This article is written by Avya Kashyap (BBA LL.B), Amity University, Patna during her internship with Le Droit India.
Abstract:
International contracts are inevitable in conducting international business but they require consideration for reasons relating to different legal jurisdictions, choice of law, and jurisdiction. This article explores some aspects of cross-border contracting that are contract formation, contract capacity, consideration as well general risk allocation. It also examines the current role of choice of law and jurisdiction clauses to seek enforceability, as supported by the presently valid sections of the Indian Contract Act 1872[8] and across the international conventions such as CISG and the New York Convention.
Explaining through the case laws of Renusagar Power Co. Ltd. v. General Electric Co.[3], this article underlines the significance of legal certainty and risk mitigation to reduce the probability of risk in international contracts along with the legal perspectives of the same.
Keywords: Cross-border contracts, contract law, choice of law, jurisdiction, dispute resolution, Indian Contract Act, CISG, enforceability, international trade.
Introduction:
In the present day context of a closely integrated world economy it is impossible for companies operating in the international arena to conduct their operations without entering into cross border contracts. These are contracts which involve parties from different legal systems and most of them are worked under contractual principles such as offer, acceptance, consideration, and mutual intention. However, while interpreting and implementing contract terms across borders there are a number of issues that are not present in domestic contract contexts. Choice of law and jurisdiction, mode of dispute resolution and the considerations arising from compliance with international conventions are very important in the formulation of cross border contracts.
This article is centered on contract law in the context of International business transactions, the nature of cross-border contract law, and challenges experienced in seeking legal enforcement across international borders. Thus, by eliminating these problems parties shall be able to establish effective contracts that exclude legal uncertainties and enhance understanding of global business dealings.
Key consideration in cross border contracting.
Contract across borders is frequently used in cross border business and trading, usually, such contracts are guided by the principles of law of contract that define the understanding of the parties and enforceability of the contract. They include issues to do with the law to be applied, the law of the country of operation or the country that has jurisdiction over the contract, and the method of solving disputes. In this paper we are determining the aspect of cross border contracting the law and jurisdictions to be selected taking into consideration the provision of the Indian and International legislation and case law.
- Formation of contract:
The basic principles of offer acceptance and consideration are applicable to domestic as well as international contracts. However, as with any cross border agreements one has to remember that standards may differ from one country to another.
Section 2(h) of the Indian Contract Act, 1872[8]: The author begins the conception by defining contract as a legally enforceable agreement. While working in terms of cross border, mutual consent overcoming language, cultural and legal barriers is essential.
Case Law: M/s Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.[(1966)AIR543][1]
This case pointed out the need to apply offer and acceptance when the communication is transpiring across border. The court held that a contract is concluded when the acceptance is communicated with relevance of clarity about the place of acceptance in cross-border contracts.
Section 2(h) of the Indian Contract Act, 1872[8]– “A contract is an agreement enforceable by law.” The fact is that in cross-border, there is an agreement by the parties despite their differences in language, culture, and legal concepts.
- Capacity to contract:
Interstate contracts must employ refugee legal competence of the parties allowed by their laws.
Section 11 of the Indian Contract Act, 1872[8]: Provides the legal aspect of capacity to contract and says that every person is capable of entering into a contract if they above eighteen years, of sound mind and not prohibited by law from doing so.
- Consideration:
Consideration is also given very much importance in cross border contracts is also vital in contractual cross- border contracts.
Section 2(d) of The Indian Contract Act, 1872[8]: Defines consideration. When it comes to mode of payment cooperation and care must be taken in international contract special attention should be given to the currency and the mode of payment.
- Force Majeure and Frustration of Contract:
Cross border contracts should contain Force majeure clauses, which are essentially clauses that discharge one party from performing the contract in extraordinary situations of natural forces happen or the situation of political instability as such risks are higher.
Section 56 of The Indian Contract Act, 1872[8]: Doctrine of frustration is mentioned here where if the performance of a contract has been found impossible by the circumstances beyond control of the parties, then it is void.
