The Legal Regime for International Sales - Essay Example

International Sales Introduction: The two World Wars in the twentieth century gave rise to two separate world blocs, while a third front developed in the 1960s and 70s, comprised of once-colonized nations. The collapse of the Soviet Union has created more changes and resulted in the emergence of new markets where legal systems are in a stage of transition. An international framework for the law would thereby comprise existing domestic and foreign laws and the law that is harmonized through the action of international formulating agencies. Such harmonized law has been framed largely without the input of several of the emerging markets, such as the states of the former Soviet Union.1 International conventions are not codes, hence they do not cover a complete area of law and any unification that takes place can best be done on the basis of harmonization. During the first half of the twentieth century, legal systems were nationalized and private international law mainly sought to achieve the localization of issues and disputes, while conflict of laws also served this purpose. But during the later half of the 20th century, more instruments have emerged that have harmonized commercial law systems, and it appears that a new conflict of laws system may be needed. Earlier legal systems focused upon maintaining national identity, but this is yielding to a tendency to adopt internationally recognized standards or harmonized law. International trade law became distinguished from domestic law in that it applied to international export transactions, whether of goods or services. While domestic transactions fall within the province of national law, international trade is instead focused upon moving away from the fetters of national law in order to develop a common, international consensus. Harmonization, unification, codification: The modern perception of the law of international trade has been defined by Schmitthoff, who stated: “It is a remarkable fact - as remarkable as the world-wide acceptance of the rule of law and the universal acceptance of corporateness - that the law of international trade shows a striking similarity in all national legal systems.”2 While similarity in legal systems may not necessarily equate to uniformity, the use of a functional comparative approach leads to convergence in legal systems which is akin to uniformity. On this basis, applying Schmutthioff’s views, that conflict of laws is the factor that leads to the applicability of international trade law rules3. The law of international trade includes a spectrum of business activity, primarily related to the export of goods, which can be divided into two categories (a) transactions founded upon the international sale of goods and (b) those related to the supply of services abroad.4 But the notable aspect about international law is that it seeks to move away from the limitations of purely domestic law to a transnational perspective of international trade law. This requires harmonization of national laws, or the convergence of national law systems through elements such as judicial parallelism or commonality in domestic laws and rules, such as for example in the principles of contract law.5 The process of harmonization has recently produced international restatements of the principles of contract law. The law of private international trade was applicable within a domestic province only by the leave and license of the sovereign. But with the growing trend away from nationalist states towards international cooperation, there have also been changes to the law of international trade. National courts have traditionally been reluctant to apply foreign law, especially if such a foreign law is relevant only in the context of a trade usage. But there has been an increasing trend towards the arbitration of disputes or the use of other non judicial methods, which has favored the application of international principles of law as opposed to nationalist legal principles6. Recent developments in the law have favored the use of extra legal standards and trade usages which may be applied in preference to the rules of national law. Goode points out that the benefits of an international trade usage are that it “has normative force through the conjunction of usus and opinion juris.7Another aspect that is changing is that parties to an international trade contract are often interested in regulating their transactions without reference to any State law, hence the strict application of national law may not be desirable. Since arbitration is the preferred method of resolution of international disputes, this may even result in a decision being reached without the strict application of law, thereby producing a new transnational legal order that supersedes the circumscribed boundaries of national law. The objective of harmonisation is to produce a unification of the law of various countries, where differences exist. Additionally, where existing national laws do not adequately serve the purposes of commercial trade or accommodate the changes occurring therein, harmonization allows scope for reform of the law. Hence, harmonization aims to develop a legal structural framework that applies international standards. There are several means by which law may be harmonized. Spanogle has summarized them