The coronavirus outbreak may have made it easy to miss several significant legal developments unfolding in international business. International Transaction Attorney Steve Suneson shares what global companies and law practitioners can do to reduce risk by making sure three important developments are part of their international transaction deliberations.
Since the start of the COVID-19 pandemic, there have been significant legal developments in the area of international contracts that international companies and law practitioners should consider. This article discusses three of those, including:
Force Majeure Developments
Force Majeure has risen to the forefront in many international disputes. A force majeure clause will typically excuse, suspend or even terminate the performance of a party due to an event outside of the reasonable control of the affected party.
Such events include natural disasters, wars, terrorism and labor shortage. Given the havoc that the COVID-19 pandemic has wrought on the international community, many international transactions have been faced with force majeure disputes. This will likely continue for the foreseeable future.
The most important protection for a party is to have a carefully drafted force majeure clause. However, the drafting of this clause has changed during the pandemic.
The coronavirus is no longer an unforeseeable event. Drafting should include the knowledge we have today concerning the fluidity of COVID-19. Many jurisdictions may not determine that a valid force majeure event exists unless the force majeure clause expressly includes events that are foreseeable. Moreover, many force majeure clauses in the past used general terminology. It is important to expressly reference terms such as pandemic, stay-at-home orders or lockdowns.
Finally, international practitioners should not just focus on the drafting of the force majeure clause in the contract. A remedy independent of the agreement may exist in civil law jurisdictions to the extent the agreement is regulated by such jurisdiction.
Civil law jurisdictions, such as France, Spain, countries in Latin America, and the Province of Quebec in Canada, have codified many important legal principles into their statutory framework. In many instances this includes force majeure protection. Analyze the applicable civil code and determine whether it may provide force majeure relief to a party even if the contractual force majeure provision may be insufficient.
Legal Guide to International Sales
The Legal Guide was released in February 2021 and is a joint publication of the United Nations Commission on International Trade Law (UNCITRAL), the Hague Conference on Private International Law – Conférence de La Haye de droit international privé (HCCH), and the International Institute for the Unification of Private Law (UNIDROIT).
It is an informative guide to anyone operating in the area of international contracts. The discussion on the United Nations Convention for the International Sale of Goods (CISG) and its application and interplay with other international principles and guidelines is particularly helpful.
The Legal Guide also serves as a useful reminder that the CISG will generally apply to an international transaction, regardless of the intent of the parties, where the parties are from countries who have ratified the CISG treaty unless the parties expressly disclaim the CISG. Most industrialized nations (including the United States but, somewhat surprisingly, excluding the United Kingdom) have ratified the CISG.
Legal practitioners engaging in international transactions usually will want to disclaim the CISG because, unlike the Uniform Commercial Code (UCC) in the U.S., the CISG contains no statute of frauds, allows parole evidence, and often will result in no enforceable contract in instances where the application of the UCC will result in one.
In addition, the CISG applies to more than just the sale of tangible goods. It covers many forms of software and even certain licensing agreements and SaaS arrangements if, for example, a license grant is deemed unlimited and in exchange for a one-time payment. In such instances, a court may determine that the license is really akin to a sale. See, for example, Corporate Web Solutions v. Dutch company and Vendorlink B.V. (2015), where a Dutch court found that the parties’ agreement was a contract of sale although the parties entered into a license agreement and applied the CISG to the transaction.
Finally, the Legal Guide is useful in comprehensively describing the UNIDROIT Principles of International Commercial Contracts, and the HCCH Principles. The Legal Guide articulates and clarifies the differences between these non-binding, soft-law instruments, as well as the interplay among these principles and the CISG in international transactions.
A new set of Incoterms® went into effect in 2020. These eleven international commercial shipping terms are set forth by the International Chamber of Commerce (ICC) and provide a shorthand guide to international terminology that allocates shipment-related risk and responsibility between buyers and sellers. They do not address the transfer of ownership of goods.
Updated every 10 years by the ICC, the 2020 edition includes a number of clarifications to shipping terms that are worth analysis. There are approximately seven changes, three of which are significant. The first change deals with the type of insurance coverage needed, who is responsible for purchasing the insurance, and the amount of insurance coverage. These changes impact the Cost Insurance and Freight (CIF) rule and Carriage and Insurance Paid To (CIP) rule; in particular, the CIP rule now requires a higher level of insurance coverage.
The second major change relates to the allocation of costs between the buyer and the seller. Previously, there had been some confusion among the parties about add-ons which sometimes created disputes, such as terminal handling charges and other types of costs which were back-charged to sellers. To resolve these disputes, Incoterms®2020 better details the allocation of costs between seller and buyer, especially those in or around the port or place of delivery.
A third substantial revision deals with cargo security during transportation. Ever since the events of 9/11, cargo security has been a concern but one that had not been adequately covered in the 2010 version. The 2020 revision extensively lays out security-related requirements, such as mandatory cargo screening and the responsible party for the related costs.
Perhaps because the COVID-19 pandemic swept the world soon after the release of Incoterms® 2020, there has been less coverage of these changes to the Incoterms® than usual. As a result, it appears that many forms of contract templates and other drafts still reference Incoterms® 2010.
For Incoterms® 2020 to apply, not only must the specific Incoterm be referenced but it must also refer to the 2020 version. If the contract still references Incoterms® 2010, then the particular Incoterm will be analyzed under the 2010 version.
If no year is referenced together with the Incoterm, then it will be unclear which version should apply and should a dispute arise between the parties it could result in added costs to the parties to resolve such matter. As a matter of best practice, the Incoterm referenced in the agreement should be listed together with the applicable version (which in most cases will be Incoterms® 2020).
Pandemic-era legal challenges
The pandemic has resulted in unique legal challenges and has in some instances taken away attention to important legal developments. While we continue to live in the COVID-19 pandemic era, the Legal Guide to Uniform Legal Instruments in the Area of International Commercial Contracts (with a focus on sales) and its particular discussion of the CISG; the Incoterms 2020®, and the legal developments of force majeure law in jurisdictions worldwide warrant increased attention in international transactions.
Steve Suneson, a commercial business and international transaction attorney, spends most of his time serving the cross-border and international law needs of foreign companies in Canada, Australia, Britain, Sweden and other European companies doing business in the United States in a multitude of industries. Reach out to Steve at email@example.com.
This information is not intended as legal advice. Readers should seek legal counsel from an attorney before acting. © 2022 Jones & Keller, P.C. All rights reserved.