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Part I Sales Law: Development and Modern Practice, 4 Contract and the Law

From: Global Sales and Contract Law

Ingeborg Schwenzer, Pascal Hachem, Christopher Kee

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Performance of contract — Formation of contract — Choice of law clauses — Applicable law — Rome I Regulation and choice of law

Contract and the Law

  1. A.  General 4.01

  2. B.  Law Applicable to the Contract 4.03

    1. I.  Choice of Law 4.05

      1. 1.  General 4.05

      2. 2.  Admissibility 4.06

      3. 3.  Restrictions 4.09

      4. 4.  Prerequisites 4.17

        1. (a)  Express and Implicit 4.17

        2. (b)  Time 4.19

    2. II.  Other Conflict-of-Law Rules 4.25

    3. III.  International Commercial Arbitration 4.29

    4. IV.  Particular Issues in the International Sale of Goods 4.32

      1. 1.  Application of the CISG 4.32

      2. 2.  Dépeçage 4.36

      3. 3.  Law Applicable to Choice-of-Law Clause Formation 4.37

      4. 4.  Eligible Laws 4.41

  3. C.  Content of Obligations 4.47

    1. I.  Freedom of Contract 4.47

      1. 1.  General 4.47

      2. 2.  Contractually Defining Party Obligations 4.54

      3. 3.  Trade Terms 4.56

    2. II.  Interplay between Contract and Default System 4.58

(p. 51) A.  General

4.01  The relationship between a sales contract and the law can, for the purposes of this chapter, be loosely divided into two principle issues.1 Chronologically the first issue concerns which law governs the contract—namely what is the applicable law. As a contentious matter this typically only arises in the context of international or cross-border transactions. However, consciously or otherwise, the question of the applicable law must always be determined first. As is repeatedly demonstrated throughout this book, different legal systems offer different solutions; and it would be impossible to know which solution was the correct one if the applicable law was not already determined. Conflicts of law, or private international law as it is also called, is a difficult and complex subject.2 This chapter only seeks to introduce and outline some of the main topics as they relate to the sale of goods.

4.02  The second relationship issue concerns the content and extent of the parties’ obligations. Both the parties’ contract and the applicable law may be the source for these obligations, and where, for example, they conflict it is necessary to know which prevails.

B.  Law Applicable to the Contract

4.03  Lord Diplock in a House of Lords decision once noted:3

Contracts are incapable of existing in a legal vacuum. They are mere pieces of paper devoid of all legal effect unless they were made by reference to some system of private law which (p. 52) defines the obligations assumed by the parties to the contract by their use of particular forms of words and prescribes the remedies enforceable in a court of justice for failure to perform any of those obligations.

4.04  As this quote from Lord Diplock suggests it is necessary to know which law is applicable to the contract.4 All jurisdictions have a method of doing this, typically through a series of rules often referred to as ‘conflict of law’ rules. In some jurisdictions these rules are clearly elaborated in statute.5 In others they are discernible from cases and academic sources.6 In the vast majority of jurisdictions the first rule is to have regard to the parties’ choice of law. Where the parties have not made a choice, regard is had to other conflict of law rules.

I.  Choice of Law

1.  General

4.05  When parties choose the law applicable to their contract, they are ordinarily understood to be making a choice regarding the substantive applicable law, sometimes also referred to as the proper law of the contract. This choice does not typically include the conflict-of-law rules of any nominated jurisdiction, thereby excluding situations of renvoi. However, the choice does presumptively encompass all elements of the designated substantive law including all mandatory provisions.7 The designated law may, however, provide that certain otherwise mandatory rules will not apply if the law is applicable only by choice of the parties.8

2.  Admissibility

4.06  Almost all jurisdictions recognize the ability of, at least, merchants to choose the law applicable to their sales contract.9 However there are notable exceptions to this rule, among them Brazil,10 (p. 53) Saudi Arabia,11 and Uruguay12 which, as of the time of writing, do not recognize choice-of-law clauses.13 Some of these countries have begun to attenuate this harsh position at least in arbitration. For example, in Brazil where the parties choose arbitration they are also free to agree on the rules of law that govern the contract.14

4.07  At the international level the uniform instruments on conflict of laws, such as the Rome Convention,15 Rome I Regulation,16 as well as the Hague Convention 195517 and other regional instruments,18 all provide for the possibility of a choice of law.

4.08  Although there is debate as to whether the CISG pre-empts conflict-of-law rules19 where it does apply, Article 6 CISG grants the parties the freedom to exclude the application of the Convention altogether, or, subject to Article 12 CISG, derogate from the CISG’s provisions. In contrast, Article 10 of the OHADA Treaty20 specifically notes that the Treaty overrides the domestic laws of Member States; however the AUDCG neither expressly permits nor excludes party autonomy. While the majority opinion appears to be that OHADA law does not have an objection to freedom of contract as such,21 it is unclear whether this opinion can be extended to choice of law.

3.  Restrictions

4.09  Even in jurisdictions which strongly support a choice-of-law principle, the circumstances of that choice are not unrestricted. Different approaches to restricting the parties’ freedom to choose the applicable law can be seen in the various jurisdictions. In a distinction that is reminiscent of questions of contract validity,22 the particular approach appears to depend on whether the policy objective concerns the protection and maintenance of the legal system as a whole or if it is to protect a party (or a class of persons). Restrictions intended to protect the system as a whole are less nuanced than those intended to protect parties of a particular type. As such, a spectrum can be discerned.