Case Law: Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310][2]
In the case of Satyabrata Ghose v. Mugneeram Bangur & Co, was held that a contract becomes void where its performance is impossible because of some event which has occurred after, or before but in consequence of fulfilment of the condition precedent to be performed by one party thereby destroying “source” with objective extinction, and making further implementation completely illegal. Force majeure clauses are usually written into cross-border contracts that deal with such possibilities.
- Risk allocation and insurance:
Cross-border agreements are riskier than an exclusively domestic contract. There are greater risks to be taken, from political and economic to the headaches of logistics. Insurance against certain risks-such as export-import insurance-may help potential financial loss.
- Dispute resolution:
In view of geographical and legal differences, clear methods of resolving disputes need to be developed. It would involve stating various mediation, arbitration, or litigation processes. International arbitration can generally be preferred since it offers neutrality of venue and is enforceable in most countries under the New York Convention.
- Currency, Exchange Rates and Payment Terms:
Most cross-border transactions involve more than one currency. The currency of payment and the treatment of exchange rate fluctuations can be included in the contract. Sometimes, the method and timing of payment-such as bank transfers and letters of credit-can also be specified.
- Tax implications:
Most cross-border contracts give rise to complicated tax problems, including VAT, customs duties, or withholding tax. Parties should take a look at the tax requirements in each jurisdiction and try to buffer the burden with contractual provisions or tax treaties.
Choice of law and jurisdiction in international contract.
One of the crucial elements constituting cross-border contracts involves the specification of the legal system governing the agreements and/or identification of the courts where jurisdiction may be sought in case of dispute. Failure to reconcile these issues may raise uncertainty in the enforceability of such a contract.
- Choice of law:
A proper choice of law clause will be critical in the determination of what country’s legal framework shall apply to the interpretation and enforcement of the contract. Without one, the parties are bound to face uncertainties from time to time where courts apply conflicting laws from different jurisdictions. [7]
This is a clause that dictates the law governing the contract between parties. When it comes to international transactions, the parties can choose the law of a particular country that will apply to interpreting and enforcing the contract. Commonly chosen legal frameworks include English law, U.S. law, or Swiss law due to their well-established principles in commercial transactions.
Section 28 of the Indian Contract Act, 1872[8]: This section the validity of agreements which limit jurisdiction to a particular place only. The Indian law permits party autonomy; however, the choice of law should be reasonable and not against public policy.
Factors to Consider:
- Stability and predictability of the rule of law.
- Familiarity of the chosen law to both parties.
- The enforceability of the contract under the chosen legal system.
- Compatibility of the Chosen law with mandatory local laws.
Case Law: Renusagar Power Co. Ltd. v. General Electric Co. [(1994) Supp (1) SCC 644] [3]
In this regard, the Supreme Court of India has, in a case, upheld a choice of law clause in an international contract, upholding the principle that parties are free to choose the law that shall govern their contract, provided it does not offend public policy.
- Jurisdiction and Forum Selection:
Forum selection clauses identifying the court or tribunal with authority to resolve disputes are thus quite common in cross-border contracts. First, jurisdiction clauses help the parties avoid the uncertainty of litigating the dispute in multiple jurisdictions.
- Jurisdiction clause: It enumerates the courts that shall have the requisite powers to decide upon disputes arising out of the contract. The jurisdiction may be either exclusive or non-exclusive. In case of an exclusive clause of jurisdiction, the courts defined in such a clause can entertain the dispute. A non-exclusive clause is one whereby there can be more than one jurisdiction for resolving the disputing issue.[7]
- Forum Selection: Parties would often want to choose courts in some neutral jurisdiction, particularly if there is concern about bias in either party’s home country. Factors that generally influence forum selection include efficiency of the legal system, ease of enforcement of judgments, and proximity to the parties involved.[7]
- Section 20 of the Code of Civil Procedure, 1908[9]: It provides that a suit shall be instituted where and allows both the parties to agree on a particular forum for dispute resolution within reasonable limits.
