Private International Law: Lex Mercatoria - Case Study Example

Private International Law: Lex Mercatoria Question i. Definition and Historical Background Lex Mercatoria is a body of rules that were developed by the merchant community in the medieval times to serve the needs of an international trade; the ‘lex mercatoria’ served as an international commercial law.1 Various scholars hold diverse views regarding the historical origin of ‘lex mercatoria. A section of scholars holds the view that the origin of the ‘lex mercatoria’ is attributed to the Roman ‘ius gentium’- a body of rules that guided the trade relations involving the Roman citizens and foreign traders.2 However, the other section of scholars traces the origin of the ‘lex mercatoria’ to the ancient sea trade that was carried out between the residents of Phoenicia and Greece.3 Moreover, a majority of scholars concur that the historical origin of the ‘lex mercotoria’ is linked to the ‘law merchant’ which was experienced in the ‘Middle Ages’.4 The rapid expansion of the international commerce in Western Europe led to the development of the ‘law merchant’; this law was based on usages and customs. The ‘law merchant’ was applied by tribunals, which were located along the trade routes, to settle various transnational disputes. Typically, the development of the ‘law merchant’ was an attempt by the merchant community to formulate regulations that would respond to the needs of the international trade. In this regard, the ‘law merchant’ endeavoured to overcome the setbacks that were associated with the Roman law; the law saw the trade of the ‘Middle Ages’ expand significantly in Western Europe.5 However, the ‘law merchant’ lost its supremacy in the 19th century; the supremacy was majorly lost when a number of states began to codify various laws.6 Similarly, a majority of nations began to embrace nationalism; this led to the incorporation of the ‘law merchant’ into the national laws. The uniformity that was demonstrated by the ‘law merchant’ fade as it was embodied and blended with the municipal laws. This resulted in the supremacy of the national laws as far as the international commerce is concerned; in this respect, the national commercial laws began to gain popularity in regulating the international trade. In a number of circumstances, the disputes arising from an international trade would be settled via the private international law.7 ii. Where can one find the ‘lex mercotoria’? Presently, there are a number of debates which question the existence of the ‘lex mercatoria’ in a ‘single place’; it evident that a number of opponents are inclined to compare the domestic law to the ‘lex mercatoria’.8 The proponents of the domestic law believe that the national law can be found in a ‘single place’; according to them, this scenario differs with respect to the ‘lex mercatoria’. However, a number of legal practitioners are of the view that the ‘lex mercotoria’ is definitive and, as result, it can be found in the decisions that were made in the past. A number of the past decisions, however, indicate that the national law is increasingly displaced by the international trade law as far as the international trade is concerned. It is evident that the use of the national law is unwelcomed among the international traders who are constantly in need of fair and prompt arbitration.9 As a result, there is an increasingly impact, as well as existence, of the ‘lex mercatoria’ in the modern international trade law. Similarly, a large number of the national laws, which are revised in line with the international commercial law, underscore the utilization of the ‘lex mercatoria’ in the international business circles.10 iii. The Vienna Convention The Convention on International Sales Contract is an international commercial law that is perceived as the ‘new lex mercatoria’. The Convention on International Sales Contract was formed with a view of diverting from national laws which hampers an efficient international trade among the transnational traders.11 Similar to ‘the ancient lex mercatoria’, ‘the new mercatoria’- the Convection on International Sales Contract- portrays a number of features such as the usages of commerce and recourse to international trade arbitration, as well as standard clauses.12 Additionally, the Convention on International Sale Contracts is viewed as a commercial law that is simple and certain among the trade community.13 These are among the factors that are influencing the popularity of the Convention on International Sales Contract in the spheres of the trade globalization. iv. Features that Indicate the Existence of the ‘Lex Mercatoria’ in the Vienna Convention a) The Attainment of Uniformity The ‘lex mercatoria’ was associated with uniformity as far as the cross-border dispute is concerned. As opposed to the national law, the Convention on International Sales Contract attempts to enhance the international trade via the provision of a level-playing ground among the international traders.14 The Convention on International Sales Contract has made substantial steps as far as settling the international trade disputes are concerned; these efforts are experienced in the sphere of international sales. The Convention on International Sales Contract has endeavoured to develop rules that were characterized by uniformity. These efforts were made in recognition that the unification of similar laws of regional states would not be successful; this is due to the fact that the