Legal System in International Trade

Determining whose legal system has jurisdiction when a commercial dispute arises is another problem of international marketing. A frequent error is to assume that disputes between citizens of different nations are adjudicated under some system of laws. Unfortunately no judicial body exists to deal with legal commercial problems arising between citizens of different countries. Confusion probably stems from the existence of international courts such as World court at The Hague and the International Court of Justice the principal judicial organ of the United Nations. These courts are operative in international disputes between sovereign nations of the world rather than between private citizens and / or companies.

Legal disputes can arise in three situations: between governments, between a company and a government, and between two companies. The World Court can adjudicate disputes between governments, whereas the other two situations must be handled in the courts of the country of one of the parties involved or through arbitration. Unless a commercial dispute is involved the International Court of Justice or any similar world court does not handle it. Because there is no “international commercial law,” the foreign marketer must look to the legal system of each country involved.

When international commercial disputes must be settled under the laws of the countries concerned, the question in a dispute is: Which law governs? Jurisdiction is generally determined in one of the three ways:

  • On the basis of jurisdictional clauses included in contracts,
  • On the basis of where a contract was entered into, or
  • On the basis of where the contract was performed.

The most clear cut decision can be made when the contracts or legal documents supporting a business transaction include a jurisdiction clause. A clause similar to the following establishes jurisdiction in the event of disagreements.

That the parties hereby agree that the agreement is made in xyz,(country) and that any question regarding this agreement shall be governed by the law of the state of ABC,(country)..

This clause establishes that the laws of the state (as given above) would be invoked should a dispute arise. If the complaint were brought in the court of another country, it is probable that the same ABC laws would govern the decision. Cooperation and a definite desire to be judicious in foreign legal problems have led to the practice of foreign courts judging disputes on the basis of the law of another country or state whenever applicable. Thus, if an injured party from Oregon brings suit in the courts of Mexico against a Mexican over a contract that included the preceding clause, it would not be unusual for the Mexican courts to decide on the basis of Oregon law. This is assuming of course, it was recognized that Oregon law prevailed in this dispute either as a result of the prior agreement by the parties or on some other basis.

When things go wrong in a commercial transaction the buyer refuses to pay, the product is of inferior quality, the shipment arrives late, or any one of the problems can arise.

The first step in any dispute is to try to resolve the issue informally, but if that fails the foreign marketer must resort to more resolute action. Such action can take the form of conciliation, arbitration, or as a last resort, litigation. Most international businesspeople prefer a settlement through arbitration rather than by suing a foreign company.

Most disputes that arise in commercial transactions are settled informally. When resolution is not possible, conciliation can be an important first step in settling a dispute. Conciliation (also known as mediation) is a nonbinding agreement between parties to resolve disputes by asking a third party to mediate differences. The function of the mediator is to carefully listen to each party to explore, clarify and discuss the various practical options and possibilities for a solution with the intent that the parties will agree on a solution.

Unlike arbitration and litigation conciliation sessions are private and all conferences between parties and the mediator is confidential; the statements made by the parties may not be disclosed or used as evidence in any subsequent litigation or arbitration. The track record for the conciliation process is excellent, with a majority of disputes reaching settlement and leading to the resumption of business between the disputants.

Conciliation is considered to be especially effective when resolving disputes with Chinese business partners because they feel less threatened by conciliation than arbitration. Conciliation can be either formal or informal. Both sides agreeing on a third party to mediate can establish informal conciliation.

It is not legally binding that an arbitration clause should be included in all conciliation agreements. Experience has shown that having an arbitration clause in the conciliation agreement makes it easier to move to arbitration if necessary.