The Governing Law of the Contract for Sale

Introduction

            Panther Games Pty Ltd. is an Australian company in ACT, Australia.  The company manufacturers computer games which are offered on the international market.   Panther recently entered into a contract with Best Buy in the USA for the sale of its June 2006 release of its computer war game Conquest of the Aegean. The main issues are determining the governing law of the contract for the sale of the computer games,  intellectual property rights protection and the tax consequences for Panther.  Other issues include the compatibility of the laws of the USA with Australia,  the role of the World Trade Organization in international trade and arrangements for payment of the computer games.  Each of these issues will be examined below.

The Governing Law of the Contract for Sale

            The doctrine of party autonomy permits the parties to an international contract to choose the governing law to regulate the transaction and any disputes that might arise under it.[1]   By exercising this right, the parties can avoid the complications that arise with respect to conflicting laws in international business transactions.[2]  In the event Panther and Best Buy either cannot agree on a governing law, or for some reason neglect to choose a governing law, the proper law of contract will be determined by reference to a number of variables.[3]

            Under international law the approach taken to the proper law of the contract is articulated in Dicey and Morris as follows:

“The system of law by which the parties intended the contract to be governed or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.”[4]

            In attempting to ascertain the legal system with which the contract has its closest and most real connection, courts typically take a subjective, rather than an objective approach.[5]  Rather than look to precedents for guidance courts will look at the special circumstances and facts of each contract.[6]   Cheshire and North explain that the matters that the court may take into consideration in ascertaining the proper law of the contract are:

1.      The parties’ domicile and residence.

2.      The company’s national character.

3.      The principal place of business.

4.      The place where the contract is negotiated and concluded.

5.      The place for the performance of the contract.

6.      The style (for e.g. language) of the contract. It may be that the language is consistent with one system of law and inconsistent with another.

7.      Whether a stipulation is valid under one system of law and void under another.

8.      The contract’s economic connection to another contract.

9.      The subject matter of the contract.

10.  The place where the insurance premium is located.

11.  Or “any other fact which serves to localize the contract.”[7]

Based on these guidelines, if the contract is negotiated in Australia with payment to made in Australian dollars and paid in Australia, the goods are located and manufactured in Australia and the contract is negotiated and concluded in Australian it is highly likely that Australian law will govern the contract.   That is, unless Best Buy and Panther agree on a governing law.

            Failure to choose a forum for the adjudication of any disputes arising out of the contract will also give rise to the practiced rules of international law with respect to the doctrine of forum non conveniens.  In most cases courts take into account the:

“…judicial efficiency, effectiveness, and economy, the interests of the jurisdictions involved and of the parties.”[8]

The doctrine of forum non conveniens seeks to determine which forum is the most convenient venue for the adjudication of disputes.  To this end, much depends on the location of witnesses, parties, assets and evidence.  In a case where another forum is obviously the more convenient forum, the court seized of the matter is at liberty to decline jurisdiction.[9]

            Based on the jurisdictional rules of law in private international law, there is a good chance that both the US and Australia could have jurisdiction over any dispute arising out of the contract between Panther and Best Buy.  Although the application of these rules could favour Australia as the proper law of the contract and the most convenient forum, there are no guarantees that a US court would decline jurisdiction over a matter.  In order to avoid these complications, Panther may wish to include a choice of law clause in the sales contract.

US and Australian Contract Principles

            Regardless of which law is deemed the proper law of the contract between Panther and Best Buy, both Australia and the US share similar principles of contract law.  These principles are based on presumptions of good faith and fairness. The concept of good faith under Australian contract law is implied by operation of law.[10]  However, in the United States the duty to act in good faith with respect to contractual arrangements, is an absolute one by virtue of Federal Statute.[11]

            Under Australian contract law, the duty to act in good faith is reflected in the ruling of the court in Secured Income Real Estate (Australia) Ltd. v St. Martins Investment Pty Ltd (1979) 144 CLR 596.  In this case the court described the duty as a duty to cooperate to the extent that one party is required to:

“…do all such things as are necessary on his part to enable the other party to have the benefit.”[12]

Similarly, Section 1-203 of the US Uniform Commercial Code requires that:

“…every contract or duty within this Act imposes an obligation of good faith and fair dealing in its performance or enforcement.”[13]

Section 201(19) of the US Uniform Commercial Code elaborates by defining good faith as “honesty in fact in the conduct or transaction concerned.”[14]  Likewise the US Restatement of Contracts 1981 emphasises the duty to cooperate by insisting that the parties to a contract act in good faith with a view to ensuring the enforcement of the contract.[15]  Section 5(2) of the Sale of Goods Act 1923 (NSW) also equates good faith with a duty to act honestly.[16]

            Having regard to the similarities in the US and Australian concepts of good faith, honestly and to the ultimate benefit of the contract, both Panther and Best Buy are assured of similar results under the substantive laws of both jurisdictions.  Be that as it may, there may be other considerations for opting for a particular jurisdiction.  For instance, the inconvenience of having to travel to a foreign country for trial might dictate opting for one jurisdiction over another.

