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Breakout Session 1404 Jeffrey L. Roth, Attorney, Fees & Burgess, P.C. Allen L. Anderson, Attorney, Fees & Burges

International Commercial Contracting : Identifying and Addressing Risk Areas. Breakout Session 1404 Jeffrey L. Roth, Attorney, Fees & Burgess, P.C. Allen L. Anderson, Attorney, Fees & Burgess, P.C. April 24, 2007 10:45 a.m. – 11:45 a.m.

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Breakout Session 1404 Jeffrey L. Roth, Attorney, Fees & Burgess, P.C. Allen L. Anderson, Attorney, Fees & Burges

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  1. International Commercial Contracting: Identifying and Addressing Risk Areas Breakout Session 1404 Jeffrey L. Roth, Attorney, Fees & Burgess, P.C. Allen L. Anderson, Attorney, Fees & Burgess, P.C. April 24, 2007 10:45 a.m. – 11:45 a.m.

  2. Understanding Legal Systems, and How International Contracting Differs from Domestic Contracting

  3. What Law Applies to an International Contract? • Practically, whatever law parties agree to in the contract, however: • can default to either home country of the parties, or to location in which contract is performed; • United Nations Convention on Contracts for the International Sale of Goods (CISG); • default rules under private international law.

  4. § 1-105. Territorial Application of the U.C.C. Act; Parties' Power to Choose Applicable Law. • Except as provided hereafter in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties. Failing such agreement this Act applies to transactions bearing an appropriate relation to this state. • Where one of the following provisions of this Act specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law (including the conflict of laws rules) so specified.

  5. Conflict of Laws/United States • Restatement 2nd (Conflict of Laws) §187(1) • allows choice for issues of supplemental law - even split choice & (2) even with mandatory rules . . . unless • the chosen state lacks substantial relationship or • if contrary to fundamental policy of state with materially greater interest for the issue

  6. Conflict of Laws/United States • §188(1)Restatement - Absent choice: local law applies of state that has, with respect to an issue, most significant relationship to the transaction and the parties . . . • §188(2)Restatement - Relevant contacts/elements are: the place of contracting; place of negotiation; of performance; situs of subject matter; domicile or residence; nationality; place of incorporation and place of business of parties (weighing those factors follows the importance for the issue; negotiating and performance together in one place usually score as indicative of proper law) • §196Restatement - one or more singular issues may be split off to be subjected to another national (or state) law

  7. Conflict of Laws/Europe • Rome Convention 19 June 1980 gives the general conflicts rules • Applies to most contracts (some exclusions) • All European countries apply this to all cases irrespective of reciprocity; this is their approach to all contracts before a judge in EU, whatsoever the particular international link

  8. Conflict of Laws/Europe • National law chosen by parties (art. 3) • Explicit or implicit choice, partial or posterior choice; validity is judged under the national law of contract (as indicated) itself (art. 8) • Rule absent choice (art.4): closest connection as found via the rebuttable presumption that law of residence applies of party that performs the characteristic performance . . .

  9. Conflict of Laws/Mexico • Mexico City Treaty of 17 March 1994 • Broader scope than European treaty • Party autonomy established (art. 7 & 8) • Absent choice the rule is flexible (… vague); art. 9 wants all elements weighed and it brings into consideration « principles of international commercial law » - it taps directly into the «Law Merchant»; Art. 10 refers again to guidelines, customs, principles of international common law, usages & practice • Splitting up may be done by the judge or arbitrator

  10. Choice of Law and Forum Location • Provides certainty to the agreement • Saves time and money determining enforceability and contractual rights • Business contracts are time sensitive • Loss of funds due to legal bills • Loss of profits due to stagnant contracts

  11. Cultural Issues and Local Counsel

  12. Different cultural standards • Philosophy of “harmony” influences negotiations in Japan: Japanese “wa” concept is reflected in the Japanese negotiation style by placing emphasis on developing a trusting long term relationship; there is an aversion to litigation and emphasis on contracting parties working out differences among themselves. • Research and attention to detail when negotiating: Conflicts that result from cross-cultural misunderstandings can be avoided if both parties understand their respective rights and duties. • Different local legal rules • Can eliminate your ability to enforce or obtain judgment on a contract; Negotiations should lead to a written contract that is enforceable in the countries of both parties. • Dispute resolution system should be completely and fairly addressed. • Jurisdictions which limit true freedom of contract as seen in the United States • May increase liability exposure if unheeded