4.10  The least nuanced way to achieve this protection is to refer broadly to matters of public policy without any real specificity. This approach is found particularly in those jurisdictions where commercial transactions are influenced by religious values or norms, such as United Arab Emirates and Yemen.23 As a general proposition, however, the same restriction can be found, although perhaps not so often used, in most, if not all jurisdictions.24

(p. 54) 4.11  An arguably more graduated approach is found in the so called ‘bona fides’ requirement. In the well-known Vita Food case25 the Privy Council26 recognized the choice of law by the parties ‘provided the intention expressed is bona fide and legal and provided there is no reason for avoiding the choice on the grounds of public policy’.27 Likewise in the USA, § 187 Restatement (2d) of Conflict of Laws declares a choice of law as invalid ‘if there is no other reasonable basis for the parties’ choice’. This position has been adopted throughout common law28 and civil law jurisdictions.29 Some states examine the same issue from the opposite perspective—whereas bona fides describes a positively framed position, a prohibition based on fraud is a negatively framed position.30

4.12  Closely connected to this approach is the position that restricts the parties’ choice of law in so far as it requires a sufficient connection to the contract.31 This position, once seen in England,32 is still found in some common law systems,33 especially in USA case law,34 and was legislatively affirmed in § 1-105(1) UCC. However, as early as 1984, a New York statute provided that contractual stipulations providing for the application of New York law must be given effect even if there were no substantial contacts with New York under special circumstances.35 On this basis § 1-301(a) UCC 2003 did away with the substantial relationship requirement. The new choice of law however was a keenly debated provision during the revision of Article 1. All US states have retained the choice-of-law rule in former § 1-105 rather than enacting the text of § 1-301 UCC 2003.36 The ALI bowed to the overwhelming rejection of this rule, and approved a substitute that effectively reinstated § 1-105.37

4.13  A similarly motivated approach found in quite a few legal systems is to only permit the choice of a foreign law where the contract is an international one.38

(p. 55) 4.14  Finally, in the most nuanced of approaches, many jurisdictions have placed restrictions on choice of law where a consumer is a party to a transaction. In such transactions the law of the habitual residence of the consumer typically applies.39

4.15  The most modern approach is to allow for a choice of law by the parties but to combat any opting out by applying certain mandatory laws that would be otherwise applicable.40 For example, Article 3 Rome I Regulation provides that where ‘all other elements relevant to the situation at the time of a choice of law are located in a country other than a country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country’.41

4.16  As a concluding remark on restrictions it can be noted that it is generally agreed that overriding mandatory provisions, not only of the law of the forum but also of (certain) third countries may be applied.42 This is the case not only in connection with choice-of-law clauses but in connection with the application of any foreign law. A good example is found in Article 9 Rome I Regulation. Article 9(2) preserves the application of overriding mandatory provisions of the forum. Overriding mandatory provisions are those that are ‘regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation’.43 There may be less application of mandatory laws in international commercial arbitration.44

4.  Prerequisites

(a)  Express and Implicit

4.17  Most legal systems recognize not only an express choice of law but also an implied one.45 China stands as a significant and important exception to this observation as Article 3 PRC Judicial Interpretation on Application of Law requires that a choice-of-law clause be clearly expressed. There is, however, an exception to this rule if both parties, during litigation, coincidently apply the same foreign law and do not raise any objection.46

4.18  Where an implicit choice is possible, most legal systems provide that it must be clearly demonstrated by the contract or the circumstances of the case.47 However, what amounts to a clear indication is itself not at all clear. Factors demonstrating an implied choice have included: the (p. 56) indirect reference to a law in the contract, the choice of a particular law in previous contracts, the language of the contract,48 forum selection clauses,49 arbitration clauses nominating a seat of arbitration,50 references to certain legal institutions,51 clauses or terms that are typical to a particular legal system,52 currency chosen for payment, the place of execution of the contract,53 conduct of the parties during litigation,54 and the place of performance.55 These factors are not conclusive and may instead be indicative of an intention to apply the provisions of a foreign law as contractual terms—rather than applicable law.56

(b)  Time

4.19  A choice of law may be made at the time of the conclusion of the contract. Many jurisdictions also permit, or ostensibly permit, the choice to be made subsequently. There are essentially three different scenarios in which a subsequent choice may be made or appear to be made. The first scenario involves so-called ‘floating’ choice-of-law clauses; the second considers a situation where the parties change their choice of law after contract conclusion; and the third concerns the conduct of the parties during litigation and whether this amounts to a choice of law.

4.20  In the present context,57 a floating choice-of-law clause typically gives one party to the contract the ability to nominate an applicable law; usually from an agreed list.58 It has been noted that this type of clause is common in bills of lading.59 Within Europe, Article 3(2) of the Rome I Regulation is generally considered to permit floating choice-of-law clauses.60 Domestically, the possibility has been accepted by various civil law jurisdictions.61 In common (p. 57) law jurisdictions outside Europe the issue is not so clear, although these are also likely to accept a floating choice.62

4.21  The second scenario concerning the time of choice involves situations where parties decide to change the applicable law after the contract has been concluded. In jurisdictions which permit a choice of law in the first instance, there should be no reason in principle why parties would not also be allowed to change subsequent to contract conclusion. However, regard may need to be had to rights of third parties which may be affected if a change in the applicable law is allowed.63

4.22  The third scenario identified as relevant to the issue of time and choice of law, involves the conduct of parties during litigation. It could be argued that this is not genuinely a third scenario but rather evidence of the parties’ original choice, an example of the parties simply changing their choice of law as per scenario two, or an implicit waiver of the prior choice of law.64

4.23  There is ample case law from throughout the world on the question of whether the conduct of the parties during litigation may amount to a choice of law.65 This applies in particular to cases where parties have in their pleadings referred to the law of the forum, whereas the conflict-of-law rules point to the application of a different law. Whereas in some jurisdictions it is necessary that the parties were aware that there may be a conflict-of-law question,66 other jurisdictions do not have this requirement and have simply inferred from pleadings that this amounts to an implicit choice of law.67