as follows: (a) Uniform substantive law (b) uniform choice of law rules (c) Lex mercatoria or the general principles of law and (d) standard form contracts.8 According to Goode, harmonization can be effected through bilateral treaties, European Community legislation such as Directives, multilateral conventions embodying a uniform law and those not embodying a uniform law9, all of which can function as sources of law which can be subject to the necessary constitutional acts required to provide them the force of law within a particular international jurisdiction. Another means for the harmonization or the international regulation of commercial law occurs by taking into account the mandatory nature of rules while at the same time, taking into account the association of the rules and the parties, i.e, taking into account both hard and soft law. Hard law includes international conventions, national statutory law as well as customary international law, all of which fall under the category of laws harmonized by inter governmental agencies. Examples of hard law include the 1980 United Nations Convention on Contracts for the International Sale of Goods, the UNIDROIT Factoring Convention and the English Sale of Goods Act. As opposed to this, soft law is applied to extra legal standards and although States may be involve din the formulation of such laws, they are generally given effect to by private parties. Sale of Goods and the potential of CISG: Harmonisation has some significant advantages in the area of trade and the sale of goods. Firstly, it allows for a lifting of barriers created by the complexity of different legal regimes and thereby improves commerce. Secondly, it creates a set of laws that apply specifically to trade and the sale of goods by disregarding differences among countries in the manner of regulation of domestic sale transactions. The CISG is a typical example of such harmonized law that is intended to bring about harmonisation in the area of international sale of goods; it is a system of international trading law that is compatible with both civil and common law10. The CISG has also been adopted by a widespread base of countries. Harmonisation is also beneficial in an evolving context where national laws are non existent, such as for example electronic commerce, where the UNCITRAL Model Law on Electronic Commerce would apply. It creates one legal structure that applies on an international basis and thereby has the potential to eliminate the conflict of laws that diversity in national laws may produce. This also reduces the attendant transactional costs associated with resolving such conflicts of laws, through the replacement of the many legal systems of different countries with a single, international legal instrument.11 It is also easier to adopt reforms at an international level as compared to a domestic level. The Vienna Convention for the International Sale of Goods or the CISG was signed in 1980 and came into force internationally on January 1, 1988. According to Professor Peter Schlechtriem, the Vienna Convention is the “uniform law convention with the greatest influence on the law of worldwide trans border commerce.”12 The Vienna Convention operates on the basis of standard international contractual forms and CIF contracts. CIF contracts are the most commonly and widely used kinds of contracts for sea borne commerce.13 A CIF contract is one that includes the cost of freight and insurance cover for transport of the goods to the required destination.14 A CIF contract is not a contract “that goods shall arrive but a contract to supply goods that comply with the contract of sale and to obtain a contract for carriage and contract of insurance.” 15 Therefore, this arrangement provides advantages both for the seller and the buyer – for the seller because he is able to charge a higher price taking into account the extra services of insurance and freight costs and he also gets paid for the goods before they arrive at their destination. From the perspective of the buyer, it is an attractive arrangement because he does not have to encounter the difficulties associated with hunting for insurance cover in a foreign country. The CISG offers some advantages in formulation of an international framework for the sale of goods, thereby enhancing the possibilities for world trade without encountering choice of law issues. But it is significant to note that the U.K. is one of the countries that have chosen not to ratify the CISG and continues to rely upon its Sale of Goods Act that is based on common law principles. Some of the reasons attributed for UK’s failure to ratify the CISG include (a) ratification not viewed as a legislative priority (b) lack of interest from the business community in supporting the ratification (c) opposition from influential organizations and (d) a fear that the UK will lose its edge in international arbitration.16 Hence, despite the widespread acceptance of the CISG, there are still problems that arise in terms of the underlying principles that may define laws such as CISG and UNIDROIT, which may not be acceptable to every nation, as further detailed below. Problems with traditional harmonisation measures: While it may be argued that harmonisation is very beneficial, especially in the context of international trade, there are also some disadvantages