Navigating the Transnational Sale of Goods: The Role and Importance of Trade Usages and Practices Today

Author: Mahammad Jafarov, Legal Consultant, LLB at Baku State University (2018-2022), MA in Diplomacy and International Affairs at ADA University (2022-2024)

Editor: Elnur Karimov, LLD (Doctoral Program in Law) at Kyushu University, 2021-2024 

Abstract

In the globalized world, international trade has become a crucial part of the economy of many countries. With the increasing number of transactions taking place across borders, the regulation of transnational sales of goods has become a significant challenge for policymakers and international organizations. The transnational sale of goods involves the movement of goods across national borders, making it a complex process that requires effective regulation. One of the key mechanisms used to regulate such transactions is through the use of trade usages and practices. This research aims to examine the role of trade usages and practices in the regulation of transnational sales of goods and their effectiveness as a regulatory mechanism.

Introduction

In expanding world markets, transnational business activities are virtually limitless. These include the export and import of goods, the exploitation of natural resources, direct or indirect investments, process licensing, patents or trademarks, the provision of personal services such as marketing and finance, technological, transport or management expertise, as well as related activities such as shipping and insurance. Buying and selling transactions are the top of the most widely used business activities.

Transnational sales of goods are a common occurrence in today’s globalized economy, where businesses operate across national borders. These sales involve the movement of goods across national boundaries and often involve different legal systems and cultural norms. As a result, regulating transnational sales of goods can be a complex process.

One of the most important issues in transnational sales contracts is the determination of applicable law to the regulation of separate relations between parties. In addition to regulation based on national, regional or international normative acts, trade usages and practices also act as an actual source in the regulation of buying and selling relations and other related relations between commercial actors. As a matter of fact, trade usages and practices have played a significant role in facilitating international trade for centuries. As businesses increasingly operate beyond national borders, understanding and adhering to these practices becomes even more critical. This article examines the effectiveness of trade usages and practices in regulating the transnational sale of goods relationships today and their importance as a regulating mechanism.

Historical Evolution of The Role of Usages and Practices in The Regulation of Trade Relations

The role of usages and practices in the regulation of trade relations can be traced back to ancient times when traders engaged in cross-border transactions based on informal agreements and customs. However, it was not until the emergence of modern commercial law that the role of usages and practices in regulating trade relations became formalized and recognized by the legal system. Historically, international trade law has been shaped by merchant customs and practices out of necessity and mutual interest and by the realities of the business world. Before the active participation of the state in the regulation of transnational trade relations, the earliest form of international trade law was the medieval mercantile law (‘’lex mercatoria’’), a general regime and regulatory system based on customs and governed by the merchants themselves from the earliest days of trade. The ‘’merchant law’’ was based on the principles of good faith, fair dealing, and commercial reasonableness, and it was widely recognized and followed throughout Europe. The eleventh and twelfth centuries saw a commercial renaissance in Europe, which was partly linked to the opening of trade with Eastern markets and partly to general political and economic developments on the continent, including the rise of towns and cities as autonomous (Goode, R. (1991)). Throughout this period, the revival of Roman law in medieval European universities and the development of both ecclesiastical and secular legal principles led to the creation and development of the “lex mercatoria”. Based on the Roman law of nations – ‘’ius gentium’’, the standards of merchant law gradually moved towards uniformity through the expansion of trade itself (Benson, B. L. (1989)).

If we compare with the modern era, in the medieval period, in regulating transnational trade, the relevant trade usages and practices were the core source, and the national legislative acts were the auxiliary source of regulation. By adopting local markets and maritime customs and usages related to trade, the laws ultimately directed merchants away from local legislation and toward a universal legal system based on commercial interests. Such universalization created a solid foundation for transnational commercial law.

In the new period, the commercial actors who realized that the expansion of international trade and growing economic interdependence required the privatization of commercial regulation, reworked their regulatory norms and mechanisms. Based on commercial experience, international organizations and trade associations have drawn up a large number of general conditions, standard contract forms and standard commercial terms that intend to regulate various forms of commercial transactions in detail and where possible uniformly, and this trend continues according to the relationships formed. These efforts have allowed merchant law to experience a strong resurgence in recent decades, a process characterized by many legal scholars as the emergence of a “new lex mercatoria” operating on a transnational scale (Valioti, M. (2015)). Modern lex mercatoria, a field of international private law, is based on the commercial concepts and contractual practices of the international merchant community, which mainly consists of trading, shipping, insurance and banking institutions of all countries. The international conventions adopted for the regulation of transnational commercial relations, model laws, and other normative documents determine general positions regarding trade usages and practices in the regulation of trade law. As a result of determining the position of these trade uses and practices in the regulatory system, the role of the relevant regulatory mechanism has been strengthened.

