INTERNATIONAL CONTRACTS WITHIN THE BRIC - First part

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I'm posting the first part of the translation of my article about international agreements among Brazil, Russia, India, and China. Hope you enjoy it.


INTERNATIONAL CONTRACTS WITHIN THE BRIC
Rules governing international transactions of sale of goods and
International commercial arbitration


1. THE BRIC DREAM
The discussion about the BRIC countries began in 2001 in a report Goldman Sachs Group entitled Building Better Global Economic BRICs , which forecasted that by 2050, Brazil, Russia, India and China would exceed, in terms of GDP, the economy of the six major industrialized nations of the world (USA, Japan, Germany, Britain, France and Italy).
Since then, other reports have been published by the same group in 2003 and 2005, confirming the prognosis. In 2007, the book BRICs and Beyond was published. The work sought to reassess the assumptions of previous studies and noted that the BRICs economies grew well above expectations from the beginning of the decade. Early studies of Goldman Sachs Group may have been too conservative for, while hoping that the 4 countries would reach around 10% of world GDP at the end of 2010, by 2007 they owned 15%.
It is noteworthy that, after the economic crisis of 2008-2009, a new publication Goldman Sachs Group said categorically that the BRIC countries were to recover more quickly from the crisis. Notably, part of good performance economic development of BRICs is due to trade among themselves. Brazil, for example, benefited from the fact that China has become its largest importer for several months in 2009, according to statistics from the Ministry of Development, Industry and Foreign Trade of Brazil (MDIC). According to data from MDIC, from January to July 2010 the value of exports from Brazil to China was approximately 40% higher than the value of exports from Brazil to the United States.
In this perspective, IMF data also indicate that the BRICs have been, alone, responsible for more than 50% of the additional wealth production in the world during the decade of 2000-2010.
At the same time, the BRIC countries have developed their diplomatic relations and formed coalitions outside the economic realm. To name a few examples, one can point out the role of Brazil and India in the Doha negotiations, the IBSA forum between India, Brazil and South Africa, which brings together three democracies from three continents, the BASIC coalition, formed by Brazil, South Africa, India and China, which sought to defend common interests on environmental and climate issues among the countries, besides the participation of BRIC countries in the G-20.
Brazil and India also seek - along with Germany and Japan, in what is called the G-4 - a permanent seat on UN Security Council United, which already has two other BRIC countries: China and Russia.
It is important to note that the relationships described above generate consequences and needs that go beyond the economic sphere. Since it is clear that a closer economic cooperation among BRIC countries in the future is inevitable, it becomes necessary to study the legal framework of the group members, especially regarding to international contracts, in order to remove barriers to economic integration within the BRIC.
In this context, this work has been devised to analyze the internal rules and international conventions ratified by each of the BRIC countries, in order to guide entrepreneurs and lawyers dealing with international contracts in those nations. Specifically, this paper will study the rules applicable to international sales contracts and to international commercial arbitration.

