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5.1 Lex Mercatoria. . . . . . … 5.2 International Sales Contracts and the CISG 5.3 Agency versus Distributorship Legal Issues 5.4 Termination 5.5 Arbitration 5.6 Mediation 5.7 Elements of an Agency or Distributor Contract . When a firm gets involved in international business, it enters into several con. Wwacts, either written or implied, with many partners, some of which are located abroad. Examples of such contracts include: • The contract of sale between the exporter and the importer . The contract of insurance between the exporter or the importer (depending on the terms of sale, which will be covered in Chapter 6) and an insurance company (covered in Chapter 10) • The contract of carriage between the exporter or the importer and the ship- ping line • The contract between an exporter and its agent or distributor • The contract between an exporter or an importer and its bank, regarding payment arrangements such as documentary collection or letters of credit (concepts that will be covered in Chapter 7) These contracts are formed under the precepts of many traditions, local laws, multilateral governmental agreements, and international treaties that are some- times not ratified or only partially ratified by some countries. Frequently, these contracts are further complicated by a profoundly different understanding of what a contract represents. Nevertheless, international traders and logistics man- agers have learned to operate within this complex framework. 5.1 Lex Mercatoria When a contract is established between two parties in the same country, the law governing the execution of this contract is clearly determined by that country’s legal system. In the United States, for example, it is the Uniform Commercial Code (UCC), in France, it is the Code de Commerce Français, in Germany, it is the Handelsgesetzbuch, and in Japan it is the shöhö. All domestic legal systems include ample jurisprudence and expertise to determine how contracts should be executed. However, when the contract is between two parties in different countries, no specific laws govern this contract, except what is called Lex Merca- toria-trade law- which is composed of a multitude of international agreements and international trade customs, all of which complement domestic laws. Lex Mercatoria is complex because it includes many different sources of law and jurisprudence. It includes United Nations treaties and other decisions; inter- national agreements, such as the General Agreement on Tariffs and Trade (GATT), which has given rise to the World Trade Organization (WTO) with its own rules and court system; multilateral agreements on specific industry issues, such as the Warsaw Convention on international air transport or the textile Multi-Fiber Agree- ment; regional agreements, such as the European Union and the North American Free Trade Agreement (NAFTA); bilateral agreements, such as the Open Skies agreement between the United States and the Netherlands (see Chapter 12) and the special status granted to Hong Kong by the People’s Republic of China; Inter- national Chamber of Commerce rules, such as the Incoterms® rules for terms of trade (see Chapter 6) and the UCP-600 for bank documentary credits (see Chapter 7); and arbitration decisions and jurisprudence, established by the International Chamber of Commerce Arbitration Court or private arbitrators. In addition, many states*-countries- pick and choose which treaties they will ratify and, on occa- sion, which articles of the treaties they will ratify. They can also choose to become only signatories to a treaty, which means they do not make a full commitment to its terms. In addition, states can decide to abide by the terms of a treaty, but not ratify it. Finally, things get even more interesting when courts decide that some domestic principle cannot be violated by an international convention or custom, even if the country has ratified the agreement. The United States is an exception in many ways regarding its compliance with Lex Mercatoria. The courts of the United States generally do not use jurispru- dence established in other countries, or decisions made by international bodies, in their decisions. The courts’ position is that laws are the results of a democratic process and that neither foreign courts nor international bodies are elected by U.S. nationals, and therefore their decisions cannot be binding.’ The counter. argument is that the United States, by following such policies, is isolating itself from the rest of the world. The debate is far from settled.? This chapter does not attempt to cover Lex Mercatoria in depth. Only an overview of three of its major elements is presented here. The first part of the Chapter covers the issues regarding the contract of sale between an exporter and an importer, which, for most countries, are covered by the United Nations Con- vention on Contracts for the International Sale of Goods (CISG), also known as the Vienna Convention. The second part of the chapter covers the issues regard- ing contracts between exporters and agents and contracts between exporters and distributors, as well as the resolution of eventual disputes through the arbitra- tion system. The third part of the chapter lists the primary clauses of typical contracts between exporters and their international partners. The specific aspects of contracts as they pertain to the terms of sale–the International Commercial Terms (Incoterms® rules) of the International Chamber of Commerce (ICC)-will be covered in Chapter 6. Contracts relating to banking and payments will be covered in Chapter 7, insurance contracts will be covered in Chapter 10, and contracts of carriage between shippers and carriers will be covered in Chapters 11 and 12. 5.2 International Sales Contracts and the CISG Whether a sales contract is considered “international” is not always evident. Courts generally look at two criteria to decide whether a contract is international: the economic criterion, that is, whether there was a transaction that involved a transfer of merchandise from one country to another, and its mirror image of a transfer of funds; and the judicial criterion, which is based on whether the transaction has links to the laws of different states.* For example, a sale of office supplies to a French company’s subsidiary located in Germany by a German sup- plier is not considered international, because it does not involve two countries; however, the same sale to the company’s headquarters, located just across the border, is international. Whenever there is a sales contract between two parties in two different countries, the domestic laws no longer apply, and it is governed by the Vienna Convention.