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International Contracting: An End To Common Law?

September 20, 2010

My recent observations about the negative perceptions of contracting generated a healthy discussion. I had commented on the growing threat to the relevance of contracts and legal professionals if they cannot find a way around their anachronistic debates over precise forms of wording.

Not surprisingly, my mail box split between those who shared my concern and others who went to great lengths in describing the legal and jurisdictional background. Unfortunately, the latter group is clearly entrenched and does not want to change and the former group appeared largely fatalistic, believing that change will not be achieved in the foreseeable future.

Those responses caused me to think further and to recognize that perhaps the key issue here is Common Law. Maybe, specifically when it comes to international contracting, the system that is currently dominant simply is not ‘fit for purpose’. It is a system that relies on precision, in an era when cultural and linguistic variations demand far greater focus on intent. We need to bridge these gaps with agreements that reflect the spirit, not the letter.

Common law has become dominant because the English-speaking world has tended to drive the world trade agenda, especially in business-to-business contracting. Because so many of the big global companies came from this English-speaking world, it also suited their view of risk management to use the system (and generally the courts) with which they were familiar. In general, they rejected alternatives out of hand – for example, UNCISG or industry standard agreements. Often, there was not even an assessment of whether these alternatives were good or bad – they were different and that was cause enough to reject them.

It is only natural that incumbent groups feel threatened by change. They want to remain important and they do not want to relinquish their ‘specialist’ knowledge. But in today’s already complex trading conditions, the last thing we need is a contracting model that adds to the complexity. Contracts should be about clarity, understanding, a joint record and a vehicle for communication. Today, most of them lack these characteristics. Indeed, many lawyers feel that the contract should not be circulated precisely because ‘the layman’ will not understand it.

So perhaps it is not the question of archaic language and excessive word-smithing that must be attacked. Maybe it is the entire system of Common Law contracting that needs to be challenged and replaced. Human history is littered with examples of tools, technologies and skill sets that either became irrelevant or simply could not adapt. Why would this not be another on that list?

  1. Yes! I once had a US contract that had a 350 word common-law default clause translated into German language and into a form more common in Germany. The result was nine words: “In the event of default, German law will apply.” German negotiators focus on business issues, not small details of default clauses such as how many days are allowed to cure the breach.

    Incidentally, this is my third try to post comments in the last few months and I hope it works this time.

    • Dick, excellent comment, thank you. I think your other comments made it onto the blog, but if not, I am sorry – adn at least this one did! Please keep them coming because I know you have a wide variety of experiences you can share.

  2. Florante C. Abaya permalink

    I cannot agree more on your observation that one of the major roots of the problem is the “common law”.

    Taking into consideration the keystone principle of common law “stare decisis” of which specialty knowledge are dominated by gigantic corporations owned and operated by the descendant of the originators of the foregoing law, it is not probable, if not impossible, to change the status quo, simply because they will be relinquishing their obvious unfair advantage and comfort zone.

    However, a joint and corroborative effort by emerging nations to compel the dominant force in adapting an alternative international law (with precise and simple words) in contracting maybe an alternative and level the playing field amongst contracting parties. Furthermore, it will eliminate the added contingencies that contracting parties are adding to their contract cost because of the ambiguous words in the fine print of the contracts.

    In conclusion, it is in my own opinion that these problems will only be eliminated or at least be mitigated when all contract practitioners/professionals are self regulated and begin to practice the basic ethical standards in contract drafting that we are destined to provide. However, it is just a wishful thinking.

  3. Durga permalink

    Basics of common law was developed over the time mostly in UK and some other English speaking countries. It is obvious that common law principles are highly influenced by the tradition, beliefs and practice of these people. These factors do not apply all over the world. So, common law could not be relevant and effective in global context. Difficulty on lengthy interpretation also make it out of context.

  4. One more comment…is there any evidence that common law contracts are becoming a norm? It wasn’t my experience back in the day. In fact, we were running a $500m per year international purchasing operation with almost zero signed contracts.

    Contractless purchasing was more the norm. This was at a major US computer company. The practice evolved because contract negotiations dragged out well after we had to start doing business..and it worked. Yes, we would have had difficulty bringing a court into a dispute but we almost never did that anyway.

    Our supply base was primarily in code law countries and so were the purchase order issuers. We didn’t deal with common law contracts much.

    • Dick, I suspect most of those contracts were for direct materials or relatively low value services. It was perhaps also at a time when there was less regulatory pressure and less focus on reputational risk. Our research suggests these issues are driving more rigor in ensuring contracts are in place (though of course a PO is a contract) and that these are ‘favorable’ to the more powerful party.

      As for the prevalence of common law contracts, it is perhaps the dominance of English as the international business language which is in part driving this, but yes, it is certainly at present the prevalent basis for cross-border contracts ,,, whether or not this is appropriate.

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