unification of certain similar laws would lead to the alteration of other laws. For instance, the unification of a law regarding sales for states that are located in a certain region is more likely than not to affect the property law. In this regard, the Convention on International Sales Contract is perceived as a law which is associated with an optimal solution as far as settling the international-trade disputes are concerned.15 Accordingly, various states can adopt uniform substantive regulations which are created purposely to regulate the international trade; the Vienna Sales Convention provides rules that can be applied directly.16 Moreover, it is noted that the Vienna Convention was not established to fill a vacuum in the legal system; in contrast, the Vienna Convention was designed to supplement other existing rules. Generally, the Vienna Convention provides a platform for various international traders to settle various disputes in an expeditious and effective way via the dispensation of justice that relies on a uniform law. b) The Autonomy of parties The conventional laws acknowledge the doctrine of autonomy to parties; in this respect, the parties have the liberty to choose a substantive law that can be used to settle a dispute which is linked to their trade relations.17 Article six of the Convention on International Sales Contract provides that parties have the authority to exclude the dependence on the Convention, as well as diverge from the effect of the clauses provided by the Convention.18 Below is an example of dispute that was settled via the use of the Convention on International Sales Contract; the resolution of the disputes was based on uniform rules. This example indicates that the ‘lex mercatoria’ exists in the Convention on International Sales Contract. It would also underpin the fact that decisions made in the past indicates the ‘lex mercatoria’ is definitive. v. A Case Study a) Sociedade de Construçoes Aquino & Filho Lda versus Fundició Benito 2000 A Spanish firm, which was a seller, agreed to sell the metal inspection covers for a sewage system to a Portuguese company, which was a buyer. The buyer claimed that the product failed to meet the specifications that were provided in the contract; additionally, the covers were claimed to be faulty; furthermore, the products supplied were claimed to be inappropriate for the purpose that was intended by the buyer and was known to the seller.19 b) An assessment of the dispute A court cited the Vienna Convention’s article 8(2) claiming that the seller was not notified of the requirements for which the public works projects’ products (covers) were intended. The purchaser requested that the covers which were agreed upon should be inscribed ‘D400’ in order for the contract to be binding. The seller told the buyer that there would be a need of purchasing different models; the buyer confirmed after the seller sent a sample of covers that were inscribed ‘D400’. However, the sample sent did not contain products that had complete specifications of the buyer. On the other hand, the buyer claimed that the Transit covers were faulty; this allegation was considered to be true by the court.20 c) The Court’s Verdict Citing article 25 CISG The court ruled out that the seller had exercised a fundamental breach of the contract; the court reached at this conclusion by incorporating the article 25 CISG into the decision making process. Given that the buyer had made a mistake of the product selection- the buyer ordered covers that were appropriate for footways which were installed on the road- the court ruled out that each party contributed to the eventual outcome; as a result, the court held that the amount of money that was supposed to be paid to the seller for the sale of covers should be reduced by 50%.21 d) The Analysis of the Case in the Light of the ‘Lex Mercatoria’ The above case indicates that the ‘lex mercatoria’ is definitive; similarly, the ‘lex mercotoria’, which is represented by a number of the International Commercial laws, exists in the present world. Specifically, the features of ‘lex mercatoria’ are highly associated with those of Vienna Convention.22 In relation to other laws, the Vienna Convention is characterized by a significant number of rules which are independent of the domestic law. The Vienna Convention has a number of rules that apply to all contracts of sales that are associated with businesses which take place in the contracting states. For instance, in the above case, which involved a Spanish and Portugal companies, the court applied article 25 CISG.23 This implies that while the Vienna Convention is definitive, it also attempts to apply a uniform rule that is deemed to be acceptable between the contracting parties; these features were common during the existence of the ‘old lex mercatoria’.24 The cross-border disputes were resolved via the application of uniform rules; additionally, the rules that were laid down by the merchant community were ensured to be conclusive as far as a court decision making process is concerned. The cross-border rules are likely to become popular among the legal practitioners, scholars and businesspersons given the fact that online businesses, which are non-physical, are hardly linked to the rules of a certain jurisdiction.25 In this regard, there is a need to have a comprehensive and definitive international trade law The opponents of the ‘lex mercatoria’, and its related Vienna Convention, argue that the municipal law can