The Negotiation and Drafting of International Contracts Course of Mr. Robert Simpson



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Anticipatory breach

If it is clear to one party that there will be a fundamental breach (an “anticipatory breach”) by the other party, the first party may terminate the contract. See, for example, (PICC Art. 7.3.3):


Where prior to the date for performance by one of the parties it is clear that there will be a fundamental non-performance by that party, the other party may terminate the contract.
The PICC calls this anticipatory non-performance.
In addition, if a party reasonably believes there will be a fundamental non-performance by the other party, it may demand adequate assurance of performance and meanwhile withhold its own performance. If the other party does not give such assurance within a reasonable time, the party demanding it may terminate the contract:
A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and may meanwhile withhold its own performance. Where this assurance is not provided within a reasonable time the party demanding it may terminate the contract (PICC Art 7.3.4).
In American law, the terms describing the two above situations are anticipatory breach and prospective inability to perform.
The PECL language is simpler:
Article 9.304 (ex art. 4.304) - Anticipatory Non-Performance

Where prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it the other party may terminate the contract.


See also UCC §2-610-611 and CISG Arts. 71 and 72.
In American law, the terms describing the two above situations are anticipatory breach and prospective inability to perform.
The perfect tender rule
There is a problem for a trader who is a CISG purchaser and resells under the UCC or US law.
Under the UCC, a buyer is entitled to reject a tender of delivery under a one-delivery contract of sale that fails in any respect to conform to the contract. This is the "perfect tender" rule.
The CISG imposes a much stricter standard for rejection and cancellation. A buyer cannot reject defective goods and cancel unless a non-conformity substantially deprives the buyer of what it was entitled to expect under the contract and, even then, only if the seller foresaw, or a party in its position would have foreseen, such a result. This follows from Article 49(1) which permits a buyer to avoid the contract only if the seller's failure to perform amounts to a "fundamental breach," as that term is defined in Article 25. The buyer cannot even demand substitute goods unless the non-conformity constitutes a fundamental breach.
This situation must be remedied by appropriate language in the contract. For example, a seller who wants strict adherence to its Terms of Payment clause can state "Non-compliance with any provisions of this clause shall be regarded as a fundamental breach of contract." A buyer to whom strict compliance with the delivery schedule is imperative should have the phrase "time is of the essence" in the contract.

Restitution

Upon termination of a contract, especially if damages are not appropriate, either party may claim restitution in kind or a money equivalent of whatever it has supplied, provided it concurrently makes restitution of whatever it has received (PICC Art. 7.3.6 and PECL Arts. 9.308-309). Remember the case of Osteen v. Johnson.



Force majeure and hardship

Non-performance may be excused or suspended in the event of hardship or force majeure (see below).




  1. Damages for Breach of Contract

a. American law


See American contract law above. Damages are the preferred remedy for breach of contract. Remember the contract of protecting a party’s expectation interest. Damages compensate the expectation interest by putting the aggrieved party back in the position he would have been in, had the contract been performed as envisioned. The aggrieved party has the burden of proof of that he has suffered the loss because of the breach of contract and must prove the amount of the loss with reasonable certainty. Speculative damages are not recoverable.
b. French law
Art. 1149. Damages due to a creditor are, as a rule, for the loss which he has suffered and the profit which he has been deprived of, subject to the exceptions and modifications below.
Art. 1150. A debtor is liable only for damages which were foreseen or which could have been foreseen at the time of the contract, where it is not through his own intentional breach that the obligation is not fulfilled.
Art. 1151. Even in the case where the non-performance of the agreement is due to the debtor's intentional breach, damages may include, with respect to the loss suffered by the creditor and the profit which he has been deprived of, only what is an immediate and direct consequence of the non-performance of the agreement.
Art. 1152. Where an agreement provides that he who fails to perform it will pay a certain sum as damages, the other party may not be awarded a greater or lesser sum.
(Act n° 75-597 of 9 July 1975) Nevertheless, the judge may "even of his own motion" (Act n° 85-1097 of 11 Oct. 1985) moderate or increase the agreed penalty, where it is obviously excessive or ridiculously low. Any stipulation to the contrary shall be deemed unwritten.
Art. 1153. (Act n° 75-619 of 11 July 1975) In obligations which are restricted to the payment of a certain sum, the damages resulting from delay in performance shall consist only in awarding interests at the statutory rate, except for special rules for commerce and suretyship.
(Ord. n° 59-148 of 7 Jan. 1959) Those damages are due without the creditor having to prove any loss.
(Act n° 75-619 of 11 July 1975) They are due only from the day of a demand for payment "or of another equivalent act such as a letter missive where a sufficient requisition results from it" (Act n° 92-644 of 13 July 1992), except in the case where the law makes them run as a matter of right.
(Act of 7 April 1900) A creditor to whom his debtor in delay has caused, by his bad faith, a loss independent of that delay may obtain damages.
c. Swiss law
Swiss law refers to positive damages and negative damages. Swiss law defines positive damages as loss of revenues (lucrum cessans) and costs (damnum emergens). Positive damages include loss of revenues (lucrum cessans) and costs incurred (damnum emergens).
As concerns negative damages, the determination which is made relates to what would have been the interest of the victim in not having concluded the contract; the damages, thus, cover the losses incurred by the party because of having entered into the contract. The compensation here tends to put the victim back in the patrimonial situation in which it would have found itself if the contract had not been entered into.
d. PICC