  13. Consulting With Local Counsel • Malpractice suits against attorneys? • Billed-hour explanations? • Referral basis • ‘bad apples’

  14. Pre-contractual liability: • United States • France • China • Local requirements • Working with foreign governments

  15. DRAFT PROPOSAL _________ –_______________ #________________ Contractual parties : _________________ Seller : ____________, _______ Czech Republic Buyer : ____________________ Products : ________ as per Appendix A of that Agreement Prices Prices as per Appendix A Prices are valid for _ months from date of agreement. Prices should be revised quaterly on last day of March, June, September and December, using __________ for ____ of wheel price. Method of Payment Net 30 from Invoice day. If the payment is not paid within 30 days, Seller has right to invoice penalty in amount of __% per each week of delay, up to __% of value of unpaid goods. Deliveries Supplier deliver Goods to Customer in regular monthly batches on parity CIF Chicago as per dates in Appendix B of that agreement. Transfer of Risk and Title Risk on Goods to pass from Supplier to Buyer upon delivery on parity ___________, title to pass upon full payment. Guarantees The product shall be guaranteed by the Supplier for ____ years against any defect attributable to production and not detected in the inspection at the Supplier’s works. This period shall start from the end of the month marked on the Product. The Product, which during the guarantee period proves to have faults making them unsuitable for service or reducing its service life, shall be rejected. However, before being rejected definitively, the defective product may be submitted to an examination in the presence of both parties – the Buyer and the Supplier – if the latter so requests.

  16. AGREEMENT This agreement is entered into this __day of __________2006 between _________________________________ with offices at ____________, ________, China ("Seller"), and ______________________ with offices at _______________, _________, ________ _________ ("Buyer"). The Seller agrees to sell, and the Buyer agrees to buy, ____________ ("Goods") in accordance with the following agreement and terms: 1. SPECIFICATIONS - The description and specifications of the Goods to the delivered under this Agreement ("Specifications") shall be as set forth in Attachment 1 to this Agreement, incorporated herein by reference. 2. PRICING - Pricing, quantities and the delivery schedule of Goods shall be as set forth in Attachment 2 to this Agreement, incorporated herein by reference. All prices shall be in U.S. dollars. 3. DELIVERY A. Packing Requirements - Goods shall be packed according to Buyer's Drawing No. _______________, _________ . B. Shipping Marks: N/M C. FOB _________ (Incoterms 2000) D. Subject to Clauses 3F and 3G and satisfactory inspection in accordance with Clause 4 below, title to the Goods shall transfer to Buyer upon delivery to the Buyer’s designated shipper at the ___________. E. The Seller warrants that it has sufficient capacity to produce and deliver the Goods in accordance with the delivery schedule in Attachment 2. If any event contemplated pursuant to Article 79 of the United Nations Convention on International Sale of Goods occurs and hence affecting delivery under this Agreement, the Seller agrees that it will allocate existing supply of the Goods, and capacity to manufacture the Goods, to Buyer in accordance with the ratio of the Buyer's open or unsatisfied orders for the calendar year compared to all open orders for the Goods for the calendar year.

  17. Contract Drafting Generally • short, plain English; • avoid legal jargon, if possible; • use active voice; • be precise, clear, and focused; • particularly important in international context – why add confusion with complicated language?

  18. Comparing the Laws Surrounding Contracts and Contract Interpretation

  19. National Laws: Uniform Commercial Code • Conventions and Treaties: United Nations Convention on Contracts for the International Sale of Goods • Soft Laws: International Institute for the Unification of Private Law (UNIDROIT) and Principles of International Commercial Contracts • Customary International Business Laws: International Chamber of Commerce Uniform Customs and Practices for Documentary Credits addressing Letters of Credit • International Commercial Arbitration Decisions: arbitration decisions are based on the application of international commercial law

  20. General Overview • Uniform Commercial Code (UCC): U.S. domestic contracting rules that apply only to sales of goods (“all things which are movable at the time of identification to the contract for sale,” excluding money and real property (UCC § 2-103(k)).

  21. General Overview • Convention on Contracts for the International Sale of Goods (CISG), developed by United Nations. This is an international set of contracting rules that apply if two parties’ states are both members of the convention and the parties do not opt-out of the CISG.

