Laws Governing Commercial

CONTRACTS
-Dr. Thomas Kurma
 OUTLINE
- Commercial contracts and the laws that regulate them especially with regard
to the domestic and international commercial contracts. (difference between
domestic and international commercial contracts)

- Who is competent to contract?

- Essential elements of a contract

- Jurisdiction with regard to cross border commercial contracts

(International Contracts)

- Hague Principles (Principles of Choice of Law)

 INTRODUCTION

- Our daily life, helps us to understand the law of contracts well. Our life is full of negotiations and
agreements.
- Managing them is very important and crucial.
- There is a dictum “ All contracts are agreements but not all agreements are contracts.”
- We are going to deal about the commercial contracts.
- All types of contracts in India are regulated by the Indian Contract Act 1872 (ICA) and other specific
laws in accordance with the subject in question.
- To the extent they are domestic contracts, they are regulated by ICA, but when the parties are from
different countries, they have to make a choice of law, according to which they shall be made liable.
- There are various types of contracts our concern here is with regard to the commercial contracts and
laws which regulate them.
- Commercial Contracts are those contracts which deal with the commercial aspects of a product or a
service.
 WHAT IS A CONTRACT?

Contract: Section 2 (h) of Indian Contract Act 1872 defines,

“An agreement enforceable by law is a contract. ”

What agreements are Contracts?

Section 10
“All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void.”

Section 13 Two or more persons are said to consent when they agree upon the same
thing in the same sense. (free from coercion, undue influence, fraud, misrepresentation,
and mistake)
WHO ARE COMPETENT TO CONTRACT?

Section 11. “ Every person is competent to contract who is of the age of

majority according to the law to which he is subject, and who is of sound
mind, and is not disqualified from contracting by any law to which he is
subject.” (Sound mind: is capable of understanding and of forming a rational
judgment as to its effect upon interests.)

On the age of majority: Mohori Bibee v. Dharmodas Ghose– In this case it was
held that an agreement by a minor is void.
 ESSENTIAL ELEMENTS OF A CONTRACT

For a contract to be legally binding it must contain four essential elements:

- an offer
- an acceptance
(Case on Offer & Acceptance: Harvey v. Facey: the quotation of the price was held not to be an offer. In this case,
the defendants were the owners of a plot of land known as Bumper Hall Pen. The plaintiffs being interested in
purchasing the same sent a telegram to the defendants- “Will you sell us Bumper Hall Pen? Telegraph lowest cash
price.” The defendant’s in reply telegraphed- “lowest price for Bumper Hall Pen, £ 900.” The Plaintiffs sent another
telegram to the defendants saying “we agree to buy Bumper Hall Pen for £ 900 asked by you…” The Plaintiffs in the
Court contended that the second telegram from defendants quoting the lowest price was an offer and the same had been
accepted by the Plaintiff, hence the contract was complete. In the case it was eventually held that the exchange of
aforesaid telegrams had not resulted in formation of a contract. It was observed that the first telegram had asked two
questions, one regarding willingness to sell and other regarding the lowest price. In reply only lowest price was quoted
and this quoting of the price was not an offer. That the third telegram from the Plaintiffs saying we agree to buy was
only an offer and not the acceptance of an offer. Since this offer had not been accepted by defendants, there was no
binding contract between the parties.
Felthouse v. Bindley: For a valid contract the acceptance should be communicated and moreover such communication should be
made to the offeror. Another point of law explained in the case was that the offeror cannot impose upon the offeree duty to reply
and therefor an offeror cannot say that failure to reply will be deemed to be acceptance of the offer.)
- an intention to create a legal relationship
(Case on the intention to create a legal relationship: The concept of intention to create legal relationship was decided in
the case of Balfour v. Balfour. In this case, the defendant who was employed on a government job in Ceylon, went to
England with his wife on leave. For health reasons the wife was unable to accompany the husband in Ceylon. The husband
promised to pay £300/ month as maintenance to wife for the time she lived apart. The husband however failed to pay the
amount and was eventually sued by his wife. In the case it was held that the husband was not liable to pay as there was no
intention to create a legal relationship between the parties.)

- a consideration
(Chapple v Nestle (1959): Nestle were running a special offer whereby members of the public could obtain a music record
by sending off three wrappers from Nestle’s chocolate bars plus some money. The copyright to the records was owned by
Chapple, who claimed that there had been breaches of their copyright. The case turned round whether the three wrappers
were part of the consideration. It was held that they were, even though they were then thrown away when received.
Collins v Godefroy (1831): Godefroy promised to pay Collins if Collins would attend court and give evidence for
Godefroy. Collins had been served with a subpoena (i.e., a court order telling someone they must attend). Collins sued for
payment. It was held that as Collins was under a legal duty to attend court, he had not provided consideration. His action
therefore failed.)
Stilk v Myrick (1809):Two out of eleven sailors deserted a ship. The captain promised to pay the remaining crew extra
money if they sailed the ship back, but later refused to pay. It was held that as the sailors were already bound by their
contract to sail back and to meet such emergencies of the voyage, promising to sail back was not valid consideration. Thus
the captain did not have to pay the extra money.
 JURISDICTION OF CROSS BORDER COMMERCIAL CONTRACTS
& HARMONIZATION OF THE CONTRACT LAW

- There is a concern for the cross border commercial contracts due to the
diversity of legal systems. (e.g. form requirements, duress and
unconscionability, on prescription periods etc.)

Choice of Law
- Harmonization of legal systems is not required it can be substituted by
choice of law and is an indispensable tool for legal certainty.

- Choice of law still cannot provide a uniform legal framework for all the
business activities.

