01 November 2017

To exclude or not to exclude the “Vienna Convention” / CISG?

This article was written by Monique Carroll, Simon Brown and Scott Langford.

The decision to include/exclude the “Vienna Convention” or CISG from an international sale of goods contract is a complex one. It will depend on the subject matter of your particular contract - the advantages and disadvantages often cut both ways and require serious consideration.

For contracts where ease of execution and enforcement are key priorities, the CISG can offer a number of advantages. However, the general perception is that, for suppliers of commodities and goods from countries with stable common law or codified legal systems, it may be better to exclude the CISG and seek to have the law of that country apply.

What is the CISG?

In 1980, UNCITRAL introduced the United Nations Convention on Contracts for the International Sale of Goods (CISG), also known as the “Vienna Convention”. The CISG is a treaty setting out a uniform law for agreements for the international sale of goods. Approximately 85 countries have adopted the CISG, including:

Current CISG contracting states include

Notably, the UK is not a contracting state.

The CISG is intended to facilitate international trade by establishing a system of uniform sale of goods rules which can apply to an international sales contract.

It has been typical for sellers of commodities, like iron ore or copper concentrate, particularly from stable legal jurisdictions, to push to exclude the operation of the CISG from their sales contracts. As a result, it has become difficult for buyers to resist this where the well‑established sale of goods rules of that stable jurisdiction apply.

However, it is important to note that the success of the CISG has been significant, and the decision to exclude its operation should not be taken without active consideration of the commercial benefits in allowing it to apply to your contract. Equally important is an understanding of the shortfalls of incorporating the CISG depending on the particular jurisdictions you are doing business in.

When does the CISG apply?

As set out in the diagram on the right, the CISG will automatically apply where both of the contracting parties are based in countries which have adopted the CISG - or where they choose, as their governing law, the laws of a jurisdiction that has adopted the CISG.

When the CISG can apply

When the CISG can apply

Note: Often the scenario in the top left quadrant is the least likely to have been considered by the parties. If excluding the C1SG, the parties need to do so explicitly, by stating: “The laws of.,. the C1SG, shall apply”, or “the United Nations Convention on Contract for the international Sale of Goods is excluded in its entirety”,

Examples of CISG application

Unless expressly excluded, the CISG would apply in each of these situations:

  • A Chinese car parts manufacturer and Australian importer enter a sales and delivery contract choosing Singaporean law to apply to their contract. The CISG applies here because the parties have agreed to the application of the laws of Singapore, a Contracting State. Even if one party is not a Contracting State, the CISG would still apply.
  • An Australian resources company and Chinese steel manufacturer enter a contract for the delivery of iron are to China where the contract specifies the laws of Western Australia will govern their contract. Unless expressly excluded, the CISG applies here because the parties have agreed that the laws of Western Australia will govern their contract and each of the States/Territories in Australia have incorporated the CISG into their legislation.
  • An Australian seller and Chinese purchaser enter into a sales contract without choosing a specific law to govern their contract. Here, the CISG applies by virtue of the application of private international law, which in most situations will point to the law of the seller ‑ in this example, Australia, a Contracting State ‑ as the law which has the closest connection to the transaction.

However, it should be noted that the CISG will not apply to certain types of goods and contracts, including:

  • goods bought for private use;
  • goods sold by auction (not including sales at commodity exchanges);
  • a sale of shares arrangement;
  • stocks and investment securities;
  • the sale of ships, vessels or aircrafts;
  • contracts for the sale of electricity.

The case for including the CISG

There are certain real benefits to adopting the CISG as the governing law of your contract, or otherwise allowing it to apply. This is because:

  • the CISG is an established, comprehensive uniform body of law for commercial contracts for the sale of goods;
  • in transactions involving the international sale of goods, where speed and ease of transfer is key, the CISG can ensure a smooth and efficient outcome ‑ a key benefit of the CISG is that it does not require that a contract be in writing in order for it to be valid and binding. This benefit that will be appreciated by parties negotiating and finalising agreements after protracted negotiations where there is little time to formalise the terms in a comprehensive written document (Article 11);
  • disputes can arise where there is difficulty for parties in assessing and identifying the applicable law when it is foreign to one party ‑ the CISG provides a unified and simplified legal framework, which can be particularly useful when doing business in contracting states with vastly different legal frameworks to those of, for example, Australia;
  • the CISG is intended to exhaustively set out the law on the issues it traverses. As a result, if a dispute arises as to whether, for example, a buyer is entitled to subtract from the purchase price damages it claims for late delivery of the goods, the terms of the CISG provide a simple, easily‑identified and comprehensive solution to this dispute.