4.24  In common law jurisdictions the fact that parties have pleaded their cases under the law of the forum rather than an otherwise applicable law, may or may not be regarded as a choice-of-law issue at all; rather it could be seen as one of domestic procedural/evidentiary rules due to the so-called ‘presumption of identity’. Pursuant to the ‘presumption of identity’ the court will apply its own laws on the presumption that they are the same as the foreign law where the content of those laws is not proven.68 The circumstance arises because, in the relevant jurisdictions, issues of foreign law are treated as questions of fact rather than questions of law.69 The principle of ‘presumption of identity’ has been widely criticized both in case law and commentary.70 In civil law legal systems the maxim iura novit curia also governs the application of foreign law—that is, in principle it is up to the court to ascertain the foreign law.71 However, if it is not possible to ascertain the content of the applicable foreign law the law of the forum is to be applied instead.72

(p. 58) II.  Other Conflict-of-Laws Rules

4.25  Where the parties have failed to make a choice of law, the applicable law will be determined by relevant conflict-of-laws rules. These may be found in international conventions such as the 1955 Hague Convention, or regional conventions such as the 1980 Rome Convention, and subsequently the Rome I Regulation,73 or the Mexico Convention.74 Where there is no uniform approach, reference is to be had to the domestic conflict-of-laws rules.

4.26  In former times there were two approaches to identifying the applicable law to a sales contract. The first was the law at the place of the conclusion of the contract. The second approach was the law where the obligations arising from the contract were to be fulfilled. These approaches have become outdated in many legal systems; however they can still be found in instances.75 Unlike civil law systems more generally, in some, predominantly Ibero-American jurisdictions, a strict distinction is made. These systems appear to apply only the law of the place of contract conclusion to issues of form76, whereas they apply only the law of the place where the main obligations of the contract are to be performed for issues of contract obligations, effects, and extinction.77

4.27  The modern approach found in the uniform acts as well as in many national jurisdictions is to apply the closest connection test78 or that of the most significant relationship.79 The focus of this test is the closest legal system as opposed to the closest country.80 In many jurisdictions the question of the closest connection is determined by the characteristic performance.81 Characteristic performance points to the law of the party who is to effect the performance which is characteristic of the contract. In sales contracts this will usually point to the seller’s place of business at the time of the conclusion of the contract.82 Although the common law approach does not generally utilize the characteristic performance rule, it will similarly nevertheless usually result in the application of the law of the place of the seller.83 (p. 59) The position in the USA may be different. Section 191, Restatement (2d) of Conflict of Laws, provides that the law of the place of ‘where under the items of the contract the seller is to deliver the chattel’ applies. In certain cases this may lead to the law at the place of the seller but not necessarily.84

4.28  Article 4(1)(a) of the Rome I Regulation expressly points to the law of the habitual residence of the seller. This however appears to be only a presumption as Article 4(1) is subject to Article 4(3). Article 4(3) contains a closest connection test.

III.  International Commercial Arbitration

4.29  International commercial arbitration requires separate consideration as survey after survey of modern business practice has identified it as the preferred method of dispute resolution.85 However, as the issues associated with international commercial arbitration and the law applicable to the contract are complex, only a very brief summary is provided here.86 Throughout the following it is useful to recall that arbitration has a lex arbitri and does not have a lex fori.87 The application of conflict-of-laws rules is a very important point of distinction between the two.88

4.30  Almost all international commercial arbitral laws give parties the authority to choose the law applicable to the contract.89 If the parties have not chosen an applicable law, then depending on the lex arbitri one of five likely options will be present—arbitrators may either: (1) directly nominate the applicable law;90 (2) choose a set of conflict-of-laws rules and from those rules ascertain the applicable law;91 (3) be required to use a particular conflict-of-laws rule set out in the lex arbitri (typically closest connection);92 (4) apply the conflict-of-laws rules of the seat;93 or (5) be required to apply the substantive law of the seat of arbitration to the contract.94

4.31  Aside from the varying approaches to determining the applicable law, international commercial arbitration differs from litigation in three additional but no less important ways. The first is that many arbitral statutes allow parties to authorize arbitral tribunals to decide cases as (p. 60) ex aequo et bono or as amiable compositeur.95 This essentially means deciding a case based on principles of fairness and justice without necessarily applying any particular law. The second difference concerns the application of ‘anational’ rules of law such as the PICC, PECL, DCFR, and lex mercatoria.96 Many arbitral laws permit the parties to determine their dispute by reference to anational rules of law. In some instances arbitral tribunals may also be allowed to use these rules of law in the absence of express party choice.97 The third difference, related to the second, is that many arbitral statutes appear to put a positive duty on the arbitral tribunal to take trade usages into account.98

IV.  Particular Issues in the International Sale of Goods

1.  Application of the CISG

4.32  There has been some debate as to the relationship between the CISG99 and the domestic conflict-of-laws rules—in particular whether the CISG displaces those rules in Member States.100 The prevailing view is that conflict-of-laws rules are pre-empted by the CISG, where the convention applies by its own terms.101

4.33  Where the CISG is applicable Article 6 CISG permits the express or implicit102 exclusion and modification of the Convention.103 Choice-of-law clauses then either function as an exclusion of the CISG and designation of the law applicable instead (Article 6 CISG) or have to be used when determining the law applicable to matters outside of the scope of the Convention (Article 4, sentence 2 CISG) or to fill external gaps of the Convention (Article 7(2) CISG).104 It is now nearly undisputed that the choice of the law of a CISG Contracting State without any further (p. 61) specifications does not amount to an exclusion of the Convention105 but merely serves the last two purposes mentioned.

4.34  Contrary to this internationally prevailing view, there have been several instances where courts have interpreted the mere fact that the parties’ pleadings were based solely on the domestic law as amounting to implicit exclusion of the CISG.106 This position is artificial and clearly wrong.107 As noted earlier the CISG automatically applies in contracting states,108 and thus it is for courts to ensure it is not simply ignorance that leads to its exclusion.109

4.35  The general application of the CISG operates differently in regard to the Scandinavian legal systems (Denmark, Finland, Iceland, Norway, Sweden). Upon ratification of the CISG, these countries declared a reservation under Article 94 CISG to the effect that the CISG does not apply to inter-Scandinavian sales contracts. Furthermore, these countries have declared a reservation under Article 92 CISG to the effect that with regard to questions concerning the formation of sales contracts they are not to be regarded as CISG Contracting States. For these questions, choice-of-law clauses then also become relevant to determine the law applicable to the formation of the contract.