pre-empt the clauses of the Vienna Convention. The article 6 of the Vienna Convention outline that the party autonomy regulates a contract with respect to matters that are provided by the Convention. With reference to article 4, the Vienna Convention does not deal with the validity of a contract or related clauses. The aspects that are covered by the Vienna Convention include the liability of a seller with respect to goods that do not portray conformity; it is provided that the liability is reflected by an expression provision. Furthermore, article 36(1) provides that a seller would be liable according to the contract- the article 36(2) explicitly refers to a particular assurance that for a given period the specified goods would be suitable for a certain purpose or will maintain certain features.26 In this respect, it is evident that the parties are at liberty to agree that the liability of a seller will vary from the norms that are provided by the Vienna Convection. According to the various articles, as well as article 36(2), the liability of a seller is likely to be significantly deviated from the norms of the Convention; it may as well be eradicated. However, the municipal law normally restrict such provisions; in a large number of domestic laws, disclaimers that tend to favour a proficient trader are deemed to be ineffective among the consumers. In this respect, it is arguable that the ‘lex mercatoria’ is not definitive; as a result, the domestic law can prevail over the clauses of the Vienna Convention.27 Question 2 I. Almi (American Construction Company) versus Rusai (Russian metal supplier) The three days delivery of goods after the deadline that was agreed between Almi (buyer) and Rusai (seller) resulted in a dispute after an American Construction Company (buyer) rejected the shipment by a Russian metal supplier (seller). The American construction company claimed that there were a number of sub-buyers that were lined up to purchase the aluminium urgently; as a result of the delay, it suffered a loss of sub-sale. The buyer also indicated that the seller had committed a fundamental breach of the contract; on the other hand, the seller claimed that the delivery date was not important; additionally, the seller claimed that it was not aware of the sub-sale arrangement made by the buyer. The Fundamental Breach of Contract A fundamental breach is a legal term that refers to a breach of contract which is so fundamental; this kind of breach allows the distressed party to terminate the performance of a certain contract. It also entitles the distressed party to sue the other party for related damages. Article 25 of the ‘Convention on Contracts for the Sale of Goods’ provides that a breach of contract is established to be fundamental in the event that it leads to a damage to the distressed party to an extent of denying him or her what he or she is entitled to experience with respect to a given contract; however, there is an exception provided in the event the person in breach did not predict, and a sound individual of the same type and under similar situation would not have foretold comparable results.28 The late delivery of goods is considered as a fundamental breach of contract if it is outlined in the agreement and leads to significant damages in the event that it is not observed; this is underpinned by the fact that a party is denied what he is expected to obtain as demonstrated by a contract. On the other hand, the breach of a contract may cease to be fundamental if the person in breach did not foresee such results (of delay and consequent damages to the distressed party).29 II. International Criminal Court Arbitration Case Number 9448 July 1999 The manufacturer of roller bearings from Switzerland (seller) entered into a contract of supplying the United States market via an exclusive agent (buyer). The contract was deemed to be contented among the parties in the first two years following which the buyer ceased to make the required payments. The seller began an arbitration process with a view of accessing the payments of the outstanding invoices that related to the goods which were delivered; additionally, the seller demanded for an interest payment. On the other hand, the buyer alleged that the supplied goods did not conform to the standards that were agreed in the original contract; among the issues that were quoted include, lateness of the goods delivered, and wrong quantity. In this regard, the seller was required to pay the amount of money that was claimed by buyer in order to offset the fundamental breach that was committed by the agent, including lateness. The purchaser failed to pay the costs of advances that were established by the International Criminal Court of the International Court of Arbitration for counterclaim. The Arbitral Tribunal attempted to defend the claims of seller as opposed to that of the buyer’s.30 The Arbitral Tribunal assessed that the contract between the seller and the buyer to be a sales of good’s contract as far as article 3(1) CSIG is concerned. Additionally, the Arbitral Tribunal stated that the Vienna Convention applied pursuant to article 1(1) (a) CSIG given that Switzerland is one of the contracting states.31 III. Obligation of Seller Under article 35, a seller has an obligation of delivering goods that are of quality, quantity, and other descriptions which are outlined by a given contract. With regards to the CIF contract, the buyer agreed to insert a term into contract which