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Week 5-Negotiating an International Commercial Contract

The document outlines the key aspects of negotiating international commercial contracts, focusing on the legal significance of pre-contractual agreements and the formation of contracts. It highlights essential considerations for negotiations, such as understanding applicable laws, cultural differences, and the importance of good faith. Additionally, it discusses various types of pre-contractual agreements, including letters of intent and non-disclosure agreements, and emphasizes the differences between common law and civil law regarding pre-contractual liability.

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0% found this document useful (0 votes)
6 views53 pages

Week 5-Negotiating an International Commercial Contract

The document outlines the key aspects of negotiating international commercial contracts, focusing on the legal significance of pre-contractual agreements and the formation of contracts. It highlights essential considerations for negotiations, such as understanding applicable laws, cultural differences, and the importance of good faith. Additionally, it discusses various types of pre-contractual agreements, including letters of intent and non-disclosure agreements, and emphasizes the differences between common law and civil law regarding pre-contractual liability.

Uploaded by

mk.tricat.2001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Week 5

LW5303 Commercial Contracts

Negotiation of an International Commercial Contract


30 September 2022
Dr Kehinde OLAOYE (Kenny)
• Understand the legal significance of documents drafted
during the pre-contractual stage
Lesson • Understand important points to consider when negotiating
an international commercial contract
Outcomes • Understand (differences) in applicable laws
 The Formation of Contract
 Pre-contractual Agreements
 Legal significance of pre-contractual agreements
 Key considerations for negotiating an international
commercial contract
 Selected Examples
Outline  Popular media - Mubadala withdraws offer for Brazil's
Burger King brand owner
 Conclusion
 Class presentation: Group 5
Class activity: Pass it on
• In part I we examined the applicable law and principles of
international commercial contracts
• Part II deals with negotiating and drafting international
commercial contracts
• A contract is an agreement between two or more parties
determining their enforceable rights and obligations
• A contract is ‘entered into’ and becomes ‘binding’ once the
parties reach consensus, agreement
• A contract becomes binding when one party makes an offer
Introduction and the other party accepts the offer
• Negotiations for cross-border contracts can take months and
even years
• What happens if one party breaks off contract negotiations?
• There are different approaches in different applicable laws
• It is important to determine the nature, the boundaries and
the features of the concept of offer as a preliminary stage to
the contract
 Contract law is the foundation of international commercial
contracts
 A commercial contract is legally enforceable and
considered a valid by the law if it contains all of the
following elements:
The parties all have the intention to create a legal
Reminder relationship;
 There must be consent or agreement;
There must be consideration;
 The terms of the agreement must certain; and
the parties to the agreement must have the capacity to
enter the agreement
Intention to create a legally-
binding relationship
• Intention is determined objectively from the circumstances,
including the nature of the words used or the conduct of the
party making the offer
• In commercial transactions, there is an assumption that the
agreement is intended to be legally binding
• In social or domestic situations, unless the parties state
otherwise, there is a presumption that such agreements are
not intended to be legally binding
• The law requires that there be an offer on ascertainable
terms which receives an unqualified acceptance from the
person to whom it is made
Pre -contractual stage
The Stages of
Contract
Negotiation and
Contract Drafting
Contractual Stage

Post -contractual stage


It is common to adopt templates and model agreements but parties
should ensure that contracts are checked by lawyers
The first draft of a contract may be very different from the finalized draft

1. Carry out background investigation on negotiating partners and


Considerations for the reality of the commercial context in which they operate
Negotiating 2. Take cultural differences into account
3. Be flexible
Contracts
4. Make realistic commitments
5. Ensure that parties have common understandings and goals
6. Understand that negotiations may fail
Video: Tips for negotiating agreements

