TBR 420 (Week 3 & 4)

INTERNATIONAL CONTRACT LAW

*Know the rules of the conflict of law determining the lex causae or proper law of an
international agreement.

1 INTRODUCTION

 International trade transactions – various international contracts involved.

 Contracting parties from different jurisdictions.
 The law of the country where the dispute is adjudicated, is not necessarily applicable
to the merits of the dispute.
 Applicable law determined in terms of the rules of private international law (PIL) /
conflict of laws.
 Private international law: Rules that a local court applies in order to indicate the legal
system applicable to a legal matter that contains a foreign/international element.
 PIL = branch of national/domestic law; each country/jurisdiction has its own set of PIL
rules. SA courts apply the rules of SA PIL.
 Van Niekerk & Schulze pg 57 – 65.

 PIL: determining the lex causae = applicable law = legal system applicable to the
matter at hand.
 Lex fori = law of the forum / law of the court where the dispute is instituted. From SA
perspective: lex fori = SA law.
 When international contract dispute brought before SA forum: apply SA rules of PIL
to determine lex causae /applicable law. If the contract is found to be governed by SA
law: SA law = lex fori and lex causae.
 Matters of procedure – governed by law of the forum.
 Matters relating to the substantive content / merits of an international dispute –
governed by the lex causae. If SA law is found to be the law applicable to the
contract, then SA law is both the lex fori and lex causae.
 First step in solving a PIL matter: establishing jurisdiction.
Application of these concepts to the factual scenario:

Fashions (Pty) Ltd, a company incorporated according to the laws of South Africa and
its main place of business in Durban, concludes a contract with Moda SRL, an Italian
company with its registered place of business in Milan, in terms of which Fashions
purchases designer clothing from Moda to the value of € 1 million. The goods are to
be delivered Free on Board (FOB) port Genoa (Italy). Payment has to take place by
means of a confirmed letter of credit. The goods are delivered as per the terms of the
contract, but Fashions fails to pay the purchase price. Moda institutes a claim for
breach of contract against Fashions in the Kwa Zulu Natal High Court, Durban.

 SA rules of PIL determines law applicable to the contract

 Procedural matters governed by lex fori

Rules of SA PIL to determine the law applicable to an international contract?

2 PRIVATE INTERNATIONAL LAW OF CONTRACT

 The law governing the substantive elements of a contract: proper law of the contract.
 Chosen by the parties or assigned by the court as the proper law of the contract.

2.1 CHOOSING THE LAW APPLICABLE TO THE CONTRACT – PARTY AUTONOMY

 Most legal systems give recognition to the principle of party autonomy, though the
scope may differ.
 SA: Laconian Maritime Enterprises Ltd v Agromar Lineas 1986 (3) SA 509 (D)
 Insert a choice of law clause into contract: express choice of law
 Choice: mostly a national legal system. Example: Italian law (probably), or SA law.
 May the parties choose an international instrument as governing law (not a national
legal system) – e.g. the CISG? – Depends on the scope of party autonomy ito the
rules of PIL of the forum.
 Tacit choice of law: infer choice of law from other aspects of the contract /
surrounding circumstances.
 Tacit choice of law recognised under SA PIL: Guggenheim v Rosenbaum (2) 1961
(4) SA 21 (W); Ex parte Spinazze 1985 (3) 633 (A).
 Factors from which tacit choice inferred: reference to an act of Parliament of a
country; use of technical terms of a specific legal system; choice of seat of arbitration
of a specific country.
 Hague Principles on Choice of Law in International Commercial Contracts.
2.2 Determining the proper law in the absence of a choice by the parties – assigned
proper law

Two approaches in SA law:

a) The subjective approach

 Presumed intention theory – what the intention of the parties in respect of the choice
of law would have been, if they had applied their minds to the issue. Court assigns an
“intention” to the parties.
- Standard Bank v Efroiken and Newman 1924 AD 171.
 Not officially rejected, but much support exists for the objective approach.
 Most of the later cases supporting the subjective approach – all relevant connecting
factors considered.
 Connecting factor: a factor that connects the legal matter to the relevant legal system
 Examples of connecting factors considered under subjective approach: place of
conclusion of the contract (lex loci contractus); the place where the company is
registered; where the parties are domiciles; where the performance of the contract
had to take place (lex loci contractus); chosen seat of arbitration.

b) The objective approach to determining the proper law of the contract

 System of closest and most real connection to the contract determined.

 Takes all relevant connecting factors into account: law of place of conclusion of
contract, law of place of performance etc.
 The court weighs up the relative importance of the connecting factors: qualitative
approach followed.
 Place of performance (locus solutionis) – one of the most important connecting
factors. International contracts: mostly more than one place of performance. If this is
regarded as a determining connecting factor, what happens when there are two
places of performance? Two approaches:
o Scission principle: Each performance has its own proper law. Apply law of
performance that is defective/ outstanding. Laconian Maritime – case.

