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International Business Transactions and Contract Governance

Hisaei Ito
Professor, Chuo Law School, Director at the Institute of Comparative Law in Japan
Areas of Specialization: Commercial Law, Banking Law, and Comparative Law

Introduction

On January 23, 2018, Toshimitsu Motegi, the Minister of State for Economic and Fiscal Policy, revealed that a signing ceremony for Trans-Pacific Partnership (TPP) will be held in March 2018[1]. According to the government’s estimation, a huge economic sphere accounting for 40% of global GDP and 10% of the world’s population would emerge[2], and its economic effect would be about 13 trillion yen, if the economic partnership agreement with EU is taken into account[3].

As well-known generally, the Japanese manufacturing industry has developed production sites in Asia and established supply chains throughout Asia, amid the intensification of global competitions and the economic growth of Asian countries. The alliance of TPP would produce favorable effects on these global supply chains. However, as global business transactions are increasing, it will be necessary to approach legal disputes arising out of them fairly and properly. This Essay is aimed at understanding the business environment of these transactions and discussing need for establishing international rules for contracts by focusing on global supply chains as an example.

Framework of contract governance

Contract governance has been proposed by Professor Grundmann of the Humboldt University of Berlin, Professor Möslein of the Philipps University of Marburg, Professor Riesenhuber of Ruhr-University Bochum, et al. as a conceptual framework for addressing issues in the contract law area[4]. Its purpose is to provide a view of the development of social norms for transactions, assuming the long-term viewpoint, network relations, and internationality, which characterize modern business transactions, and clarifying how these are incorporated into the norms for contracts. The purpose of the analysis is to integrate interdisciplinary insights, such as institutional economics, incomplete contracts, relational contract theory, network contract theory, legal regulations, private ordering, Ordoliberalism, behavioral economics, etc. The conceptual setting of contracts governance is to offer perspectives to all people who are involved in modern business transactions, including those who draw up contracts, make managerial decisions, or determine policies of legal matters.

In Japan, too, research has been conducted actively for elucidating the background of actual transactions and the formation of norms for contracts in the business society. For instance, there is an attempt in the relational contract theory to incorporate norms that are formed and shared through internal relations, which are based on the community in which parties to transactions proactively participate, in substantive law [5]. In addition, it has been pointed out, by the analysis of business practices in Japan, that there exists a social norm in which if a written agreement loses its appropriateness due to a change in the environment of transactions, ex-post adjustment will be encouraged and a new agreement will be produced[6]. With the same academic interest, the 2017 annual conference at the Japan Association of Private Law discussed how business customs in Japan have changed due to recent technological innovations and globalization, under the theme “The Reality and Change in Japanese Business Customs.”[7]

A framework through contract governance tries to take a holistic approach by applying interdisciplinary insights to business customs and practice, and how social norms have been developed in a business society. That may share the same academic concern with research for Japanese business customs and transformation of social norms.

Characteristics of international business transactions, and implications from enterprises alliance contract

John R. Commons, one of the founders of institutional economics, recognizes business transactions as collective behaviors. Under the Civil Code of Japan, a contract assumes a bilaterally fixed transaction between two parties that is formed by their offer and acceptance. Meanwhile, Commons considers that even a one-time exchange (sales contract) in the market involves a seller, a buyer, and their respective potential business partners, and so it is necessary to illustrate the contract law by taking into account at least these four parties. Further, he argues that the transaction is on continuous and long-term base, the problem of herd behavior exists, and because an authority (e.g., court) is required for settling such complex conflicts of interest, five parties should be considered as the parties involved in the transaction [8]. The characteristics of the above transaction are the same as those of international business transactions, which is the main theme of this Essay[9], although, different from domestic litigation, there are no authorities for settling legal disputes arising out of international transactions. Therefore, it is expected that unified laws or models, such as CISG and UNIDROIT Principles of International Commercial Contracts, will be expected to play some roles.

On the other hand, it is pointed out that comparative legal research is necessary for designing an internationally unified model beyond the differences among law families and, in fact, the efforts come out the fruits[10]. Thus, let me introduce some debate on enterprises alliance contract in Japan, and look for the possibility of applying them to transactions in global supply chains.