https://www.youtube.com/watch?v=QCT1BWZByko
Pre-Contractual Agreements
Types of Precontractual Agreements
• Letters of intent/Memorandum of Understanding
• Non-disclosure Agreements
• Estimate and Invoice Forms
Non-Disclosure Agreement(NDA)
• An agreement that is used by parties to ensure that information exchanged during
the pre-contractual stage of assessment or negotiations on a subsequent agreement
is kept confidential
• A non-disclosure agreement facilitates the exchange of ideas and negotiation of
commercial contracts
• It enables parties to protect their know-how and technology against
misappropriation or abusive use by the other party.
• It is usually signed as soon as discussions begin
• Disputes can arise from a non-disclosure agreement
• Purpose:
• To ensure that the information will be used only for the purpose of the
anticipated transaction (and not for any other competitive purpose)
• To ensure that all disclosed (confidential) information will be kept secret
Examples of
Model Non-
Disclosure https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/592212/Example-Mutual-
Non-Disclosure-Agreement.pdf

Agreements https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Tools/Tender-notice/NDA_form.pdf
Any proprietary information, including but not limited to,
technical and financial information disclosed by either
party to the other hereunder and designated as confidential
Sample Non- shall be kept secret and confidential and not used by the
receiving party other than in the course of the feasibility
Disclosure studies, or other evaluation contemplated hereunder nor
disclosed by such party other than to its employees requiring
Agreement same for performance of their duties hereunder, unless and to
the extent such information was known to the receiving party
prior to disclosure hereunder, is subsequently disclosed to the
receiving party by a third party or becomes public knowledge.
The obligations of this Article shall survive termination of
the letter of understanding and continue in effect for a
period of 7 years thereafter.
Estimate and Invoice Pro Forms
• A detailed status of projects and work to be performed, with an indication of the price,
either by nature of work or construction or by agreed consideration
• It only constitutes a study document which will enable the negotiations to pursue
• It may be optional or mandatory
• May take the form of a project, or of a preliminary study, in order to estimate the extent
of the work to be performed and the price at which the work will be accomplished
• A mere invitation to begin negotiations or a unilateral promise of agreement which
only binds the company offerer, and does not constitute an offer
• Depending on the intention of the parties, it will simply be a draft contract or a
reciprocal agreement which does not lead to the formation of the contract but provides
some obligations such as the payment of fees to the company offerer in case of a
failure of the negotiations or of the client's change of mind
A Letter of Intent

A Memorandum of Understanding (MOU) or


letter of intent (LOI) is used by parties to
establish their intentions or mutual understanding
concerning the main commercial contract
Why do parties sign a letter of intent?
• The transaction is too complex or too large to negotiate in one single
phase
• The parties are not yet aligned on the structure or nature of a
transaction
• Discussions may have reached a stage where outlining a number of
mutually acceptable principles and procedures is possible;
• Binding obligations can only be agreed on after preliminary hurdles
are overcome, certain milestones have been achieved, or if a prototype
has been delivered and accepted
Example of MOU/Letter of Intent Clause
Clause Expressly Excluding Pre-Contractual Liability

Sales & Purchase Contract

(...) due to the non-binding nature of this MOU {Memorandum of


Understanding}, neither of the parties is obligated at any time, either during the
Term of this MOU or thereafter, to continue to discuss or negotiate with regard
to any portion or all of the matters or activities which form the subject(s) of this
MOU, and neither party is obligated to conclude any further written agreements.
Neither party is obligated to refrain from any independent discussions or
agreements with third parties with respect to the subject(s) of this MOU
• Usually MOU’s are intended to be non-binding, with a limited number
of binding terms
• The applicable law, however, may impose liability on a party if it
terminates negotiations that have become somewhat binding (or if a

Are pre- party could, in good faith, reasonably anticipate that a contract would
result from the negotiations)

contractual • The party terminating such negotiations in bad faith can be held liable
for damages towards the other party (‘precontractual liability’)

negotiations • It also depends on the contents of the contract


• Under civil law, a party who breaks off contract-negotiations in bad
binding? faith may be liable for the losses caused to the other party
• It is bad faith, in particular, for a party to enter into or continue
negotiations when intending not to reach an agreement with the other
party while leaving the other party under the justified assumption that
a contract would be concluded. The same applies if a party insists on
contract terms so clearly unreasonable that they could not have been
advanced with any expectation of acceptance, provided that there is
some demonstrable advantage to be gained for that party by avoiding
the contemplated transaction.
• A duty of good faith in contractual
negotiations is generally not recognised in
Hong Kong Hong Kong law
Offer
Contents Acceptance of offer
of a Valid
Contract
Consideration