 Unitary principle: One proper law for the whole contract. When there are two places
of performance: to determine which one more important – look at the other
connecting factors. Authority: Improvair (Cape) (Pty) Ltd v Establissements Neu
1983 (2) SA 138 (C).
If still not possible to choose between the two places of performance: authority for 3
solutions
  Van Rooyen: Scission principle applied
 Laconian case (obiter dictum) – law of performance in respect of payment should
be applied
 Maschinen Frommer GmbH & Co v Trisave Engineering & Machinery Supplies
(Pty) Ltd 2003 (6) SA 69
c) law of performance in respect off delivery of the goods.

2.3 Aspects of a contract not governed by the proper law

a) Contractual capacity

 In respect of transactions relating to immovables: law of the place where the property
is situated (lex situs).

 Determining contractual capacity in respect of transactions relating to movables:

conflicting authority

 Kent v Salmon 1910 TPD 637: Law of place of conclusion of contract

 Guggenheim v Rosenbaum: Two possible legal systems: Law of place of

conclusion of contract or law of domicile (lex domicilii) of the relevant party, but
preference given to the latter.

 Kahn: academic opinion: Law of domicile or law of place of conclusion or proper

law of the contract.

b) Formalities of the contract

 Ex parte Spinazze 1985 (3) SA 651 (A) – facultative approach endorsed. Contract
regarded as formally valid if in compliance with the formal requirements of either the
lex loci contractus (law of place of conclusion of contract) or the proper law of the
contract.
 Formal validity of contracts relating to immovables: lex situs.

c) Illegality of a contract

 Contract found to be legal in terms of the proper law, but illegal in terms of the law of
the forum – should it be enforced by the forum?
 Depends on public policy - if found to be against the external public policy of the
forum – not enforced.

d) Consensus between the parties

  Which legal system to apply to the question of whether the parties reached
consensus?

 Putative proper law – legal system applicable to the contract if it had come into being.

3 REFORMING SA PIL IN RESPECT OF DETERMINING THE LAW APPLICABLE TO

INTERNATIONAL CONTRACTS

 Currently not in keeping with international best practice.

 Rome I Regulation (EU) – possible model for reform?

Week 4

International Sales Law Part I

Lecture Outline

1. Introduction
2. Formation of the international sales contract
3. Performance
3.1 General principles of (South African) sales la
3.2 Delivery of the goods
3.3 Payment for the goods
4. Passing of risk and ownership in the goods sold
5. Non-performance, impossibility of performance and illegality

1 INTRODUCTION

 No separate set of rules under SA law applicable to international sales contracts

 International sales contracts distinct from domestic sales, should be governed by a
unique set of rules tailored to them, eg CISG.

2 FORMATION OF THE CONTRACT

 International sales contracts – offer and acceptance not always clearly

distinguishable.
 Conclusion of the contract: consent between the parties reached regarding the
essentials of the contract.
 Essentialia of a sales contract – agreement on:
o Goods to be delivered by seller
 o Purchase price to be paid by the buyer
 International sales contract deemed to be concluded: at the time when and place
where the acceptance of
 the offer takes place.
 Offer: definite, complete.
 Acceptance: unequivocal and unconditional
 Party wishing to rely on the contract bears the onus of proving it has come into
existence.
 SA law rules on formation: when the acceptance of the offer has been effectively
communicated to the
 offeror (communication / information theory).
 International contracts: various approaches and theories in respect of formation.

3 PERFORMANCE OF AN INTERNATIONAL SALES CONTRACT

3.1 General principles of South African sales law

 Bilateral contract
 Residual obligations
 Buyer:
o Accept delivery
 Seller:
o Duty of custody of the goods between sale and delivery
o Duty to transfer ownership in the goods / guarantee against their eviction by a
third party
o Guarantee the fitness for purpose of the goods
o Guarantee against latent defects.

Residual obligations may be contracted out of / modified by means of agreement.

3.2 DELIVERY OF THE GOODS

 Primary obligation of the seller: delivering unhindered possession of the goods sold.
 Making the goods available for collection by the buyer / delivering the goods to the
buyer.
 International sales: different geographical settings – goods conveyed across borders.
 Standard terms: govern time, place and manner of delivery.
 ICC Incoterms: 2020.
 E-terms; F-terms; C-terms; D-terms.
 Details surrounding delivery of the goods, indicate method employed in calculating
the cost of the goods.

i. E-terms
 Seller has the responsibility to make the goods available and ready for collection by
the buyer at a specific time and place.
 EXW (Moda warehouse, Milan)

ii. F-terms
 Seller has the obligation to deliver the goods to an international carrier for shipment;
buyer bears responsibility to nominate carrier and
 arrange for all incidental matters.
 FOB (FREE ON BOARD)
 Seller has the obligation to deliver the goods on board a named ship.
 Seller has to package the goods adequately for export.
 Buyer: arrange for carriage of the goods by sea to their destination (at his cost).

iii. C-terms
 Seller has to arrange for and pay for carriage and insurance of the goods from port of
shipment to the named destination.
 CIF (Cost, Insurance, Freight)
 Seller has to arrange for and pay freight, transport and insurance of the goods
 Seller has to ship goods as specified at port of shipment as agreed
 Seller has to arrange for transport and insurance of goods form port of shipment to
destination.
 Insurance contract has to be transferable in order for buyer to be able to claim.
 Normally used in conjunction with bill of lading.
 Price of goods – much higher than FOB.

iv. D-terms
 Largest responsibility and expense for the seller.
 Pay and arrange for all transport from own premises to specified premises
(destination).
 DDP – Delivery Duty Paid
  See Van Niekerk and Schulze pp 72-78.