Under the Unidroit rules, any non-performance gives the aggrieved party a right to damages either exclusively or in conjunction with other remedies, unless the non-performance is excused (Art. 7.4.1). The aggrieved party is entitled to “full compensation” including for physical suffering and emotional distress (Art. 7.4.2). Compensation is due only for harm that is established with a reasonable degree of certainty. There may be compensation for the loss of a chance (Art. 7.4.3). The non-performing party is liable for the harm “it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its non-performance.” (Art. 7.4.4.) Damages may be determined by the cost of a replacement transaction (Art. 7.4.5) or with reference to the current price of goods under similar circumstances (Art. 7.4.6). The aggrieved party is required to mitigate its losses, but may recover costs of mitigation (Art. 7.4.8). If a party does not pay a sum of money when due, the aggrieved party may recover interest and any additional damages (Art. 7.4.9). Finally, interest is due on damages for non-performance of a non-monetary obligation from the time of non-performance (Art. 7.4.10).


e. PECL
The PECL rules are similar (Art 9.501-507). However, the foreseeability rule is less restrictive in that damages are not required to have been foreseen or reasonably foreseen if the non-performance is “intentional or grossly negligent” (Art. 9.503).
f. CISG
Similar rules also appear in the CISG (Arts. 74-78). Its foreseeability test is stated as follows:
Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.
g. International commercial arbitration
The following rules relating to the determination of damages have involved in the context of international commercial arbitration:


  1. The damage must be reasonably certain.

ii. The damage must be foreseeable.


iii. The aggrieved party has the right to be totally indemnified (principle of indemnisation intégrale) including damage to its image and commercial reputation.
iv. Expropriation (including a legal expropriation) gives rise a right of total indemnification.
v. There is an obligation to mitigate damages. There is a requirement to accept a substitute performance if it is not reasonably difference from the contractual performance.
vi. Detailed rules have developed concerning the determination of damages arising out of the expropriation of a company. Methods to determine losses include those based on the patrimonial value of the enterprise (net accounting value, replacement value and liquidation value) and those based on a prospective analysis of the enterprise (discounted cash flow), with the latter becoming more widely used (despite uncertainties of valuations, but along with appropriate adjustments to take into account the relevant circumstances.
vii. Legal interest (intérêts moratoires) is due on an award from the date it is rendered until final payment.
vii. Arbitrators often include a decision as to which party or parties are to bear the expenses of the arbitration.
viii. Punitive damages are not allowed.
ix. Arbitrators make appropriate determination of the currency in which damages are awarded.


  1. Specific Performance




    1. American law, see above. Generally, specific performance is inappropriate where damages are recoverable and adequate. Specific performance is an equitable remedy granted, at a court’s discretion, in unusual circumstances (e.g., when an object is unique). This rule has been broadened by the UCC which allows for specific performance not only if goods are unique, but also in other appropriate circumstances. The common law’s preference for damages over specific performance is not found in civil law countries.



