The effects of diverging legal systems

The natural effect of trade is to create a mutual need between states: states become dependent on one another for the export and import of products and monies.^[1] In the same vein, it also creates a mutual need between businesses. Businesses strive to grow and at some point, will often wish to expand beyond state borders to enlarge their market share and get access to new products, services, and markets. Trading abroad brings legal uncertainty, as businesses will operate under another legal system with which they will be less familiar. Especially for SME, which for financial reasons have less access to legal counsel and other expertise, this unpredictability can be a deterrent to conducting business abroad. For instance, 39% of EU businesses that sell online but that do not sell cross-border, mention diverging contract laws as one of the obstacles to trading abroad.

Within an international contract the parties can insert a choice of law clause to indicate the applicable law to the contract. One of the possibilities would be the domestic law of either party. This has the advantage of being familiar to one of the parties and if the execution of the contract (partly) takes place in that legal system it can be hoped the law provides suitable solutions for the dispute. There are also disadvantages. One of the parties is confronted with a legal system with which they are not familiar and could incur additional costs for translations and specialised legal counsel. Furthermore, psychologically a party might feel more comfortable with their own domestic law (regardless of whether there is a legal reason to choose it) and the choice can make the relation between the parties feel more uneven. In contracts between a private company and a state or state agency the company might question the neutrality of the state law. Therefore, parties might be reluctant to give the other party the advantage of using their own domestic law. If the parties have equal bargaining power this can lead to an impasse.

In the case of unequal bargaining power, the stronger party can impose their choice of law and (potentially) leave the other party at a disadvantage.

The other option is to choose the law of a third country. Choosing a neutral law places the parties on an equal footing. The parties are equally unfamiliar with the law and this affects predictability. The outcome of a dispute might be different from the intentions of the parties. Furthermore, if the applicable law has no connection at all with the contract, then problems could arise if the agreement contains concepts that are known in the legal system where the contract was performed but not in the applicable law. An example is a floating charge, which does not exist in every legal system. Therefore, the neutral law might not be the best fit for the contract.

If the parties cannot agree on a choice of law, the contract will be silent on this issue. This leads to additional legal uncertainty, as then the forum that is seized will apply its private international law to decide whether they have jurisdiction and if they do what the applicable law is. A unified private international law can help to reduce legal uncertainty with regards to determining the applicable law. As procedural law it does not unify the law substantively and therefore the uncertainty as to the content and the interpretation of the applicable law remains.

In 1949 Mario Mattcucci, the then Secretary General of UNIDROIT, wrote that private international law is not sufficient to solve problems coming out of the differences between legal systems and that‘unification of private international law and international unification of private law’ are both needed.^[2] There is a need to develop a unified international commercial law, a true transnational commercial law: ‘‘International trade needs a real jus commune mercatorum, a material law that can govern international relations.’ This is more suited to the needs of business than transposing domestic law solutions to an international context.

Domestic commercial law is tailored to transactions that take place within the legal framework of that state and some provisions are less suited to international transactions. The UCC contains a perfect tender rule. This means that the goods should conform exactly to the contract. If they do not conform, the buyer can return the goods to the seller. This rule is less practical in the international context. If the merchandise does not conform exactly to the contract and the buyer sends it back this causes more significant logistic problems. The merchandise needs to be taken on a potentially long and difficult journey across borders and through customs with all the associated costs, delays, and risks. Therefore, the CISG has no perfect tender rule and the buyer can only refuse the merchandise if the non-conformity is of such severity that it can be considered a fundamental breach of the contract. In case of minor differences between the goods that were delivered and that which was contractually agreed the buyer cannot refuse to accept the merchandise but can claim damages.^[3] Therefore, the buyer is compensated for his loss, the goods are put to use, and the additional costs for the seller are kept to a minimum. This pragmatism is more suited to the realities of international commerce.

The need for a truly transnational international commercial law has regularly been expressed over the decades. In 1979 Schmitthoff wrote

No branch of law suffers as much from the division of the world into many national legal systems as commercial law. That division is a serious obstacle to the international exchange of goods and services. On the international level - as in the home market - businessmen want to supply goods to their customers and make sure that they receive the purchase price, they want to build factories and installations, establish a proper distribution network for their goods or services, in brief, they want to get on with the business. But they do not wish to get entangled in legal snares, such as those created by the diversity of national laws.

Dalhuiscn writes: 'At least in the area of professional dealings the formation and operation of transnational law may be considered the national and unavoidable consequence of the internationalisation of the flow of goods, persons, services, knowledge, capital, payments and assets.'¹ Orlandi states that 'foreign traders often fear municipal laws as they can hide dangerous traps for the success of their businesses.'¹⁶ Eleanor Fox writes that ‘Disharmonies of law and procedure are costly and bothersome.^,27 Michael Kabik discusses how: ‘International trade has been hindered by a myriad of distinct domestic laws governing the sale of goods.¹*’

More intense international trade leads to a further need for harmonised law.^[4] These considerations all lead to the starting point that legal harmonisation is beneficial for businesses and trade.

Although the need for a harmonised law is thus regularly discussed and affirmed, the question is whether diverging laws really do hamper international trade. There is some evidence that diverging laws lead to higher transactions costs and this leads to higher prices and therefore this affects the economy. To measure whether diverging laws have a strong negative effect on international trade more extensive empirical research is necessary.

