The harmonisation of international commercial law

The terms harmonisation and unification arc often used interchangeably even though they arc not necessarily the same thing. Schmitthoff suggests that these are two distinct concepts that function differently: unification means that a new unified law replaces existing national laws, whereas harmonisation is aimed at harmonising the underlying principles of national

The place of non-state rules 49 laws.^[1] UNCITRAL describes harmonisation as 'the process through which domestic laws may be modified to enhance predictability in cross-border commercial transactions and unification as 'the adoption by states of a common legal standard governing particular aspects of international business transactions.^ UNCITRAL gives model laws as an example of legal harmonisation and international conventions as an example of legal unification whilst acknowledging that the two concepts are closely related in practice.

Unification can refer to uniformity of sources (the laws are the same) and uniformity of results (the laws arc applied in the same way). There are no supranational courts in international commercial law that can apply the law in an authoritative manner. As the sources arc applied in domestic courts from different legal systems uniformity should be understood as uniformity of sources. Unification of law leads to the creation of transnational commercial law whereas the harmonisation of law ensures that the (international) commercial laws of various states become progressively more similar in nature, principles, and rules. Transnational commercial law is only aimed at international transactions. Domestic commercial law is aimed at all transactions. Therefore, harmonisation of international commercial law leads to further similarity between commercial laws (both domestic and international) whereas transnational commercial law is the uniform body of law that exists in parallel to the state.

The emphasis on harmonising international commercial law through the creation of transnational commercial law leads to a further division between domestic contracts and international contracts as the law is harmonised for international transactions. Within one state different laws arc applicable to domestic contracts and international contracts. If commercial law is harmonised for all transactions, then the law will be the same across both domestic and international transactions. This is not necessarily more desirable as international trade has different requirements from domestic trade.

Even if the concepts of unification and harmonisation arc distinguishable, they are also inevitably linked. For instance, if an international convention (uniform law) is ratified it will in turn influence domestic law as the convention is applied within the national legal system (leading to harmonisation of law). Therefore, this book uses the term harmonisation for ease of reading but means both harmonisation and unification.

Legal harmonisation through international conventions

Legal unification can occur through international conventions. Upon ratification, there is a direct obligation on the state to implement the convention. The part of the law that is covered by the convention is then uniform across ratifying states. It does not matter which participating state’s law is applicable to the contract because substantively the laws are the same. The application of conventions is not perturbed by the elements of domestic law that can interfere with the application of a foreign law or non-state rules. Conventions therefore create certainty and foreseeability for the contracting parties.

Those perturbing elements are mainly international public policy and mandatory laws. International public policy (also called international public order) refers to the cornerstone principles of the legal system that are that fundamental to its functioning, that a court will not enforce any arbitral award or decision from a foreign court or apply those provisions of the applicable foreign law that run contrary to this. International public policy is distinct from domestic public policy, which has a wider scope and includes mandatory rules. Mandatory laws (also known as lois de police) arc those laws that arc perceived ‘as so essential for the political, social and, economical organisation of the state that they determine their field of application without taking into account the conflicts of law. ⁹⁹

By ratifying a convention, a state gives up a small amount of its sovereignty. The impact on sovereignty from ratifying a treaty is three-fold: it diminishes the authority to enact laws, it diminishes the authority of executive branches to design, implement and enforce legislations, and it can diminish the authority of the court to interpret the law.^[2] In commercial law conventions, the loss of sovereignty is minimal: these conventions can often be contracted out of by the parties, they are only applicable to a specific set of transactions, they mainly replace variable rules of commercial law, they arc applied/interpreted by domestic courts, and there is no overarching international body that oversees their implementation and application.

There are drawbacks to unification through international conventions. They are ‘very difficult to achieve and rather clumsy in operation.*' Drafting a convention involves different stakeholders and negotiations take a long time. It is consequently an expensive process.

The changes the instrument brings arc also not necessarily those that the drafters set out to achieve. Peter Hall identifies three types of policy changes:

• • First order: characteristics of incrementalism
• • Second order: strategic changes
• • Third order: a paradigm shift.^[3]

International conventions could theoretically belong to any of these categories, yet in practice are likely to be changes of the first order. Conventions are usually drafted along the lines of lowest common denominator policy; that is to say, the bottom line on which the stakeholders can find agreement. States prefer transnational laws to resemble national laws. If international commercial law resembles domestic commercial law this reduces transaction costs for the contracting parties in that particular jurisdiction. They would thus not need to spend additional funds to familiarise themselves with a transnational legal instrument that does not resemble their own legislation. This encourages international trade and enhances the economy. Furthermore, it confirms a state’s leading position in international commerce. States would thus strive towards changes of the first order even if changes of the second or third order would be more effective in accomplishing uniformity.