Concept and Nature of Trade Usages and Practices

There is no uniform conventional understanding of trade usages and practices. Most states also do not define trade customs in their legislation either, but simply state their position on whether or not to accept trade customs as a source of regulation and determine the specifics of its application. However, if we attempt to define international trade usages and practices, they can be explained as the norms that have developed over time in a given industry or market, are widely recognized, and are expected to be adhered to by actors involved in the relevant sectors. These usages and practices are based on common practices and customs that have become standard in a particular industry or market (Carr, Indira & Stone, Peter. (2014)). They provide a framework for conducting business transactions that is flexible and practical, allowing parties to negotiate and agree on terms that are consistent with industry standards and practices.

Trade usages and practices can take different forms, such as customs, usage of trade, and standard practices (Goode, Roy. (2004)). Customs are long-standing practices that are widely recognized and followed within a particular industry or market. For example, it is customary for buyers to inspect goods before accepting delivery in the construction industry. Usage of trade refers to a practice that has become widely accepted and recognized within a particular industry or market. For example, in the shipping industry, it is common practice to use bills of lading to document the shipment of goods. Standard practices refer to the standardized procedures and practices that are developed and implemented within an industry or market to promote efficiency and consistency.

In practice and theory, trade usages, practices and customs are often used as synonyms and can be used interchangeably. The distinction between them can be seen more in the Anglo-Saxon legal system, but even today there is no unit consensus on the differences between these terms. Prominent Legal Scholar, Clive M. Schmitthoff points to the lack of clarity regarding the transition from practice, custom, and customary law, which makes it difficult to determine the legal nature of trade usages often used in international transactions. Professor Schmitthoff outlines that international customs develop gradually, starting as business procedures, evolving into common practices, and ultimately gaining legal status, both nationally and internationally. (Schmitthoff, Clive M. (1988)). According to the approaches of some legal scholars, practices developed by international trade agencies such as the International Chamber of Commerce, specialized agencies of the United Nations, and other trade associations have the potential to become trade customs and usages through common and constant use (Schmitthoff, Clive M. (1988)).

Trade usages and practices provide predictability and stability to business transactions by establishing a common understanding of industry standards and practices. They promote efficient commercial practices by providing a framework for negotiating and agreeing on terms that are consistent with industry standards. As such, trade usages and practices are an important means of regulating transnational sales of goods, especially in industries or markets where national laws are not well-established or differ significantly between countries.

The nature of trade usages and practices is often organic and dynamic, meaning they evolve in response to changes in industry or market conditions. They are shaped by a range of factors, including technological advancements, changes in consumer preferences, and shifts in global economic conditions. As such, trade usages and practices are constantly evolving, and new practices may emerge while old practices may become obsolete (Murray, Michael & Holloway, David. (2012)). Despite their informal nature, trade usages and practices play a critical role in regulating business transactions. They provide a flexible and practical means of regulating transnational sales of goods that complements and supplements the legal framework for transnational sales of goods. Parties involved in transnational sales of goods rely on trade usages and practices to provide a common understanding of industry standards and practices and to negotiate and agree on terms that are consistent with these standards.

Functions of Trade Usages and Practices

Broadly speaking, trade usages and practices serve several important functions in the regulation of transnational sales of goods.  We can categorize the functions of trade usages and practices as follows:

  • Filling gaps in the parties’ agreement: As a legal source trade usages and practices can be used to fill gaps in contracts, where the parties may have omitted certain terms or failed to foresee specific situations. By referring to established practices, parties can determine how to address these gaps, reducing the likelihood of disputes. Without a clear agreement between the parties, courts and arbitral tribunals may also look to trade usages and practices to fill gaps or interpret ambiguous terms. This can help to resolve disputes arising from transnational sales of goods.
  • Interpretation of contractual terms. Trade usages and practices can help clarify the meaning of contractual terms that may be ambiguous or unclear, ensuring that both parties have a mutual understanding of their rights and obligations. This promotes efficient enforcement of contracts and minimizes the risk of disputes.
  • They provide a framework for negotiating and agreeing on terms that are consistent with industry standards. This promotes efficient commercial practices and reduces transaction costs by providing a shared understanding of industry norms.
  • Establishing a level of trust and confidence between parties. By following widely recognized trade usages and practices, parties can establish a level of trust and confidence in their business dealings. Parties can rely on these established norms to guide their behaviour, knowing that they will be accepted and enforced by other participants in the market. This can help to facilitate future transactions and build long-term business relationships (Goode, R. (1995)).
  • Encouraging standardization and consistency in industry practices. Trade usages and practices can promote standardization and consistency in industry practices, reducing transaction costs and improving supply chain efficiency (Bridge, M.G. (2007)).
  • Providing a flexible means of regulating business transactions. Trade usages and practices provide a flexible and practical means of regulating transnational sales of goods that complements and supplements the legal framework for transnational sales of goods (Bridge, M.G. (2007)). This is particularly important in industries or markets where national laws are not well-established or differ significantly between countries.
  • Facilitating dispute resolution. In case of disputes, trade usages and practices can be used as a reference point to determine the parties’ intentions and obligations. Courts and arbitral tribunals often consider these usages and practices when resolving disputes in the transnational sale of goods.