Section 2.6 discussed that the CISG is regularly excluded from international contracts, although the exact extent is unclear. Furthermore, courts do not always apply the CISG even when it has not been excluded. This has especially been the case in the US. However, there is evidence that this is changing. A Westlaw database search in 2006 fielded around 48 decisions in the US involving the CISG whereby two-thirds of these decisions stemmed from the preceding 5 years. Repeating the same database research in July 2015, 185 decisions are found. The same database search in February 2020 finds 281 cases so in the past 14 years the number of cases referring to the CISG has risen significantly. The rising number of cases indicates further acceptance and entrenchment of the CISG within the US.

The above discussion of the CISG shows a certain reluctance towards the use of harmonised international commercial law. It also shows that, as the instrument becomes more well known the usage increases. This thus supports the importance of uncertainty avoidance in international commercial law. There is an assumption that a harmonised international commercial law is needed to increase predictability, but there is a lack of empirical evidence to support or denounce this assumption.

Not all businesses have the same need for a harmonised international commercial law. Professor Schweitzer identified three distinct groups:

Group 1:

• • Parties arc from different countries but share the same language
• • Parties have similar legal systems (common law countries, France/ French speaking African countries)
• • The parties will choose the law of one of their own countries, or will opt for a third country with a similar legal system
• • The outcome in court would be predictable for the parties and they will not feel the need for a unified law. They arc sufficiently at ease in both systems to make cither law a viable option.

Group 2:

• • One of the parties has stronger bargaining power
• • The stronger party determines the choice of law. If the stronger party allows the weaker party to determine the applicable law for strategic reasons, such as with a view to long-term cooperation, it still maintains agency with regards to the decision.
• • Litigation outcome is predictable for the stronger party and this party would thus not feel the need for a uniform law
• • Uniform law could be beneficial for the weaker party or parties. The law will then be same regardless of which domestic law is applied, as substantively these are similar. A uniform commercial law would increase predictability and legal certainty for the parties.

Group 3:

• • Parties come from countries with different legal systems and languages and have equal bargaining power.
• • The preferred choice is the law of a third country - a neutral law
• • This choice leads to several problems such as linguistic issues (parties already do might not share the same language and the third country law is in another language) and a weak knowledge of the law which could potential disadvantage one or more of the parties.
• • This leads to additional legal and translation costs
• • The outcome is unpredictable for the parties so for this group there is a stronger need for a harmonised law.

• [1] Charles-Louis de Secondât Montesquieu, De I’Esprit ¡les Lois Livre XX, Chapitre 2, De I’Esprit du Commerce http://classiques.uqac.ca/classiques/montesquicu/de_esprit_des_ lois/partie_4/de_esprit_des_lois_4.html 24. 2 European Commission, 'A Digital single market strategy for Europe’ (2015) Com 192 of 6th May 2015.
• [2] Mario Mattcucci, ‘Prospects of International Unification of Law from a European Viewpoint’ (1949) 10 Louisiana Law Review 15, 16. 2 Klaus Peter Berger, ‘Lex Mercatoria doctrine and the UNI DROIT principles of international commercial contracts’ (1997) 28 Law and Policy in International Business 943,958 Quoting from: Progressive Codification of the Law of International Trade United Nations Documents A/CN.9/L.19 (1970). 3 Loukas Mistelis, ‘Is Harmonisation a Necessary Evil the Future of Harmonisation and New Sources of International Trade’ in Ian F Fletcher, Loukas Mistelis and Marise Cremona (editors) Foundations and Perspectives of International Trade Law (Sweet & Maxwell 2000) 20. 4 UCC § 2-601 Buyer’s Rights on Improper Delivery.
• [3] CISG Article 46 (2) and 74. 2 Clive M Schmitthoff, ‘American and European Commercial Law’ (1979) 6 Journal of Legislation 44, 44. 3 Jan Hendrik Dalhuiscn, On Transnational and Comparative Commercial, Financial and Trade Law (Third edition, Hart Publishing 2007) 5. 4 Chiara Giovannucci Orlandi, ‘Procedural Law Issues and Uniform Law Conventions’ (2000) 5 Uniform Law Review 23,23. 5 Eleanor M Fox ‘Harmonization of Law and Procedures in a Globalized world’ (1991) 60 Antitrust Law Journal 593, 593. 6 Michael Kabik, ‘Through the Looking-Glass: International Trade in the ‘Wonderland’ of the United Nations Conventions of the International Sales of Goods’ (1992) 9 International Tax and Business Lawyer 408, 409.
• [4] Franco Ferrari, ‘Le Champ d’Application des « Principes pour les Contrats Commerciaux Internationaux» élaborés par UNIDROIT’ (1995) 47 Revue Internationale de Droit Comparé 985, 986/987. 2 Jan M Smits, ‘European Private Law: A Plea for a Spontaneous Legal Order’ in Deirdre M Curtin, Jan M Smits et al. (editors) European Integration and Law: Four Contributions to Celebrate the 25th Anniversary of Maastricht University’s Faculty of Law (Antwerp-Oxford 2006) 70. 3 Ibid, 70. 4 Franco Ferrari, ‘Homeward Trend and Lex Forism in International Sales Law’ [2009] International Business Law Journal 333,336/337 Francesco G Mazzotta, ‘Why Do Some American Courts Fail to get it Right?’ (2005) 3 Loyola University Chicago International Review 85. 5 Karen Halverson Cross, ‘Parol Evidence under the CISG: The ‘Homeward Trend’ Reconsidered’ (2007) 68 Ohio State Law Journal 133 Some of these decisions concern appeals. 6 Ingeborg Schweitzer, ‘Who Needs a Uniform Contract Law, and why?’ (2013) 58 Villanova Law Review 723, 723-725.