What Is the Purpose of the CISG?

‘The CISG is an excellent example of how international laws on a particular topic can be harmonised. The CISG’s existence means national laws have very little role to play in regulating contracts for the international sale of goods.’

Convention of International Sale of Goods (CISG) is an international treaty that offers standardised laws around the international sale of goods. This treaty was developed and approved by the United Nations Commission on International Trade Law and put in place in 1980 in Vienna. As of August 2010, the CISG has been signed by and agreed by 76 countries around the world. These 76 countries include some of the most powerful countries and accounts for most of the world trade such as China, US, Russia and Japan. This paper aims to investigate and analyse the effect of CISG on individual countries’ national laws and jurisdiction system.

Introduction

Document Purpose

This document has been written to describe the back ground information on CISG including its origin, members, purpose, relevant case laws and more importantly, the effect of CISG on international law harmonisation in context of its impact on national laws.

Background

The CISG was initiated and developed by the United Nations Commission on International Trade Law. It was then approved by a total of 11 countries in Vienna in 1980, and then later on flourished to a total member of 76 countries today. The CISG is also referred to as the Vienna Convention as it was originally signed in Vienna in 1988. CISG has been seen as a huge achievement for UNCITRAL as the Convention has been accepted by countries from “every geographical region, every stage of economic development and every major legal, social and economic system”. Countries that have agreed to the CISG account for almost two-thirds of the international trading volumes. Countries that have joined the CISG are referred as ‘Contracting States’ as part of the convention. The CISG has a superior legal effect than domestic laws for any international trades between the contracting states unless specific exclusion terms are defined. Of the international laws available today, the CISG is being regarded as having the greatest influence on member countries than any other treaties in the context of world commerce.

The CISG has been seen as a huge milestone achieved by the United Nation in the international legislative space. It has the flexibility of allowing certain countries the option of inserting exceptions or options on a number of specific areas. This flexibility option has encouraged an increasing number of countries to join the treaty, especially for those countries that have certain unique legilative areas which could otherwise prevented them from joining the treaty. Thus some countries have made declarations and maintained reservations to the CISG’s full scope. However, out of the total 76 countries that have signed the CISG, 55 of them have opted to agree with the full scope of the treaty without any reservations.

Although CISG has been seen as a great achievement in the legal harmonisation of the laws around the international sale of goods, however it has also attracted critics in promoting the use CISG to ensure that international trades are made mandatory to adopt the standardised trading rules. The initial driver for creating a harmonised law system on the international sale of goods was due business profitability and economy of scale. It is recognised that having a standardised law for the international trade of goods would have a positive impact on improving business efficiency and reduce unmercenary cost. However, the underlying factors that affect the final successful use CISG are political and cultural. The diplomat is responsible to create and promote a harmonised law for the sale of international goods. Without the diplomat support and promotion, CISG could be simply ignored, thus national laws will prevail.

This report provides insights to CISG and discusses the limitation on treaty making as a mechanism for legal harmonisation. Part one discusses the limitations confronted by CISG when creating a standardised law system. Part two discusses CISG’s effects on individual national laws and reasons behind these effects. Part three provides a list of past cases that had significant effect on CISG. Finally, part four discusses the limitations in the current world in order to maintain consistency of the CISG and a number of recommendations.

Compromised Harmony

In order to attract significant amount of countries to join the treaty, there were a number compromises made within the terms and scope of the CISG. These compromises include revocation and reservations made by certain countries as their conditions in agreeing to the CISG. Often these concessions adds more complications to the issues that CISG aims to resolve.

Scope and Limitations

It was noticed by the UNCITRAL that the ULIS failed to adequately identify a number of significant issues. For instance, Article 1(1) of the CISG states that:

“This Convention applies to contracts of sale of goods between parties whose places of business are in different States:

(a) when the States are Contracting States; or

(b) when the rules of private international law lead to the application of the law of a Contracting State.”

