An international contract: governing law, jurisdiction and the CISG

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What makes an international contract different?

When an Israeli company signs with a German supplier, a Vietnamese manufacturer or an American customer, a question arises that nobody asks in a local contract: under which law will the agreement be interpreted, and who will decide it if a dispute breaks out? Different legal systems disagree on basic matters: what counts as a fundamental breach, what compensation is awarded, how long you have to file a claim, and even whether the duty of good faith applies in negotiations. Without agreeing on this in advance, every dispute starts with an expensive preliminary argument about “where” and “under what law”, before anyone gets to the substance of the matter.

The four clauses that prevent this argument (governing law, forum, language and currency) are very short, and most of the international disputes that reach lawyers come from one of them being missing or carelessly drafted. The general principles of drafting commercial contracts are collected in the guide to commercial contracts.

Choosing the governing law (choice of law)

As a rule, Israeli law respects the parties’ freedom to choose the law that will apply to an international contract. A typical governing-law clause: “This contract shall be interpreted and governed by the laws of the State of Israel, without their choice-of-law rules.” The chosen law decides how vague terms will be interpreted, which duties apply even if they were not written (for example, good faith), which remedies are available, and what the limitation period is.

The choice is a business one: Israeli law when the Israeli party is strong in the negotiations and wants a law it knows; English law or New York State law when both parties need a neutrality they recognize, mainly with American or European parties. It is important to understand that the governing law and the forum do not have to be the same (arbitration in London under Israeli law is a possible combination), but such a combination makes the proceedings more expensive, because the arbitrator will need a legal opinion on the foreign law.

The CISG: the law that applies even when you did not ask for it

Israel acceded to the UN Convention on Contracts for the International Sale of Goods (CISG, the 1980 Vienna Convention) on 22 January 2002, and the Convention entered into force for Israel on 1 February 2003. It was given the status of Israeli law in the Sale (International Sale of Goods) Law, 5760-1999. What this means: a contract for the sale of goods between an Israeli business and a business from another country that is a member of the Convention (97 countries, including the United States, Germany, China and France) is automatically subject to the Convention’s rules (formation of the contract, the duties of the seller and the buyer, non-conformity, avoidance and damages), unless the parties have expressly excluded it. Section 3 of the Law widens its application: under Israeli law, the Convention also applies to a contract where one party is a business from a country that is not a party to the Convention. The Convention does not apply, among other things, to consumer sales, auctions, securities, or ships and aircraft.

The Convention’s rules differ in several points from the Israeli Sale Law, 5728-1968 (חוק המכר, התשכ״ח-1968): for example, in the buyer’s duty to give notice of non-conformity within a reasonable time and at the latest within two years of delivery of the goods, and in the requirement that the notice specify the nature of the non-conformity. If you want a familiar local law to apply, you need to write this: “The parties expressly exclude the application of the United Nations Convention on Contracts for the International Sale of Goods.” A governing-law clause that only says “the laws of the State of Israel” may not be enough, because the Convention is part of Israeli law. This kind of precision in the wording is the core of the work in legal support with commercial contracts with a foreign party.

Jurisdiction: a court or arbitration?

The courts of a particular country. An exclusive jurisdiction clause in favor of the courts in Israel gives certainty, but an Israeli judgment has to be enforced in the country where the other party’s assets are. The reverse is also true: a foreign judgment is enforced in Israel only under the Foreign Judgments Enforcement Law, 5718-1958, which requires, among other things, that the foreign court had jurisdiction under its own law, that the judgment is final and enforceable in its country, that it does not conflict with public policy, and that there is reciprocity in the enforcement of Israeli judgments in that country. A claim in Israel against a foreign defendant also requires service outside the jurisdiction, which is possible only on one of the grounds in regulation 166 of the Civil Procedure Regulations, 5779-2018 (תקנות סדר הדין האזרחי, התשע״ט-2018) (for example, a contract made or breached in Israel, or a contract governed by Israeli law), and by a court decision on the method of service (regulation 167). The defendant may challenge the jurisdiction or argue that Israel is not the appropriate forum (regulation 168).

International arbitration. A foreign arbitration award is enforced in Israel under the Arbitration Law, 5728-1968 (חוק הבוררות, התשכ״ח-1968), and the Regulations for the Implementation of the New York Convention (Foreign Arbitration), 5738-1978 (תקנות לביצוע אמנת ניו-יורק (בוררות חוץ), תשל״ח-1978). The 1958 New York Convention, which Israel ratified in 1959, today obliges 172 countries to enforce foreign arbitration awards. This is the decisive advantage of arbitration in international contracts: enforcement almost everywhere, together with confidentiality and the choice of an arbitrator with relevant expertise. The disadvantages: high cost at the large institutions, and very limited appeal. The common institutions are the ICC (Paris), the LCIA (London) and SIAC (Singapore). On Israeli law in international arbitration, see International arbitration: what really applies in Israel, and on enforcing an arbitration award, see Enforcing an arbitration award.

