Contracts are a private arrangement between one or more parties. I sell you a sandwich, and you give me $5 – that is a contract. If the money you gave me was counterfeit, or the sandwich I gave you had poison in it, there probably would be quite a few consequences, but two of the things that usually would be true would be that you would still owe me $5 in real money, if you gave me fake money, and I would owe you a refund, if I sold you a poisoned sandwich. We should add a condition, however: we should say “in most countries”.
Why? Because what gives contracts force is that they operate in a context of legal rules that are provided by, and enforceable under, national legal regimes (including sub-units like provinces and territories). If it’s OK to sell a person a poison sandwich in your country, therefore, maybe you could get away with it.
Another source of “contract enforcement power” is treaties, which are agreed rules systems set up by mutual agreement of the governments of two or more countries. The rules imposed by treaties are given power by the combined force of the legal regimes of the participant countries, which agree that their citizens will comply with the rules. Treaties often create special tribunals to handle disputes about the application of the rule system created by the treaty.
A third source of rules is international associations, like standards bodies. People can opt into these standard sets of rules by incorporating the set of rules into their contracts. If the association that created the set of rules is connected to an international organisation like the UN, then the rules may be supported via treaties. If the body is independent, then people can adopt the rules for convenience, but when it comes to applying and enforcing the rules, the parties will have to revert directly to the separate national legal systems of the countries they come from to do that. In that case, the choice of law made under the contract could become very important. It is easy to think of these rule sets as mini-universes of their own, where one solution applies to all participants. In practice, the results could differ widely.
Let’s look at an example. International trade is an area where the participants literally come from every country on earth. The best way for international trade to work smoothly is for people to rely on standardised sets of rules and standard-form documents. Such rules and documents have developed over hundreds of years.
A common document used in international trade is the contract for hiring a vessel, called a “charter party”. One of the standardised charter party documents currently in use is the NYPE Time Charter. (“NYPE” refers to the New York Produce Exchange.) This contract was first published in 1913 and has been revised and reissued a number of times, e.g. in 2015. It covers a range of topics that are relevant when hiring a ship, such as: how long the voyage will take; where the ship will be delivered; what fuel (bunkers) it will have when delivered; what cargo it is allowed to carry; and many other things.
One of the clauses in the NYPE 2015 Time Charter (clause 54) allows the parties to choose the law that applies to the contract. I live in Australia, so let’s say I hire a ship locally, using this standard contract, and the ship supplier and I agree that the law that will apply to the contract will be “the law in force in the State of Western Australia, Australia”. Because Australia has a federal system of government, this means that three layers of laws are brought into play immediately: our local State law (Western Australia), the federal law of Australia, and any international treaties that the Australian federal government has implemented.
Another clause in the contract is clause 25: “BIMCO Electronic Bills of Lading Clause”. BIMCO stands for the Baltic and International Maritime Council, which is a shipowners association. BIMCO develops standard clauses which are implemented by bodies in charge of standard-form contracts, like NYPE. This clause says that, at the parties’ option, certain documents can be issued, signed and transmitted in electronic form.
Sounds great: the contract allows us to send notices back and forth by email. But, what does Australian law say about electronic signatures, and making agreements via electronic methods? If the law doesn’t allow this, then this particular clause won’t work in Australia. As it happens, the Australian Parliament is full of wise lawmakers, and in 1999 the Australian Parliament enacted the Electronic Transactions Act 1999 (Cth). This law includes section 8, which says that “a transaction is not invalid because it took place wholly or partly by means of one or more electronic communications”. Section 15E applies section 8 to contracts.
Notice the law doesn’t say that an electronic contract is valid. It says it isn’t invalid just because it was made electronically, which means that we have to check the other federal laws (which include implementations of treaties)and the other layer of law (State law) to see if there is anything preventing this particular kind of arrangement being made electronically. Let’s assume we have done that and didn’t find any blockage. The result: clause 25 of the NYPE 2015 Time Charter works in Australia.
Clearly, there could be a lot of confusion and effort spent in trying to work out what parts of standard contracts do and don’t work successfully in different countries. For that reason, many contracting parties will choose a country where the rules are well known, e.g. England, with disputes to be subject to arbitration under a well-known set of arbitration rules.
[The author, James Irving, is an Australian Lawyer and New York Attorney. Visit his firm’s website for more information about him and his areas of work. Photo credit: RMS Queen Mary 20Jun1945 New York, photo taken by the US Navy, a public domain image courtesy of Wikimedia Commons.]