Capacity to contract
Offer
• An offer for a commercial contract can take many forms
• It may be formal and informal
• An offer is a promise to do (or not to do) something in the future. An offer is also a display of
willingness to enter into a contract on specified terms, made in such a way that a reasonable
person would expect acceptance to result in a legally-binding contract.
• Once an acceptance of an offer is made, a contract exists between the parties.

Example

Please find.., a request for offers concerning a performance... This offer will enable us to establish a
contract... Considering this time limit, we would like to begin our exchanges, even though some
elements still need to be specified... You will find enclosed a first expression of need as well as a draft
contract.., in order to facilitate our discussions.., We would like to receive from you a financial and
technical proposition in response to this demand as soon as possible and at the latest the... We stay at
your disposal for any complementary information in helping finalizing your offer
An Invitation to Bid (Invitation to Treat)
• An invitation to treat is different from an offer
• It is a negotiating statement and a request for an offer
• It is a declaration of willingness to enter into negotiation
• It is not an offer, and thus cannot be accepted to be the basis for a binding contract.
• The distinction between offer and invitation to treat is found, respectively, in the intention or in the
absence of an intention to be bound as soon as the addressee accepts the terms stated. An invitation to
treat is a request to the addressee to negotiate rather than an invitation to communicate an acceptance.
Example
Party A and B attend the 2022 Hong Kong Fair for Manufactures of Industrial Kitchen Equipment’s. Party A
who is a manufacturer of industrial ovens displays these ovens. The display includes the price of the ovens,
description, models and functions of the ovens.

Analysis
The display of goods by Party A, price-lists, circulars and advertisements will be considered an invitations to
treat.
Elements of Valid Offer
• The offer must be definite and precise
• It must be firm
• It must state clearly sets out the fundamental elements of the contract.
In German Law, the offer, must include an undertaking and the intent to be bound, and mention
the fundamental points of the contract

In American Law, the UCC holds the same requirements as French Law: to be binding, the
offer must include the fundamental elements of the contract. If some elements were to be
missing, § 2-204 provides that the contract is nevertheless formed if the intent of the
parties can be proved and if there is a "reasonable basis" to complete this contract.
Examples
Example 1
Party A sends an email to Party B stating that I offer you 1000 bags of cement.
Analysis
This is not a valid offer because it is not definite

Example 2
Dear x,
Please find attached the invoice for the stated goods price individually for 500 HKD. If you
agree with this offer, please email xxx to confirm your acceptance of the offer. Afterwards, our
sales representative in Hong Kong will contact you.
Analysis
This is a valid offer which can be the basis for the parties commercial contract.
Termination of Offer
• An offer terminates when there is a:
• Rejection of the offer by the offeree;
• Revocation of the offer by the offeror;
• lapse of time;
• death or other incapacity of one of the parties; or
• • failure of the condition to materialise where the offer is conditional

Example
Party A makes a written offer to party B which includes the following clause ‘This offer is valid until the 21 of
August 2022’. Party B writes back to Party A accepting the offer on 21 September 2022.
Analysis
The offer was terminated on 21 August 2022.
If the offeror revokes the offer,
The offeror can withdraw the
a notice of revocation must be
offer at any time before it is
communicated to the offeree
accepted.
before acceptance is made

Revocation of
Offer The general rule is that an
acceptance of an offer must be
The offeror, as part of the
communicated to the offeror
offer, may specify the method
before revocation of the offer
of acceptance by the offeree
or before expiration of the
offer through the lapse of time
Counter-offer
A counter-offer is usually considered to be a rejection of the original offer and the making
of a new offer by the offeree
 Withdrawal of the counter-offer does not restore the original offer so as to allow the
offeree to accept the same
An offeree’s request for information, or even an enquiry to negotiate a better price, is not
a counter-offer
Example

Party A offers to sell 1000 cars to party B at the price of 50,000 HKD each. Party B accepts but offers to
buy the cars at the price of 40,000 HKD each.