2.  Dépeçage

4.36  Although dépeçage is a general issue in conflict-of-laws discussions, it is a particular problem which may arise in the international sale of goods. Dépeçage is a concept under which different aspects of a transaction are governed by different laws; in this context the laws of different jurisdictions. While dépeçage has been discussed at a theoretical level,110 cases on dépeçage are rarely reported. Indeed it is difficult to conceive of reasons why parties would wish to split the governance of their sales contracts in this way.111 Nonetheless it appears permissible in many jurisdictions for the parties to choose different laws to govern different parts of their contract.112 Jurisdictions differ on whether adjudicators should assume that parties intended the (p. 62) one law to govern their entire contract.113 Perhaps unsurprisingly it appears to be those jurisdictions whose conflict-of-laws rules operate in a dépeçage fashion114 who also argue against a single law presumption.115

3.  Law Applicable to Choice-of-Law Clause Formation

4.37  The question of which law applies to formation of a choice-of-law clause has always been the subject of much controversy. Today it appears virtually undisputed that for this issue, these clauses are to be treated no differently from other terms of the contract.116 There have been and still are three different approaches: lex fori, lex contractus (the law that would apply to the contract without the choice-of-law clause), and lex causae (the law chosen by the parties).

4.38  The modern approach117 seems to be to apply the law designated by the parties as the applicable law.118 This approach is strongly favoured not only by international instruments such as the 1955 Hague Convention119 and Rome I Regulation120 but also by many domestic conflict-of-laws rules.121 This position however is criticized especially in cases where there is a so-called ‘battle of forms’. Instead of applying the parties’ choice, some scholars suggest the objective lex contractus to be more appropriate.122

4.39  Matters are different where the CISG applies to the international sales contract. The question becomes relevant at different stages dependent on the reason for the application of the CISG. Assuming that both parties are located in CISG states and the case is litigated before state courts in one of these countries, the Convention applies on account of Article 1(1)(a) CISG. In this scenario a choice-of-law clause for example designating ‘English Law’ has two functions. First of all it operates as an exclusion of the CISG under Article 6. As the Convention determines its sphere of application autonomously, the formation of an exclusion is to be determined by the rules of the Convention (Articles 14–24 CISG).123 Once it has been proven that the clause—at this stage being understood as an exclusion—has been formed, it has to be determined whether the parties have also managed to enter their contract into the law designated. This is a matter of the applicable conflict-of-laws rules. If one follows the position that the law chosen by the parties governs the choice-of-law clause, it then follows that in the above example the formation of the clause designating ‘English Law’—now being understood as a choice-of-law clause—has to be evaluated under ‘English Law’.

4.40  Where only one (or none) of the parties is located in a CISG state but the dispute is litigated before state courts in a CISG state, and where the parties have chosen the law of a CISG state without excluding the CISG, the formation of the choice-of-law clause is subject to the CISG. (p. 63) This is the case as Article 1(1)(b) CISG allocates this question to the CISG.124 If the clause has validly been formed under the CISG, the CISG will be the governing law of the contract.

4.  Eligible Laws

4.41  Much has been written about the question of whether parties to international commercial contracts, instead of choosing a domestic law, are free to refer to general rules of law, international usages, or to the lex mercatoria.125 With regard to this question, two categories of choices have to be distinguished: first, a choice-of-law clause that operates at the level of conflict of laws and, secondly, a choice-of-law clause which merely maps the contract—that is, which ‘copies’ the provisions of the law chosen into the contract as other contractual provisions and therefore operates at the level of substantive law.126 It has been pointed out above that the main difference between both levels is that different mandatory rules apply to the contract.

4.42  Problems arise, however, with regard to the choice of ‘anational laws’ and ‘rules of law’. In the field of international sales this particularly relates to the CISG and uniform projects. With regard to these sets of rules no problems arise, where they are chosen at the level of substantive law, as all gaps left by these sets of rules can be filled with the law objectively applying to the contract. It is, however, disputed whether these sets of rules may also be chosen as ‘the’ applicable law—that is, at the level of conflict of laws.

4.43  With regard to the 1955 Hague Convention and the 1980 Rome Convention, it has generally been stated that uniform projects127 cannot be chosen at the level of conflict of laws. With regard to the CISG, the matter is disputed.128 Whether the 2008 Rome I Regulation brings change in that regard is yet to be clarified.129 When dealing with this question it has to be borne in mind that the 2005 Draft of the Regulation stated in its Article 3(2) that ‘The parties may . . . choose principles and rules of the substantive law of contract recognised internationally or in the Community.’ The final text of the Regulation is less explicit and to some extent misleading as it states in the introductory notes at para 13 that ‘This Regulation does not preclude parties from incorporating by reference into their contract a non-state body of law or an international convention.’ The formula ‘into their contract’ could, of course, be understood as referring to the level of substantive law where the parties copy certain provisions into their contract but generally remain subject to the mandatory rules of the law objectively applicable.

4.44  With regard to lex mercatoria, the situation is clear. The introductory considerations of the European Commission’s draft as of 15 December 2005 on Article 3(2) expressly excluded lex mercatoria, which was considered too vague. The final version makes no reference at all to lex mercatoria, however; it will have to be regarded as not being sufficiently definite to be chosen at the level of conflict of laws. Choosing lex mercatoria will therefore only have effect in terms of the substantive law level.

4.45  The dispute is, however, in practice not of great relevance. Under the principle of favor negotii choice-of-law clauses stipulating the CISG or one of the uniform projects at the level of conflict of laws are to be upheld at least to operate at the level of substantive law. In other words, the rules chosen apply in any case. The mandatory provisions constituting the framework of the contractual relationship may, however, be different.

