This article is written by Pratyusha Ganesh, from Symbiosis Law School, Hyderabad.
Commercial exchanges conducted under the purview of international commercial contracts, especially those associated with the sale of goods, are considered to form the spine of international trade.
Interpretation of a Contract means, the responsibility of an arbitrator to identify the terms and conditions of the bond and give it a meaning and it plays an important role in the American law. It is one of the most common sources of contractual hearing. It is also a hot and commonly debated topic among contract law intellectuals.
The major theories that have been in usage over the previous years for the interpretation of contracts are the “textualist and the contextualist theory”. The textualist theory says, “the contract adjudicator must normally consider only the contract’s written text when interpreting the contract.” On the other hand, according to the contextualist theory, “the interpreter should consider all relevant contextual evidence to interpret the contract, beyond the written contractual text.”
Nature of International Commercial Contracts
International institutions have identified contracts as “international” when the parties concluding the agreement come from two or more different States. The other definitions include, contracts with “significant connections with more than one State”, “involving a choice between the laws of different States’, or ‘affecting the interests of international trade”.
The Hague Principles describe that, a contract can be identified as “commercial’’ when “each party is acting in the exercise of its trade or profession.”
The CISG gives another approach that limits its scope to commercial matters.
Laws/Rules that govern International Commercial Contracts
The contractual parties choose the forum and the law. However, there are exceptions and limitations imposed by the states with respect to selecting the medium and the governing law for their contracts.
In the instance of failure to select the appropriate valid law, the court with which the authority lies, will apply the relevant provisions of private international law to regulate the law that is applicable to the contract, including any international provisions that might apply by default.
In international commercial disputes, it is a common practice for the parties to choose arbitration as the method for deciding on the disagreement.
International commercial arbitration is enforced by a single, nearly conclusive regime that is governed by the “Convention on the Recognition and Enforcement of Foreign Arbitral Awards”, New York, 1958 with 156 State parties.
The arbitration law governs the tribunals.
Most of the intercontinental commercial arbitration laws, especially the ones resulting from the “UNCITRAL Model Law on International Commercial Arbitration”, recognize party autonomy, which permits the parties to choose the rules of law applicable to the contract.
In addition to the above, arbitral tribunals, can be authorized to decide upon cases by deriving judgements on the basis of general principles of fairness and justice without considering a specific law or by applying “rules of law,” like the lex mercatoria and the UNIDROIT Principles of International Commercial Contracts 2010” without reference to any national law.
A conclusive and descriptive research on the applicable laws and rules will be done in the further chapters.
As the cross-border business is reaching heights, the heated argument of with respect to the interpretation and gap-filling in cross-border commercial contracts receives greater attention.
The legal authorities that govern international commercial contracts are “CISG, UNIDROIT Principles, PECL and DCFR.” They provide the rules on interpreting the contracts in a uniform way. A lot of research and developed in this area to understand these concepts beyond the basics.
The focus is on the 3 main laws that govern the international contracts i.e., CISG, the UNIDROIT principles and the National Laws of the states that have entered into the contract.
The research will provide an overview of laws and rules used in International Commercial contracts and dispute resolution models.
My resonation with the above views is discussed in the suggestions and conclusion of this project.
United Nations Convention on Contracts for the International Sale of Goods (CISG)
This chapter presents a more descriptive research on the applicable laws with respect to international commercial contracts.
It dwells into CISG (United Nations Convention on Contracts for the International Sale of Goods) as the main convention related to the International Contracts.
Previously, merchants established their own laws with respect to international contracts, according to their needs and traders wanted to carry on their exchange business even though there was a hindrance of language, culture and personal laws. Hence, there was an evolution of these laws into the International Contract Laws.
When there is an agreement between diverse countries, the contract is governed by the international contract law unless there is an agreement to stand by the laws and regulations of one of the countries. International contract law is a subdivision of private international law. These provisions are often applied to the international sales laws.
From 1980, “United Nations Convention on Contracts for the International Sale of Goods (CISG)” governed the international sales contracts. CISG acts as a governing body for contracts for the international sale of goods. The idea behind the development of this Convention is to encourage commercial interactions between private parties.
