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Foreword
The decision to write this book was taken in consideration of an unmet need
of non-law students enrolled in undergraduate and postgraduate courses ad-
dressing international contracts.
In non-law faculties today there are more and more taught-in-English classes
that deal with issues in connection with international contracts, and students
may face serious difficulties in preparing for exams, mainly because of a lack
of suitable handbooks in English taking into account their non-legal back-
ground.
We have tried to attend to this unmet need by providing those students with
a useful tool summarising basic principles applicable to international contracts.
In doing so, we have thought it appropriate to try to strike the right balance be-
tween general notions (a theoretical approach), on the one hand, and contract
templates and sample contractual clauses (business-case approach), on the oth-
er, in order to give them a view of how international contract law may affect
international business practice.
Throughout the process, we have relied on principles and notions resulting
from international instruments (such as the Principles on Choice of Law in In-
ternational Commercial Contracts recently promulgated by the Hague Confer-
ence on Private International Law) and on contract templates drafted in private
practice or made available to the public by international chambers of commerce
or trade centres, which we acknowledge as our sources.
Although this book is the result of a shared effort and the outcome of a joint
project, chapters 1, 2, 5, 7, 8, 9 and 10 were authored by Vincenzo Salvatore,
whilst chapters 3, 4, 6 and 11 were written by Renzo Cavalieri.
Each author remains individually responsible for any errors and inaccuracies
contained in his respective chapters.
IX
A contract is international when it has certain links with more than one
State.
Internationality concerns all cases involving a choice between the laws of at
least two distinct States. Hence the notion of conflict of laws (otherwise re-
ferred to in terms of private international law, especially in Civil law coun-
tries), used to identify the set of rules and criteria, amongst the two or more
theoretically applicable “conflicting” national laws, the application of which is
the most suitable for governing the parties’ relations.
The above will obviously be the case when parties from different countries
have entered into a contract, but it is also the case when a contract contains, ir-
respective of the parties’ citizenship or nationality, one or more foreign ele-
ments, putting it in contact with one or more legal systems.
For instance, such may be the case when parties are based in different coun-
tries, or when a contract is to be executed abroad.
Conversely, a contract cannot be classified as international, and is therefore
to be deemed purely domestic, when all of its significant elements are connect-
ed with one State only. In this regard, it must also be noted that when one or
more significant elements of a contract are connected with different territorial
units within the same national State (e.g. Quebec and Labrador in Canada, or
Massachusetts and California in the United States, or Queensland and Victoria
in Australia), such fact does not constitute internationality of the contract.
Additionally, the mere circumstance of the parties’ having chosen a foreign
State’s law to govern their contractual relationship is not per se an element suf-
ficient to classify a contract as international.
The ascertainment of internationality is thus an exercise that always implies
careful case-by-case analysis.
The most recent theories in private international law share the view that an
international contract should preferably be governed by the legal system with
which it has the closest connection.
This approach, also known as the proximity rule, considers it appropriate,
in the absence of a choice of applicable law made by the contracting parties, to
subject a contract to the law of the country with which it has the most immedi-
ate ties. The identification of the country with which a contract is most closely
connected is left to the appreciation of the judge, who will have to consider all
of its factual elements on the basis of an ad hoc analysis.
One of the major difficulties that parties and judges have to face when consid-
ering the question of the national law governing an international contract lies in
the fact that a given situation may be deemed to be of one nature under the law of
the forum (so called lex fori, i.e. the law of the country where the judge sits) and
of another nature under the law of the country with which the contract is con-
nected (so called lex causae, i.e. the law of the country which will substantially
govern the contractual relationship). For instance, the same situation may be re-
garded by one national law as presenting an issue of contract and by another na-
tional law as one of succession. A similar problem may arise when the lex fori
and the lex causae differ on questions of capacity and form. The question then is:
are these issues to be classified according to the lex fori or the lex causae?
Similar matters may surface with respect to the classification of connecting
factors: e.g. is the notion of domicile to be understood according to the lex fori
or the lex causae? One question liable to arise is the following: once a legal no-
tion has been understood according to the lex fori (i.e. primary qualification),
can it be reclassified according to the lex causae as identified consequent to ap-
plication of the rules on conflict of laws (i.e. secondary qualification)?
All of the aforementioned possibilities pose a problem of classification (also
referred to as qualification or characterisation).
The prevailing doctrine considers that, as a general rule, the primary qualifi-
cation (both of facts and of connecting factors) should be effected according to
the lex fori (with the sole exception of the criterion of citizenship, since a given
State cannot decide when an individual is a citizen of another country), whilst
the secondary classification should be effected according to the lex causae.
