By Shraddha Ray Menon

Research Support Arushi Jain and Aman Ahmed

International Commercial Contract and its essential elements

International commercial contracts are legally enforceable agreements entered into by two or more parties for the purpose of trade. International instruments have identified contracts as “international”, once the parties concluding the Agreement come from two or more different States. Hague Principles state, one approach to identifying a contract as commercial may be where each party is acting in the exercise of its trade or profession.

International Layout

Under ICC, the determination of the rights and liabilities of the parties’ will, likely rely on the law that administers the Agreement, identified according to the rules of private international law of the adjudicating forum.

The ICC Force Majeure Clause 2003 has played a pivotal role in formation and competition of contractual obligations in ICCs by the inclusion of the term ‘epidemic’ being listed as a factor to trigger the force majeure clause in a commercial contract.

In response to the pandemic, the International Chamber of Commerce issued an updated force majeure clause in March 2020 and recommended its use in international commercial contracts.

The pandemic has brought about an increase in complexity in adjudicating disputes in cases of non-performance. It is reliant on the contract signed between the parties and which law would govern the Agreement. A force majeureclause which expressly mentioned pandemics would be a favoured provision and get triggered in current times. However, if pandemic wasn’t mentioned specifically, it will likely be an instance of interpretation and reliance on other provisions. Some contracts may expressly allow parties to terminate the Agreement if the performance has been deterred by eventualities such as an epidemic or a pandemic, some may not.

The courts in some jurisdictions/ countries may validate the force majeure clauses – because it expresses the intention of the parties. In contrast, others may subject the interpretation of such clauses to stringent precepts. On a global scale, a pandemic can be constituted as an epidemic and thereby the force majeure clause in the contract can be triggered.

A change in commercial dealings among Nations

The diplomatic relations between nations have been distressed and disrupted. In the trade sector, it has redefined norms and thresholds. In February 2020, amidst the COVID-19 induced economic slowdown, the bilateral trade between countries like China & India contracted by 12.4 %. A declining trade volume indicates a flailing economic exchange, amongst other things. This has fueled negative economic integration and interdependence on trade relations between the two countries.

The impact of COVID-19 on international trade and economy has led to reduction in demand and collapsing trade flows. Japan and Britain have officially entered Britain’s first major post-Brexit trade deal (The UK – Japan Comprehensive Economic Partnership Agreement). The deal removes U.K.’s tariffs on Japanese cars in stages to zero in 2026. The deal also seeks Japan’s support to UK in Trans-Pacific Partnership (TPP), world’s largest free trade area, strengthening ties between UK and 11 Pacific Countries.

Meanwhile, the Asia-Pacific Region along with ASEAN member are entering in a multilateral free trade agreement, called the Regional Comprehensive Economic Partnership Agreement (RCEP) accounting for 30% of global GDP and population. In an uncertain time as the current, this is the first deal to connect large economies like China and Japan. India has preferred, for the moment to act as an observer and not actively join RCEP for it does not cater to outstanding issues and concerns of India.

In the post-pandemic environment, many States are likely to intensively dedicate their efforts towards rebooting their industries and protecting their vital and essential supplies. Ensuring availability of essentials for the future in case such a pandemic situation arises, can be achieved by protecting their critical domestic industries and diversifying their supply chains, both of which would require targeted policy measures. Trade policies especially in developing countries can, thus, be expected to become more conservative.

Conclusion

This unprecedented reality has rendered the performance of commercial contracts, difficult and challenging. Most businesses have faced operational difficulties because of supply chain disruption, raw material delivery slowdowns, and labor shortages. The change in the world order has had some countries make law reforms, clearly what worked till now wasn’t going to for the next decade. The shortcomings and gaps became apparent the veneer was taken off.

ANNEXURE

Frequently Asked Questions (FAQs)

1. CHINA

1.1 How is the applicable law determined by the courts in case of commercial contracts?

Ans: The parties to a commercial contract have the freedom to choose the governing law though only cases wherein there is a foreign element involved in the contract for example:

1. Either party is a foreign person or legal entity (whereas foreign ownership is not sufficient to create a foreign element)
2. The subject matter of the contract is located outside mainland china.
3. The legal facts that give rise to, amend or terminate the contractual relationship occurred outside mainland China.

If a contract that does not carry any foreign element stated above, the laws of People’s Republic of China (PRC) will be governing the contract. In addition, the application of PRC law is mandatory for equity joint ventures, contractual joint ventures and joint ventures of exploitation and development between a mainland Chinese and a foreign party and performed within Mainland China. In the absence of a choice of law, the governing law will be determined by the laws that have the closest connections with the contract.

1.2 How are force majeure clauses in commercial contracts applied and interpreted in practice?

Ans: Where the contractual force majeure clauses are broadly specified generally mainland Chinese courts will adhere to the parties’ agreement in determining whether a specific circumstance constitutes a force majeure event. Where the nature of the contractual arrangement is more restrictive, unless the parties have expressly and specifically ruled out the application of the statutory force majeure provisions, mainland Chinese courts will apply the statutory criteria in their ruling.

1.3 In the absence of statutory provisions or contractual arrangement on force which instruments are available to avoid the performance of contractual obligations?

Ans: The doctrine of “Change of Circumstances” under the PRC law shall be applicable in this case. Requirements to be met for invoking this doctrine, include:

1. There is a material change in circumstances (change in currency valuation or any economic change in the country)
2. The material changes were unforeseeable while concluding the contract and therefore exceeded the scope of commercial risks involved.
3. The performance of one party to the contract is unfair or impossible due to such changes.

If the doctrine is proved in the Court of law, then the affected party can request the court to amend or terminate the contract due to the contractual purpose getting frustrated.

• JAPAN

2.1 How is the applicable law determined by the courts in case of commercial contracts?

Ans: In accordance with the laws of Japan, termination rights or damages are granted if the claiming party has performed its obligation late, but the act was not intentional or out of negligence. Force majeure is invoked by a party to a commercial contract as a defence in case the failure to perform was not intentional act or caused due to negligence. In accordance with the general principles of the Civil Code, the Japanese courts will examine for negligence due to which the contractual obligation could not be performed, which could include non force majeure events.

Force Majeure under Japanese laws comes under the provisions of Japanese Civil Code. The clause has limited grounds for it to be invoked, force majeure cannot be used as a defence against a claim for damages for delayed payment, a leaseholder can demand a reduction of the lease interest due to a decrease in profits caused by force majeure and special formal regulations apply to force majeure clauses in contracts for construction work.

There is no statutory provision that defines the meaning of force majeure or establishes the requirements for the application of force majeure. In general, force majeure is recognized as a concept to release a party from contractual obligations due to failure of performance to contractual obligations due to an event or circumstances beyond the parties’ control.

2.2 How are force majeure clauses in commercial contracts applied and interpreted in practice?

Ans: Specific force majeure clauses in commercial contracts are valid under Japanese law unless such clauses conflict with certain general principles such as public policy. In case force majeure clause have been validly agreed, Japanese courts interpret and apply such clauses on a case-by-case basis, largely depending on the wording of the clause and the specific facts of the case including in case of a global pandemic such COVID-19. The burden of proof that a force majeure event has occurred is on the party that invoking the clause. If the failure is due to a force majeure event, the effect will depend on the wording and content of the force majeure clause in the contract.

2.3 In the absence of statutory provisions or contractual arrangement on force which instruments are available to avoid the performance of contractual obligations?

Ans: In such circumstance the party can invoke “The doctrine of a change of circumstances” taking the principle of good faith under consideration. There are certain requirements that must be met by the party while invoking this doctrine which includes:

1. An unforeseen change of circumstances has occurred
2. Such change was not attributable to the parties
3. A literal interpretation of a contract would result in an unfair outcome for a party under the principle of good faith

Remedies to the party invoking this doctrine include:

1. The right to terminate a contract
2. The right to adjust the terms of a contract.

Read PANDEMIC AND COMMERCIAL CONTRACTS- Part II by clicking here.