required that goods should be delivered quickly- in a period of less than 10 days. As a result, the seller was required to deliver goods within a period of 10 days. IV. The Provincial Court of Appeal BGH 13 November 1996 and 1 U 167/95 OLG Hamburg 12 July 1996 A German (seller) and English (buyer) entered into a contract in which the seller was required to supply the buyer the iron-molybdenum. The goods were to be delivered from China; however, the delivery date of the goods was in October 1994. The goods were never delivered given that the purchaser (German) did not receive the goods from a Chinese supplier. Following the expiry date of the additional period, the plaintiff sought the supply of the same goods from a different supplier although at a high price; the buyer sued the German seller for additional money on the purchase of products.32 The failure of delivery of goods within a specified period of time constitutes a fundamental breach given that the delivery of goods within a specific period of time is deemed to be of a particular interest to a buyer. The German seller was liable for risks that are associated with the supply from a Chinese supplier since the buyer was not consent of such arrangement. The seller (German) should have foreseen the lateness of the Chinese supplier. As indicated in article 25 CISG, this should be foreseeable during the finalization of a contract.33 V. Audiencia Provincial de Pamplona, Division 3 27 March 2000 A defendant, German, ordered through Y a sales agent who is self-employed, flagstones from seller who is a nationality of Italy (claimant). An invoice was sent by the seller to the buyer via Y; however, Y reduced the price that was specified in the invoice. The defendant wrote a cheque to Y; although the money was cashed, the plaintiff never received an amount that was equal to the purchase price. The seller sued the buyer for the buying price, as well as reminder expenses, following the reminder that was sent through the plaintiff advocate.34 Y was not authorised by plaintiff to a collecting the agent of the seller. As stipulated by article 79 CISG, when the buyer wrote the cheque, the defendant needed to bear the risk of Y cashing the cheque, and failing to hand in the purchase price to the seller. Correspondingly, it is evident that the seller did not receive the purchase price; in this regard, the handing over of cheque to Y does not amount to payment. Although an interest rate with respect to the Italian law and applicable to the international private law of German was established, the rate was maintained at a low level in the light of article 74 CISG; this is due to the fact that the plaintiff did not prove the recourse to the credit of a bank.35 As provided by article 35, a seller is obligated to deliver goods that are of quantity, quality and other descriptions which are outlined by a given contract, including date. The failure to deliver goods within 10 days constituted to a fundamental breach of contract by the Seller (Russian metal supplier). However, according to article 25 CISG, this should be foreseeable during the finalization of a contract; given that the seller (Russian metal supplier) did not foresee the failure of a late delivery during the finalization of the contract with the American Construction Company, the breach of contract cease to be fundamental. It is evident that the strike which resulted in the delay was not foreseen by the seller during the conclusion of the contract. .36 Question 3 I. The CIF CIF is an abbreviation that is widespread among the international traders; scholars indicate that the abbreviation (CIF) stands for Cost, Insurance and Freight. The term means that CIF is an agreement between individuals to sell goods at a certain price; the price incorporates the insurance coverage, freight and cost of goods. In other words, an individual should pay for the cost of goods, the sea freight for vessel with respect to the shipping of goods, and insurance charges that are associated with maritime. The CIF requires that a merchant should ship a certain amount of goods that is specified in the contract of sale. Additionally, a vendor is required to organize for insurance services with a view of benefitting a buyer, as well as arranging for invoice and tendering the documents to a purchaser.37 Generally, the transfer of ownership or title of goods is normally executed via the shipment and tender of documents. However, it is not uncommon that an individual can be asked for a delivery bill as opposed to the bill of lading38. It would be wise to assess the outcome of the deal given that the CIF requires the delivery of the bill of lading to enhance the payment for goods. Due to a number of reasons, it is arguable that the CIF is a sale of documents as opposed to sale of goods. Firstly, it is evident that a purchaser is obliged to pay for the price of goods, insurance fee and freight charges upon the receiving of documents. It can be argued that CIF contract can be regarded as the sale of documents since a purchaser is required to pay the inclusive price regardless of whether goods are in good conditions or not. Similarly, a purchaser is legally not allowed to pay for goods if the documents have not been tendered.39 Henry Dean ‘S^Sons (Sydney) Pty Ltd ‘versus ‘ODay Pty Ltd’ (1927) 39 CLR 330 The judgement of the above case was explained in Gill & Duffs. The case of Gill & Duffs is explained vividly in the final example of a case in this report. With respect