Applicable law in cross-border business transactions
In international business transactions between companies, i.e., in the B2B sector, it is often not immediately clear which national law applies to a contract. Especially when business partners are based in different countries, the question arises which law applies in the event of a dispute or in the interpretation of the contract.
Different national legal systems can lead to significant differences, such as in warranty rights, deadlines, liability or the burden of proof. Therefore, the question of applicable law is of central importance for every cross-border contract, according to the law firm MTR Legal, which advises among other things in international commercial law.
Choice of law in international commercial law: Contractual freedom in B2B trade
In principle, contractual freedom applies in international B2B trade. This means: The contracting parties have the option to determine for themselves which national law should apply to their contract. The parties can choose the applicable law, which is a central component of private international law. This decision is typically made in practice through various clauses, particularly choice of law clauses, in the contract. Such clauses might read, for example: “German law applies.” If such an agreement is made, it is binding for courts in most countries. The prerequisite is that the clauses are clearly and unambiguously formulated. This way, the parties can create a familiar and calculable legal environment for themselves in which their contractual relationship is legally assessed, meaning the respective contractual relationship serves as the subject of legal assessment.
If the parties have not made an explicit choice of law, the Rome I regulation within the European Union determines which law is applicable. This regulation stipulates that the applicable law is generally based on the habitual residence, i.e., the seat, of the contracting party that performs the characteristic service of the contract. In sales contracts, this is usually the seller, in service contracts the service provider. However, if there is an obviously closer connection to another state, for example because delivery and execution take place exclusively in a certain country, that country’s law may exceptionally apply.
Introduction to international sales law
International sales law forms the basis for cross-border trade in goods and is a central element of commercial law. It regulates according to which regulations sales contracts between companies from different countries are processed. The most important legal systems include the UN Convention on Contracts for the International Sale of Goods (CISG), the Rome I regulation as well as national laws such as the German Commercial Code (HGB) and the Civil Code (BGB). The choice of applicable law is of great importance as it significantly determines which rights and obligations the contracting parties have within the framework of the sales contract. Especially in international business transactions, it is therefore essential to review the choice of law clauses in the General Terms and Conditions (GTC) carefully. Only in this way can companies ensure that they understand the rules applicable to them and the significance of the respective legal system, and best protect their interests in international trade.
Conclusion of contracts and General Terms and Conditions (GTC)
The conclusion of a sales contract in international trade is the crucial step where the contracting parties define the essential terms of their business. These include in particular the purchase price, delivery and payment conditions, as well as other key regulations. General Terms and Conditions (GTC) play a significant role here as they often regulate the rights and obligations of the contracting parties in detail and significantly influence the design of the contract. It is important for both sides to carefully review the GTC before concluding the contract and ensure that they are clearly and understandably formulated. Particular attention should be paid to the choice of law clauses as these determine which legal system applies to the contract. Only if the contracting parties know the chosen legal system and its rules can they effectively exercise their rights under the sales contract and minimize legal risks.
UN sales law in over 90 countries
A particular aspect of international sales is the United Nations Convention on Contracts for the International Sale of Goods (CISG), commonly referred to as the UN Sales Law. This agreement applies in over 90 countries worldwide, including many significant trading partners such as Germany, Austria, Switzerland, France, the USA, and China. The UN Sales Law automatically applies when two companies from contracting states enter into a cross-border sales contract for movable goods unless the parties have expressly excluded its application. In the context of the UN Sales Law, a contracting state is any country that has ratified the CISG and is thus bound by its regulations. The significance of the sales contract under the UN Sales Law is that it establishes the legal foundation for international goods deliveries between businesses from different contracting states. This is often the case because the UN Sales Law in certain points deviates from national law, and there can be uncertainties as to whether it truly aligns with one’s interests.
If the UN Sales Law is not excluded, it applies directly to the relationship between businesses from the participating contracting states. This applies even if, for example, the parties have only agreed on “German law” or “French law” in their contract. There are sometimes substantial differences between German sales law and the UN Sales Law, especially in terms of warranty and contract processing, so the choice of German law compared to the UN Sales Law can be of particular importance for companies. Therefore, it is especially important for companies to consider whether they wish to apply the UN Sales Law when drafting their contracts.
Obligations of seller and buyer
In international sales law, the obligations of the seller and the buyer are clearly defined. The seller is obliged to deliver the agreed goods properly, hand over the required documents, and transfer the ownership of the goods. The buyer, on the other hand, must pay the purchase price and accept the delivered goods. These fundamental rights and obligations of the contracting parties are established both in the UN Sales Law and in most national legal systems. For practical purposes, it is crucial that the contracting parties know their respective obligations in detail and clearly regulate them in the contract. The GTC should describe these obligations clearly and ensure that no misunderstandings arise. Only in this way can the parties effectively enforce their rights from the sales contract and avoid conflicts.
Choice of law of great importance
The choice of law can be of great importance for internationally operating companies. Therefore, they should consider before concluding a contract which applicable law they want and what advantages and disadvantages it brings. A lack of or unclear choice of law can lead to legal uncertainty, different interpretations, and in case of dispute, to protracted and expensive proceedings. It is therefore advisable to incorporate a clear choice of law clause in every contract. The question of whether the UN Sales Law should apply or not should also be expressly regulated. Clear regulations help prevent legal disputes and create legal certainty. This is all the more true in international trade relations, where many particularities must be considered.
Furthermore, it should also be examined which court should have jurisdiction in the event of a dispute, as the jurisdiction agreement can also be established in international contracts. However, this question stands legally separate from the applicable law and is subject to its own rules, particularly concerning the international jurisdiction of courts.
Problem of conflicting choice of law clauses
In international sales law, it can happen that the GTC of both contracting parties contain different choice of law clauses. This problem of conflicting choice of law clauses is of great practical importance because it can lead to uncertainties regarding the applicable legal system. Case law has not yet developed uniform solutions for this, which increases the risk of disputes. It is all the more important that the contracting parties carefully examine the choice of law clauses in their GTC and reach an agreement on the applicable law as early as possible. A clear and coordinated regulation helps avoid conflicts and ensures that both sides know and can enforce their rights and obligations from the sales contract.MTR Legal Rechtsanwälte advises on international commercial law and other topics of international law.Feel free to contact us!