(p. 64) 4.46  The situation is entirely different as regards the field of arbitration. Over the last few decades an increasing number of arbitral laws expressly provide for the validity of the choice of rules of law rather than a national law.130

C.  Content of Obligations

I.  Freedom of Contract

1.  General

4.47  Nowadays it can be said that freedom of contract is the backbone of private law. This is expressed most emphatically in Article 1134 French CC which states ‘Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites’, which can be translated as ‘What has been lawfully agreed upon by the parties has the effect of law as between them.’ In some legal systems this freedom is even found in national constitutions.131

4.48  Freedom of contract encompasses several aspects. First it means that the parties are free to enter into contracts or not to enter into contracts at all. Secondly, they are free to choose with whom they contract. Thirdly, and most importantly, they may shape the content of their contract—this includes the liberty to formulate a species of contract not necessarily described in statute or to mix and match from different and already recognized categories of contract. Fourthly, freedom of contract means freedom from the requirement of form, including the freedom to include form requirements according to the particular desires of the parties. Finally, the parties are free to alter or terminate their contract.

4.49  Naturally, this freedom is not unlimited. All legal systems reserve the right to deny validity to contracts or individual clauses which are not tolerated by the frameworks set by the mandatory rules set by the respective legal systems.132

4.50  The freedom to enter or not to enter into a contract finds its limits in many areas of the law. First and foremost are those commercial enterprises formally owned and operated by a state, which offer goods and services that may be called necessities of life. These include water authorities, power authorities, public transport, hospitals, and certain health-welfare providers etc. During the course of the privatization of the provision of these services in many states in the 1990s, the obligation which was originally with the state, moved to the privatized entities. In a similar vein, restrictions can be seen in those states which heavily regulate particular industries. Thus, for example, in India the sugar and coffee growers are directed by the Sugar Controller or Coffee Board to deliver the products to receivers at a fixed price and quantity.133

4.51  Furthermore, obligations to contract can be found specifically in statutes dealing with anti-trust or competition regulation. In those legal systems with developed laws in this area, it is now agreed that monopolies or businesses with market control are not allowed to discriminate by refusing to contract without justifiable reasons.134 This in effect leads to an obligation to (p. 65) conclude contracts with all upstream and downstream partners under market-conforming and standard industry condition.

4.52  Some legal systems have gone a step further and imposed a general obligation to contract under certain circumstances. Switzerland may be identified as being one such country.135 In a 2002 decision, the Swiss Federal Supreme Court held that such a duty exists where: (i) someone offers goods or services intended for everyday needs, (ii) which are offered to the public at large, (iii) where because of the market power of the supplier the customer cannot reasonably be expected to turn to alternative sources, (iv) and there are no justified grounds for refusing to contract.136

4.53  Together with the obligation to contract, there is a corresponding restriction on the ability to choose a contracting partner as well as a restriction on the content, and in particular the freedom to bargain for the price. This may be so either because the prices are set or fixed, or alternatively because contracts must be entered into under market-conforming conditions.

2.  Contractually Defining Party Obligations

4.54  It follows from the general principle of freedom of contract that the parties are able to contractually define rights and obligations in accordance with what they find to be appropriate for their individual contractual relationship. In many legal systems, especially civil law countries, the law expressly provides for this freedom.137 The CISG and the uniform projects expressly provide for the freedom of the parties to shape the content of their contract.138 However, this approach is undisputed even in those legal systems where there is no express provision to that effect.139 It follows that the parties may include clauses relating to the modes of payment or to the delivery of the goods and the passing of risk—for example INCOTERMS® such as CIF, FOB, or FAS.

(p. 66) 4.55  Nevertheless this freedom is not unlimited. These limits can be found in the mandatory requirements of the law; typically they relate to notions of illegality, immorality, unconscionability, good faith, and the like. All these provisions are intended to either safeguard the general interests of a political system, the interests of a (economically weaker) party, or sometimes the interests of third persons. The sheer number of mandatory rules will greatly depend on the political system of the country.140 The general discussion of issues concerning validity of contract is dealt with in Part IV.

3.  Trade Terms

4.56  Trade terms are discussed throughout this text where relevant. For present purposes it is enough to note that with regard to the content of the obligations there is a long history of parties using shorthand references to describe their respective obligations under the contract. These references have become known as trade terms.

4.57  Although generally simplifying the contracting process, the use of trade terms is not without its difficulties. Trade terms, like any other clause in a contract, require interpretation. Complications can arise because some domestic legal systems have defined certain of these terms, legislatively or otherwise.141 The hard law definitions do not always concur with soft law definitions found in instruments like the ICC INCOTERMS®.142 It does appear however that domestic trade terms either are gradually being replaced by ICC INCOTERMS® or the understanding of those domestic terms is being harmonized with the more modern definitions found in the ICC INCOTERMS®.

II.  Interplay between Contract and Default System

4.58  Primacy must be given to the contract. This is most prominently expressed by the previously mentioned143 Article 1134 of the French Civil Code according to which the contract is the law between the parties and that the obligations stem from the contract. Although perhaps not as specifically stated as in the French Civil Code, this position is recognized by all legal systems.144 It is the intent of the parties, rather than the law itself, that binds the parties to the contract.145 The law in turn provides mechanisms, institutions, and judicial bodies to enforce the will of the parties or to keep the parties to their promise. In other words, it gives legal effect to the will of the parties.146

4.59  Therefore as a general proposition, one must be cautious not to place the default system on the same footing as the contract. The provisions of the codes and laws in the field of private law are generally dispositive (permissive)—that is, they only apply where the contract and the interpretation of it do not provide an answer for a specific legal question.147 However, when contracts are interpreted, gaps must be filled and, if there is no indication of how this may be done, then recourse is to be had to the default system.