2. MAJOR CONVENTIONS TO BE EXAMINED
2.1 Vienna Convention on Contracts for the International Sale of Goods
Several international organizations aim at creating uniform standards for international trade.
Amongst them, the UNCITRAL (United Nations Commission on International Trade Law) is the most prominent, and has fulfilled a key role in developing uniform standards for trade.
Specifically in the case of contracts for sale of goods, the most important convention on the subject is certainly the Vienna Convention on Contracts for the International Sale of Goods (CISG), established under the auspices of UNCITRAL in 1980.
In its preamble, its universalizing purpose is clear:
[The States parties to this Convention] BEING OF THE OPINION that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade (…)
Currently ratified by 74 countries , representatives of more than 90% of global trade in goods (GAMMA JR, 2009), the CISG is the most successful trade treaty in history. In fact, it has been classified by some authors as the Magna Carta of international trade (ZELLER, 1999), or as an "unexpected success story" in Professor Schlechtriem’s words.
Some of the topics covered by the CISG are: formation and execution of international contracts of sale of goods ; the seller’s obligation to deliver the goods and the buyer's obligation to pay the price , the rights of the parties in case of breach of contract ; exceptions from liability for breach, as the occurrence of force majeure , among others . The goal of the CISG rendering the regulation of such issues was to establish core standards on which there could be a reasonable consensus between countries of different legal backgrounds.
It should be noted that the CISG applies only to the sale of tangible goods, excluding from its rule the sale of services, financial services or workforce.
The position of each of the BRIC countries towards the CISG will be further analyzed.
2.2 International Arbitration and Recognition of foreign arbitral awards
International commercial arbitration is a tool of enormous relevance in international trade agreements. Arbitration has advantages in relation to national courts. It is not only a mechanism generally faster and more economical than the traditional procedures, but often a more convenient and specialized one. It can be carried out secretively, and allows the parties to choose the applicable law. There are two main international conventions on arbitration, both covered on the following topics:
2.2.1 UNCITRAL Model Law on Arbitration Procedures
Aiming at harmonizing the various national laws on the subject, a committee consisting of representatives from 58 countries and 18 international organizations, chaired by the UN Commission for International Trade Law, was formed to discuss a model law on arbitration procedures.
The UN General Assembly, through Resolution n.40/72 of December 11, 1985, approved the final text of the Model Law on International Commercial Arbitration at the end of the 18th annual meeting of the committee. The General Assembly recommended that:
All States give due consideration to the Model Law on International Commercial Arbitration in view of the desire for uniformity in arbitration laws and the specific needs of the practice of International Trade Law (UNCITRAL, 1985).
The Convention received accession of countries that move two thirds of the global trade. Its text has solved several flaws from previous Conventions, as well as influenced the review of arbitration rules from the major arbitration chambers. It also influenced a great part of domestic laws on arbitration, especially those promulgated after its approval. The Model Law covers arbitration since its formation until the execution of the final decision, constituting a relatively complete code.
2.2.2 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
This convention is of paramount importance, since it provides that arbitration shall be recognized as a valid and legal instrument for the settlement of conflicts, and establishes the enforcement of foreign arbitration awards by local courts of each contracting State.
In short, the New York Convention allowed individuals to escape the relative insecurity of national courts, since the choice of jurisdiction and governing laws became virtually free. Therefore, its importance cannot be underestimated. According to the United Nations:
The Convention is widely recognized as a founding instrument of international arbitration and requires courts of contracting States to give effect to an arbitration agreement and also to recognize and enforce awards made in other States, subject to specific limited exceptions. The Convention entered into force on 7 June 1959.

The position of each of the BRICs towards international arbitration will be detailed in topic 4.
3. THE BRICS’ LEGAL SYSTEM AND THE VIENNA CONVENTION ON THE INTERNATIONAL SALE OF GOODS
3.1 BRIC’s domestic laws on International Commercial Contracts
Despite the many advantages of CISG, only Russia and China among the BRICs have ratified it to date. And yet it is worth noting that both countries have made reservations, as will be discussed below.
3.1.1 Application of the CISG in China
China ratified the CISG in December, 1986. However, it has adopted a significant reservation to the text: it compromised to apply the CISG only if the other country involved in the transaction has also adopted the convention.
Regarding this reservation, the renowned author Peter Schlechtriem weaves interesting comments:
The consequence of article 1(1)(b), which meant that parties in non-contracting states could be subject to the application of the CISG, (a law that their country had not ratified), met with serious objections in Vienna, and it was accepted only on account of a compromise allowing a reservation, that is a ratifying state could declare that it would not be bound by article 1(1)(b).