Analysis

Party B has made a counter-offer for purchase of the cars which will be considered a new offer.
Main Differences between Common Law and
Civil Law
Common Law Civil Law
Tribunals are reluctant to admit pre-contractual Recognizes the possibility of pre-contractual liability.
liability. The dominant perception is that in a However, there are some differences concerning the
negotiation each party pursues its own interests basis for such liability.
The judge assumes that true intent of the parties what The judge will refer to all preliminary documents
is agreed to by the parties in the contract. (correspondences, letters of intent...) in order to
determine the true intent of the parties
Different Domestic Laws (Summary)
Law A Valid Offer
English Law (As applicable in Hong Kong ) The offer must include elements of a contract
American Law The offer must include the fundamental elements of the
contract.
If some elements were to be missing, § 2-204 provides
that the contract is nevertheless formed if the intent
of the parties can be proved and if there is a "reasonable
basis" to complete this contract.
French Law The offer be definite and precise, and that it clearly sets out
the fundamental elements of the contract.
German Law The offer must include an undertaking and the intent to be
bound, and mention the fundamental points of the contract
Negotiations of Contract under
International Commercial Contract
Laws

CISG and UNIDROIT Principles


Part II Formation of the contract
Article 14
(1) A proposal for concluding a contract addressed to one or more
specific persons constitutes an offer if it is sufficiently definite
and indicates the intention of the offeror to be bound in case of
acceptance. A proposal is sufficiently definite if it indicates the
goods and expressly or implicitly fixes or makes provision for
determining the quantity and the price.
(2) A proposal other than one addressed to one or more specific ­
CISG persons is to be considered merely as an invitation to make offers,
unless the contrary is clearly indicated by the person making the
proposal.
Article 15
(3) An offer becomes effective when it reaches the offeree
(4) An offer, even if it is irrevocable, may be withdrawn if the ­
withdrawal reaches the offeree before or at the same time as the
offer.
Contd.
Article 16
(1) Until a contract is concluded an offer may be revoked if the ­revocation
reaches the offeree before he has dispatched an acceptance.
(2) However, an offer cannot be revoked:
(a) if it indicates, whether by stating a fixed time for acceptance or otherwise,
that it is irrevocable; or
(b) if it was reasonable for the offeree to rely on the offer as being irrevocable
and the offeree has acted in reliance on the offer
Article 17
An offer, even if it is irrevocable, is terminated when a rejection reaches the
offeror
Article 19
(1) A reply to an offer which purports to be an acceptance
but contains additions, limitations or other modifications
is a rejection of the offer and constitutes a counter-offer.
(2) However, a reply to an offer which purports to be an
acceptance but contains additional or different terms
which do not materially alter the terms of the offer
constitutes an acceptance, unless the offeror, without
undue delay, objects orally to the discrepancy or
Contd. dispatches a notice to that effect. If he does not so object,
the terms of the contract are the terms of the offer with
the modifications contained in the acceptance.
(3) Additional or different terms relating, among other
things, to the price, payment, quality and quantity of the
goods, place and time of delivery, extent of one party’s
liability to the other or the settlement of disputes are
considered to alter the terms of the offer materially.
UNIDROIT Principles
Article 2.1.2
(Definition of offer) A proposal for concluding a contract constitutes an
offer if it is sufficiently definite and indicates the intention of the
offeror to be bound in case of acceptance.