4.60  The perception is slightly different in common law legal systems. Particularly in the context of the sale of goods, legislation in common law jurisdictions often speaks of implied terms—as if (p. 67) these were terms agreed but not expressed by the parties. Such ‘terms’ are in fact general rules of law which govern a specific class of contracts (in this case sales contracts) unless the parties opt out or vary them.148 An inconsistent express term will generally amount to evidence of opting out. Describing these as ‘terms’ feels artificial even if it can be said to be technically correct.149 The common law, however, also recognizes another sort of ‘implied term’, those implied by fact150 and it is useful to be cognisant of the distinction.151

4.61  While this slight difference in approach between civil law and common law jurisdictions should not lead to a practical difference in the application of a default system, it may explain some misunderstandings at the international level. Article 35(2) CISG describing a default rule for conformity of the goods serves as an example of this point. The article begins with the words ‘Except where the parties have otherwise agreed’, which some American commentators152 appear to have incorrectly understood to be expressing the possibility for parties to limit liability, rather than setting their own parameters for conformity under Art 35(1) CISG.

4.62  It has been argued that the default system should mirror the majority of contracts.153 However it has to be remembered that default systems are elaborated to last for a longer period of time and cannot be added easily to the changing needs and demands of trade and parties. This is especially true of international conventions such as the CISG. For these reasons a default system must be expressed in general terms and it is the role of instruments like the ICC INCOTERMS®, that are regularly adapted to changes in practice, to fine-tune these provisions.

4.63  Two pertinent examples in the context of the CISG involve the passing of risk and the reasonableness of non-conformity notice period. The passing of risk is dealt with (Arts 66 et seq CISG) in a very broad and general way; the specificity that is needed by international trade is found when parties incorporate INCOTERMS® rules, for example, into their contract. Likewise the reasonableness of the non-conformity notice period laid down in Art 39(1) CISG154 will in many instances be informed by trade practices.


1  A third issue that may arise is the question of a court’s jurisdiction. An examination of the considerations made by courts, when determining whether they have jurisdiction to hear a matter, is beyond the scope of this work.

2  See eg the 1,458 page treatise by Fawcett/Harris/Bridge devoted purely to the international sale of goods in the conflict of laws.

3  Eng Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1983] AC 50 (HL) at 65.

4  Disputes resolved by arbitration where the tribunal is acting as amiable compositeur may be a rare exception. For this issue see para 4.32.

5  EU, Afg, Alg, Are, Che, Chl, Chn, Cri, Cub, Egy, Esp, Gtm, Irn, Irq, Jor, Jpn, Lby, Mex, Per, Phl, Prt, Qat, Syr, Tha, Tur, Twn, Yem.

6  Aus Nygh/Davies, Ch 19; Can Waddams, p 423 and see also Syncrude Canada Ltd v Hunter Engineering Co [1984] Carswell BC 542 reversed on other grounds by Syncrude Canada Ltd v Hunter Engineering Co [1989] 57 DLR (4th) 321; Ind Mulla, Contracts, vol I, p 21; Mys Ngui Mui Khin and anor v Gillespie Bros & Co Ltd [1980] 2 MLJ 9; Sgp PT Jaya Putra Kundur Indah v Guthrie Overseas Investments Pte Ltd [1996] SGHC 285, para 39; UK Fawcett/Harris/Bridge, Ch 13; USA Symeonides, 58 Am J Comp L (2010), 307.

8  See eg Hkg Art 17(1) Control of Exemption Clauses Ordinance (1989): Where the proper law of a contract is the law of Hong Kong only by choice of the parties (and apart from that choice would be the law of a jurisdiction other than Hong Kong) sections 7 to 12 do not operate as part of the proper law.’ See also Sgp s 27(1) Unfair Contract Terms Act (1993); Eng s 27(1) Unfair Contracts Act (1977); Sco s 27(1) Unfair Contracts Act (1977); Wal s 27(1) Unfair Contracts Act (1977).

9  EU Art 3 Rome I Regulation; Common Law (UK) Dicey/Morris paras 32-062–064; Afg Art 27 CC; Are Art 19(1) CC; Arm Art 1284 CC; Blr Arts 1093, 1124 CC; Che Art 116 PIL; Chl Art 113(2) Com C, Art 1545 CC, Decree Law no 2349 of 13 October 1978 (freedom derived from parties’ contractual autonomy as supported by Yrarrazaval et al, p 315); Chn Art 126 PRC CL; Cri Art 18 CC; Cub Art 7 CC; Dza Art 18 CC; Egy Art 19(1) CC, Art 39(1) Arbitration Law; Esp Art 10(5) (with connection with the transaction) CC; Gtm Art 31 Law of J O; Irn Art 968 CC, Art 27(1) Arbitration Law; Irq 25(1) CC; Isr s 24 (General Part) CL; Jor Art 20(1) CC, Art 36(a) Arbitration Law; Jpn Art 7(1) General Rules of Application of Laws (known as Horei Law) Act; Kaz Art 1112 CC; Ken Khanna/Sejpal, p 125; Kgz Art 1198 CC; Kwt Art 59 Law no 5 of 1961 regulating the legal relationships with a foreign element; Lby Art 19(1) CC; Ltu Art 1.37 CC, Tamasauskaite/Petrauskas, p 412; Mda Art 1611 CC; Mex Art 13(V) CC; Nga Fagbohunlu/Ganiyu, p 133; Omn s 64 Civil Procedural Law; Per Arts 2095, 2096 CC; Phl Art 1306 CC; Prt Art 41 (legitime choice) CC; Qat Art 27 CC; Rus Arts 1186, 1210 CC; Syr Art 20(1) CC; Tha Art 13 of Conflict of Laws B E 2481 (1939); Tun Art 62 Private International Law of 1998; Tur Art 24 PIL; Twn Art 6 Governing the Application of Law to Civil Matters Involving Foreign Elements Act; Ukr Okhendovskii/Zadorozhij, p 446; Uzb Art 1189 CC; Ven Art 29 PIL, Art 116 Com C; Yem Art 29 CC; Zaf Walker, p 157.

