The complexity of contracting internationally

Globalisation has opened the door to individuals and businesses to become bolder and more internationally active. This implies a greater degree of international contracting. Although substantial benefits can arise from expanding your business internationally, it can also present many difficulties if you are unaware of the legal consequences of contracting in the international arena, particularly where you are involved in a contractual dispute with an international party.

Private international law regulates the dealings between people of different nations and the question of which legal system should be applied to a specific legal situation. It is not a segment of public international law and as such is not governed by international conventions that different States sign and incorporate into their law. For this reason, private international law does not provide universal solutions in respect of international contracting.

Private international law depends predominantly on numerous concepts and case law from which it draw its authority. These sources merely serve as guidelines to determine which legal system should reign over a specific relationship. Fortunately, the use of conventions to regulate private international law is becoming a more attractive notion, but until this is followed by all nations, the lack of uniformity will continue to cause uncertainty. The result is, that where international dealings are not conducted correctly, a lengthy procedure may ensue to determine which legal system is suitable and just to resolve the dispute.

A contract cannot exist without an empowering legal system whose norms specify that a contractual obligation exists. In other words, a contract draws its authority from a legal system. This can be illustrated by way of example:

Person A, living in South Africa, and Person B, who is a resident of Italy, wish to enter into a contract with one another. Both parties agree that the contract is to be executed in China. Later on in their contractual relationship, a dispute arises. Which legal system prevails? South African law, Italian law or Chinese law? In such a case, private international law is implored to determine the law to govern the contract.

The solution is encapsulated in a concept known as ‘party autonomy’. When a court has to determine which law governs a contract, there are three possibilities:

  1. Expressly chosen law;
  2. Impliedly chosen law; or
  3. The most closely connected law.

The first solution would require the parties to ensure that the desired legal system is expressed in their contract. This means stating the governing system specifically in their contract and eliminating any doubt as to the possibility of any other legal system having influence over the contract’s governance. For example, the parties choose the law of China to govern their contract.

Secondly, if the parties do not expressly state which system should govern their relationship, the court then determines whether the parties have chosen the legal system tacitly. In layman terms, this means determining whether the parties left hints within the contract which indirectly points to a specific legal system. Tacit choice can be inferred from any indication which can be manipulated into the formation of a choice by the parties.

Lastly, should the parties fail to make a choice altogether (either expressly or tacitly), the courts will then assign an appropriate law. This is a process adopted by the courts which involves an investigation into all the legal systems involved within the contract and identifying the legal system with which the contract has its closest and most real connection.

From the above it is clear, that uncertainty in an international contract as to the applicable legal system and how to deal with contractual disputes, may result in a very costly and time-consuming exercise of having to determine firstly the applicable legal system and then the adjudication of the dispute in terms of that system. So, before you take the bold step internationally, get smart and obtain the necessary advice so you can approach your international contracting armed with the necessary knowledge to avoid headaches later.

April 6, 2014
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