An important exception to qualification according to the lex fori applies
when a judge must ascertain facts or connecting factors governed by conven-
tions addressing international conflict of rules or by other supranational sources
of private international law (e.g. rules rendered applicable in a member State by
a European Union regulation). In such cases the judge will have to take into ac-
count the international origin of the legal or regulatory source in order to ascer-
tain the relevant notion, and follow the rules of interpretation applicable to the
international conventions (or European Union law) involved.
When entering into an international contract, the parties want to know which
amongst the possible applicable national laws will govern their obligations. On
the other hand, when a dispute arises from or is otherwise related to a contract
having links to more than one legal system, the courts must also be in a position
to determine what country’s law governs that contract.
Furthermore, a proper consideration of the law governing an international
contract is important for the parties themselves, in order to better plan the trans-
actions foreseen and to mitigate risk in case of failure to fulfil their respective
obligations.
In international contract law, a general principle of contractual freedom
allows parties to choose the national law applicable to their contractual rela-
tions. The parties to a contract are indeed best placed to determine which set
of legal provisions is most suitable for their transaction: their autonomy en-
hances predictability and legal certainty of remedies available in the event of
future disputes, both important conditions for efficient cross-border trade and
commerce.
Of course, the more extensively the parties have dealt with the respective
duties, rights and consequences of breaches when agreeing the content of
their contract, the less important the law that they choose as applicable to
their contract will be. In other words, as has been correctly noted, the govern-
ing law operates as a “gap filler”, since it will be applicable to settle legal is-
sues that have not been completely addressed by the contract. This latter fact
is also particularly relevant when the parties make a partial choice of law, for
the remainder of the contract, i.e. that part not covered by such choice, will be
governed by the law otherwise applicable in the absence of choice (see, infra,
section 2.2).
When choosing the law governing their relations, contracting parties should
be duly mindful of the consequences of their choice, free of national prejudice
and aware that neither the choice of the law of their respective countries (“my
law” or “your law”) nor the choice, as a sort of compromise, of that of a third
“neutral” country (many international contracts are subject to English law or to
the laws of the State of New York) may be the best possible solution.
The choice requires indeed an in-depth analysis and a thorough considera-
tion as to the reliability and effectiveness of the national law contemplated,
with the parties bearing in mind that the choice of legal system governing their
contract may have unintended consequences on their business relations and
may sometimes even undermine the validity of the contract itself.
Parties should also avoid making reference to a nation that has more than
one legal system overall (e.g. the USA), but rather specify the specific territori-
al unit that they are designating (e.g. the law of Delaware).
The autonomy of parties in choosing the law governing their contractual re-
lations does face certain limits, which either restrict their freedom (preventive
or active limits) or prevent the law chosen from being applicable to the matter
concerned (subsequent or passive limits).
In the former case there will be overriding mandatory rules that a given
country considers so crucial for the safeguarding of its public interests that they
will be applicable in any situation falling within their scope, irrespective of the
law chosen by the parties and otherwise applicable to the contract. These are
mainly rules of public law (e.g. import and export restrictions, tax provisions,
antitrust law) that are applicable directly to the contractual relations and cannot
be replaced by foreign law, regardless of any agreement to the contrary by the
contracting parties.
In the latter case, the notion of public policy (ordre public) will embrace the
fundamental values of the lex fori which must not be jeopardised by the appli-
cation of foreign law. Here, the judge will assess the possible impact of applica-
tion of a foreign law on the political order of his country and ascertain whether
such application will undermine the national interest. For instance, it might be
considered contrary to public policy to allow the application of a governing law
that does not ensure compensation for an agent upon termination of a given
contract in the absence of any fault committed by such agent.
10
11
We have seen that the law governing an international contract may be de-
termined primarily by the parties or, failing the parties’ choice of applicable
law or should such choice be void or ineffective, according either to interna-
tional or domestic rules on the conflict of laws or to the substantive rules of the
country of jurisdiction.
Moreover, we have seen that a general principle prescribes that priority is to
be afforded to the parties’ autonomy and to their freedom of choice, and that,
failing such choice, either the rules governing conflict of laws or the substan-
tive law established by international agreements to which the States concerned
12
13
1
Under the Italian Civil Code (art. 1321), a contract is defined as an “agreement between
two or more parties intending to establish, regulate or extinguish an economic relationship”. In
the context of international trade, a basic principle is the “Freedom of contract”, according to
which “[t]he parties are free to enter into a contract and to determine its content.” (clause 1.1
of UNIDROIT Principles 2016).