10  Bra Art 8 Introductory Law; see also Albornoz: the author relies on the answers to ‘Questionnaire on International contracts’ produced for the preparatory meeting (CIDIP V) for the Inter-American convention on the law applicable to international contracts. The 1942 Introductory Law was enacted for the Civil Code of 1916. Although a New Civil Code has been in force since 2002, the 1942 Introductory Law remained as the rule of interpretation and conflict of laws of the New Civil Code.

11  Sau applies Shari’a as its principal source of law. There are no conflict-of-law rules in Shari’a law leading to the application of a foreign law upon the choice of the parties. See Sau Dewidar, pp 301–3; Egy and Shari’a Gamal Al Din, pp 104–11, Salama, Al Wasit Fel Qanun Al Dawli Al Khas Al Saudi, pp 515–19; see also Hafez, p 27.

12  Ury Art 2403 CC (Appendix of the Civil Code).

13  Arguably also Col and Pry, see Muñoz, p 31.

14  Bra Art 2 Arb Law; Par Art 32 Arb Law.

15  EU Art 3 Rome Convention.

16  EU Art 3 Rome I Convention.

17  Art 2 Hague Convention 1955.

18  See eg Mex Art 7 of the Mexico Convention (currently only in force between Mex and Ven); see also Twn Art 48 Law on the Relationship Between the People in the Taiwan Area and the Mainland Area; similarly Chn Regulation on the Problems of Jurisdiction for Foreign-Related Civil and Commercial Litigation; for discussion see Chi Chung, 22(3) St John’s J L Comm (2008), 559.

19  See paras 4.33 et seq.

20  Treaty on the Harmonisation of Business Law in Africa (JO OHADA, no 4 of 1 November 1997).

21  See eg Lohoues-Oble, Uniform L Rev (2008), 319.

22  See paras 15.01 et seq.

23  See Are Art 27 CC; Yem Art 35 CC.

24  For the Sub-Saharan African jurisdictions, see Penda Matipé, p 25; Afg Art 35 CC; Alg Art 24 CC; Are Art 22 CC; Bhr Art 3(b) CC; Cri Art 18 CC; Egy Art 28 CC; Esp Art 12(3) CC; Gtm Art 31 JOL; Irq 32 CC; Jor Art 29 CC; Kwt Art 73 Law no 5 of 1961 Regulating the Legal Relationships with a Foreign Element; Lby Art 28 CC; Mex Art 15(2) CC; Phl Art 1306 CC; Qat Art 38 CC; Syr Art 30 CC; Ven Art 8 PIL; Yem Arts 35 and 975 CC.

25  Vita Foods Products Inc v Unus Shipping Co [1939] AC 277 (PC).

26  The case originated in Can.

27  Vita Foods Products Inc v Unus Shipping Co [1939] AC 277 (PC) p 290. See also Compagnie d’Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1970] 3 All ER 71 (HL).

28  See eg Aus Augustus v Permanent Trustee Co (Canberra) Ltd (1971) 124 CLR 245 (HC); Hkg Shenzhen Development Bank Co Ltd v New Century Int’l (Holdings) Ltd and Another [2002] HKCU 917 (HC); Ind Mulla, Contracts, vol I, p 21.

29  See eg considering both Egy and Sau, Salama, Mofawadat Al Aqud Al Dawlia, pp 191–2.

30  Arg Oyarzábal, 36 U Miami Inter-Am L Rev (2004), 510; Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, paras 27 et seq; Chl Ramírez Necochea, pp 127–8; Esp Art 12(3)(4) CC; Abarca Junco, p 177; Mex Art 15(I) CC; Pereznieto Castro, p 207; Per Basadre Ayulo, p 2003; Prt Ferrer Correia, p 422; Tur Art 24 PIL.

31  See eg Esp Art 10(5) CC (with connection with the transaction); Prt Art 41 CC.

33  See eg Ind Mulla, Contracts, vol I, p 24 appearing to note this may be a requirement.

34  USA Jones & Laughlin Steel Corp v Johns-Manville Sales Corp, 9 July 1980, US Ct App (3rd Cir), 626 F 2d 280, 284; Dresser Industries, Inc, Waukesha Engine Div v Gradall Co, 15 December 1988, US Dist Ct (ED Wi), 702 F Supp 726, 731, Barden v Hurd Millwork Company, Inc, 28 March 2008, US Dist Ct (ED Wi), 249 F R D 316, 320, Mahoney v Ronnie’s Road Service, 2 April 1996, NC Ct App, 122 N C App 150, 154, 468 S E 2d 279, 281, Mostek Corp v Chemetron Corp, 16 September 1982, Tex Ct App (5th Dist), 642 SW 2d 20, 23.

35  USA (NY) Gen Oblig Law § 5-1401; (Cal) § 1646.5 CC; (Il) 735 Ill Comp Stat Ann 105/5-5 have a similar statute. Each of these states requires that a minimum of 250,000 USD be in dispute, and these statutes take precedence over the §1-105 UCC as adopted by the states. USA (De), Del Code Ann 6 § 2708 requires that 100,000 USD be in dispute. For a survey of various states’ choice-of-law statutes see also Graves, 36 Seton Hall L Rev (2005), 59.

36  The US Virgin Islands—though not a state—differ in that the text of § 1-301 UCC 2003 has been enacted.

38  Arg Boggiano, vol II, p 176; Che Art 1 PIL; BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 6, Vischer/L Huber/Oser, paras 71 et seq. Related see Irn Art 968 CC points to the laws of the place of the performance of the transaction, and not the place of conclusion of the contract, except in cases where the parties to the contract are both foreign nationals and have explicitly or impliedly declared the transaction to be subject to the laws of another country. Hence, freedom of choice, be it express or implied, can only be exercised when the parties to the contract are both of foreign nationalities. See also Basedow, 75 RabelsZ (2011), 36.

