Much has been written in professional publications and our blogs about international contracting and the applicable law. This topic is often discussed in legal precedents too. Which law applies to an international contract? Which general conditions apply? How are things arranged? In this blog, I am summarising the rules that generally apply with regard to this subject.
Choice of law
If parties conclude an agreement, with the parties not being established in the same country, the matter of which law applies to this agreement is always an issue. In general, the parties can include a provision in the agreement in which a choice is made regarding the applicable law. The parties may choose the law of one of their places of residence. In some cases, it may be beneficial to opt for the law of a country where neither party is established. This is permitted.
A choice of law may also be included in general conditions. In that case, the choice of law is valid only if the general conditions also apply.
No choice of law
Parties sometimes conclude an international agreement without including a choice of law. If no general conditions apply, the law applicable to the agreement is determined on the basis of international treaties and European regulations.
For Member States of the European Union (with the exception of the United Kingdom and Denmark), the Regulation on the law applicable to contractual obligations (Rome I) applies. This Regulation stipulates which national system of law has to be applied. The Regulation has universal operation, which means that these rules apply irrespective of whether the designated law is the law of a Member State or of another country. On the basis of the Rome I Regulation, the main rule is that the law of the country of the party delivering the characteristic (most important) performance applies.
This main rule is interpreted as follows for the agreements below:
– purchase agreements: the law of the country of the seller;
– service agreements: the law of the country of the service provider;
– distribution, agency or franchise agreements: the law of the country of the distributor, agent or franchisee.
Remember: there are categories of agreements to which the main rule does not apply. Consumers and employees enjoy the extra protection of special rules. Other rules also apply to immoveable property.
The Vienna Sales Convention
Once it has been established which law applies to an international contract, it must be determined in the case of commercial purchase agreements whether the Vienna Sales Convention Applies. The Vienna Sales Convention (officially: the United Nations Convention on Contracts for the International Sale of Goods) applies by operation of law in the case of an agreement between commercial parties, involving the purchase of movable items.
Many countries worldwide are party to the Vienna Sales Convention. The Convention arranges the law on contracts and any disputes that may arise. The Vienna Sales Convention is seller-friendly. For instance, the Convention includes an obligation for the purchaser to investigate, with a short time limit for lodging a complaint. Dissolution of the purchase agreement is also less straightforward than, for instance, on the basis of Dutch Law. The Vienna Sales Convention may be explicitly excluded in an agreement or general conditions. This may be more beneficial for the purchaser.
It should also be noted that the Vienna Sales Convention is considered to be part of the national system of law. Although it is true that the Convention prevails over national law, it does not arrange all matters that may be involved in the case of a purchase agreement. Examples include the calculation of statutory interest. In that case, parties have to rely on the applicable national law. It therefore remains important to agree not only on the applicability of the Vienna Sales Convention, but also on the system of law that will arrange other subjects.
Which general conditions?
It may be that an agreement does not contain provisions about a choice of law and/or the applicability of the Vienna Sales Convention. In that case, it is important to check whether general conditions apply to the agreement.
The general conditions often contain a choice of law. If both parties apply their general conditions in an international context, this can lead to problems. Which general conditions apply and which law applies to the agreement as a result?
According to Dutch law, the general conditions of the party that has first declared these general conditions to be applicable will apply to the agreement. This is also referred to as the first-shot rule.
Within another system of law, it may be that a later set of conditions has become applicable (last shot) or that both sets of conditions are not applicable (knock out). According to German law, the general conditions of both parties are compared and only the ‘common denominator’ of both general conditions will be part of the agreement. The other provisions in the general conditions will not become part of the agreement.
However, more problems may occur regarding the applicability of general conditions. If a purchase agreement is involved, the question of whether the general conditions are applicable to this agreement has to be answered on the basis of the Vienna Sales Convention. This is the case even if the general conditions exclude the Vienna Sales Convention. As stated above, the Vienna Sales Convention is considered to be part of the national system of law and this Convention prevails. A striking aspect with respect to many national systems of law is that the Vienna Sales Convention imposes strict conditions regarding the applicability of general conditions. In addition to the fact that the general conditions have to be declared applicable, the other party must have had the possibility to familiarise itself with the general conditions. It is therefore necessary, before the agreement is concluded, to forward the general conditions by post or e-mail so that no problems will occur.
The above examples show that various systems of law deal differently with the issue of which general conditions are applicable. If the Vienna Sales Convention is applicable, the situation becomes even more complicated. Consequently, it is essential to make the correct choice of law. As a seller or service provider, you will hope to avoid a situation in which liability limitations do not appear to apply, while a purchasing party will attach great importance to guarantee provisions. A situation in which the applicability of another system of law results in the exclusion of general conditions may easily occur.
Agreements are concluded in all shapes and sizes. In the case of cross-border contractual arrangements in particular, it is vital to determine which law applies to the agreement. It is also important to investigate whether general conditions also apply, and if so, which set will prevail if several sets have been declared applicable. It is vital to clearly lay down a choice of law and the applicability of general conditions in the agreement, so that no disputes may arise about this in the future.
International legislation includes many exceptions with regard to the applicable law. We will be pleased to offer you constructive advice in drawing up your agreement or your general conditions. By stipulating the applicable law in the correct manner, you can avoid a great deal of legal debate.