATT allows the creation of customs unions and free trade areas as an exception to the MFN principle if it facilitates trade and does not raise barriers to trade of other contracting parties.
Anti-dumping and countervailing measures
Dumping refers to the unfair trading practice of exporting products at a cost below market price. Regulated by GATT, parties cannot introduce products into a foreign country to cause material injury to an established industry or to slow the establishment of a domestic industry.
Anti-dumping regimes involve imposing duties that represent the price difference between goods sold on the exporter’s domestic market and goods sold on the import market. Such measures protect against anti-competitive behaviour but are not a means of trade protection. The regimes are not entirely consistent with WTO-GATT aims to liberalise trade barriers and are declining in use in the international trading arena. However the Committee on Anti-Dumping Practices provides a forum for consultation and exchange of information. Anti-dumping measures can only operate where enacted by domestic legislation since they are enforced by the importing country.
A countervailing duty is imposed for the purpose of offsetting a subsidy. Subsidies are not prohibited under WTO unless there is evidence of injury or damage to the importing country. The Agreement on Subsidies and Countervailing Measures forms the current regime for imposing countervailing duties on subsidised goods to conform to GATT principles. The Committee on Subsidies and Countervailing Measures exists to carry out tasks assigned under the Agreement
International contracts relating to intellectual property (IP)
Developments in international trade through e-commerce have seen an increased emphasis on IP protection. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which replaces earlier international IP agreements, outlines rules to control anti-competitive practices in international licences relating to IP. TRIPS enables compliance disputes to be brought to attention of the WTO. Further it applies basic WTO principles to IP rights, such as the national treatment principle and the MFN principle.
International commercial litigation and conflict of laws
The resolution of disputes arising from private international commercial transactions may be conducted through international commercial mediation, litigation or arbitration. Some inherent difficulties of international litigation include the reluctance to litigate in a foreign court due to unfamiliarity or potential bias; and issues of enforcement of a foreign judgment. To overcome this, international commercial arbitration (‘arbitration’) has become a widespread means of solving international commercial disputes.
Like mediation, arbitration is a private dispute resolution process pursuant to an agreement between parties. The arbitrator or arbitral panel derives their authority and jurisdiction from the commercial agreement; and their decision is prima facie binding. Arbitration is divided into institutional and ad hoc arbitration.
Institutional Arbitration is conducted through an organisation, such as the ICC. The organisation governs the arbitral process through a set of rules and administrative structures. Resorting to the institution is typically determined by terms of the commercial contract between parties.
Ad hoc Arbitration occurs where parties have not specifically made reference to arbitral institution in the contract but agree to submit their dispute to arbitration. Parties can agree to arbitrate according to a statute governing arbitration in the State of one contracting party; or according to an independent set of arbitral rules, such as the UNCITRAL Model Law on International Commercial Arbitration. These rules provide coverage of international commercial arbitration and parties do not need to settle on the arbitration rules.
Recognition and enforcement of an international commercial arbitral award will be according to the laws of State seeking enforcement . Where the State has adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, enforcement will be according to the terms of the Convention. The Convention provides a simple, uniform and effective means of enforcing arbitral awards and processes. In practice, the Convention is the chief means of recognition and enforcement of arbitral awards globally.
Conflict of laws rules in relation to private commercial disputes
International conventions or customs govern international sale of goods contracts, depending on the terms of the sale contract. In the absence of an international convention, domestic law applies. The ‘conflict of laws’ governs which domestic law applies under the principles of private international law. This refers to a situation where the application of respective domestic laws in a commercial dispute can produce very different outcomes.
Private law is crucial to international commercial transactions by establishing whether a contract exists; rights and obligations between parties; and the extent of liability if the contract is not performed.
Disputes between governments in relation to the design and implementation of trade measures: A key role of the WTO in international commercial law is the dispute settlement mechanism for trade disputes. The DSU provides a comprehensive set of rules and procedures to implement each party’s obligations under the WTO Agreement, either in isolation or in combination with an agreement between parties. Another important feature is the WTO TPRM which examines a member’s trading policies to determine whether they have potential adverse effects on other member states.
International trade fraud
International trade fraud is an incident of international commercial transactions. It affects traders through loss of cargo, increased insurance premiums and shipping expenses, as well as the cost to final consumers. The types of fraud vary from documentary fraud; charter-party fraud; fraudulent insurance claims; scuttling; diversion of cargo; counterfeiting, and money laundering.
A notable case in international trade fraud is the Salem Case. This case involved the scuttling of a ship carrying more than 200,000 tons of crude oil. Millions of pounds were lost by the cargo owners, being the highest value conspicuously lost in history. Although US$56 million was claimed from rights assigned under the insured cargo, little has been recovered from the fraud. The case alerted governments and multinational corporations of the inherent risks involved in international operations. It further highlights that complications of international jurisdiction make it difficult to successfully prosecute fraudsters.
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.
International Conventions relevant to international sale of goods include:
- UN Convention on the Limitation Period in the International Sale of Goods 1974
- UNIDROIT Convention on Agency in the International Sale of Goods 1983
- UN Convention on International Bills of Exchange and International Promissory Notes 1988
- UN Convention on Independent Guarantees and Stand-By Letters of Credit 1995
- International law
- International trade law
- Public international law
- Law of the Sea
- United Nations
- Lex Mercatoria
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