associated with harmonisation. One of these is that harmonization is not able to achieve a unification in the law, mostly because it is generally applied within a limited scope, such as for example, in the context of sale of goods. Moreover ineffective harmonisation may actually increase the problems arising out of the conflicts of laws17. Secondly, not every country in the world may choose to adopt the harmonizing measure, because there may be a lack of political will to incorporate the international harmonizing measure into the scope of domestic law. The CISG and the Model Law on International Commercial Arbitration have experienced a high level of success in that they have been adopted by many countries, with gains accruing in the form of saved transaction costs. But as Wagner points out, the widespread adoption of these laws is not conditioned by their inherent virtues, and there is no consensus on the issue of whether or not these laws constitute best practice, since most States have adopted them just to run with the crowd.18 The Vienna Convention, unlike the UK Act on the Sale of Goods operates on the basis that the contract which exists is between parties in two different countries.19 The second underlying assumption of the Act is that where the rules of private international law arise, then the law of the contracting state will prevail. Therefore, it enjoys precedence over national laws, since in an instance where there is a conflict of laws generated, it will be the international Vienna Convention that will prevail. But problems identified with the CISG are its dearth of consumer remedies and that it does not apply to consumer sales. The right of lien to retain possession of the goods sold as provided for under the Sale of Goods Act of 1979 in the U.K. is likely to be of limited use to the Seller because in most international trading transactions, the Seller is likely to have handed over the possession of the goods to the Buyer and is therefore unlikely to be able to retain a lien on the goods20. There is also no provision in the Vienna Convention for product liability, therefore no liability rests upon a seller for death or injuries caused by goods sold to any person.21 The scope of protection offered to both Seller and Buyer under the CISG may therefore be limited and subject to dispute. There has been considerable opposition to the ratification of the Vienna Convention in the U.K., primarily because of what is perceived as the inadequate nature of remedy available to buyers under the Convention. Several experts in the UK have openly expressed their opposition to its ratification within the U.K with one of their grounds of opposition being the fact that there would be a reduction in the international arbitration cases coming to England.22 One of the problems that have been identified with the Vienna Convention is the fact that most legal practitioners understand Convention provisions in accordance with their own domestic laws23. Another problem identified with the applicability of the Vienna Convention on an international basis is the difficulty in determining the exact parameters of good faith in international trade, since the notion of good faith in contracts may be understood differently in different countries. All of the above demonstrates some of the problems that can arise in harmonisation or convergence of national laws. In discussing the CISG and the UNIDROIT, Kronke points out that there are various problem areas and gaps that may be identified in the terms for sale of goods set out as per Convention standards24. Some of these problem areas include standard terms, conclusion of contracts using an authorized agent, and effects arising from State intervention at various stages of a contract, hence these laws also demonstrate some level of lack of clarity, similar to those generated in complex intergovernmental transactions. Other problems that rise in the context of harmonisation of law include the reluctance by most parties to litigate in foreign courts due to unfamiliarity with the foreign courts and the dangers of potential bias. A dispute over a foreign judgment may involve one of three elements (a) whether the Court which issued the judgment has the necessary jurisdiction (b) choice of law applicable in those judgments and (c) recognition and enforcement of judgments.25 The difficulty and problems associated with recognition of foreign judgments is yet another reason why there is reluctance to adopt international Conventions, where the potential for litigation raises significant problems in the resolution of international contractual and intellectual property disputes. Hence arbitration is the preferred method of dispute resolution in international disputes. Current state of harmonisation: While the CISG represents the most widely adopted international provisions for the sale of goods, the UNIDROIT contract principles represent a restatement of contract principles to conform to an international context. These go over and beyond traditional Convention principles in that they have been recommended by institutional and government users as an effective means to cope with the complexities of trade in a global environment. Another example is the ICC Model Commercial Agency Contract, which addresses the potential conflict of laws by including the following provisions: “Any questions relating to this contract which are not expressly or implicitly settled by the provisions contained in this contract shall be governed, in the following order: (a) by the principles of law generally recognized in international trade as applicable to international (agency) (distributor) contracts, (b) by the relevant trade usages and (c) by the UNIDROIT principles of International Commercial Contracts….”