  22. Countries That Have Adopted the UNCISG include: Argentina, Australia, Austria, Belarus, Belgium, Bosnia, Bulgaria, Burundi, Canada, Chile, China, Croatia, Cuba, The Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Herzegovina, Holland, Hungary, Iraq, Italy, Kirghizstan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, New Zealand, Netherlands, Norway, Peru, Poland, Romania, Russia, Switzerland, Slovakia, Slovenia, Singapore, Spain, Sweden, Syria, Uganda, Ukraine, United States of America, Uruguay, Uzbekistan, Venezuela, Zambia

  23. What if CISG is Silent About a Particular Issue? • Use general principles of CISG • Default to UNIDROIT principles Shhh!

  24. General Overview • UNIDROIT: International Institute for the Unification of Private Law developed their Principles of Commercial Contracts in 1994. These are intended only for international agreements between commercial parties. • designed more as a model rule for different governments for use in creating their own contracting rules, but can apply to a private agreement at the agreement of the parties. • supplements international laws

  25. Application • UCC: transaction in goods and the U.S. domestic laws apply; however, the CISG can displace the UCC in an international context. • UNIDROIT: only applies on express agreement by the parties.

  26. Formation Writing and other Requirements: • UCC - sale of goods over $500 must be evidenced in writing; only price term required (no quantity, etc needed); gap-fillers are provided in terms of “reasonableness.” • CISG and UNIDROIT - no writing required; CISG requires quantity and price to be spelled out. • You CAN verbally commit under the CISG and the UNIDROIT principles.

  27. Electronic Contracts • UCC/USA:UETA (Uniform Electronic Transaction Act) and ESign • validates and allows enforceability of electronic signatures and documents • CISG • no express law • Since there is no writing requirement … ? • Telex and telegram expressly allowed

  28. Mirror-Image UCC - Battle of the Forms • Contract can still be formed if offer and acceptance don’t match, so long as the acceptance does not change material terms, or the offeror does not object in a certain time period. • Material terms include arbitration agreement; significant changes in obligations of the parties.

  29. Mirror-Image • CISG - the offer and acceptance must match in order for a contract to be formed; otherwise, acceptance operates as a counter-offer. No specific Battle of the Forms provision.

  30. Mirror-Image • UNIDROIT - Article 2.1.22 “Where both parties use standard terms and reach agreement except on those terms, a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance unless one party clearly indicates in advance, or later and without undue delay informs the other party, that it does not intend to be bound by such a contract.”

  31. Acceptance • UCC - “Mailbox Rule” • CISG and UNIDROIT- acceptance not effective until received (although can accept by performance if offer so requires).

  32. Title and Delivery • UCC - does contain provisions for who bears the risk of loss and when title passes. Examples: • “FOB destination” implies that Seller will pay shipping costs up to the point of delivery to Buyer, and is liable for any damages or loss to the point. • “FOB place of shipment” means that Seller is only responsible for the goods getting to the common carrier, at which point Seller’s liability ends.

  33. Title and Delivery: • CISG and UNIDROIT - no specific shipping or title provisions; parties generally refer to Incoterms for shipping terms (International Contracting Terms created by the International Chamber of Commerce: similar to UCC provisions but have different meanings, and do not discuss when title passes). • CISG defaults to domestic law for title passage rules, and because domestic laws differ, it is best to include title provisions in the document itself.

  34. Warranties • UCC and CISG: • Similar default warranties • Warranty of Merchantability - goods are fit for their ordinary purpose(s) • Warranty of Fitness for a Particular Purpose - goods match any purpose made known to the Seller, where Buyer relied on Seller’s skill and judgment in choosing goods

  35. Implied Warranty: Merchantability and Usage of Trade UCC § 2-314 • (1) Unless excluded or modified (§ 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the Seller is a merchant with respect to goods of that kind.  • (2) Goods to be merchantable must be at least such as • (a) pass without objection in the trade under the contract description;  and • (b) in the case of fungible goods, are of fair average quality within the description;  and • (c) are fit for the ordinary purposes for which such goods are used;  and • (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;  and • (e) are adequately contained, packaged, and labeled as the agreement may require;  and • (f) conform to the promise or affirmations of fact made on the container or label if any. • (3) Unless excluded or modified (§ 2-316) other implied warranties may arise from course of dealing or usage of trade.