39  EU Art 6 Rome I Regulation; Aus Consumer Law s 64; Che Art 120 PIL; Chn Art 101(18) Model Law on Chinese Private International Law; Jpn Art 11(1) Horei Law; Tur Art 26 PIL.

40  See eg Art 11 Mexico Convention, which provides that the provisions of the law of the forum shall necessarily be applied when they are mandatory.

41  But see Che Art 15(2) PIL.

42  In the positive sense Che Arts 18, 19 PIL; Ltu Art 1.11 CC. For detailed consideration of this point in numerous jurisdictions including Aus, Che, Deu, Eng, Nld, USA see Nygh, pp 217 et seq. See also Nga Tawa Petroleum Products v Owners of MV Se Winner, Nigeria Law Report, vol II, NSC, 25 as cited in Penda Matipé, p 24.

43  Art 9(1) Rome I Regulation.

44  See for discussion Greenberg/Kee/Weeramantry, paras 3.106 et seq.

45  EU Art 3(1) Rome I Regulation; Latin America Art 7 Mexico Convention; Common Law (Eng) Vita Food Productions Inc v Unus Shipping Co [1939] AC 277; Afg Art 27 CC; Alg Art 18 CC; Are Art 19(1) CC; Aus Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; Che Vischer/L Huber/Oser, paras 171 et seq; Egy Art 19(1) CC; Art 39(1) Arbitration Law; Hkg York Airconditioning & Refrigeration Inc v Lam Kwai Hung T/A North Sea A/C Elect Eng Co [1995] HKC 287; Irn Art 968 CC, Art 27(1) Arbitration Law; Irq 25(1) CC; Jor Art 20(1) CC, Art 36(a) Arbitration Law; Kwt Art 59 Law no 5 of 1961 Regulating the Legal Relationships with a Foreign Element; Lby Art 19(1) CC; Qat Art 27 CC; Syr Art 20(1) CC; Tha Art 13 Conflict of Laws; Tun Art 62 Private International Law of 1998; Tur Art 26 PIL; Yem Art 29 CC. However some jurisdictions do not appear to recognize this possibility—see for instance Alg Art 18 CC; Hafez, p 23.

46  Chn Arts 2, 4(2) PRC Sup Ct Jud Int on Application of Law.

47  EU Art 3(1) sentence 2 Rome I Regulation; Che Art 116(2) PIL.

48  EU BGH, 7 December 2004, NJW-RR (2005), 581, 581; Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 42; Ven Dos Santos, pp 75–7.

49  Arabic/Middle East Hafez, p 23; EU MünchKommBGB/Martiny, Art 3 Rom I, paras 48 et seq; Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 40. But see Mys Globus Shipping & Trading Co (Pte) Ltd v Taiping Textiles Bhd [1976] 2 MLJ 154 (FC): the following clause was treated as a jurisdiction clause rather than a choice-of-law clause: ‘Any dispute arising under the Bill of Lading shall be decided in the country where the carrier has its principal place of business and the law of such country will apply.’ Similarly see Latin America Art 7 Mexico Convention which specifically states that the election of a certain court by the parties does not necessarily entail election of the applicable law, Muñoz, p 28.

50  EU MünchKommBGB/Martiny, Art 3 Rom I, paras 51 et seq; Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 41; Hkg, York Air-conditioning & Refrigeration Inc v Lam Kwai Hung T/A North Sea A/C Elect Eng Co [1995] HKC 287.

52  Arabic/Middle East Hafez, p 23; EU MünchKommBGB/Martiny, Art 3, Rom I, para 61, with reference to KG Berlin, 21 February 2008, NJW-RR (2009), 195 (regarding former German law of the same content); Aus Nygh/Davies, para 19.4; Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 42; Egy Salama, Mofawadat Al Aqud Al Dawlia, pp 193–6; Eng Amin Rasheed Shipping Corporation v Kwt Insurance Co [1984] 1 AC 50 (HL); Sau Salama, Mofawadat Al Aqud Al Dawlia, pp 193–6.

54  EU MünchKommBGB/Martiny, Art 3 Rom I, paras 53 et seq; Arg Boggiano, p 186, fn 33 (in a case with various foreign elements in which both parties based their pleadings exclusively on Argentinean law, it was found that the parties had made an implied choice of Argentinean law); Che BaslerKommIPRG/Amstutz/Vogt/Wang, Art 116, para 43M; Egy Salama, Mofawadat Al Aqud Al Dawlia, pp 193–6. For the CISG see para 4.34.

57  Choice-of-law clauses appearing in standard terms and conditions, and referring generically to the assignee’s place of business may also be referred to as floating choice-of-law clauses. Those are not the type considered in this work.

58  See Nygh, p 98 citing references.

60  MünchKommBGB/Martiny, Art 3, Rom I, para 18. For Art 3(2) Rome Convention (relevant to Dnk) the same holds true, see Fawcett/Harris/Bridge, para 14.24; see also Nygh, p 99.

61  Che Art 116(3) PIL (implicit), Vischer/L Huber/Oser, para 143; Tur Nomer/Şanlı, p 317.

62  See Aus Nygh, p 99 noting that a change of choice is now recognized by the common law; see also Ind Mulla, Contracts, vol I, p 24 (negative view). In the USA the matter is disputed, see Hartman Cross/Oxford, 48 South Tex L Rev (2006), 148.

63  See eg Art 3(2) Rome I Regulation; see also discussion in Nygh, pp 100–3 with regard to Rome Convention.

64  See eg Egy Azmi, p 487.

66  Aut OGH, 28 June 1989, IPRax (1991), 121; Che BGer, 28 April 1993, BGE 119 II 174, 175ff; Tur Art 24(3) PIL, Vischer/L Huber/Oser, paras 178 et seq.

67  EU MünchKommBGB/Martiny, Art 3, Rom I, para 46. See also