    1. French law:

Art. 1142. Any obligation to do or not to do resolves itself into damages, in case of non-performance on the part of the debtor.


Art. 1143. Nevertheless, a creditor is entitled to request that what has been done through breach of the undertaking be destroyed; and he may have himself authorized to destroy it at the expense of the debtor, without prejudice to damages, if there is occasion.
Art. 1144. A creditor may also, in case of non-performance, be authorized to have the obligation performed himself, at the debtor's expense. "The latter may be ordered to advance the sums necessary for that performance " (Act n° 91-650 of 9 July 1991).
c. CISG
There is an important compromise between the civil law system and the common law’s preference for damages over specific performance :
Article 46
(1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement.
(However :)
Article 28
If, in accordance with the provisions of this Convention, one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention.
Where an action is brought in the US, the court will look to see if specific performance is allowed under the UCC. UCC 2-717 permits a jilted buyer of goods to seek specific performance of the contract if the goods sold are unique or in other appropriate circumstances.
d. PICC:
The Unidroit rules follow the civil law tradition which does not view specific performance as an exceptional remedy allowable only under equitable circumstances.
Article 7.2.2 - Performance of Non-Monetary Obligation
Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless
(a) performance is impossible in law or fact;

(b) performance or, where relevant, enforcement is unreasonably burdensome or expensive;

(c) the party entitled to performance may reasonably obtain performance from another source;

(d) performance is of an exclusively personal character; or


(e) the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the non-performance.
e. PECL
Article 9.102 - Non-monetary Obligations
(1) The aggrieved party is entitled to specific performance of an obligation other than one to pay money, including the remedying of a defective performance.
(2) Specific performance cannot, however, be obtained where:
(a) performance would be unlawful or impossible; or

(b) performance would cause the obligor unreasonable effort or expense; or


c) the performance consists in the provision of services or work of a personal character or depends upon a personal relationship, or
(d) the aggrieved party may reasonably obtain performance from another source.
(3) The aggrieved party will lose the right to specific performance if it fails to seek it within a reasonable time after it has or ought to have become aware of the non-performance.
(See also UCC 2-716.)


  1. Force majeure and hardship



a. Force majeure

Non-performance is excused if due to an impediment beyond the party’s control which it could not reasonably be expected to have taken into account at the time of the conclusion of the contract. A party invoking force majeure has the burden of proof to show that: its failure to perform is due to an impediment beyond its control; and such impediment could not reasonably have been anticipated at the time of the conclusion of the contract.


A defaulting party must give notice of the force majeure.
The defaulting party is exempted from liability to pay damages, but the non-defaulting party may terminate the contract if the non-performance becomes fundamental.
(See CISG Art. 79, PICC Art. 7.1.7 and PECL Art. 8.108).
Suggested contractual provision:
_.1. Neither party hereto shall be liable to the other nor shall be deemed in default hereunder for failure or delay to perform any of its agreements or obligations caused by or arising out an event of force majeure. An event of force majeure is any unforseeable and irresistible act, legal or factual situation beyond the control of the parties.
_.2. A party affected by an event of force majeure shall promptly notify the other party, supplying full information and any supporting public documents relating to such event. An event of force majeure may be pleaded only during the duration thereof and the party concerned shall use its best efforts to avoid or limit any damages and to remedy its failure or delay to perform as promptly as possible.
_.3. A party affected by an event of force majeur which does not notify the other party as provided above shall lose any right it may have to invoke such act of force majeure.

b. Hardship

Under American law, hardship is not an excuse for performance. However, in exaggerated situations, performance may be excused pursuant to notions of frustration or impossibility.


Under both the PICC and the PECL, a party must also fulfill its obligations even if its performance has become more onerous.
However, if an “occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished” (PICC) or performance becomes excessively onerous because of a change of circumstances (PECL), the disadvantaged party may request renegotiations to adapt the contract, provided the following conditions are met: (a) the change of circumstances occurs after the conclusion of the contract; (b) the change could not reasonably have been taken into account at the time of the conclusion of the contract; and (c) the risk of the event is not one which the disadvantaged party assumed or should be required to bear. The PICC also require that the event be beyond the control of the disadvantaged party.
If the parties fail to reach agreement, either party may resort to the court which may terminate the contract or adapt the contract to distribute the losses and gains in an equitable manner.
If you want to be sure that parties will be required to renegotiate in the event of hardship, this should be stated in the contract.