Legal Status of Trade Usages and Practices at the Transnational Level

In this section, we will review trade usages and practices from some major existing legal transnational laws, regulations, guidelines, or doctrines.

United Nations Convention on Contracts for the International Sale of Goods (CISG).

The development of international trade and the growth of global markets in the 20th century further emphasized the role of usages and practices in the regulation of trade relations. The 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) recognized the importance of usages and practices in international trade by providing that the parties may be bound by usages and practices that they have agreed to and that are widely known and regularly observed in international trade.

Article 9 of the CISG states that:

  • The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.
  • The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

These provisions caused much debate among drafters during the Vienna Conference. Article 9 sets out the framework for the interpretation of usages and practices applicable to international sales contracts regulated by the CISG. The requirements of Article 9, paragraphs 1 and 2, shed some light on the distinction between trade practices and usages. Article 9(1) addresses the subject-specific experiences. For the formation of usages, case law requires long-term contractual relationships involving a series of sales contracts that create a common basis for understanding future behaviour in similar circumstances. Article 9(1) also refers to trade practices agreed upon by the parties. To determine the content of such an agreement and the explicit or implicit intentions of the parties, it is possible to rely on the guidelines outlined in Article 8 of the Convention.

Unlike the purely subjective approach of Article 9(1), 9(2) reconciles subjective and objective approaches (Ferrari, F., & Kroell, S. (2017)). Although Article 9(2) of the CISG does not directly define the term, it provides a useful description of such usages, which are binding on the parties in the absence of contrary intent. This Article provides that, unless otherwise agreed, the parties shall be deemed to have implicitly applied to their contract or its formation a usage widely known and regularly observed by the parties to the contractor engaged in the relevant trade. Article 9(2) thus requires actual or constructive knowledge. The interpretation and addition of the contract take place by giving legal effect to the objective expectation, regardless of the actual intention of the parties. Actual knowledge is not required for the operation of a trade usage under the CISG, as long as the usage is internationally recognized and regularly observed in the trade or industry in which it is applied. It is not required that the knowledge of the use is universal, nor that the use be observed universally or in all trades (Ferrari, Franco & Leible, Stefan. (2015)). However, the knowledge must be universal in the relevant trade field or industry to which the trade usage applies.

Some scholars argue that the requirements of Article 9(2) are based on a presumption of implied intent (Ferrari, F., & Kroell, S. (2017)). However, where one or both parties to a contract are unaware of a trade usage but should have known, the question arises whether it is the law itself and not the implied agreement of the parties that gives the trade usage a binding force. It is debatable whether the CISG attributes a normative function to trade usage regardless of the parties consent.  Some scholars, such as John O. Honnold and Peter Schlechtriem, support the view that, in the scheme of the Convention, trade usages function only as a gap-filler, an auxiliary source to complement the intentions of parties unable to make alternative arrangements (Honnold, J. O. (1999); Schlechtriem, P. (1986)).

Relevant business usages “have the same effect as a contract” between the parties and “constitute only the terms implied by usage.” However, proponents of the latter view recognize that under Article 9(2), parties to an international sales contract may be bound by trade usage even without actual intention (Ferrari, F., & Kroell, S. (2017)). According to this view, Article 9.2 requires both the subjective element, that is, that the parties knew or should have known of the usage of the trade, as well as the objective element, that the usage in that particular type of trade must be well known and regularly observed in international trade. They consider that the provision has a legal effect consistent with the objective expectations of the parties and is therefore based on a hypothetical intention, which must be distinguished from a notional intention under Article 8(2) of the Convention. On this matter, the US Federal District Court determined that the usages and practices established by the parties or the trade itself are automatically included in the scope of any contract governed by the Convention unless there is an express agreement by the subjects that there will be no exception to them. The Court interpreted Article 9(2) CISG without requiring actual or presumed knowledge (Barbara Berry, S.A. de C.V. v. Ken M. Spooner Farms, Inc., 2006). This seems to be close to the normative approach that does not depend on the consent of the parties.