The word ‘International’ was missing from the above article and also only appeared in the title of the CISG. A compromised solution was put in place, and the scope of the CISG was defined as parties’ ‘place of business’. However further issues have been identified as result of this change. This is demonstrated in Article 10, which defines the rules required in determining a party’s place of business. James Bailey states that, from Article 10 of the CIST, “the CISG can apply to transactions which are ostensibly domestic sales.” Another issue with CISG is that there is no clear definition of ‘goods’. The consistency of application of the CISG is then left to the local courts to apply a consistent definition of goods around the world, and most of the time this is very difficult. This issue can be demonstrated with the application of software. Various jurisdiction systems around the world treat software vastly different from each other.

For instance, in UK, softwares are not being treated as goods, but as complementary supply of a service. On the other hand China treats software as goods. If individual countries’ local legal system treat software different to each other, then when an international sale of software occurs, there is a high chance of one country refer software to the CISG and another country considers that software is not a good, therefore does not fall in the CISG ruling, thus refers to the national law. Therefore it is vital to ensure that such gaps are fulfilled within the CISG to ensure a harmonised law system for the sale of international goods.

Revocation

The process of putting together a legally binding contract between countries varies greatly between different legal systems. For instance some countries allows one party to freely withdraw from a legally binding contract without any legal remedies. In some countries it is seen to be an act of bad faith to revoke an offer unless the other party had a chance to respond.

Article 16 of the CISG aims to resolve this issue by putting clauses into the treaty of when and under what circumstances an offer can be revoked.

Article 16 states:

“(1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.”

(2) However, an offer cannot be revoked:

“if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or

if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer”

The choice preferred language in this article demonstrates a compromise between the CISG, civil and the common law system by stating the same rule but in language commonly used to the above mentioned legal systems. As Eörsi explains, Article 16(2)(a) adopts words familiar to civil legal system and Article 16(2)(b) adopts words familiar to common law system. However the potential issue and explanations are the same and carries the same meaning.

Reservations

CISG allows its members to make reservations to its text in order to attract a wider range of states to sign up to the CISG and indeed it has attracted increasing number of countries to sign up due this flexibility. However the down side of this flexibility is that it provides loop holes where contracting states can create their individual versions of the CISG. This practice further deepens issues around the international sale of goods and disobeys the mission of the CISG, which aims to create a standardised law system for the sale of international goods among its contracting states. Article 98 provides the opportunities for contracting states to make certain reservations authorised by the CISG. The CISG authorises the following reservations: 57

• Article 92 authorises the exclusion of Part II (concerning formation of the contract) and Part III (concerning obligations of the buyer and seller and remedies for breach). For example, the Scandinavian States have declared that they will not be bound by

Part II of the CISG.

• Article 93 permits a State in which two or more territorial units apply different systems of law to declare that the CISG does not extend to all of its territorial units. Australia, for example, has declared that the CISG does not apply to the territories of Christmas Island, the Cocos (Keeling) Islands and the Ashmore and Cartier Islands.

• Article 94 allows a State that has an existing agreement regarding matters governed by the CISG to declare that the CISG does not apply to parties that have their place of

business in that State. The Scandinavian States have again exercised their right under

Article 94 to exclude inter-Scandinavian trade from the CISG as a treaty already exists between these countries.

• Article 95 states that Article 1(1)(b), dealing with conflict rules when determining the jurisdiction of the CISG, may be excluded. China, Singapore and the United States of America have each declared that they would not be bound by Article 1(1)(b).

• Article 96 allows a State whose law requires contracts to be in or evidenced by writing to exclude any provision of Article 11, Article 29 or Part II (which provides that a contract need not be in writing under the CISG). Countries including Argentina, Chile, Russia and China have made declarations under Article 96. The following example demonstrates the challenge to uniformity that arises from the inclusion

in the CISG of the ability of States to make reservations. Imagine a contract for the sale of goods between two parties whose places of business are respectively Australia and China. Does the CISG apply? Both states are signatories to the CISG but what if the Australian party has its place of business on Christmas Island? Further, what is the consequence of the contract not being in writing? The CISG provides that a written contract is not required, but the Chinese reservation under Article 96 throws this issue into uncertain waters. The Australia/China hypothetical explains how the CISG reservation procedure complicates the harmonisation process. Without the reservations, parties to a transaction between Australia and China need be aware of only one law, the CISG. However, as a result of the reservations, parties need be aware of three layers of law,58 being the standard CISG provisions, the