That is, the buyer must pay the contract price and is only entitled to subtract from this monies proportionate to value differences reflecting the non‑conforming quality of the goods. This, compared to resorting to the common law rules of set‑off which can result in protracted technical legal arguments (over the course of many months), may be a very attractive solution in many scenarios.

The case for excluding the CISG

If the CISG is included in your contract, caution should be exercised with regard to the following matters, particularly if you are the seller:

  • Gap‑filling ‑ because the drafters of the CISG could not agree on certain terms, there are notable gaps in its operation that must be filled by the applicable domestic law governing the contract. For example, the CISG does not cover issues such as validity of the contract, transfer/retention of title or transport. Complications can therefore arise where another body of legal rules apply to your contract, leading to a “dual‑operation” of laws, with the CISG applying to certain aspects of the contract, and another body of law applying with respect to the remainder.

This underscores the necessity of expressly excluding the CISG, or alternatively, including express terms to deal with the foreseeable gaps in its application, and considering any inconsistencies that might arise between the written terms of the contract and the applicable law. The more you seek to derogate from the CISG however, the harder the task of contractual interpretation becomes ‑ thereby detracting from the benefits of having the CISG apply.

  • Timeframe for examination of goods ‑ under the CISG, this is much more liberal than under many domestic legal systems. The CISG provides for examination ‘within as short a period as is practicable under the circumstances’ and a notice ‘within a reasonable time’ after discovery of non‑conformity by the buyer (Article 38). The timeframe for a buyer’s notice of defect is also liberal with the CISG providing that the buyer must give notice of non‑conformity within a ‘reasonable time’ after receiving the goods, but within two years unless this is inconsistent with a contractual guarantee (Article 39).
  • Broad notion of non‑conformity ‑ the CISG treats any defect in quality, quantity, description and packaging as alike, and a buyer need only prove that its contractual expectations have not been meet (Article 35).
  • Unilateral price reduction ‑ if the buyer has a reasonable excuse for its failure to comply with the examination and notice requirement under the CISG, it may still unilaterally reduce the purchase price for the goods or claim damages for non­conformity ‑ except for loss of profit.
  • Termination ‑ requires a “fundamental breach” (although parties may define what breaches are fundamental in nature), and the provision of notice is required before a defaulting party’s repudiation can be accepted. Therefore, common law termination rights (including immediate termination rights) are curtailed by the CISG (to the extent they are not already curtailed by the agreement).
  • Material departures from Australian law ‑ there are certain areas of operation where the CISG materially departs from Australian contract law (and the contract law of other typical common law jurisdictions).

For example, the principles of contractual interpretation are quite different from Australian law, as the CISG provides that subjective intention, extrinsic materials and post‑contractual conduct may be taken into account when determining the intention of the parties to a contract, including the established conduct of the parties and their common practices.

In the case of Roder Zelt‑und Hallenkonstruktionen Gmh v Rosedown Park Pty Ltd (1995) 17 ACSR 153, the Federal Court of Australia (FCA) had to consider whether a retention of title arrangement was valid under a contract. Although retention of title is not governed by the CISG, the

FCA applied Article 8 of the CISG to take into account all the parties’ post‑contractual conduct, and held that the particular retention of title clause was not too vague (under Australian law, retention of title provisions will only be valid if not too vague or lacking in clarity). The CISG enabled the FCA to take into account this post‑contractual conduct and likely assisted it in concluding that the retention of title arrangements could stand.

While some might consider these gaps or differences to be undesirable due to the departure from Australian principles of contractual interpretation, conversely they illustrate the ability of the CISG to provide pragmatic, commercial resolutions to disputes, bearing in mind the common scenario of different legal backgrounds of the parties to the international sale of goods contract.

Conclusion

The CISG must be considered by parties that are negotiating and performing international contracts for the sale of goods, given that it might apply as the default governing law where it has not been expressly excluded. Parties, particularly buyers, should not necessarily be afraid of allowing the CISG’s operation, as it might lead to a better commercial outcome and avoid protracted legal disputes in sale of goods transactions.

However, if including or allowing the inclusion of the CISG, parties should bear in mind the “gaps” in the CISG’s application, particularly where these gaps might be filled by another body of law, or by legal rules which might affect a party’s ability to enforce the written terms of the contract, If it is considered necessary to materially address these gaps, thought should be given to expressly excluding the CISG.

As a general rule, the CISG framework is probably considered to be more onerous on a supplier, particularly as regards conformity of goods, when compared with the sale of goods laws of stable and well‑established legal jurisdictions. Accordingly, it is still commonplace for suppliers of commodities to insist on the exclusion of the CISG from applying to their sales arrangements, where they can ensure the application of the laws of such a jurisdiction.

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