However, it is important to note that trade usages and practices cannot be used to override the express terms of the contract. Article 6 of the CISG provides that the parties are bound by the terms of their contract and that any subsequent agreement between them must be in writing. This means that parties cannot rely on trade usages or practices to modify or contradict the express terms of the contract.

Overall, trade usages and practices play a crucial role in regulating international trade under the CISG. They provide a framework for the interpretation of contracts and can help to fill any gaps in the contract where the parties have not agreed on specific terms or conditions. However, their use is limited to situations where they are relevant and consistent with the express terms of the contract.

The UNIDROIT Principles, which embody a set of model rules aimed at harmonizing and modernizing international contract law, recognize the role of trade usage in contract formation, interpretation, and performance. The UNIDROIT Principles of International Commercial Contracts, like the CISG, recognize the importance of trade usages and practices in international commercial transactions.  Article 1.9 of the Principles provides that:

(1) The parties are bound by any usage to which they have agreed and by any practices which they have established between themselves.

(2) The parties are bound by a usage that is widely known to and regularly observed in international trade by parties in the particular trade concerned, except where the application of such a usage would be unreasonable.” This can be interpreted that parties to an international commercial contract may be bound by trade usages and practices that they have agreed upon or that are widely known and regularly observed in their trade. However, if the application of a trade usage or practice would be unreasonable, it may not be binding.

The UNIDROIT Principles also recognize the role of trade usages and practices in interpreting contractual terms. According to Article 4.2, statements and conduct of a party should be interpreted according to their intent when the other party knew or should have known that intent. If not applicable, interpretation should rely on a reasonable person’s understanding in similar circumstances. Relevant factors include negotiations, established practices, usages, and subsequent conduct. According to this Article, if the other party knew or could not have been unaware of the intent behind the statements or conduct, the interpretation should be based on that intent. If this is not applicable, the statements and conduct should be interpreted according to the understanding that a reasonable person in the same position as the other party would have had in the same circumstances. It provides a framework for interpreting statements and conduct in legal situations, prioritizing the intent of the parties when it is known or should be known, and resorting to a reasonable person’s understanding when the intent is not clear. It also highlights the importance of considering all relevant circumstances in the process of interpretation.

Incoterms play a vital role in defining trade usages and practices in the international sale of goods. They provide a common framework for buyers and sellers, helping them to understand their respective responsibilities and obligations, reduce potential disputes, and facilitate smooth cross-border transactions. These are customary practices and procedures that are widely recognized and followed in the relevant trade or industry. Incoterms are designed to reflect these usages and practices, and they are updated periodically to ensure that they remain relevant to current trade practices. The Incoterms cover various aspects of trade usages and practices, including delivery and transfer of risk; transportation and logistics; customs clearance and duties; documentation; allocation of costs. By incorporating these trade usages and practices into the Incoterms, the parties can ensure that their respective obligations and responsibilities are clear and consistent with the industry standard. It is important for the parties to carefully consider the relevant Incoterm and any applicable trade usages and practices before entering into an international commercial transaction.

The International Chamber of Commerce (ICC) Rules of Arbitration provide guidelines for the resolution of disputes arising from international sales of goods. In particular, the ICC Rules of Arbitration recognize the importance of trade usages and practices in international trade and commercial contracts. Article 17 of the ICC Rules of Arbitration provides that the arbitral tribunal shall take into account any trade usages and practices applicable to the transaction in question. This means that the tribunal must consider any relevant customs, practices, or understandings that are commonly accepted in the relevant industry or trade sector.

London Court of International Arbitration (LCIA) Arbitration Rules acknowledge implicitly trade usages and practices as part of their rules for resolving disputes too. These institutions recognize the importance of trade usage in contract interpretation and dispute resolution, which ultimately contributes to the harmonization of international commercial law. Although the LCIA Arbitration Rules do not specifically mention “trade usages and practices” as a term, they do address the application of substantive laws and the consideration of trade usages in the resolution of disputes. According to Article 22.3 of the LCIA Arbitration Rules (2020), the arbitral tribunal shall apply the substantive law(s) or rules of law that it considers appropriate to determine the merits of the parties dispute. This typically includes considering the relevant trade usages and practices that are applicable to the specific transaction or industry sector involved in the dispute. In line with the principles of international commercial arbitration, the LCIA Arbitration Rules provide that the tribunal shall take into account any relevant trade usages and practices when determining the dispute. This is implicit in Article 22.4, which states that the tribunal shall decide the parties’ dispute “in accordance with the terms of their contract and any applicable usage(s) of trade”. By referring to “applicable usage(s) of trade,” the LCIA Arbitration Rules acknowledge the importance of trade usages and practices in resolving international commercial disputes.