.26 From the above, it may be noted that the provisions mentioned above on the resolution of disputes clearly spell out the manner in which disputes arising out of uncertainty of jurisdiction are to be settled. They reflect the increasing force behind international laws, which have moved far ahead of earlier Conventions which functioned merely as guidelines, reflecting principles rather than the force of rules. While earlier, it was national laws that had precedence and thereby generated confusion in determination of appropriate jurisdiction and dispute resolution, legal provisions such as the CISG and the UNIDROIT reflect a much greater impact of international law. The reluctance to accept foreign judgments or to accept the resolution of a dispute within a foreign Court had earlier functioned as significant barriers to harmonization. However, as Kronke points out, with the refining of the principles of international provisions such as the UNIDROIT Principles of International Commercial Contracts, there is increasing use of these international provisions.27 This is significant because it is being used in natural gas supply contracts, as well as barter and service contracts, whereas earlier, there was reluctance to enter into such contracts due to the belief that only certain national laws were adequate, such as those of the U.S. or the U.K. But the changing framework of these international provisions, especially in the provision for relevant trade usages and the increased emphasis on international commercial arbitration as a means for the resolution of disputes, has been a welcome measure, because it provides a means for those who enter into commercial contracts to be able to effectively seek and attain a resolution of disputes without necessarily utilizing any State law. For example, the UNIDROIT Principles which represent an improvement over the CISG, have at the outset, taken into account the differences existing in the legal systems of the western countries and those of the Socialist economies. Section 1.4 states: “….nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law”. In Socialist economies, the exchange of goods and services takes place in accordance with State plans, where Government dictates the terms of the contract, which State enterprises conclude for sale and purchase of goods. But the inclusion of Section 1,4 clearly comes against Socialist principles and specifically sets out the fact that the contracts are to be guided according to the principles of private international law practices in western countries, which in turn, gives investors and businessmen a greater degree of confidence in going ahead with their contracts. Similarly, the UNIDROIT principles includes at section 1.7, a general and over arching duty for the parties to the contract to act in good faith, right from the pre-contractual phase and all the way throughout the contract’s life cycle and the requirement of good faith has been made mandatory. Hence, the differentials in comprehension of acting in good faith may be addressed to some measure through such provisions. Article 7.2.2 of the UNIDROIT principles also clearly offers the remedy of specific performance, which was not an option under the earlier CSIG. Hence, to some extent, such international provisions address the limitations of harmonization and made them more widely applicable. Conclusion: Harmonisation of laws, especially in the sale of commercial goods, is a difficult measure to achieve due to the inherent reluctance of parties to accept the laws of foreign countries and the bias they may entertain against them. International laws may also pose a threat to national sovereignty, which has traditionally been against nationalistic concerns that existed earlier. But within a global context, harmonisation of law appears to be a necessary measure because so many commercial transactions are now being carried out on a global basis and there is too much of potential for disputes to occur. International commercial laws also offer the scope for expeditious reform to meet the needs of a changing global economy, without the complications arising from the need to modify the laws of several different countries. They offer a single legal framework that can be applied globally. On the basis of the discussion above, it may be concluded that there have been significant improvements made in the area of harmonization of laws. One of the primary means is by increasingly offering arbitration as a means for the resolution of commercial disputes and by requiring good faith and performance of contracts. Some of these measures may be quite successful in terms of ensuring that many of the earlier deficiencies that has been experienced in the harmonisation of law have been successfully addressed. The regime for international sales is much more comprehensive today as compared to what it was earlier; the UNIDROIT and other similar provisions represent a