  36. Implied Warranty:  Fitness for Particular Purpose UCC § 2-315 • Where the Seller at the time of contracting has reason to know any particular purpose for which the goods are required, and that the Buyer is relying on the Seller's skill or judgment to select or furnish suitable goods, there is, unless excluded or an implied warranty, that the goods shall be fit for such purpose.

  37. CISG -- Article 35 (1) The Seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract. • Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: • are fit for the purposes for which goods of the same description would ordinarily be used; • are fit for any particular purpose expressly or impliedly made known to the Seller at the time of the conclusion of the contract, except where the circumstances show that the Buyer did not rely, or that it was unreasonable for him to rely, on the Seller's skill and judgment; • possess the qualities of goods which the Seller has held out to the Buyer as a sample or model; • are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.

  38. Warranties • UNIDROIT: • No specific reference • “Best Efforts” and “Reasonable Performances” • “Where the quality of performance is neither fixed by, nor determinable from, the contract a party is bound to render a performance of a quality that is reasonable and not less than average in the circumstances.” Article 5.1.6.

  39. Remedies Specific Performance • more prevalent internationally • Under UNIDROIT - basic remedy and damages are secondary remedy • Under the UCC - only allowed where other damages are inadequate • Under the CISG - allowed without conditions • Courts are not bound unless the law of the forum state provides for it in a given situation.

  40. Specific Performance CISG Article 46(1) (1) The Buyer may require performance by the Seller of his obligations unless the Buyer has resorted to a remedy which is inconsistent with this requirement. UCC § 2-711 (2) Where the seller fails to deliver or repudiates the Buyer may also … (b) in a proper case obtain specific performance or replevy the goods as provided in this Article (Section 2-716).

  41. Remedies Specific Performance • Under UNIDROIT- allowed in most cases, subject to some exceptions: • impossible • unduly burdensome

  42. Liquidated Damages • Easily allowed under international laws • UCC less receptive • Under UNIDROIT parties may enforce all liquidated damages, regardless of actual damages

  43. Comparing the Specific National Laws Surrounding Contracts and Contract Interpretation

  44. NATIONAL CONTRACT LAW • Russian Civil Law - similar to common law contract law. • Article 158 allows silence in acceptance if prior relationship. • Article 160 applies Article 2 of UCC in terms of statutes of frauds. • Section 428 applies common law adhesion provisions. • Article 162 applies writing requirement for statute of frauds in common law. • Section 451 provides for material changes circumstances which are similar to common law. • Preliminary Contracts are not enforceable; contract must be complete. • Section 469 provides implied warranties of merchantability and particular purpose applied along with price reduction remedy.

  45. NATIONAL CONTRACT LAW • China: • Foreign Economic Contract Law • Law divides contract law into general provisions, formation, performance and remedies, transfer and assignments, modification and miscellaneous provisions. • Article 17 is a version of American concepts of anticipatory repudiation and adequate assurance. • Article 19 adopts Hadley v. Baxendale limitation on damages. • Article 20 similar to the American law on liquidated damages. • Article 22 adopts common law’s principle of mitigation of damages. • Article 24 and 25 recognizes excuse of force majeure. • All contracts must be in writing under Chinese Law.

  46. NATIONAL CONTRACT LAW • China continued: • Article 32 requires that recission and modification be in writing. • Article 12 requires the certainty of terms in the offer. • Article 37 recommends the alternative disputes resolution system of arbitration and mediation. • The Foreign Contract Law of China provides that the statute of limitation is four years.

  47. NATIONAL CONTRACT or SOFT LAW? • European Contract Law: • European Union’s Commission on Contract published the “Principles of European Contract Law.” • Similar to the common law of contracts and Uniform Commercial Code in the United States. • Contractual existence may be proven by any means, including testimony of witnesses. • Modifications must be in writing. • Merger clauses similar to UCC. • Notice is effective when it reaches offeror. • Advertisement could constitute offer if certain information included. • Firm Offers are irrevocable for an extended time.

  48. NATIONAL CONTRACT or SOFT LAW? • Principles of European Contract Law-continued • Mail Box Rule rejected. • Additional Terms of the Acceptance quite similar to Article 2 of the Uniform Commercial Code in United States. • Pre-Contractual Liability applicable in European Community. Parties have a general duty to negotiate in good faith. Failure to do so can result in pre-contractual liability. Not applicable in United States. • Each party has an affirmative duty not to disclose confidential information. • Obligation of contracting parties to disclose agency relationship

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