3.3 PAYMENT FOR THE GOODS

 Main obligation of the buyer.

 Documentary letter of credit (LOC) as important payment method in international
sales transactions.
 Buyer approaches bank to issue LOC in favour of seller; in terms of which the bank
undertakes to pay the purchase price to the seller upon presentation of certain
shipping documents to the bank.
 The documents serve as prima facie proof that the goods shipped by the seller are of
a certain quality and quantity, and have been insured.

 Most important shipping documents:

 Commercial invoice
 Bill of lading
 Insurance certificate
- Study Van Niekerk and Schulze pp 244-248.

 Uniform sets of rules compiled internationally to govern LOC.

 ICC Uniform Customs and Practice for Documentary Letters of Credit (UCP).
Current: UCP600.
 UCP incorporated into LOC contracts by means of agreement between international
bankers.
 Clear indication in underlying contract that UCP is applicable.
 SA: standard banking practice to include UCP.
 International Standard Banking Practice for Examination of Documents under
Documentary Credits (ISBP), approved by ICC Banking
 Commission.
 Three main documents under a LOC – Van Niekerk and Schulze pp 263-267.
 LOC: 3 separate contracts: Nature and effect of these legal relationships complex
and open to different interpretations. See chapter 5 of Van
- Niekerk and Schulze (optional reading material) for more detail.
 a) Underlying contract of sale between applicant (buyer/importer) and the
beneficiary (seller/exporter)
 Does the issuing of a LOC discharge the applicant (buyer’s) obligation to pay the
purchase price?
 When a LOC is issued and accepted by the beneficiary, it operates as conditional
payment of the purchase price ito the underlying contract of sale.
 Beneficiary should first attempt to obtain payment from the issuing bank; if the latter
unwilling/unable to pay – beneficiary may claim from the applicant.

b) Contract between applicant and bank issuing the LOC

 Contract of mandate: mandatary undertakes to perform a mandate for the mandator.
 Issuing bank: mandatary of applicant as per the application form.
 Mandatary has to perform mandate with the care of a reasonable person in
accordance with its authority and all lawful instructions by the mandator (applicant).
 Mandatary entitled to compensation: reasonable expenses; allowed to charge
commissions and fees for opening and negotiating LOC.

c) Contract between issuing bank and beneficiary

 Originates from the underlying contract of sale between the applicant (buyer) and the
beneficiary (seller).
 Issuing of LOC – suspensive condition to the obligation of the seller to deliver the
goods.
 Legal nature of the undertaking by the issuing bank to the beneficiary?
 Contract of Delegation. Delegator = applicant/buyer; delegatory (beneficiary/seller).
Delegator gives instruction to delegatee (= issuing bank) to bind itself as against the
delegatory for the amount of the purchase price. Delegatee issues LOC.

Doctrines applicable in respect of letters of credit:

1) Doctrine of autonomy of the LOC

 LOC separate transaction from the underlying contract of sale.
 LOC: reliance by issuing bank on the documents – if the documents comply with the
conditions, payment takes place.
2) Doctrine of strict compliance
 Documents to conform strictly with those stipulated by the applicant in the application
form and set out in the LOC.
 e-UCP: electronic LOC
4 PASSING OF RISK AND OWNERSHIP IN THE GOODS SOLD

 SA law of sale: risk passes once the contract becomes perfecta (unconditional sale
where goods ascertained and price determined).
 Transfer of ownership of movables: requires proper delivery with the necessary
intention on the part of the seller to transfer ownership and
 on the part of the buyer to acquire ownership.
 Various forms of actual and fictional delivery.
 Symbolic delivery – delivery of the bill of lading – document of title.

 General principles relating to passing of risk/ownership: modified by the inclusion of a

specific Incoterm:

 FOB
 Risk passes when goods have passed the ship’s rail at the port of shipment.
 Transfer of ownership: delivery of goods to the carrier constitutes delivery in terms of
the contract and transfers ownership (to the buyer) if the required intention is present,
unless the parties agree otherwise.
 CIF
 Risk passes when goods have passed the ship’s rail at the port of shipment.
 Transfer of ownership: goods represented by a bill of lading (document of title) –
transfer of the bill of lading = transfer of ownership.
- Van Niekerk and Schulze pp 82-86.

5 NON-PERFORMANCE, IMPOSSIBILITY AND ILLEGALITY

 Van Niekerk and Schulze pp 89 -93

 Absolute /objective initial impossibility of performance: contract void ab initio
 Objective supervening impossibility of performance terminates contractual obligations
(if due to an event beyond the debtor’s control).
 Illegal agreements: void and unenforceable (against public policy).