significant improvement over the provisions of the CSIG, which was also not accepted by the United Kingdom due to its perceived lack of effective remedy. But as Kronke has pointed out, this may not be fully adequate to meet the needs of those entering into commercial contracts28. He suggests that there is a need for more fine tuning and better levels of coordination between government bodies and private law formulating agencies in addressing some of the deficiencies that may still exist, or that may come up in due course of time as the laws remain in force over an extended period. There must be a careful analysis of reciprocal endorsement and recommendation of each other’s instruments, for example the UNIDROIT and the UNCITRAL. Kronke also recommends that such important international laws should be drafted by those organizations that possess expertise in the formulation of law rather than using economic policy think tanks, who may be well intentioned but may not be fully conversant with the complex processes involved in the implementation of laws and the problems that could arise. Law that may be frame din a such a manner that it purports to be harmonized is not necessarily going to be interpreted in a harmonized manner, unless sit is properly formulated by experts who are familiar with the ramifications of law. Mistelas also points out that international conventions operate through a process of ratification of laws by the constituent countries, which could be a time consuming procedure, hence measures could be introduced to speed up the process29. What is emerging within the international context is lex mercatoria and soft law and this dualism needs to be addressed if harmonisaiton of law is to be effective. The question of how successfully law can be harmonized will depend upon the degree to which there is interaction between different sources of law, and a good harmonized legal framework should be applicable both in the domestic and international contexts, if it is to be truly effective. Hence, it appears likely that further refinements will be required to the provisions of international commercial sales before a truly harmonized framework can be achieved. Bibliography * Benjamin, 2002. “Sale of Goods” (6th edn), Sweet and Maxwell * Carr, Indira, 2005. “International Trade Law (3rd edn) * Clarkson and Hill, 2007. “The Conflict of Laws”, (3rd edn), Oxford University Press * Conference of the International Academy of Commercial and Consumer Law”, Oxford (Hart) at pp 6 * Garro, Alejandro, 1989. "Reconciliation of Legal Traditions in the UN Convention on Contracts for the International Sale of Goods", 23 International Lawyer at pp 443-483 * Goode, Roy, 1993. "Reflections on the Harmonization of Commercial Law", IN Ross Cranston and Roy Goode (eds.), “Commercial and Consumer Law. National and International Dimensions”, Oxford: Clarendon. * Goode, Ray, 1998. "Usage and its Reception in Transnational Commercial Law", IN Jacob S. Ziegel (ed.), “New Developments in International Commercial and Consumer Law: Proceedings of the 8th Biennial * Juenger, Friedrich, 1994. "Whats Wrong with Forum Shopping?", 16 Sydney Law Review, 5-13 * Klaus Peter Berger, 2000. "The CENTRAL Enquiry on the Use of Transnational Law in International Contract Law and Arbitration, Mealeys International Arbitration Report, 15(9). * Kronke, Herbert, 2005-6. “The U.N. Sales Convention, the UNIDROIT Contract Principles and the way beyond”, Journal of Law and Commerce, 25, pp 450-465 * Mistelas, Loukas, Fletcher, Ian and Cremona, Marise(eds) (2001).”Foundations and Perspectives of International Trade Law”, London: Sweet & Maxwell, pp 3-27 * Mistelis, Loukas, 2000. "Regulatory Aspects: Globalization, Harmonization, Legal Transplants and Law Reform. Some Fundamental Observations ", The International Lawyer, 34(3): 1055-1069 * Moss, Sally, 2005. “Why the United Kingdom Has Not Ratified the CISG”, 1 Journal of Law and Commerce 483 * Paul,Joel, 1991. "Comity in International Law (Private International Law)", Harvard. Journal of International Law: 1-79 * Schlechtriem, Peter, 2005. “Requirements of Application and Sphere of applicability of the CISG” 36, VUW Law Review at 781 to 794 * Schmitthoff, Clive M, 1964. "The Law of International Trade, Its Growth, Formulation and Operation", IN Clive Schmitthoff (ed.), “The Sources of the Law of International Trade with special reference to East-West Trade”, London, 3-38, at pp 3. * Schmitthoff, Clive, 1981.”Commercial Law in a Changing Economic Climate”, 2nd ed., London: Sweet & Maxwell, at 19 * Schmitthoff, Clive, 1990. “Export Trade. The Law and Practice of International Trade”, 9th edition, London: Stevens & Sons/ Sweet & Maxwell, at pp 3.Spanogle, John A, 1991. "The Arrival of Private International Law", 25 Geo. Washington oyrnal of International Law and Eco” at pp 486-494. * Van Reesch, Paul, 2003. “Judicial Consistency and Article 25 of the Convention on the International sale of Goods, 77 Australian law Journal, 436 :442 * Wagner, Gerhard, 2007. “Transaction costs, choice of law and uniform contract law”, Modern Law for global commerce, Congress to celebrate the fortieth annual session of UNCITRAL, Vienna, July 9-12, 2007 Cases cited: * Arnhold Karberg v Blythe, Green, Jourdain and Co (1915) 2 KB 379 * Ross T Smyth and Co Ltd v T D Bailey, Son and Co (1940) 3 All ER 60 Read More