‡ Figure 5.1: The United Nations Complex in Vienna, Austria Photo @Radu Bercan/Shutterstock. Used with permission. The Vienna Convention, or CISG, was born in 1980 of two other conventions, the Uniform Law for the International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF). Both had been written in The Hague in 1964 but had been ratified by only a few countries because they were somewhat deficient.5 In contrast, the CISG has been ratified by more than 84 countries,” whose export and import activities represent more than 80 percent of all world trade. The major exception to the list of developed countries that have signed the CISG is the United Kingdom, whose “[m]inisters do not see the ratification of the Convention as a legislative priority” and therefore have not taken the time to introduce legislation to ratify it in the last 36 years. As often is the case, though, several countries, including the United States, have not ratified all of the Convention and have left out some provisions, some of which may have conflicted with domestic law. The CIG has nevertheless become the law of international contracts, as traders will often elect to have their contracts governed by the laws of a contracting state, and therefore the CISG will apply. For example, even though the United States is not a full signatory to the CIG, transactions between United States companies and their counterparts abroad fall under the Vienna Convention if the country of the other party is a signatory to the CISG. In addition, U.S. companies have the right to “opt in” or “opt out” of the CISG by specifying, in the language of the contract, the particular law to apply to the contract. This point must be specific, though: “The choice-of-law provision must expressly exclude application of the CISG because without an express exclusion, CISG will govern.”® By choosing to have “the laws of the State of Texas” apply to a contract, a company actually elects to have the CISG apply, because the State of Texas operates within the U.S. federal system, which includes all treaties in force, including the CISG. The CISG is substantially different from the UCC-the Uniform Commercial Code, or the commercial law of the United States-in a few of its aspects, notably the contract formation and remedies for non-conforming goods or late delivery. It also differs from several other countries’ domestic laws, as evidenced by the number of countries that have not ratified specific articles of the CISG. Although these exclusions may make good political fodder, they may not be acceptable to courts that handle disputes between traders located in countries that have adopted different versions of the CISG, or have amended it to include some other interpretation.10 5.2.1 Contract Formation The CISG does not consider that a contract has been accepted until both parties agree to all terms. It is customary for a seller to make an offer. The buyer may respond positively, but indicate that it wants a different schedule of delivery or term of payment, or some other aspect of the transaction to be handled differ- ently. Under the UCC of the United States, such a response is construed as an acceptance of the offer. Under the CIG, it is understood as a rejection of the offer, and as a counter-offer by the buyer, unless the suggested changes do not materially affect the contract. The CISG specifies that changes to “price, pay- ment, quality, and quantity of the goods, place, and time of delivery, extent of one party’s liability to the other- most likely to be understood as an Incoterms® rule (see Chapter 6)-or the settlement of disputes are considered to alter the terms of the offer materially, and therefore that no acceptance is made in those cases. Il Another difference between the UCC and the CISG regarding offer and ac- ceptance of a sales contract is what is referred to by U.S. lawyers as the “Battle of the Forms.” For most businesses, an offer or an acceptance is made p in the ntract. de, the t accept nd ons ot tract. standard business form, with many small-print statements pre-printed on it, de. signed to protect the interests of the party writing the offer (or the acceptance, in most instances, these pre-printed clauses do not match, Under the UCC, the courts have determined that these differences do not matter in the formation of a contract, unless they significantly affect the contract terms, and regard these differing terms as additions to the contract terms, to be sorted out by the cour in case of conflict. Under the CISG, the requirement of a mirror image may signify a return to what, for Americans, would be the pre-UCC rules, where the contract Terms are determined by the terms pre-printed on the form of the party “Airing the last shot.” Then again, it may signify that there is no contract until all terms match, with little tolerance for differences. I? There is little evidence that the sec- ond interpretation is likely to prevail, especially if both parties thought there was a contract and acted accordingly. 5.2.2 Creation of the Contract The CIG treats the length of time during which the offer is considered outstand- ing differently than the UCC does. Most offers contain a clause stating that the offer is open until a certain date; under the UCC, however, the offer can be with- drawn at any time, without prejudice, for almost any reason. Under the CISG, the offer cannot be withdrawn by the seller (or the buyer) before its expiration date, and the other party can accept it at any time until that time. The offer is considered irrevocable. The CISG does not dictate that contracts of sale must be written: any agree- ment between a seller and a buyer can form a contract. Obviously, the issues of the proof of the existence of a contract, and of the terms of the contract, then be- come difficult to determine unless there are witnesses to the discussion between seller and buyer. Even when a contract of sale is signed, the written contract terms can be superseded by an oral exchange between the two parties, as long as there is evidence that it was the intent of both parties. In one of the jurisprudence cases contained in the United Nations Commission on International Trade Law (UNCITRAL) database–called CLOUT, for the Case Law on UNCITRAL texts-two witnesses corroborated that the written terms of the contract had been modified orally by the seller and the buyer, and the modifications were used by the court in determining the case,13 In contrast, the UCC requires that any sales agreement above U.S. $500 be in writing. 5.2.3 Breach of Contract Finally, the CIG treats non-conforming goods and delays in shipments much differently than the UCC. Whereas the UCC applies the “perfect tender” principle lie, the goods must exactly conform to the goods contracted and be delivered within the framework specified in the contract), the CISG grants the seller more latitude. For example, the buyer cannot refuse or cancel delivery unless the non contormity or the delay “substantially deprives the buyer of what it was entitled to expect under the contract and, even then, only if the seller foresaw, or a pari» in its position would have foreseen, such a result.”I In other words, the buyer cannot avoid the contract unless the seller performs a fundamental breach of the contract. Therefore, firms operating on a just-in-time basis should specifically notify their suppliers that they are following a just-in-time manufacturing policy, so that suppliers can then “foresee” the problem that a delay in shipment cause’s. In counterbalance, the CISG allows the buyer to unilaterally apply a price re- duction to the contracted amount for non-conforming goods. Such a price re- duction should be proportional to the goods’ loss of value (percentage that is non-conforming) or to the loss of market incurred by the buyer in the event of a delay. However, the burden placed on the buyer to notify the seller in a timely manner, and to explain which rem
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