The “United Nations Convention on Contracts for the International Sale of Goods” is the most widely used convention and provides practical and functional contract rules. There are 84 states who are a part of the CISG convention and they account for more than three-fourth of the world trade.
The laws laid down by CISG covers the scope, obligations, remedies and various other aspects of the treaty. The CISG was drafted by UNCITRAL in order to amalgamate the law of sales through two conventions prepared by the “International Institute for the Unification of Private Law” and was adopted in 1964. One convention covered the international sale of goods whereas the other spoke about the formation of contracts for the international sale of goods. The conventions were seen as primarily Western European devices and hence did not gain extensive support.
The scope of this treaty/convention is restricted to commercial contracts for the intercontinental sale of goods. The contractual parties have the freedom to opt out of the CISG model or any of its provisions at any time but have to adhere to it otherwise.
Predominantly, the principles will apply to contracts settled by parties from two or more CISG States. Additionally, the CISG will oversee contracts between contractual parties from two or more States/countries where the rules of private international law reflect the application of the law of a CISG State.
If the parties have chosen arbitration as their dispute resolution mechanism, CISG will apply in such a circumstance.
For the implementation of the CISG to be successful, it is important that more and more states adopt and use it. It is important that the courts and the arbitral tribunals construct CISG in an even and uniform method and not by analyzing the domestic laws of each nation.
This will make sure that there are uniform precedents and that the benefits of a harmonized regime are obtained.
According to its Article 7, this issue is addressed by CISG by forming a public international law requirement for the countries, by their courts, to construe and infer the Convention with respect “to its international character and the need to promote uniformity in its application”. This provision requires courts to interpret the CISG independently, without any reference to the national/domestic laws by interpreting foreign judicial pronouncements and scholarly writings.
This is considered to be a relatively new approach for many courts and UNCITRAL is providing full assistance to the courts in this attempt.
CISG is considered to be a sister treaty to the “Convention on the Limitation Period in the International Sale of Goods.”
It was originally adopted in the year 1974 and amended in 1980 for seamless and smooth operation with the CISG. It applies to the exact same kinds of International Commercial Contracts and provides the identical scope.
However, the limitation period is of 4 years with respect to the Sales contracts and disputes arising out of the same.
The Limitation Convention has over 30 states as its parties as has similar rules regarding the parties opting out of the convention.
The International Institute for the Unification of Private Law (UNIDROIT) Principles
The “Unidroit Principles of International Commercial Contracts” came into force in the year 1994 and were subsequently amended in the years 2004 and 2010 by UNIDROIT.
Appropriate revisions are being made by Unidroit whenever necessary. Currently, it is dealing with the specific aspects of long term contracts.
Following the approach of CISG, the Unidroit Principles too, is a compilation of the universal rules for international commercial contracts and therefore have a wider scope than the CISG treaty, which is restricted to sales contracts.
Additionally, they also cover the other aspects that the drafters of the CISG did not agree upon, for example the agency, validity and assignment, etc. They are not binding principles and are open to amendments and changes. They are usually applicable at the choice of the contracting parties or on the decision and choice of the arbitral tribunal, with the authority to do so.
There are number of critical questions that these principles raise:
- The first being that, there can be a lot of distinction between the domestic law of one country and that of another. They are also habitually ill-suited for the problems and issues that international trade arises. Also, it is next to impossible to find a proper solution to a problem applying some national/domestic laws as they are basic and, in most cases, inaccessible. An unending conflict of laws can arise and can lead to uncertainty and inconvenience.
- The International uniform law conventions are usually not approved by many countries and therefore there are chances of one party being ill-advised.
- Besides, international uniform law conventions seem disconnected and incomplete and only deal with the rights and duties of the contractual parties ascending from the explicit types of dealings covered. Even a comprehensive and worldwide accepted instrument like the “Convention on Contracts for the International Sale of Goods” (CISG), contains a number of vague provisions and presents substantial gaps,which come with the risk to be interpreted and augmented in a different way in different countries.
National/Domestic Laws of the particular state/country
The contracting parties have a choice of applying the national/domestic law to their International Commercial Contracts. The choice subsists among the following:
- The bargaining power of the parties with respect to what law has to be applied.
- The law of a third (developed) state might be chosen by the parties to avoid complications and disputes.