Protecting Intellectual Property Rights in Software under International Law

            There are several international treaties and conventions protecting intellectual property rights that apply to both Australia and the US.  The primary treaties are the Protection of Literary and Artistic Property (Berne Convention), the Universal Copyright Convention (UCC), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the World Intellectual Property Organization (WIPO).  Panther’s software property rights in is computer games are particularly vulnerable to piracy, as software has a serious problem for intellectual property rights protection globally.[17]

            To this end the Berne Convention offers perhaps the best form of intellectual property rights protection.  By virtue of the Berne Convention, all copyright holders are protected in each of the member states against the incidents of copyright infringement.  Moreover, registration of the copyright is not necessary for registration by member states in any other member state.  Protection is also exemplified by the World Trade Organization’s adoption of the Berne Convention under TRIPS, and software was specifically added to the Bern Convention.[18]

Payment of the Software

In order to facilitate the payment for the software, Panther should use a letter of credit which provides for the funding the sale.   The letter of credit mandates that the purchaser make arrangements with his bank  to submit  payment to the vendor/beneficiary and agrees to reimburse the bank.  The letter of credit is typically submitted with shipping documents such as the bill of lading.[19]

            The letter of credit is an arrangement by which the issuing bank makes an undertaking to render payment to and/or at the request of a third party.[20]   Letters of credit are autonomous in that they are completely distinct from the main sales’ contract under which they apply.[21]  Therefore, any dispute under the main contract will not impact Panther’s right to be paid.  As Michael Stern explains, the autonomy of the letter of credit dictates that  “the issuer’s obligation to pay” when the documents comply with the letters of credit:

“…is unaffected by any claims that the customer may have against the beneficiary on the underlying contract.”[22]

Transporting the Goods

            Like the letter of credit which ensures payment separate and apart from the main contract for sales, delivery of the goods can be regulated by a separate contract and usually is for the purposes of international trade.  The Hamburg Rules impose upon the carrier of goods by sea a duty to ensure that the ship is seaworthy for the duration of the journey.[23]To this end the contracts for the transport and delivery of goods over international borders typically incorporate the Hamburg Rules which are variations of the Hague Rules and its amended version, the Hague-Visby Rules.[24]  As Carr explains, the liability of the carrier:

“…is based on the principle of presumed fault or neglect which means that the onus is on him to show otherwise.”[25]

The World Trade Organization

            The WTO which replaced GATT following a series of negotiations by world leaders and referred to as the Uruguay Rounds was signed in 1995.[26]  The new WTO made a concrete effort to commit member states to a series of new obligations inclusive of cross-border trade agreements that relaxed trade restrictions and improved participation by less developed nations.[27]  The WTO obligations also commits its member states to indiscriminate treatment of all member states with respect to cross border trade agreements.[28] In other words the WTO has as its primary aim the free movement of goods and services from one member state to another.[29]

            Keeping these goals and regulatory aims of the WTO into account, Panther may be obliged to enter into agreements for the sale of computer games to least developed nations under the mandate of the WTO.  The obligation to increase participation by less developed nations may compromise copyright protection.  By virtue of the leniency afforded least developed nations, many of these countries have not as yet complied with the minimum standards of copyright protection under the WTO.[30]

            The most-favoured nation treatment under the WTO however, while ensuring that other WTO members have access to Panther’s good, also ensures that other member states cannot deny exports from Panther.  The most-favoured nation treatment advocates the free movement of goods among member states, ensuring that there are no barriers to cross-border trade within the WTO. [31]

Taxes

            Australian taxes are payable on all sources of income which include foreign income except for wages earned abroad.[32]  Therefore the computer games sold on the US market will be recorded as taxable income in Australia.  However, Panther will not be accountable to the US taxing authorities for profits on those sales.[33] Likewise any taxes on imports into the US will be managed between the US’ taxing authorities and Best Buy.  With each company accountable to its own taxing authorities, the Australian company will not be at risk of paying double taxes.

            If Panther was a multinational corporation with a company in the US which negotiated the sale of computer games to Best Buy, the US Panther company would likely be accountable to both the US and the Australian taxing authorities under the complex laws of transfer pricing.  Article 9.2 of the OECD Model Tax Convention seeks to minimize the incidents of double taxation in these kinds of situations by encouraging member states to consult with each other.[34]

Conclusion

            There are a number of legal issues that might arise in the course of international business transactions.  The legal issues arise from the moment the contract is negotiated to the moment it is executed.  As discussed, the method and means of negotiation can ultimately determine the governing law of the contract. It is therefore important from the outset to determine what forum and what law should ultimately govern the contract in the event there is a dispute.  Other matters such as payment for goods delivered and delivery of the goods can be protected outside of the main contract.  This is important since in many cases goods are delivered and payment should be secured in the event an unrelated dispute arises. As noted, the letter of credit is separate from the main contract and secures payment independent of the main contract.