- The idea of putting each and every business relationship on the same legal
footing remains an illusion. (Gerhard Wagner. University of Bonn, Germany)
Uniform Legal Framework: Why do we need?
- Uniform legal framework presupposes not only that statutory sources are
identical but also that there is a single decision maker charged with the authority
to decide controversies of opinion one way or another.

- National laws are not suited for the international trade.

- Even highly developed legal systems prove to be inadequate and outdated.

UNIDROIT : International Institute for the Unification of Private Law. (63 Member
States drawn from all five continents, India is a member since 1950)

https://www.unidroit.org/contracts#UPICC
Private International Law governs the choice of law to apply when there are
conflicts in the domestic law of different countries related to private transactions.
This means that there is a dispute or transaction that involves one of the following:
- what jurisdiction applies
- choice of court, forum selection, renvoi (transfer of proceedings)
- choice of applicable law
- recognition or enforcement of a foreign judgment

Purpose of the Choice of Law:

- ‘Global players’ or small or medium businesses are unable or unwilling to agree

on a particular domestic law as the law governing their contract and end up by
not making any choice as to the applicable law or by referring for that purpose to
no better defined ‘general principles of law’, ‘generally accepted principles of
international commercial law’, the ‘lex mercatoria’, or the like.
- The Principles on Choice of Law in International Commercial Contracts (HCCH Principles), the first
“soft-law” instrument of the HCCH, are designed to promote party autonomy in international commercial
contracts. –
- By acknowledging that parties to a contract may be best positioned to determine which set of legal norms is
most suitable for their transaction, party autonomy in the international commercial context
- Enhances predictability and legal certainty – important conditions for effective cross-border trade and
commerce.
- At the same time, the HCCH Principles also set reasonable boundaries to party autonomy and thus may
provide a refinement of the concept where it is already accepted.

- Choice of law agreements

- The parties’ choice of law must be distinguished from the terms of the parties’ primary contractual
arrangement (“main contract”). (The main contract could be, for example, a sales contract, services contract or
loan contract. Parties may either choose the applicable law in their main contract or by making a separate
agreement on choice of law)

- Choice of law agreements should also be distinguished from “jurisdiction clauses” (or agreements), “forum
selection clauses” (or agreements) or “choice of court clauses” (or agreements), all of which are synonyms for
the parties’ agreement on the forum (usually a court) that will decide their dispute.

- Choice of law agreements should also be distinguished from “arbitration clauses” (or agreements), that denote
the parties’ agreement to submit their dispute to an arbitral tribunal.
Hague Principles (Principles of Choice of Law)

- First published in 1994, with a second edition in 2004, a third in 2010 and
now in their fourth (2016) edition

-Represent a non-binding codification or “restatement” of the general part of

international contract law.

-Globalization of legal thinking

The Model Clauses are divided into four categories according to whether their purpose is

(i) to choose the UNIDROIT Principles as the rules of law governing the contract

(ii) to incorporate the UNIDROIT Principles as terms of the contract

(iii) to refer to the UNIDROIT Principles to interpret and supplement the CISG when the latter is chosen by the
parties, or

(iv) to refer to the UNIDROIT Principles to interpret and supplement the applicable domestic law, including any
international uniform law instrument incorporated into that law.

In order for the Principles to apply, two criteria must be satisfied.

- First, the contract in question must be “international”. A contract is “international” within the meaning given to that
term in the Principles unless the parties have their establishments in the same State and the relationship of the
parties and all other relevant elements, regardless of the chosen law, are connected only with that State (Art. 1(2).

- The second criterion is that each party to the contract must be acting in the exercise of its trade or profession (see Art.
1(1)). The Principles expressly exclude from their scope certain specific categories of contracts in which the
bargaining power of one party – a consumer or employee – is presumptively weaker (Art. 1(1)).
 Principles on Choice of Law in International Commercial Contracts
(approved on 19 March 2015)
Preamble

1. This instrument sets forth general principles concerning choice of law in international commercial contracts. They
affirm the principle of party autonomy with limited exceptions.

2. They may be used as a model for national, regional, supranational or international instruments.

3. They may be used to interpret, supplement and develop rules of private international law.

4. They may be applied by courts and by arbitral tribunals.

There are 12 Articles which deal the principles on choice of law in International Commercial Contracts

https://assets.hcch.net/docs/5da3ed47-f54d-4c43-aaef-5eafc7c1f2a1.pdf

https://www.unidroit.org/english/principles/contracts/principles2016/principles2016-e.pdf

Cases decided by UNIDROIT Principles: http://www.unilex.info/dynasite.cfm?dssid=2377&dsmid=14311

Article 1 : Scope of the Principles
Article 2: Freedom of choice
Article 3: Rules of law
Article 4:Express and tacit choice
Article 5:Formal validity of the choice of law (A choice of law is not subject to any
requirement as to form unless otherwise agreed by the parties.)
Article 6:Agreement on the choice of law and battle of forms
Article 7:Severability (A choice of law cannot be contested solely on the ground that the
contract to which it applies is not valid.)
Article 8:Exclusion of renvoi
Article 9:Scope of the chosen law
Article 10:Assignment (In the case of contractual assignment of a creditor’s rights
against a debtor arising from a contract)
Article 11:Overriding mandatory rules and public policy (ordre public)
Article 12:Establishment (more than one establishment, the establishment closest to the
relationship of the contract.)
 CONCLUSION
- Each country has its proper law (domestic) to deal commercial contracts.

- There are various shortcomings with regard to the application of a domestic

law of a country with regard to the international commercial contracts.

- Choice of law is very crucial for international trade and especially

international commercial contracts.

- Taking time to settle everything with regard to the legal formalities of

commercial contracts is secret of success in any trade.

- Familiarity with the laws governing the commercial contracts is mandatory