  1. Passing of risk

  a. Basic rules


The basic rule is that risk passes at the time agreed by the parties. In the absence of agreement, risk may pass with title to the property or at the time of the delivery of the property
b. French law
Unless otherwise provided, the passing of risks takes place at the time of the formation of the contract (see Civ.3ème; 6 mars 1996: Bull. Civ. III, n° 66). The situation is different if the seller reserves his property right to the property (reserve de propriété) until payment or the fulfillment of other contractual provisions. The risks remain with the seller, and he is required to maintain the object of the sale and to “apporter tous les soins d’un bon père de famille” pursuant to Art. 1137 of the Civil Code.
c. UK law
Sect. 20(1) of the U.K. Sale of Goods Act 1979 states:
“Unless otherwise agreed, the goods remain at the seller's risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyer's risk whether the delivery has been made or not.”
d. Swiss law
Swiss law recognizes, with respect to sales contract that the transfer of ownership occurs as soon as the buyer is put in possession of the thing sold. Expressed otherwise, the carrying out of the characteristic performance has the effect of transferring ownership. In this respect, the fact that the payment occurs later, or even if it is never made, changes nothing at all.
e. CISG
See Articles 66-7020.
f. Incoterms
For international traders, Incoterms are more suitable than the delivery terms recited in the UCC. The CISG does not contain definitions of delivery terms. Incoterms specify important variations and details that are not covered by the CISG. So, under the CISG, continue to have Incoterms address passage of risk and the delivery conditions you want. There is no problem using Incoterms in tandem with the Convention. If the Convention says something different from Incoterms, Incoterms govern.

Part Two: The Negotiation and Drafting of International Contracts
A. Introduction to Negotiation and Drafting of International Contracts
1. Techniques of negotiating an international contract
a. Introduction
Throughout my professional life, I have always utilized many lessons I learned at an early age from my father who was an executive at General Electric and spent his life negotiating important financial transactions. Some of these lessons are as follows:



  1. The power of positive thinking. Think positive and be a doer. Be bigger than any problem. Be a problem solver rather than a creator of problems. Be a chief, not an Indian. Be a winner, not a loser.




  1. The magic of believing.




  1. One step at a time (the motto of Alcoholics Anonymous).




  1. One step beyond. Go as long, as hard as far as you can until you can go no further. Then take another step and then another. Progress lies in the steps beyond endurance.




  1. Work hard, but also work smart.




  1. Persistence. If at first you do not succeed, try, try again. Keep at it until you get there.




  1. My father liked the saying by George Bernard Shaw that Robert Kennedy quoted so often: "Some see things as they are and ask, 'Why?' I dream things that never were and ask, 'Why not?'"




  1. Learn anything? My father liked to tell a true-life story about a man sitting next to him on an airplane one morning. When the usual horrible breakfast fare was wheeled out, this man got a nice steak. My father asked him how he managed to do that. The man replied that he had told the airline he had a health problem and needed a high protein, salt-free meal. The man then proceeded to pull out a small shaker from his pocket, generously salted the meat and asked my father, “Learn anything?” You must always be open and ready to learn everything essential dealing with your negotiation. Information is power.

Many long years later, I can summarize some additional lessons I have learned, most of them the hard way.




  1. Necessity for the negotiator to have as complete an understanding of all aspects of the transaction to be negotiated (“bathtub theory” of a negotiator (or litigator) – fill the negotiator up for the negotiation; when it is over, pull the plug, empty and be ready to start again.

  2. Negotiate based on what objectively are your goals. What are your real goals and how important are they? Define objectives, clearly and precisely at all levels. Determine real needs and margin for negotiation.




  1. Try to understand “where the other party is coming from”. Try to understand his needs, objectives and margin for negotiation and plan objectively.




  1. Take the initiative at appropriate times in negotiations. Propose to host meetings, submit the first draft of a contract, do the hard jobs. Try to mastermind the negotiations. Fill vacuums. Try to set the agenda at the beginning of meetings. Example of Samuel Pisar: Opening statement as framework, set agenda and give a summary and conclusion at the end. If you can set the ground rules in a negotiation, you will be off to a good start.