Through an enterprises alliance contract, each constituent enterprise independently shares some strategic goal by exchanging managerial resources in an organic network of supply chains, and, in order to reach at the goal, the alliance contract devotes to promote collaboration and to help a constituency work as if it is a part of the single business enterprise[11]. Therefore, it can be deemed as having the following characteristics: (1) assets and services are continuously supplied in a long-term perspective, (2) a variety of actors are involved in transactions in a multifaceted manner, (3) transactions are inter-dependent, and (4) flexible and prompt response required to the changes in the business environment after the formation of a contract [12].

Theory of contract governance can incorporate into its framework these characteristics and the herd behavior in business transactions argued by Commons. In some cases, like supply chains, each enterprise can maintain its independence while setting some business purposes strategically and developing close connections via a network. However, in the case where production goals are allocated to multiple constituent enterprises, this can function as a production process in a single enterprise in an economic sense. Therefore, like a controlling-controlled relation in a corporate administration, such relationship may exist even in a contractual setting between an enterprise that designs a production plan and specifies quality, deadlines, etc. and another enterprise that undertakes the production, through contracts. Commons distinguishes such a relation by defining a managerial transaction among collective transactions [13].

At any rate, it generally takes time to produce some results after negotiations, for developing a strategic relationship for business transactions with the aim of fostering a continuous long-term relationship. In case enterprises have committed to long-term relationships to conduct relationship-specific investment, even if the so-called hold-up problem does not occur[14], it should be assumed that the contracts will remain valid for a long period of time to expect a return on the investment[15]. We have to take this point into consideration when a long-term contract terminates. In that case, for example, it is necessary to apply certain contractual rules that require any unavoidable reason or provide a duty to re-negotiate ex post[16]. Meanwhile, even before making a contract, equitable good faith principle applies to the process in forming a contract, and the principle requires a duty to negotiate in good faith, disclose appropriate information, and so on[17].

Creating a unified model

With reference to development of contractual rules in international business transactions, let us examine UN Convention on Contracts for the International Sale of Goods (CISG) drafted and adopted in 1980 by the UN Commission on International Trade Law (UNCITRAL), and UNIDROIT Principles of International Commercial Contracts (UPICC) adopted in 1994 by the International Institute for the Unification of Private Law (UNIDROIT).

CISG applies to contracts for sale of goods between parties whose offices are located in different countries (international sale of goods). Japan accepted CISG in 2008, and became effective in 2009, but it appears almost practitioners have little concern about this. It is possible to imply the reasons that the scope of application is strictly limited since the convention is multilaterally governed [18].

Meanwhile, UPICC adopts restatement-type format with no binding force in a legal sense, and applies to general commercial contracts that cover consumer contract, product liabilities, and electronic commerce, although CISG is not applicable to them. In addition, assuming incomplete contract theory, UPICC has been often revised to provide certain rules such as duty to negotiate in good faith before forming a contract, to regulate ex-post adjustment norms including hardship, duty to re-negotiate, and a long-term perspective, etc.

CISG virtually unifies international contract laws in various jurisdictions, and 85 countries have adopted as of February 2017. CISG looks internationally successful, although the U.K. has not yet adopted. Japan ratified the Convention about 30 years after it was adopted. During the period, Japan has never actively participated in debate on contractual rules applicable to international business transaction that international business society desires. On the other hand, UPICC tries to embed certain rules that business customs and enterprises alliance contract in Japan have developed such as long-term contracts and norms for ex-post adjustment, although, different from CISG, they have no biding force. For the near future, in the framework of contract governance to promote contractual rules for global supply chains, Japanese business customs and judicially created doctrines are expected to incorporate into the rules. Japan, through the cooperation with researchers and practitioners in other jurisdictions, can contribute to establish global business society in sustainable point of view.