A proper arbitration clause states at least: the arbitral institution and its rules, the number of arbitrators, the language of the proceedings and the seat of arbitration. The seat decides which local law applies to the conduct of the arbitration itself and which court supervises it, and this is a different choice from the law of the contract.

Currency and exchange-rate risk

A contract that sets payment in dollars for a company whose expenses are all in shekels is exposed to exchange-rate changes. A numerical example (for illustration): a deal for 100,000 dollars was signed when the rate was NIS 3.70 to the dollar, a value of NIS 370,000. If by the payment date the rate has fallen to NIS 3.40, the company will receive NIS 340,000: NIS 30,000 less, without anyone breaching the contract. Three ways to deal with this: set a contract currency that matches the structure of your expenses; include a price adjustment clause if the rate goes outside an agreed range; or hedge the risk outside the contract, with a forward transaction with the bank. In any case, state expressly who bears the conversion and transfer charges.

Language and translation

When the contract is signed in two languages, set which version prevails in case of conflict (governing language), and make sure a legal translator does the translation. Terms such as best efforts, material breach or reasonable are interpreted differently in different legal systems; it is better to define them in the contract than to rely on their “accepted” meaning. If the other party will need to present the contract to the authorities in its country, make sure the local-language version is accurate, because that is the one that will be read there.

Incoterms: who bears the risk and the cost of transport

Incoterms are uniform rules of the International Chamber of Commerce (ICC) that define, in transactions in goods, who arranges and pays for transport and insurance, and from what moment the risk of loss passes from the seller to the buyer. The current version is Incoterms 2020. The common ones: EXW, where the buyer collects from the seller’s premises and bears all the risk from that moment; FOB, where the seller is responsible until the goods are on board the ship at the port of export; CIF, where the seller pays for transport and insurance to the port of destination, but the risk passes to the buyer already at loading; DDP, where the seller is responsible up to the buyer’s door, including customs and taxes. The rules are not law but contractual terms, so the contract should state the term, the place and the version (for example, “FOB Haifa, Incoterms 2020”).

Force majeure in an international contract

Israeli contract law has no general definition of “force majeure”. The nearest protection is the doctrine of frustration in section 18 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970 (חוק החוזים (תרופות בשל הפרת חוזה), התשל״א-1970), which is interpreted narrowly. In other legal systems the concept exists in legislation or does not exist at all, so in an international contract you should not rely on the default rule of any law: you write a clause. A professional force majeure clause includes: a non-exhaustive list of events (war, epidemic, natural disaster, government order, sanctions); a duty to give written notice within a few days; a duty to mitigate damage; suspension of the obligations (not their cancellation) for as long as the event continues; and a right of each party to cancel if the event continues beyond an agreed period. Israeli law on this subject is explained in the article on frustration of contract.

Five common mistakes in international contracts

1. An Israeli jurisdiction clause without thinking about enforcement. An Israeli judgment against a foreign party with no assets in Israel is worth only as much as can be enforced in its country; sometimes arbitration is preferable.
2. Ignoring the CISG. If you have not expressly excluded the Convention, you are subject to it.
3. English terms without definitions. “Best efforts” without a definition is an invitation to a dispute.
4. No currency and exchange-rate clause. A 10% movement in the exchange rate can wipe out the profit.
5. A template from the internet. A contract written for another law may include remedies or mechanisms that do not exist in the law that was chosen.

Before signing, it is worth checking three more things: whether the other party’s country has a treaty with Israel on the enforcement of judgments; whether the other party or its country appears on sanctions lists; and what the law in its country requires for the contract to be valid (for example, registration or regulatory approval). In cross-border e-commerce, the consumer and privacy laws of the customer’s country are added to this. More guides are in the commercial contracts information center.

Frequently asked questions

What happens if the international contract is silent on the governing law?

The court or the arbitrator will decide the law according to the forum’s choice-of-law rules, usually the law of the country with which the contract has the closest connection. In a sale of goods between businesses from countries that are members of the CISG, the Convention will apply automatically. The result is uncertain, which is why you write a governing-law clause.

Can an Israeli judgment be enforced abroad?

It depends on the law of the country where the defendant’s assets are, and on whether there is a treaty. An arbitration award, by contrast, can be enforced in 172 countries under the New York Convention, so in contracts with a foreign party that has no assets in Israel, arbitration is usually the safer choice.

How do you exclude the CISG from the contract?

With an express clause, for example: “The parties expressly exclude the application of the United Nations Convention on Contracts for the International Sale of Goods (CISG).” A general reference to “the laws of the State of Israel” may not be enough, because the Convention is part of Israeli law under the Sale (International Sale of Goods) Law, 5760-1999.