The English law is generally used in transactions of an international character, specifically the ones dealing with reinsurance, maritime contract, and sea trade, and various others. The parties might choose Swiss law due to the perception that Switzerland’s political impartiality makes this a neutral law. However, political neutrality may not always be the best guide to choose a particular law to govern your contract for a particular transaction. According to the statistical survey reports of the ICC International Court of Arbitration 2013, German and French law seem to be extensively followed with respect to the above-mentioned contracts. Also, while looking at these surveys, it is very important to note that, normally, CISG is included in the law chosen by the CISG State unless otherwise specified under the convention as excluded by the contracting parties.
Conclusion & recommendations
Contract understanding plays a significant role, especially in the American law among other states. Keeping in mind the widespread debate over the interpretation of contracts, there have been next to nil observations and information and analysis on this topic.
The current law relating to cross border commercial contracts is pretty unsatisfactory. Even though there is a continuous growth in the volume of transactions and exchanges, the markets are getting integrated but there are still ambiguities with respect to what law should be followed.
It is recommended that a new provision of law must be made with uniform applicability around the world or a new convention relating to specific countries has to be made which deals with the provisions and legislations relating to all the disputes, settlements and any issue that an international/cross-border contract may arise. This will result in a considerable reduction of the disputes and easy and quick problem solving among the nations.
A detailed analysis and interpretation will be required by the arbitrator or the judge if domestic/national can be applicable to the case at hand.
- Goode, Commercial Law in the Next Millennium, Sweet & Maxwell, London 1998, pp. 100–101.
- Schwenzer, Global Unification of Contract Law, in Uniform Law Review 2016, p. 60 et seq. (pp. 63–64).
- Olavo Baptista, The UNIDROITPrinciples for International Commercial Law Project: Aspects of International Private Law, in 69 Tulane Law Review (1995), 1209 et seq. (p. 1211) speaks of an authentic ‘mine field’, which business people have to wade through.
- K. Juenger, The Lex Mercatoriaand Private International Law, in Uniform Law Review 2002, p. 171 et seq. (at p. 176).
- So expressly Article 28(1) of the 1985 UNCITRAL Model Law on International Commercial Arbitration: for further details see infraat p. 11.
- Bortolotti, F., Drafting and Negotiating International Commercial Contracts: a Practical Guide, Paris, International Chamber of Commerce, 2008.
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- Schwenzer, Global Unification of Contract Law, in Uniform Law Review 2016, p. 60 et seq. (pp. 63–64).
- Başak Başoğlu (ed.), The Effects of Financial Crises on the Binding Force of Contracts – Renegotiation, Rescission or Revision, Cham: Springer, 2016.
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 Richard A. Posner, The Law and Economics of Contract Interpretation, 83 TEX. L. REV. 1581, 1582 (2005).
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 Robert E. Scott, Text Versus Context: The Failure of the Unitary Law of Contract Interpretation.
 United Nations Convention on Contracts for the International Sale of Goods(CISG) (Vienna, 1980), Article 1(1).
Principles on Choice of Law in International Commercial Contracts (2015) (the “Hague Principles”), Article 1(2).
 Preamble, Comment 1 UNIDROIT Principles 2010.
 Hague Principles, Article 1(1).
 CISG, Article 2(a).
 Section 3.1, UNIDROIT Principles 2010.
 Ingeborg Schwenzer et al., Global Sales and Contract Law 59 (3d ed. 2012).
 The New York Convention, 1958.
 Section 3.3.2, UNIDROIT Principles 2010.
 See section 3.3.1, UNIDROIT Principles 2010.
 Schwenzer, supra note 2, at 59-60.
 CISG, Vienna, 1980.
 United Nations Commission on International Trade Law.
 United Nations Convention on Contracts for The International Sale of Goods, Explanatory Note by the UNCITRAL, 33-34 (2010).
 CISG, Part I, Articles 1-5.
 CISG, Article 6.
 CISG, Article 1(1)(a).
 CISG, Article 1(1)(b).
 The “Limitation Convention”.
 Limitation Convention, Article 8.
 The UNIDROIT Principles.
 Model Clauses for the use of The Unidroit Principles of International Commercial Contracts 4-6 (2013).
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