Article 2.1.3
(Withdrawal of offer) (1) An offer becomes effective when it reaches the
offeree. (2) An offer, even if it is irrevocable, may be withdrawn if the
withdrawal reaches the offeree before or at the same time as the
offer.
Article 2.1.4Revocation of offer
(1) Until a contract is concluded an offer may be revoked if the
revocation reaches the offeree before it has dispatched an acceptance.
(2) However, an offer cannot be revoked (a) if it indicates, whether by
stating a fixed time for acceptance or otherwise, that it is irrevocable; or
(b) if it was reasonable for the offeree to rely on the offer as being
irrevocable and the offeree has acted in reliance on the offer.
ARTICLE 2.1.5 (Rejection of offer)
An offer is terminated when a rejection reaches the offeror.
Example
After lengthy negotiations the Executive Directors of two companies, A
and B, lay down the conditions on which B will acquire 51% of the shares
in company C which is totally owned by A. The “Memorandum of
Agreement” signed by the negotiators contains a final clause stating that
the agreement is not binding until approved by A’s Board of Directors.
Analysis
There is no contract before approval is given by A’s Board of Directors.
Although the proposal may contain all the essential terms of the
contract, it does not bind the parties.
Can a party walk away from negotiations and
change his mind?
• Generally, A party is free to enter into negotiations even though he
feels uncertain as to whether he will eventually make a contract.
• He may break off the negotiations, and does not have to disclose why
he broke off.
Case Examples
Date of Decision: May 13, 2021
Court: US District Court for the
District of Delaware
Claimant: Swiss National
Defendant: Delaware USA

AGB Contemporary A.G. v. Artemundi LLC


Facts of the Case
 A Swiss art dealer approached a Delaware entity to fund the
purchase of a Pablo Picasso oil canvas painting. The
principals exchanged emails detailing material terms in
July 2020 confirming the Delaware entity agreed to fund
the Swiss art dealer’s purchase for resale.
 The Swiss art dealer reviewed the Picasso in Geneva before
confirming terms by email and voice mail. The Delaware
funding entity then reversed course and refused to fund the
purchase depriving the Swiss art dealer an alleged
$500,000 profit on resale.
 The Swiss dealer sued the Delaware funding entity for
breach of contract alleging that emails and voicemails
confirm the parties’ agreement under the United Nations
Convention on Contracts for the International Sale of
Goods.
Pablo Ruiz Picasso (25 October 1881 – 8 April 1973) was a Spanish
painter. Since his death in 1973, Picasso’s stature as an artist . Some of
his works have been sold for more than $100 million.
Arguments of the Parties

Claimant’s Argument
Artemundi argued that AGB Director Benatar’s July 6 email does not constitute an
offer under the CISG because it lacked sufficiently definite terms and failed to
express AGB’s intent to be bound by terms Artemundi finally argues the parties’
negotiations after July 6 did not cure alleged deficiencies in the July 6 contract
formation.

Defendant’s Argument
AGB argued it made a sufficiently definite offer to buy the painting for $3,300,000 and Artemundi
CEO Lumbreras and AGB Director Benatar subsequently spoke on the phone and over email to
“confirm” this offer. AGB argues its email contained all the requisite elements of an offer—the
product, quantity, and price.
“The Offer”
“Dear Javier, I confirm our deal for your Picasso at $3,300,000 USD net
to you. As discussed, the attorney Mrs. Sylvie Horowitz, copied on this
email, will contact you tomorrow with a pro-format [sic] invoice
proposition; it should be very simple so hopefully we will be able to
finalise this very quickly.
Kind regards, Alain
Court’s Decision
AGB further plausibly alleges an intent to be
bound in the event of acceptance. AGB’s
communications, especially when interpreted in
the light most favorable to AGB and in the
context of their earlier negotiations and
conversations, demonstrates an intent to be
bound.
While we find the Swiss art dealer plausibly
pleads a breach of contract, we must dismiss its
contract claim under the forum non conveniens
doctrine without prejudice to submit its claim to
the Courts in its home country, Switzerland.

Richard G Andrews
Case Example 2
Facts
In December 2019 Claimant, a US company based in New York, and
Defendant, a Dutch company, signed a letter of intent (LOI) according
to which Defendant would acquire Claimant’s 50% stake in an
equestrian show-jumping business. The LOI provided that either party
could refuse to execute this agreement before the deadline set for 2
March 2020, by paying the other party a EUR 30 million “fee”.