15
Given the great variety of contractual types, there is no formula that applies
to every situation: the determining of a contract’s contents is wholly dependent
on the type of transaction that the parties contemplate.
Obviously, the degree of complexity of the commercial operation undertak-
en by the parties will have an impact on the length and complexity of the pro-
cess leading to the conclusion of the contract 2 regulating that operation. Whilst
simple transactions carried out in daily life are usually not negotiated, the mak-
ing of complex contracts requires a preliminary stage of negotiation (pre-
contractual phase) in order to reach the actual agreement stage, and the sign-
ing of a definitive written document is only the final step taken after an agree-
ment on all aspects of the deal has been reached.
Depending on the particularities of the specific case, each contract has its
own history and features. Nonetheless, it is possible to classify contracts in dif-
ferent types and according to various criteria. For the purposes of this text the
following three deserve mention:
1) With respect to their formation, contracts can be formed either immedi-
ately or after a process of progressive negotiation. In the first case, when the
contents of the contract are fully pre-determined, and in particular when the
parties are physically present, the declaration containing the offer and the decla-
ration of acceptance are formulated simultaneously, or in any event within a
very short time-frame. The conclusion of the agreement is therefore simultane-
2
The expression “conclusion of the contract” is here to be understood as the final stage of
the contract’s making, attained when the parties have completed and given legal validity (e.g. by
signing a written document) to their agreement. It will be noted that in common law systems this
stage is also termed “contract execution”. This expression may be misleading, as in most civil
law systems the term “execution” (esecuzione, execution, etc.) is used to denote the stage of per-
formance, as defined in footnote 4.
16
3
See footnote 2.
17
3.2. Negotiation
Negotiation is the first step in the process of formation of the majority of in-
ternational contracts, and the content and length thereof usually vary according
to the complexity and economic value of the contract involved. Almost all ma-
jor business transactions are characterised by lengthy and complex negotia-
tions: in such cases, the definition of contractual terms is progressive, and the
partial understandings progressively reached in this stage do not yet legally
bind the parties.
The whole of the preparatory activity carried out by the parties before reach-
ing the final agreement is called the pre-contractual phase.
In cross-border transactions, which typically place into contractual relations
subjects speaking different languages and belonging to different business envi-
ronments, the process of reaching an agreement that will meet the expectations
of both parties often turns out to be more complicated than in domestic deal-
ings.
If the negotiation succeeds, the parties thereby reach the balancing point of
their respective interests in the planned transaction and a mutual understanding
of the rights and obligations to be set forth for each of them.
But what do parties need to agree upon? An enormous number of topics
could be brought to the negotiating table, depending on the specific type of con-
tract under discussion.
4
By the term “performance” we mean the discharge of obligations as required of the parties
to a contract.
5
The UNIDROIT Principles of International Commercial Contracts 2016 define a “long
term contract” as a contract to be executed over a period of time that normally involves, to a
varying degree, complexity of transaction and continuing relations between the parties.
18
Even though the construction of the contract has not yet been concluded and,
therefore, no legal obligations yet bind the parties, they have the duty, in the
pre-contractual phase as well, to follow certain fundamental rules of conduct.
The minimum standard of behaviour is generally embodied in the duty to
negotiate in good faith. The familiarity of the term “good faith” – even beyond
its strict legal meaning – does not, unfortunately, help us provide a precise def-
inition of the legal concept.
When applied to the negotiation stage, the principle of good faith – a key
element of ancient Roman law widely absorbed by the continental European le-
gal tradition – translates into obligations of many forms that differ from legal
system to legal system. For example, the Italian Civil Code, requires each party
to conduct itself in accordance with the principle of good faith, and prescribes
specific duties of disclosure, clarity and confidentiality. When a party fails to
observe a reasonable standard of fairness, for instance by providing a negligent
or a fraudulent misrepresentation of the contractual elements, it is in breach of
the duty to act in good faith.
The variety of ways in which good faith in bargaining is perceived, inter-
preted and applied in the different legal systems is effectively illustrated in the
following considerations by a common law judge:
19
Since it is clear that the concept of “good faith” may be subject to different
interpretations depending on the applicable legal system, what, in practice,
should parties do in order to conduct their negotiations in good faith?
Firstly, parties to negotiation are to enter into the process only if they sin-
cerely aim at entering into contractual relations. Negotiation should not be con-
ducted with the mere purpose of acquiring significant information about the
counterparty, or of diverting its attention from possible alternative business op-
portunities.