Case Law: Modi Entertainment Network v. WSG Cricket PTE Ltd. [(2003) 4 SCC 341][4]
In, this case once again confirmed the validity of such clauses in international contracts and proved that forum selection clauses selecting a particular legal forum for dispute resolution are indeed enforceable.
- Alternative Dispute Resolution: Sometimes, parties may prefer arbitration or mediation over litigation. International arbitration provides neutrality of forum and is speedier and less costly compared to litigation. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, makes arbitral awards enforceable in more than 160 countries-the reason arbitration is particularly appealing when it comes to cross-border contracts.[6]
Article II, New York Convention: It requires the member states to recognize and enforce arbitration agreements and an award made in other contracting states.
Case Law: Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552][5]
This is landmark case sealed with judgment distinguished between domestic or international arbitration in India and importantly, on the enforceability of foreign arbitral awards in view of the New York Convention.
- Public Policy and Mandatory Laws: The courts will, in certain cases, refuse to apply the chosen law or recognize or enforce a judgment if doing so will violate the public policy or the mandatory laws of a particular jurisdiction. For example, even if the parties have chosen the law of a foreign State, local laws concerning employment, consumer protection, or competition may well be applied.[6]
Conclusion
Cross-border agreements, while anchored on traditional contract law principles, face a number of challenges because of the complexities involved in dealing with diverse legal systems. Issues such as the formation of contracts, capacity, consideration, and enforceability all have to be adapted to the international context. Basic ingredients of choice of law, jurisdiction, and dispute resolution are very important in cross-border agreements with a view to ironing out legal uncertainties and hence ensuring that the given contract would indeed be enforceable across jurisdictions.
International conventions such as the CISG and New York Convention, together with domestic laws like the Indian Contract Act of 1872, provide a sound legal framework in drafting and interpreting cross-border contracts. Case laws such as Renusagar Power Co. Ltd. v. General Electric Co. and Modi Entertainment Network v. WSG Cricket PTE Ltd. further explain how such legal principles are applied in reality.
The conclusion is that cross-border contracting is successful, provided there is careful planning and clear legal provisions, supported by expert guidance in understanding risks and adapting to international standards of the law. A business can be sure its contract is enforceable, legally sound, and helpful to achieve seamless international transactions, as most of the legal complications can be managed through comprehensive and accurate drafting.
Reference:
[1]M/s Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.[(1966)AIR543]<Bhagwandas Goverdhandas Kedia vs M/S. Girdharilal Parshottamdas And Co. … on 30 August, 1965 (indiankanoon.org)>
[2]Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310]<Satyabrata Ghose vs Mugneeram Bangur & Co., And Another on 16 November, 1953 (indiankanoon.org)>
[3]Renusagar Power Co. Ltd. v. General Electric Co. [(1994) Supp (1) SCC 644] <Renusagar Power Co. Ltd vs General Electric Co on 7 October, 1993 (indiankanoon.org)>
[4]Modi Entertainment Network v. WSG Cricket PTE Ltd. [(2003) 4 SCC 341]<Modi Entertainment Network & Anr vs W.S.G.Cricket Pte. Ltd on 21 January, 2003 (indiankanoon.org)>
[5]Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552] <Bharat Aluminium Co vs Kaiser Aluminium Technical … on 6 September, 2012 (indiankanoon.org)>
[6]Pramil kant, laws regulating cross-border contracts in india, Ipleader, (28 sept 2021 )<Laws regulating cross-border contracts in India – iPleaders >
[7]Sneha Kalia, Foreign Jurisdiction Clauses in Commercial Contracts: An Indian Perspective, IndiaCorpLaw (December 28, 2020) <Foreign Jurisdiction Clauses in Commercial Contracts: An Indian Perspective – IndiaCorpLaw>
[8]Indian Contract Act, 1872 <https://www.indiacode.nic.in/bitstream/123456789/2187/2/A187209.pdf>
[9]The Code of Civil Procedure, 1908 <https://www.indiacode.nic.in/bitstream/123456789/2191/1/A1908-05.pdf>