When Defendant failed to sign the Transaction Agreement within the


agreed deadline, Claimant initiated a summary proceeding before the
Rechtbank (Court) Amsterdam seeking, in the first place, an order for
Defendant to take the 50% stake of the Business and pay for it the
agreed price of EUR 169 million (hereinafter “the Main Claim”) or, in
the alternative, an order to pay the EUR 30 million "fee" (hereinafter
“the Alternative Claim”).
Defendant’s Argument
Defendant objected that the Transaction Agreement was never
concluded and that the EUR 30 million "fee" should be reduced or
modified in some way by the Court in accordance with Art. 6:258 of the
Dutch Civil Code, due to the COVID-19 pandemic and its devastating
consequences on the Business.
The Court, after stating that the law
applicable to the dispute was Dutch law,
dismissed Claimant´s Main Claim on the
ground that there was no enforceable
contract entered into by the parties. As to
the Alternative Claim, the Court affirmed that
the payment of the EUR 30 million "fee"
could be enforced against Defendant also in
the current COVID-19 pandemic. In the
Courts Decision opinion of the Court, even if the COVID-19
crisis, especially in Europe and North
America, could be considered an unforeseen
circumstance pursuant to Art. 6:258 of the
Dutch Civil Code, however, at such an early
stage
http://www.unilex.info/principles/case/
2259#MEMORANDUM_OF_UNDERSTAN
DING
Mubadala withdraws offer for Brazil's
Burger King brand owner, shares fall

• In September 2022, Brazil's Zamp SA announced that Abu Dhabi


state investor Mubadala had revoked its tender offer to purchase a
controlling stake in the company.
• This led to a fall in the value of the shares of Burger King.
• Mubadala had offered $1.61 per share to buy a 45.15% stake in
Zamp in early August.
• The Abu Dhabi investor said in a letter to Zamp it had dropped
out after failing to obtain confirmation on whether the deal would
imply the termination of Zamp's franchise and trademark
licensing agreements.
• The withdrawal came a day after Restaurant Brands International
Inc, Popeyes' and Burger King's master franchisor, said it could
not issue a waiver requested by Mubadala for the transaction to
proceed.
• Shares in Zamp fell 6.5% to 6.80 reais after Mubadala's
withdrawal, adding to a drop of more than 8% from the previous
day's session.
• Analysts at Santander noted Mubadala's withdrawal could create
an overhang in Zamp's stock, as the Abu Dhabi firm could now
sell its existing 4.95% stake in the Brazilian company.
Mubadala and Brazil's Burger King brand
Case Study Discussion

https://www.youtube.com/watch?v=Cvrk-PF4LLY

1. What are some of the difficulties the parties may have faced during the negotiations?
2. What are some of the cultural differences between the two parties? Applicable law, language
3. What effect has the withdrawal of the offer had on the Brazil Burger King brand
4. What kind of commercial agreements would the parties have drafted? What will be the
importance of these agreements for the parties?
5. Will there be any liabilities for the parties
Discussion Questions for the Week

1. What are the elements of a valid contract?


2. What are the elements of a valid offer?
3. What are the main examples of pre-contractual commercial agreements
Conclusion

A valid offer is the


The pre-contractual
basis for a valid and
stage is as important
legally enforceable
as the international
international
commercial contract
commercial contract
Readings for the Week

Compulsory Reading (Uploaded on canvas)

1. Patrick Blanchard, ‘Offer and Acceptance in International Contract Negotiation: A


Comparative Study’ (2008) Int’l Bus LJ 3
2. Rebecca Attree, International Commercial Agreements (Thorogood 2005) ‘Pre-contract Issues’
Chapter two
Recommended Reading

3. Fontaine Marcel & de Ly Filip, Drafting International Contracts: An Analysis of Contract -


Clauses (Transnational Publishers Inc 2006) Chapter 1
4. Rebecca Attree, International Commercial Agreements (Thorogood 2005) ‘Mastering the
Essential Skills of International Negotiation’ -Chapter One

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