English Contract Law and its Importance for International Commercial Transactions
The importance of English contract law (technically the law of England and Wales, but usually abbreviated to just ‘English’) goes far beyond the legal system of the United Kingdom, and can be of importance to Serbian business entities. In light of this, a series of AKT blog posts will elucidate the main aspects of English contract law so to raise awareness of the most important potential issues when contracting under this law. Of course, for specific issues and further expertise, AKT remains at disposal to all its current and prospective clients.
This first post in the series examines some of the very basic features of the English contract law as a system that make it important for international commercial transactions, often between parties that have no other connection to the United Kingdom apart from their choice of governing law. English law is chosen as applicable in a vast number of commercial contracts around the world, in particular in the areas of sale of goods in international supply chains, commodities trading, construction, banking and financing, maritime and shipping, mergers and acquisitions, dispute resolution and international arbitration.
There is thus a solid likelihood that a Serbian company contracting with a foreign business entity in a variety of sectors might be asked to agree to English law as the governing one for the contract. What are the reasons for this popularity? The three most important are the global spread of English ‘common law’; the business-friendly content of the law itself; and the well-developed and reputable mechanisms of dispute resolution that complement the choice of law.
Firstly, there is a considerable likelihood that a business partner might come from a jurisdiction which is based on the common law system. Common law has been exported around the world as a result of the British Empire and later Commonwealth, and English law essentially serves as a basis for the legal systems of some 80 countries around the world. These include some of the ‘heavyweights’ in the world of commerce, such as (apart from the UK itself) United States, Canada, Australia, Singapore, and Hong Kong but also jurisdictions such as Cyprus, India, Cayman Islands and Ireland (where Google Europe is headquartered). Although the law in these jurisdictions is not uniform, and over time divergences arise from English contract law as well, the essential principles and many specific rules remain the same, in particular because judges closely monitor the developments in other influential jurisdictions.
Secondly, English contract law is often chosen between the parties that do not come from the common law systems at all. This is due to the intrinsic substantive features of both English law more generally and contract law more specifically. More generally, English contract law is considered to be transparent and predictable, but also to benefit from quick adaptability to new developments due to the system of judicial precedents. Essentially, as judges to a considerable extent create the law through their judgments, they are in a better position to respond to changes in the world of commerce (such as digitalisation, AI, cryptocurrencies) than legislative interventions. Although there is now a considerable amount of statutes for specific contracts in English law, these are often themselves based on the case law developed by the courts. Likewise, in large areas, the judges retain their possibility to intervene in the best interest of commerce.
A number of substantive principles of the law confirm this. Generally, English contract law puts strong emphasis on the freedom of contract and party autonomy. The main guidance for the judges is an effort to give effect to parties’ bargain and make sure that the outcome will be predictable. There is no general principle of good faith in contract law that might impact predictability, but rather specific well-developed doctrines that cover particular situations. Likewise, the change of circumstances, unless regulated in the contract by force majeure clauses, is not usually a reason for changing the contractual bargain, unless the performance of the contract becomes truly impossible. Finally, principles for calculating damages are well developed, but English law easily gives effect to limitations of liability and liquidated damages clauses as well.
Thirdly, and finally, the choice of English contract law is most often naturally complemented by dispute resolution before English courts or through arbitration seated in London. English commercial courts and arbitration institutions (most notably London Court of International Arbitration – LCIA) are generally considered effective, independent and open to the needs of businesses, both domestic and international. According to recent data, over 70% of the workload of the Commercial Court in London involved international parties without any geographical connection to the UK. As for the LCIA, around 80% of conducted arbitrations (supported by pro-arbitration English courts) involved a foreign party, and around half were entirely between foreign parties.
In conclusion, English contract law has a number of features that make it a popular choice for governing international transactions. At the same time, this requires knowledge of some of its key features so to avoid potential pitfalls. There are some considerable differences in rules in comparison as to what Serbian and more generally continental lawyers and businesses might expect. These will therefore be highlighted in the subsequent AKT blog posts dedicated to this topic.