  1. Keep control of the drafting to the extent possible. Need to save all successive drafts. As concerns drafting, keep it simple, but make it complete.




  1. Take and maintain extensive notes. Successive drafts and notes may be useful in a subsequent dispute as to interpretation.




  1. Maintain a positive mental attitude.




  1. Show a sense of humor and keep negotiations as light and agreeable as possible. (Grab the bull by the tail and face the situation. It’s as clear as mud, but it covers the ground.)




  1. Remain courteous and professional at all times. Do not get involved in personal vendetta (Example of Tevini and Zelbo in Noga arbitration).




  1. Practice the following skills: listen carefully, read others accurately, think logically, write clearly and be open to creative and sometimes oblique solutions (advice from Mark McCormack).




  1. Choice of strategy. Choice between starting from an exaggerated position and moving toward a more balanced situation or starting close to what you want and not moving much. Much depends on the negotiating culture of the other side. Preference for starting close to what you want, but it is best to announce this at the outset to the other side. Always allow for some leeway.




  1. Determine what a balanced agreement should be. What is really in the best interests of both parties. If an agreement is not even-handed, chances are it will not be respected over time and will lead to disputes and litigation. Need to preserve the ongoing relationship.




  1. Try to construct a “win-win” situation (1+1=3) in which there is no loser, but two winners.




  1. One step at a time. Proceed by steps: (a) letter of intent: general understanding of major points – try to formalize, if possible; (b) negotiate the major open points as to which there is a good chance of the parties being in agreement; (c) negotiate details as to which there is no major disagreement; (d) save the most difficult points to be negotiated at the end (determine in advance the margins of negotiation – both yours and the other party’s - arrive at solutions by compromise, give and take. Also, in proceeding by steps, use what Blanco calls the “effet du clicquet” – that is, once you reach agreement on one point or at a particular step, put that aside in a category of negotiated (and, thus, closed) matters that are not to renegotiated.




  1. Do not rush, unless it is to your advantage. Sometimes, “it is urgent to wait”. Take the time necessary to be informed, clarify your goals, negotiate and agree.




  1. Give information to get information, but do not be too candid. Imitate the Sphinx. Even better, give the impression by your attitude of being open, candid and transparent, but at the same time play your cards close to your chest.




  1. Horses for courses. Have an appropriate team to cover all aspects (general, tax, legal, accounting, marketing, etc.) (Example of Bob the Closer.)




  1. Technique of check lists. (RVP at Donovan Leisure – blunderbuss check lists).




  1. Maintain flexibility. Always have fallback positions and alternative language.




  1. Repeat questions, ask for a translation, take a break or use the closet negotiator as techniques to gain time when appropriate.




  1. Remember to include escape clauses in case the transaction fails in whole or in part.




  1. If you hesitate between a long and a short contract, go for the long contract.




  1. If the other party argues that something goes without saying, then say it anyway, just in case. This is particularly true with American partners who have a tendency to look upon the written contract as the parties’ bible. Remember the usefulness of belts and suspenders.




  1. Use previous models if appropriate, but beware (RS example with Jim Wiener). Stick to precedents and manner of proceeding if this has been productive between the parties in the past.




  1. Beware of and make judicious use of “red herrings”.




  1. Like a prize fighter, be able to take the hard blows and come back fresh and ready for more.




  1. Anticipate problems even if they may seem remote at the time of the negotiation. Imagine a disaster scenario. (Example of Bruce Rappaport who negotiated the creation of a petroleum tanker fleet with Pertamina, the Indonesian oil company. He put in strict provisions to protect himself in case the market turned down. Since the market was riding high, he had no trouble negotiating the protection he wanted - having the Indonesian government co-sign and guarantee his agreements. Thereafter there was an oil glut and an overcapacity in the world oil markets. When Pertamina backed out of the deal, Rappaport won an arbitration proceeding and was awarded over $125 million.




  1. Try to maintain “grace under pressure” (as Hemmingway described the matadors) by combining commitment to what you are negotiating with detachment.




  1. Remember Blanco’s advice that a contract is a check list for the negotiator and drafter, a bible for those who carry it out and a guide in the event of disputes.




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