Obviously the negotiation stage implies, for each party, expenditure of time
and economic resources. A party that pretends to be negotiating an agreement
but has, in fact, no real intention to conclude it, or that at a final stage of a long
process suddenly abandons it without providing any reasonable justification,
may cause significant harm to a counterparty that has been counting on the im-
minent conclusion of a contract. This is one of the moments at which the prin-
ciple of good faith comes into play: the harmed party has the possibility of ob-
taining judgment against the counterparty for compensation for loss of profits
or loss of opportunity due to the fruitless effort to reach the intended agreement.
Another rule of conduct dictated by the principle of good faith is the re-
quirement for each party to provide the other with all essential information
about the object of the deal envisaged, thus allowing reciprocal ascertainment
of an actual interest in the making of a contract. Such duty is breached when
one party intentionally misleads the other about the object of the contract by
failing to disclose relevant information which, if known by the latter, would
lead it to a different decision. For example, in the case of an insurance contract,
the insured party who intentionally does not provide the insurer with all the in-
formation required to determine the risk, is in breach of the duty of good faith.
In addition to this, each party should use language that is clear and intelligible
in consideration of the counterparty’s cultural level and specific competence,
refraining from causing confusion for the latter or taking advantage of his or
her lack of knowledge. Parties to negotiation must also keep information ob-
tained therein confidential.
To sum up, the principle of good faith in negotiation constitutes a general
condition of fairness, the content of which cannot be predetermined in a precise
20
21
22
3. The price to be paid for each unit of the Product shall be de-
termined in the Agreement, reasonably within the range of Euro
1,2 - 1,5 (CIF Genoa).
23
6. The Parties agree to discuss the possible future estab- HERE THE PARTIES
lishment of a joint enterprise for the production and distri- AGREE TO DISCUSS THE
POSSIBLE DEVELOPMENT
bution of the Product and of similar decorative items, two OF THEIR CONTRACTUAL
years after the successful implementation of the final RELATIONSHIP
Agreement.
7. By the signature of this Letter of Intent and for a period of at THIS IS AN EXCLUSIVITY
least 90 (ninety) days there from, the Parties undertake to ab- CLAUSE (STAND STILL), A
LEGALLY BINDING
stain from negotiating contracts covering the same subject of CONTRACTUAL
this Letter of Intent with any third party. OBLIGATION
8. Each Party agrees to treat the content of this Letter of Intent THIS IS A CONFIDENTI-
and any information received from another Party as strictly ALITY CLAUSE, ALSO A
LEGALLY BINDING
confidential, unless such information is of public domain, and CONTRACTUAL
to use such information only for the purposes of this Letter of OBLIGATION
Intent.
SIGNATURES OF THE
For Party A __________ (The Legal Representative, _______ ) LEGAL REPRESENTA-
TIVES OF THE PARTIES
For Party B __________ (The Legal Representative, _______ )
24
4.1. Introduction
25
Even more than the negotiation phase, the drafting phase is usually carried
out on a basis of strict cooperation between company managers and business
lawyers.
The growth of international business and trade in the last decades has trans-
formed not only financial, accounting or advisory services, but also the legal pro-
fession. Since multinational enterprises started to expand further abroad and as new
countries and players have emerged in global markets, several law firms – entities
that in the past used to be very conservative professional groupings, practicing only
their own domestic law – have also improved their international capacity and start-
ed to expand internationally, becoming global providers of legal services.
In international practice, lawyers usually operate within large firms able to
provide all the legal services that may be required by clients in relation to a
given transnational deal (corporate, finance, administrative compliance, intel-
lectual property, labour, litigation etc.). Large law firms operate as companies,
in some cases with several thousand professionals and specialised employees,
and dozens of offices in the world’s main financial centres. The role that they
play, together with banks and financial advisors, in the structure and implemen-
tation of large international transactions is increasingly crucial.
Despite the still strong prevalence of national law in matters of international
business, the need for an understanding of common business practices and legal
technicalities and the use of English as a common language tend to make law
firms’ practice quite uniform at the global level: today, the work of an interna-
tional business law firm based in Shanghai is very similar to that of a firm
based in Milan.
Business players daring to enter into contracts without the assistance of legal
counsel are likely to take for granted seemingly uncontroversial matters which,
in the event of dispute, may lead to a court ruling or arbitration award contrary
to their intentions. That is why the drafting stage should, preferably, be con-
ducted in consultation with knowledgeable professionals; lawyers may advise
the parties on the legal implications of their written statements, point out possi-
ble ambiguities or gaps left in a draft, provide information on the legal frame-
work applicable to the planned contractual relationship and, in general, carry
out all consultative functions aimed at minimising the risks borne by their cli-
ents and protecting their legitimate interests.
With only a few exceptions (such as those due to effects at national level for
States party to the UN Convention on Contracts for the International Sale of
26