03 November 2004
Key Points:
The UN Convention on Contracts for the International Sale of Goods may apply although not specifically chosen by the parties, or, even though parties have chosen a different law.
While it is common practice for parties to an international trade contract to include a choice of law clause in their agreement, often that choice is made without a full appreciation of the available options. Traditionally the choice has been between the law of one of the parties' home states or the law of a third neutral state. However, for cross-border trade transactions the parties can agree to apply the United Nations Convention on Contracts for the International Sale of Goods 1980 ("CISG") - an international law designed to regulate international sales transactions.
The CISG, drafted by the United Nations Committee on International Trade Law (UNCITRAL), was designed to facilitate international trade by establishing a system of uniform sale of goods rules which could apply to an international sales contract in place of the sometimes bewildering array of differing legal systems and different business expectations common in cross-border commerce. Not only were the rules designed to take account of different legal traditions but they also tried to ensure a fair risk allocation between buyer and seller. Sixty-five countries are currently signatories of the Convention including, since 1988, Australia. The Convention applies as part of national law unless the parties choose to exclude it.
In practice, the CISG, although popular in Europe and the US, has not had the level of use that one might expect. Old habits die hard and parties felt uncomfortable exchanging the reassurance of a national law (however uncertain) for the untested certainty of the CISG. This was compounded by a lack of familiarity with the CISG and its application.
Times are changing. Many more transactions are being governed by the CISG and international arbitration tribunals have become very familiar with applying it. With the volume of international trade entered into by Australian companies increasing all the time, successful management of cross-border risk will increasingly involve consideration of whether the CISG should be chosen.
When does the CISG apply?
It is important to know when the CISG applies and what control parties can have in regard to the applicable law. This is because the CISG can apply when parties least expect it.
Broadly speaking, the CISG applies to sales contracts (not for service contracts) between parties from different states if:
The application of the CISG is, however, specifically excluded for certain types of goods and contracts such as: goods bought for private use; goods sold by auction; the sale of shares, stocks and investment securities; the sale of ships, vessels or aircrafts; and contracts for the sale of electricity.
The CISG applies in a wide variety of situations, some of which might not be immediately obvious. Three scenarios illustrate this:
Scenario 1: Party A (Australian) and Party B (Indonesian) enter into a sales contract, choosing Singaporean Law to govern their contract.
Scenario 2: Party A (Singaporean) and Party B (Australian) enter into a sales contract without choosing a specific law to govern their contract.
Scenario 3: Party A (Australian) as the seller and Party B (Indonesian) as the buyer enter into a sales contract without choosing a specific law to govern their contract.
What these three scenarios have in common is that the CISG applies although the parties have not explicitly agreed to the application of the CISG (and may not even have considered the application of the CISG at all). In scenario 1 the CISG applies because the parties have agreed to the application of the laws of Singapore, a Contracting State. For this situation it is irrelevant that one of the parties (Indonesia) is not a Contracting State. In scenario 2 the CISG applies as both parties are from Contracting States and no specific choice of law was made. In scenario 3 the CISG applies by virtue of the application of private international law (conflict of laws), which (in most circumstances) will point to the law of the seller - in this case a Contracting State - as the law which has the closest connection to the transaction.
Even if parties explicitly choose a national law to govern their contract, it does not necessarily exclude the application of the CISG if the chosen law is that of a Contracting State. Therefore if parties intend to exclude the application of the CISG they need to do this explicitly, for example by stating: "The laws of [state], excluding the CISG, shall apply".
Why should parties apply the CISG?
Under certain circumstances parties may wish to opt out of the CISG. However, before doing so they should carefully consider the advantages the CISG may have to offer. The CISG is tailored to meet the specific needs of cross-border transactions, which may vary significantly from domestic or local sales contracts, because of long transport distances and different trade cultures. In its 25 years of existence the CISG has become a well tested and highly regarded body of law in both arbitral and court proceedings.
The CISG governs contract formation, the obligation of the parties in performing their contractual duties and the remedies available for the parties in case of a breach of contract. An important aspect of the CISG is its informality - for example, the CISG does not require that contracts for the sale of goods be in writing.
Further, the principle of pacta sunt servanda - that each party must be kept to its bargain - is clearly embodied in the CISG in several ways. For example, under the CISG a buyer cannot reject defective goods and avoid the contract unless a non-conformity of goods substantially deprives the buyer of what it was entitled to expect under the contract (ie. a "fundamental breach"). Even then, rejection can only occur if the seller foresaw, or a party in its position would have foreseen, such a result. In such circumstances the buyer is also not entitled to require delivery of substitute goods unless the non-conformity results in a "fundamental breach". Remedies for non-conformity of goods are therefore narrowed to damages and rectification rather than termination of the contract.
However, the CISG does not affect the parties' freedom of contract. Therefore parties can state in their contract what breaches are deemed to result in a "fundamental breach", thus giving a right to terminate or avoid the contract.
Lessons learned
This short article can only give a brief sense of the potential advantages of the CISG and how parties can use them for cross-border sales. However, the important points to note are:
