Navigating international trade – the importance of the contract

Monday, September 23, 2019

New Zealand is a trading nation. The New Zealand economy, and our daily lives, are dependent on exports and imports from all around the world. When a dispute arises in relation to an international contract, unique legal issues that are not encountered domestically become relevant. Effectively managing these legal issues and understanding their associated risks should be a priority for all businesses that engage in overseas trade.

The contract is key

If a dispute arises between international trading parties, the first point of reference will be the contract. The contract is what the judge or arbitrator will use to determine the parties’ rights, obligations and available remedies. This means that careful and effective drafting of the contract is the best way to manage risk and to ensure predictability and efficiency.

Governing law

An essential clause for international contracts is a governing law clause. This clause will clearly state which jurisdiction’s law will govern the contract. For example:

This Agreement shall be governed, construed and enforced in accordance with the laws of New Zealand.

The parties have complete freedom to agree on whichever jurisdiction’s laws are best to govern the contract in the circumstances. This could include a jurisdiction that has no relevance to the contract or either party.

If the contract does not clearly state which jurisdiction’s laws govern the contract, then it may be the jurisdiction where the contract is formed that provides the governing law. Deciding where the contract was formed, and thereby which laws will apply, can easily lead to a dispute within the larger dispute and result in additional expense and delay – and an unintended outcome.

The UN Convention on the International Sale of Goods

The UN Convention on the International Sale of Goods (CISG) is a uniform international sales law treaty. It provides substantive law for the international sales of goods and has been adopted by 89 States. It has been incorporated into New Zealand law meaning that its rules will automatically govern agreements for the sale and purchase of goods between New Zealand and other states that have adopted the CISG. The agreement must explicitly exclude the CISG if the parties do not want it to apply.

Jurisdiction

The other essential provision in an international contract is a jurisdiction clause. This should not be confused or conflated with the governing law provisions as they deal with separate issues. The jurisdiction clause gives clear authority to the courts of the specified jurisdiction to decide any dispute that arises in connection with the agreement. If the clause provides for exclusive jurisdiction, then only the courts of the specified jurisdiction may hear the dispute. For example:

Any dispute arising between the parties in connection with Agreement shall be dealt with exclusively in the courts of New Zealand.

If an agreement has no jurisdiction clause, then there is the risk of costly and time-consuming litigation about which jurisdiction the dispute should be heard in. There is also the risk that multiple claims concerning the same matter will proceed in parallel in different jurisdictions, which can also occur with non-exclusive jurisdiction clauses.

Enforcement

The ease and availability of enforcing a New Zealand judgment depends on the country where enforcement is sought. For example, a New Zealand judgment against an Australian party can be easily registered with the appropriate Australian court and then enforced. On the other hand, enforcing a New Zealand judgment against a Chinese trading party can be more problematic. Understanding these risks is important.

Arbitration

Arbitration is an alternative to using the courts of a country to adjudicate a dispute. It is a private, binding and enforceable dispute resolution process. Arbitration must have been agreed to by the parties in the relevant contract. The agreement should also provide which arbitration rules are to apply and when and where the arbitration should take place, so as to avoid a dispute over the arbitration procedure.

Arbitration awards are relatively easy to enforce because of the New York Convention, which has been ratified by 159 States, including New Zealand and its biggest trading partners. The Convention means that an arbitration award made in one of the signatory states can be enforced in any of the other signatory states.

What we recommend

All parties should consider the governing law, jurisdiction and enforceability of a contract before they enter it. Some contracts, particularly with larger parties, may not be negotiable. In that instance, the risk needs to be understood and managed.

If negotiation is possible, a governing law and a jurisdiction clause should always be considered. The formulation of those clauses will be informed by the practical considerations relevant to the agreement. Some things to consider are:

  1. whether it is best for New Zealand’s law to govern the contract;
  2. whether the CISG would apply and if it should be contracted out of;
  3. if it would be beneficial for a dispute to be heard in the courts of New Zealand;
  4. the location of the other party and their assets and the implications that this has for enforcement;
  5. the costs of enforcement; and
  6. whether arbitration would be more advantageous than litigation if a dispute arose.

Because of the complexity of this area of law, we recommend seeking specific advice in relation to each major agreement.

For further information, please contact a member of our litigation and dispute resolution team

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.​