The Inter-American Convention on the Law Applicable to International Contracts is a treaty designed to harmonize and standardize the rules for determining the law applicable to international contracts in the Americas. Under the Convention, trade usages and practices are given due consideration when determining the applicable law and interpreting the terms of a contract. Article 9 of the Convention specifically addresses the role of trade usages and practices. It states that when determining the law applicable to a contract, the parties choice of law shall not prejudice the application of the mandatory rules of the law of the country with which the contract has its closest connection. However, the parties may expressly agree that the contract is subject to trade usages and practices. Moreover, Article 10 of the Convention emphasizes the role of trade usages and practices in interpreting the terms of a contract. It provides that when interpreting the contract, the parties intentions and the purpose of the contract shall be taken into account, along with the relevant trade usages and practices that the parties have agreed to or should have been aware of.

WTO agreements, such as the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), contain provisions that take into account trade usages and practices. These usages and practices can include business norms, protocols, and behaviours that are widely accepted by traders, as well as the interpretation of trade terms and contractual provisions.

The Principles of European Contract Law (PECL) is a set of principles developed by a group of European legal scholars to provide a comprehensive and coherent framework for European contract law. The PECL provides guidance on a wide range of topics, including trade usages and practices. According to Article 1:105 of the PECL, trade usages and practices are customs and practices that are widely recognized and regularly observed in a particular trade or industry. These usages and practices can play an important role in interpreting and supplementing contract terms. In fact, the PECL recognizes that parties to a contract may incorporate trade usages and practices into their contract by agreement or by reference to a particular source.

In summary, trade usages and practices are recognized in various transnational legal sources, including international conventions, model laws and soft law resources. These sources emphasize the importance of harmonizing and facilitating cross-border commerce by incorporating trade usages and practices to ensure consistency, predictability, and fairness. Although the degree of recognition and application may vary depending on the specific legal source, it is evident that trade usages and practices play a crucial role in bridging gaps between different legal systems, fostering mutual understanding, and promoting efficient and equitable dispute resolution in international commerce.

Conclusion

To sum up, national laws, international conventions, various codifications, court decisions and other legal instruments recognize the regulatory, interpretative and gap-filling role of trade usages and practices. Trade usages and practices have been developed and recognized transnationally as a single set of optimal and efficient practices that trade participants consider obligatory for themselves as a form of self-regulation by the commercial environment itself.

As previously noted, trade usages and practices contributed to the emergence of merchant law in the Middle Ages. Although commercial law’s influence waned during the era of nationalization, contemporary regulatory processes have revived the relevance of these legal mechanisms. In the new period, the unification of this mechanism by various organizations, and the determination of their functions in national laws, such as regulating relations, interpreting and filling gaps, created opportunities for this mechanism to act as the core source of regulation again. At present, trade usages and practices in international trade follow a trend of increasing centralization, and uniformity, and are governed and coordinated by these centralized rules and patterns. By standardizing commercial practices and expectations, they help parties navigate complex cross-border transactions, minimize legal uncertainties, and reduce the likelihood of conflicts. Trade usages and practices also help bridge cultural and legal differences, promoting an atmosphere of trust, cooperation, and stability in the international sales of goods. As the volume of transnational sales of goods continues to grow and the global economy becomes increasingly interconnected, the importance of trade usages and practices will only become more pronounced. It is essential for businesses, governments, and international organizations to collaborate and invest in the development, dissemination, and application of these practices, ensuring their ongoing relevance and effectiveness in promoting fairness, predictability, and efficiency in the ever-evolving landscape of international trade. By doing so, they can contribute to the sustained growth of global commerce and the overall well-being of nations around the world.

I believe that the universality, flexibility, and convenience of trade usages and practices to satisfy the interests of the parties make it a fairly attractive regulatory tool. If there was a difficulty in proving the benefits of using this tool, the current centralization and unification prevent the participants of trade relations from facing such problems, and I think that in the future these problems will be reduced to a minimum with the strengthening of uniformity in the approach.

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