The draft convention is defined by the prior law, as there is a need to accommodate existing domestic rules. The convention does not begin as a tabula rasa; the starting point is formed by the various domestic legal systems of the states involved in drafting the convention. Drafters (and ultimately governments) need to compromise to find agreement. The final text is often an uneasy compromise between the different solutions proposed by states that seek to impose rules that resemble their own laws. This often leads to general and minimalist provisions.

The application of the convention will lack uniformity because it leaves room for divergent interpretations. Thus, whilst a change of the second or third order might be needed to attain a desirable degree of uniformity, the result will often not surpass a change of the first order. This means that the investment of time and money into drafting a convention might be disproportionate in comparison to the achieved results.

Conventions do not form a comprehensive legal framework. Conventions cover a specific area in the field of international commercial law such as factoring, financing mobile equipment, carriage of goods by sea etc. Even within that area, they leave gaps. For instance, the CISG covers the international sale of goods, but excludes certain types of sales such as, sales by auction, sales on execution, and sales of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, and electricity.^[4] The CISG also does not cover certain issues that are central to contracting such as validity of the contract and therefore the applicable law remains important. These gaps usually occur because the drafters concur that the legal positions arc too far apart to make a compromise feasible, these are areas of greater public policy interest and state sovereignty concerns, or these are areas in which there is already a strong national law that states arc unlikely to wish to displace. Records of negotiations for the CISG show that the diverging approaches between states to international contracting, led to leaving out controversial issues on which there was no consensus.

Once a convention is drafted, it needs to be ratified by enough states to enter into force. It can take years before a convention gets the required number of signatures. Sometimes this momentum is never achieved, and a convention fails to enter into force. Even if a state has been an active participant in the drafting process, it does not necessarily mean that this state will ratify it.

Examples of conventions in commercial law that have failed to enter into force are for example:

The 1980 United Nations Convention on International Multimodal Transport of Goods-, one ratification.

The 1983 Convention on Agency in the International Sales of Goods-, five parties.

The 1986 Convention on the Law Applicable to Contracts for the International Sale of Goods-, two parties.

The 1988 United Nations Convention on International Bills of Exchange and International Promissory Notes: five parties.

The 2001 United Nations Conventions on the Assignment of Receivables in International Trade: one ratification.

The 2009 UNIDROIT Convention on Substantive Rules for Intermediated

Securities: zero parties.^[5]

These conventions could still enter into force, but especially for the older ones this is unlikely as new developments have out-dated some of the provisions and the momentum for ratification has passed.

Other conventions enter into force, but only receive a few ratifications. If an instrument is only in vigour in a small number of states, its contribution to establishing global security and predictability for merchants is limited. Examples are:

The 1964 Convention Relating to a Uniform Law on the International Sales of Goods (ULIS) (entered into force in 1972): currently in force in three countries.

The 1964 Convention relating to a Uniform Law on the Formation of Contracts for the International Sales of Goods (ULF1S) (entered into force in 1972): currently in force in two countries.

The 1970 International Convention on Travel Contracts (entered into force in 1976): currently in force in seven countries.

The 1971 Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters (entered into force in 1979): currently in force in four countries.

The 1978 Convention on the Law Applicable to Agencies (entered into force in 1992): currently in force in four states.

The 1985 Convention on the Law Applicable to Trusts and their Recognition (entered into force in 1992): currently in force in five countries.

The 1988 UNIDROIT Convention on International Factoring: nine parties

The 1988 UNIDROIT Convention on International Financial Leasing: ten parties.

The 1994 Inter-American Convention on the Law Applicable to International Contracts two parties.

This is not to say that conventions cannot be successful. Some conventions have attracted a large number of signatories:

The 1924 International Convention for the Unification of Certain Rules of Law relating to Bills of Lading (Hague Rules) or The Hague Rules and the 1969 Protocol (Hague-Visby Rules): 90 parties.^[6]

The 1929 Convention for the Unification of Certain Rules Relating to International Carriage by Air (Warsaw Convention): 152 parties.

The 1958 New York Convention on the Recognition of Foreign Arbitral Awards (entered into force in 1958): 164 parties.

The 1974 Convention on the Limitation Period in International Sale of Goods (as amended by the protocol of 1980): 30 parties.

The 1980 Convention on the Contracts for the International Sale of Goods (entered into force in 1988): 94 parties.

The 1999 Convention for the Unification of Certain Rules for International Carriage by Air (Montreal Convention): 136 parties.

The 2001 Cape Town Convention on International Interests in Mobile Equipment (entered into force in 2006): 80 parties.