In the immediate aftermath of the Chinese position, it is clear that instant application of the CISG to contracts between China and other BRIC countries is limited to agreements with companies in Russia. Put in another way, as noted by CHEN Weizuo in an article entitled "The conflict of laws in the context of the CISG: A Chinese perspective’’:
In accordance with Article 95 of the CISG, the People's Republic of China declared, at the time of the deposit of its instrument of ratification with the UN Secretary-General on 11 December 1986, that it did not consider itself bound by Subparagraph (1)(b) of Article 1 of the CISG. As a result, situations where the CISG is directly applied by Chinese judges are relatively limited but certain; the CISG applies practically to contracts of sale of goods only if the parties have their places of business in different Contracting States.
In consequence, in contracts between Brazil and China and between India and China that are brought upon Chinese courts there is a strong possibility that the applicable law will be deemed to be the Chinese internal legislation, especially the "Law on Contracts of the People's Republic of China of 1999" and the “General Principles of Civil Law of People's Republic of China’’. If this is not the wish of the parties, they must study the conflict of law rules applicable to the case and adopt preventive measures.
Regarding the application of Chinese law, it is interesting to note that Chinese law allows parties to choose the rules applicable to international contracts. Such possibility is always interesting since it allows the parties to choose a neutral legal system or, in some cases, the one most favorable to the transaction at hand.
However, we must understand that, in a contract between a Brazilian trader and a Chinese exporter, the parties cannot choose the application of the CISG, because the Chinese law explicitly says that CISG would not apply. Nevertheless, it would be possible choose it indirectly, by stating the applicable law as being the Russian Law, for example.
Finally, the application of the CISG would still be possible in a Sino-Indian or Sino-Brazilian contract if the parties adopted arbitration, as will be discussed in a specific topic.
3.1.2 Application of the CISG in Russia
In accordance with the provisions of Article 1, paragraph (a) of CISG , international contracts for the sale of goods between Russian and Chinese parties will be governed by the CISG.
Regarding the other two countries, Russia took no reservations to paragraph (b) of article 1 (1).
Thus, contracts between Brazil and Russia and between India and Russia may be governed by the CISG, provided that, after examining the case, the conflict of law rules indicate the Russian legislation as dominant in that particular case.
This possibility adds to the fact that Russia accepts that the parties choose the applicable law, which allows the legal planning of agreements entered into with companies in the country.
In the words of the authorized doctrine :
According to the Russian conflict of law rules the parties to a contract, when one party is a foreign entity, may choose the law applicable to their rights and duties under that contract including sale agreements provided that such a choice does not affect the operation of mandatory rules of the country with which the contract is actually related. In the absence of an agreement between the parties on the applicable law, the law of the country with which the contract is most closely connected shall apply to the contract. Generally, the law of the country with which the contract is most closely related shall be considered the law of the country in which the party performing execution of crucial importance for the contract has its place of residence or main place of activity (the seller in the sale and purchase transaction, the lender in a loan agreement, financial agent in a contract of financing against assignment of a monetary claim etc.)
The same can be envisioned for the comment below :
Under Clause 166 of Fundamentals, the parties to the construction contract are free to choose the governing law for their contract. However, absent the express agreement of the parties, the governing law will be that of the country where the works are being constructed (the project country).This corresponds to the customary practice of selecting the law of the project country as the governing law of contract.
In short: in contracts between Russian and Brazilian and Indian and Russian parties, the CISG can be elected as the applicable law, provided that the conflict of law rules does not demand it to be applied and that the parties do not wish to allow Brazilian or Indian Law to rule the case.
3.1.3 Application of the CISG in India and Brazil
Neither of these countries adopted the CISG. However, the Indian law allows the parties to choose the applicable law for the agreement.
Therefore, when entering into a contract that is expected to be enforced before Indian Courts, the parties may specify the law of a CISG adopter. The strategy, however, faces some limitations, clearly summarized in the following excerpt:
In the circumstances, parties entering into contracts with Indian companies enforceable under a foreign law must note that if an action is brought under such contract in an Indian court, foreign law will have to be pleaded like an ordinary fact and proved by experts. Further, parties cannot, by agreement, confer jurisdiction on a court which does not have any jurisdiction over the subject matter. (Patel Roadways v. Prasad Trading Company, AIR 1992 SC 1514). Moreover, in order to select one out of two courts by an agreement, both the courts must have jurisdiction, and the agreement should be clear and unambiguous as regards the forum selection clause .
In Brazil, on the other hand, the parties are not allowed to choose the applicable law.
Under Brazilian conflict of laws rules (Decree-Law No. 4657 from 1942, entitled ”Civil Code Introduction Law’’), contracts between absente parties – understood as those that are not face to face at the moment of signature - are always governed by the proponent’s domicile law. (The proponent, in this case, being the one who sent the last draft accepted without alterations of any kind)
Therefore, entrepreneurs making business in the BRIC countries should pay attention to the following situations:
In contracts with Brazil, where the final proposal is sent by a party located in Brazil, the law applicable should the subject be judged by Brazilian courts shall be the Brazilian law. In this case, the CISG can never be applicable.
On the other hand, whenever the final version of the proposal is sent by Indian, Russian or Chinese parties, the law of the respective country will be applied by the Brazilian courts.
That is to say, in contracts governed by Brazilian law, any clause specifying the applicable law is void. Although, if the same contract is governed by the law of other BRIC countries, it will be deemed valid and may be enforced before Brazilian courts.

3.2 RECOGNITION OF UNWRITTEN AGREEMENTS IN CHINA AND RUSSIA
The CISG does not address the issues concerning the "validity of contract or any of its provisions or of any usage”. Even so, the convention has, in its articles 14 to 28, several provisions concerning the formation of international trade contracts, which include the use of verbal and written offers, the conceptual definition of offer and its binding power.
In this sense, the Convention adopts a liberal stance, by not limiting the expressions of willingness to a written form, as provided by Article 11: "A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses".
However, this provision is virtually ineffective in the scope of application of the CISG in the BRICs, since both Russia and China adopted the reservation of Article 96 of the Convention, which bans recognition of any expression of intent designed to celebrate, modify or accept a contract of sale which is not expressed in writing . Therefore the negotiations between these two countries must be rigorously documented in writing.