            The Hamburg Rules also ensures that the risk of damage to goods during shipment is separated from the main contract.  Liability moves from the vendor so that in the event the goods are damaged after dispatch, the purchaser has no claim against the vendor.  Ultimately, a contract for the sale of goods across international borders can involve an number of complex issues.  This paper touched on the most common issues, the proper law of the contract, the transfer of the goods, payment of the goods and applicable taxes.  Each of these matters should be given priority in any contract for the sale of goods overseas.

Bibliography

Adams, John and Brownsword, Roger. (1995) Key Issues in Contract. Butterworths.

Avi-Yonah, R. (2007) International Tax as Internationa Law: An Analysis of the International Tax Regime, Cambridge University Press.

Bagheri, Mahmood. (2000) International Contracts and National Economic Regulations: Dispute Resolution Through International Commercial Arbitration. Springer.

Car, I. and Stone, P. (2005) International Trade Law. Routledge Cavendish.

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Stern, Michael. (1985) “The Independence Rule in Standby Letters of Credit.” University of Chicago Law Review, Vol. 52(1), 218-246.

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[1] Van Eechoud, M. (2003) Choice of Law in Copyright and Related Rights: Alternative to the Lex Protectionis. Kluwer Law International, 34.[2] Van Eechoud, 34.[3] Clark, D. and Ansay, T. (2002) Introduction to the Law of the United States. Kluwer Law International, 433.[4] Hill, J. (1999) Dicey and Morris on the Conflict of Laws. Sweet and Maxwell, 1161-1162.[5] Bagheri, Mahmood. (2000) International Contracts and National Economic Regulations: Dispute Resolution Through International Commercial Arbitration. Springer, 163.[6] Bagheri, 163.[7] Cheshire, G.C. and North, P.M. (1995) Cheshire and North Private International Law. Butterworths, 90.[8] Fawcett, J. (1995) Decliining Jurisdiction in Private International Law: Reports to the XIVth Congress of the International Academy of Comparative Law, Athens, August 1994. Oxford University Press, 427.[9] Zerk, J. (2006) Multinational and Corporate Social Responsibility: Limitations and Opportunities in International Law. Cambridge University Press, 214.[10] Adams, John and Brownsword, Roger. (1995) Key Issues in Contract. Butterworths, 198.[11] Forte, Angelo. (1999) Good Faith in Contract and Property Law. Hart Publishing, 11.[12] Secured Income Real Estate (Australia) Ltd. v St. Martins Investment Pty Ltd (1979) 144 CLR 596.[13] Uniform Commercial Code Section 1-203.[14] Uniform Commercial Code Section 201(19).[15] Restatement of Contracts Act 1981 Section 205.[16] Sale of Goods Act 1923 (NSW) Section 5(2).[17] Sharari, S.A. (2006) “Intellectual Propery Rights Legislation and Computer Software Piracy in Jordan.” Journal of Social Sciences, 2(1), 7-13.[18] Sharari, S.A. (2006), 11.[19] Harfield, Henry. (1978) “Enjoining Letter of Credit Transaction.” Banking Law Journal, Vol. 95, 596-615.[20] Kozolchyk, Boris. (1966) “The Legal Natue of the Irrevocable Commercial Letter of Credit.” American Journal of Comprehensive Law, Vol. 14, 395.[21] Harfield, Henry. (1978) “Enjoining Letter of Credit Transaction.” Banking Law Journal, Vol. 95, 596-615.[22] Stern, Michael. (1985) “The Independence Rule in Standby Letters of Credit.” University of Chicago Law Review, Vol. 52(1), 218-246.[23] Car, I. and Stone, P. (2005) International Trade Law. Routledge Cavendish, 293.[24] Osmanczyk, E. J.  and  Mango, A. (2003) Encyclopedia of the United Nations and International Agreements. Taylor and Francis, 870.[25] Car, I. and Stone, P. (2005) International Trade Law. Routledge Cavendish, 293.[26] Sauve, Pierre and Stern, Robert.(2000)  (eds) GATS 200, New Directions in Services Trade Liberalisation Brookings Institution  211-217.[27] Sauve, Pierre and Stern, Robert.(2000)  (eds) GATS 200, New Directions in Services Trade Liberalisation Brookings Institution  211-217.211-217[28] Sauve,  211-217.[29] Sauve, 211-217.[30] Sauve, 211-217[31] Kufuor, Kofi, Oteng. (1997) “International Trade From the GATT to the WTO: The Developing Countries and the Reform of the Procedures for the Settlement of International Trade Disputes.” Journal of World Trade. Vol. 31(5), 117-145[32] Avi-Yonah, R. (2007) International Tax as Internationa Law: An Analysis of the International Tax Regime, Cambridge University Press, 74-75.[33] Moore, M. and Outslay, E. (2000) US Tax Aspects of Doing Business Abroad. American Institute of Certified Public Accountants.[34] OECD Model Tax Convention, 2003, Article 9.2