A final drawback is that once a convention has entered into force it can ossify and the provisions could become out-dated. Once a convention has entered into force amending it is difficult, even if changing circumstances make this desirable. Amending the provisions requires the same process of ratification that the original convention did. It is not certain all participating states will ratify the amending protocol. The 1924 Brussels convention on Carriage of Goods by Sea was amended in 1968 and in 1979 with additional protocols. Some of the countries that signed the 1924 convention did not sign both or cither of the additional protocols. This means that there are diverging rules in force, whereby in some states the 1924 convention is applicable without the protocols and in other states, the 1924 convention is applicable along with the 1968 protocol and/or the 1979 protocol. This hinders legal harmonisation.

• [1] Clive M Schmitthoff, 'American and European Commercial Law’ (1979) 6 Journal of Legislation 44,45. 2 http://www.uncitral.org/uncitral/en/about/origin_faq.html. 3 Ibid. 4 Camilla Baasch Andersen, ‘Uniformity in the CISG in the First Decade of its Application’ in Ian F Fletcher, Loukas Mistelis and Marise Cremona (editors) Foundations and Perspectives of International Trade Law, (Sweet & Maxwell 2000) 291.
• [2] This is the definition of Professor Phocion Francescakis which is used in the commentary on article 3 of the French civil code. 2 Susan Block-Lieb, ‘Soft and Hard Strategies: the Role of Business in the Crafting of International Commercial Law’ (2019) 40 Michigan Journal of International Law 433, 467. 3 Konrad Zweigert and Heinz Kotz, An introduction to comparative law (Tony Weir tr, third edition, Oxford University Press 1998) 25.
• [3] Peter A Hall, 'Policy Paradigms, Social Learning, and the State: The Case of Economic Policy Making in Britain’ (1993) 25 Comparative Politics 275, 279. 2 Clayton P Gillette & Robert E Scott, 'The Political Economy of International Sales Law’ (2005) International Review of Law and Economics 446,467. 3 Henry Deeb Gabriel, 'The Advantages of Soft Law in International Commercial Law: the role of UNIDROIT, UNCITRAL, and The Hague Conference’ (2008) 34 Brooke Journal of International Law 655,661/662. 4 Marco Torsello, 'Reservations to International Uniform Commercial Law Conventions’ (2000) 5 Uniform Law Review 85, 86.
• [4] CISG Article 2. 2 Marco Torsello, ‘Reservations to International Uniform Commercial Law Conventions’ (2000) 5 Uniform Law Review 85. 3 Keith Loken, 'A New Global Initiative on Contract Law in Uncitral: Right Project, Right Forum?’ (2013) 58 Villanova Law Review 509, 513. 4 An example is the Inter-American Convention on the Law Applicable to International Contracts (1994). The United States were actively involved in drafting the document, but they never ratified it. 5 https://treaties.un.org/doc/Treaties/1980/05/19800524%2006-13%20PM/Ch_ XI_E_l.pdf. 6 http://www.unidroit.org/fr/lo-marchandises/ol-agency-en-2. 7 http://www.hcch.net/index_en.php?act=conventions.text&cid=61. 8 http://www.uncitral.org/uncitral/en/uncitral_texts/payments/1988Convention_bills_ promissory.html. 9 http://www.uncitral.org/uncitral/en/uncitral_texts/security/2001Convention_receiv-ables.html.
• [5] http://www.unidroit.org/status. 2 http://www.unidroit.org/instruments/international-salcs/international-sales-ulis-1964. 3 http://www.unidroit.org/status-ulfe-1964. 4 http://www.unidroit.org/instruments/transport/cev. 5 http://www.hcch.net/index_en.php?act=conventions.text&cid=78. 6 http://www.hcch.net/index_en.php?act=conventions.text&cid=89. 7 http://www.hcch.net/index_en.php?act=conventions.text&cid=59. 8 http://www.unidroit.org/instruments/factoring. 9 http://www.unidroit.org/fr/leasing-ol-2/leasing-anglais. 10 http://www.oas.org/juridico/english/treaties/b-56.html.
• [6] http://www.comitemaritime.org/The-1924-Bills-of-Lading-Convention-and-its-1968-and-1979-Protocols-Hague-Visby- Rules/0,2799,19932,00.html. 2 http://www.icao.int/secretariat/legal/List%20of%20Parties/WC-HP_EN.pdf. 3 http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html. 4 http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1974Convention_ status.html. 5 http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html. 6 http://www.icao.int/secretariat/legal/List%20of%20Parties/Mtl99_EN.pdf. 7 http://www.unidroit.org/instruments/security-interests/cape-town-convention. 8 The 1924 International Convention for the Unification of Certain Rules of Law relating to Bills of Lading amended by the 1968 Visby Protocol and the 1979 Special Drawing Rights Protocol are collectively known as The Hague-Visby Rules.