to Henry Dean (buyer) versus ‘O’ Pty Ltd case (seller), the seller accepted to deliver 150 sacks of Liverpool wheat of a given quality and price to a buyer via the CIF Sydney. However, the complainant claimed that the sacks shipped were not in accordance to the contract. The shipping document sent by the seller implied that ‘150 sacks of Liverpool wheat’ were shipped. It was ruled out that the conforming documents cannot prevail if the actual goods shipped did not conform to the contract. This verdict outlines the fact that weight of the CIF is significantly based on goods as opposed to the shipping documents.40 On the other hand, the CIF contract can be regarded as a sale of goods sale of document given that the preparation of documents is viewed as an auxiliary service.41 This means that documents attempt to support the services that are offered to a product to ensure the goods arrive at the purchaser’s seaport safely. For instance, the insurance service ensures that a purchaser is able to recover the damaged and lost goods. The freight charges also ensure that goods are shipped to the purchaser’s destination at the right time and by complying with the laid down agreement. In summary, the services offered by documentation attempts to ensure that goods are finally received by purchasers. A case which demonstrates that the importance of the physical condition of goods prevail over that of documents is illustrated. Gill & Duffs SA versus Berger & Co. Inc. [1984] AC 382 A buyer attempted to reject the payment of goods against the tender of shipping documents since it did not incorporate a report from the shipping agent indicating that the goods were in a good condition and matched that of the previous sample. The lawyers provided that the report should not and is incapable of being incorporated among the shipping documents. Any additional document should have been provided by the contract. The rejection of the shipping documents by the buyer was treated to be an illegal renunciation of the contract. However, the seller accepted the buyer’s rejection of goods; the law observed this act as not covered by the contract. The right of the buyer to reject the goods was deemed to be un-exercisable until the shipping documents were transferred to the buyer by the seller. This case indicates that the importance of the shipping documents prevails that of goods. With respect to law, payment is exercisable only and only if shipping documents are correctly provided as provided in the contract. It can be argued that the payment and rejection of goods is only based on the shipping goods; in other words, an individual is needed to pay for the shipping documents as opposed to goods.42 List of references Andenaes Mads, Theory and practice of harmonisation (Edward Elgar 2011) 64. Assareh A., ‘Forum Shopping and the Cost of Access to Justice: Cost and Certainty in International Commercial Litigation and Arbitration’ (2013) JLC 67. Audiencia Provincial de Pamplona [2000] Division 3 27. Ayad M., ‘The Vienna Convention as Authority for the Use of Precedent as Customary Practice in International Arbitrations of Oil Concessions and Investment Disputes in North Africa and the Gulf Arab States; or a Lex Mercatoria for a Lex Petrolea’ 2013) JWI 926. 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Knapp C., Rules of contract law: selections from the Uniform commercial code, the CISG, the Restatement (second) of contracts, and the UNIDROIT principles, with material on contract drafting and sample examination questions (Wolters 2012) 48. Kwan C., ‘Trade Facilitation: Defining, Measuring, Explaining and Reducing the Cost of International Trade, by Patricia Sourdin and Richard Pomfret’ (2013) ITJ 321. Leukart A., The sellers right to cure: with special reference to standard terms and the United Nations convention on contracts for the international sale of goods (HL 2013) 54. Manjiao C., ‘The Iceberg Beneath the Water: The Hidden Discrimination against the Lex Mercatoria in Chinese Arbitration." (2011) JPIL 348. Mansoor Z., ‘Principles of European contract law: an autonomous lex mercatoria or part of a universal lex mercatoria’ (2013) JPL 24. Peters M. and Manu K., ‘Are the Principles of European Contract Law an Autonomous Lex Mercatoria, or are They Part of Universal Lex Mercatoria’ (2012) EJCC 6. Piergiovanni V., From lex mercatoria to commercial law (JW 2013) 53. Plaza R., ‘Transnational power transmission and international law’ (2013) IRL 44. Provincial Court of Appeal [1996] 1 U 167/95 OLG VIII ZB 37/96. Saldarriaga, A., ‘Investment Awards and the Rules of Interpretation of the Vienna Convention: Making Room for Improvement’ (2013) ICSID 198. Schwenzer I., Globalization versus regionalization: 4. annual MAA Schlechtriem CISG Conference (EP 2013). Vidigal E., ‘A lex mercatoria e sua aplicação no mundo contemporâneo 10.5102/uri.v9i1.1338’ (2011) URI 17. White A., ‘Theof: Is The Vienna Convention Hostile To Drafting History?’ (2013) AJIL: 786. Ziemele I., ‘Customary International Law in the Case Law of the European Court of Human Rights – The Method’ (2013) LPICT 249. Zumbansen P., ‘Debating Autonomy and Procedural Justice: The Lex Mercatoria in the Context of Global Governance Debates--A Reply to Thomas Schultz’ (2011) JIDS 431. Gill & Duffs SA versus Berger & Co. Inc. [1984] AC 382 Sociedade de Construçoes Aquino & Filho Lda v Fundició Benito [2004] S.L. 28, [2004]. Henry Dean ‘S^Sons (Sydney) Pty Ltd v ‘ODay Pty Ltd’ (1927) 39 CLR 330 Read More