*
  1. ^ The Nihon Keizai Shimbun Web Edition, January 24, 2018; ; Available at https://www.nikkei.com/article/DGKKZO26040920T20C18A1MM8000/
  2. ^ Cabinet Secretariat, Task Force for TPP (December 2015), Promoting Utilization of the TPP Agreement; Available at http://www.cas.go.jp/jp/tpp/kouka/pdf/151224/151224_tpp_merritt02.pdf
  3. ^ Cabinet Secretariat, Task Force for TPP (December 21, 2017), Analysis of the Economic Effect of the EU-Japan EPA, etc.; Available at https://www.cas.go.jp/jp/tpp/torikumi/pdf/20171221_eutpp_bunseki.pdf
  4. ^ Stefan Grundmann, Florian Möslein and Karl Riesenhuber, eds, CONTRACT GOVERNANCE: Dimensions in Law and Interdisciplinary Research, Oxford University Press, 2015.
  5. ^ Takashi Uchida, The Age of Contracts: Japanese Society and Contract Law, (Iwanami Shoten, 2000), p. 133 ff.
  6. ^Takao Tanase, Contract Principles and Practice, (Koubundou, 1999), p. 73 ff.
  7. ^ Symposium Materials of Japan Association of Private Law, The Actual Situation and Change in Japanese Business Customs, Shoji Homu No. 2142 (2017), p. 4 ff.
  8. ^ John R. Commons, LEGAL FOUNDATION OF CAPITALISM, Lawbook Exchange, 2006. Regarding Commons’ concept of ‘transaction’: Shingo Takahashi, J. R. Commons’ “Transaction Economics”: Institutional Economic Theory by Legal Concepts, Economic History Research 48(1), p. 16 ff.
  9. ^ Yasushi Kinumaki & Akira Saito, The Birth of International Contract Rules, (Dobunkan, 2006), p. 298 ff.
  10. ^ Luca Castellani, (translated by Ito & Takahashi), Trade Law Reform in Asia and the Role of UNCITRAL: Findings from a Comparative Legal Perspective, Comparative Law Review 50(2), p. 171 ff, Kinumaki & Saito (supra note 9), p. 263.
  11. ^ Osamu Kasai, Introduction to Contracts for Enterprises Alliance, Modern Business Law Research Association ed., The Theory and Practice of Contracts for Enterprises Alliance, (Hanrei Times, 2012), p. 7.
  12. ^ Yoshiatsu Uchida, Contracts for Enterprises Alliance and Continuous Transactions: An Essay on Their Characteristics and Mutual Relationships, Modern Business Law Research Association ed., The Theory and Practice of Contracts for Enterprises Alliance, (Hanrei Times, 2012), pp.257-259.
  13. ^ Takahashi (supra note 8) translated the concept as a “managerial transaction.” Since one-shot bargain in the market is considered to be an exchange transaction, it seems that transactions with this feature might be interpreted under rules of organization.
  14. ^ Wataru Tanaka, The Actual Situation and Change in Japanese Business Customs: Finding Clues in the Economic Theory of Contracts, Shoji Homu No. 2142 (2017), p. 41.
  15. ^ Yoshio Hirai, A Study of the So-called Continuous Contracts: Legal Theory in Markets and Organizations, Hoshino 70th Commemoration, The Shape and Issues of Japanese Civil Law, Part 2, (Yuhikaku, 1996), p. 710.
  16. ^ Uchida (supra note12), pp. 269-271.
  17. ^ Regarding Japanese judicial precedents: Kazuhiro Kanamaru, Legal Issues Surrounding Business Partnership Negotiations, Modern Business Law Research Association ed., The Theory and Practice of Contracts for Enterprises Alliance, (Hanrei Times, 2012), p. 299 ff.
  18. ^ Kinumaki & Saito (supra note 9), p. 243.

*References are all written in Japanese, however, the English translation is added for readers’ convenience.

Hisaei Ito
Professor, Chuo Law School, Director at the Institute of Comparative Law in Japan
Areas of Specialization: Commercial Law, Banking Law, and Comparative Law
Hisaei Ito was born in Akita Prefecture. He graduated from the Chuo University Faculty of Law in 1980.
He completed the Master’s Program in the Chuo University Graduate School of Law in 1982.
He completed the Doctoral Program in the Chuo University Graduate School of Law in 1990.
After serving as a Full-time Lecturer and Assistant Professor at Takasaki City University of Economics as well as Assistant Professor and Professor in the Chuo University Faculty of Law, he assumed his current position in 2004.
The current research topic is about what the principles of transactions in market-oriented indirect financing should be, and the influence this kind of corporate finance has on corporate governance.