reservations that Australia and China have made to the CISG, and the law of China regarding the sufficiency of writing in contract formation. Business supports the harmonisation of laws because harmony brings certainty. The Australian

business person is happy to sell goods to China because the uncertainty of submitting to a different legal system is ameliorated by the acceptance of the CISG by both countries. However, the reservations of both Australia and China detract from this certainty and are detrimental to uniformity.

Impact on National Legal System

Awareness

Although there are currently 76 contracting states agreeing the terms and conditions set out in the CISG. However in some of the contracting states there are very little awareness of the CISG even existed within the business community. For instance in Argentina, despite overwhelming promotion effort put in place to raise awareness of the CISG, it is still not so well known in the business circle. Likewise for Mexico and Croatia, the CISG had no effect on how international trading being conducted by the local businesses although the situation is slowly improving. Furthermore, in countries such as New Zealand, Israel and Uruguay, although the CISG has been incorporated in the local national laws, however many lawyers are either not aware or have insufficient knowledge of the CISG.

Other than the 76 countries that have agreed to the CISG, there are still more than 130 countries around the world that have not yet agreed to the terms and conditions set out in the CISG. This is because of these countries preferred to have a regionalised treaty arrangement rather than a global legal system. Reasons behind this idea is that these countries believes a regional treaty arrangement would provide better economic outcomes for the region. This is especially true for some of the African countries, as evidenced by the sign up of the CISG in Africa, only Gabon and Guinea have agreed to the CISG. In addition, Some of the major countries have not yet joined the CISG, such as UK, due to the lack of political support from the government. There were no urgency to implement the CISG, unlike Japan which suffered from the bubble economy, there were overwhelming demand for economic and law reforms within the country at the time, hence Japan eventually endorsed the CISG on 1st July 2008.

Impact on Lawyers

Case Laws

Challenges

Future of CISG

Challenges

Having agreed on a final text for the international sale of goods, the next challenge for

harmonisation, and the ultimate success or failure of the CISG, is the uniform application of the CISG. Part three of this paper will discuss the constraints countenanced in maintaining the uniformity of the text and the mechanism employed by the CISG to overcome these hurdles. Before proceeding. it is necessary to comment on the concepts of ‘harmonisation’ and ‘unification’ as they relate to the CISG.

Harmonisation and Unification

Harmonisation and unification are related concepts. They differ in the degree to which each tolerates variation. To harmonise is to bring together and make similar; to unify, however, is to make the same. Unification does not tolerate variation. Unification of the law therefore requires the law of States to be made the same. Harmonisation of law is also understood as a process. Therefore, unification of law is an exercise in harmonisation where ‘unification’ is the standard or benchmark. Article 7 of the CISG outlines the need to promote uniformity in the application of the CISG.

Importantly, the CISG does not speak of the need to promote harmony in its application. This distinction is important because, as the purpose of the CISG is the unification of international sale of goods law, there can be no variation in the way it is interpreted and applied by courts around the world. The CISG does not permit room for error. This point is also important because, by expressing the CISG’s purpose as the promotion of uniformity, the bar for determining its success or failure has been set higher. The absence of variation in the unification of law is subject to one caveat suggested by Professor Sundberg. The Professor suggests that a margin of imperfection is permissible in the unification of law, but only to the extent that the variance does not encourage forum shopping.61 This proposition is best explained using the issue discussed above regarding software and the definition of ‘goods’ under the CISG.

Article 7

Article 7 of the CISG is ‘arguably the single most important provision in ensuring the future success’63 of the CISG. Article 7 details the objectives of the CISG and how to give effect to these objectives. The battle for unification depends on the effectiveness of Article 7.64 Article 7 defines the protocol to be followed when interpreting the CISG. It directs those interpreting the CISG to take the following steps. First, regard must be had to the CISG’s ‘international character and the need to promote uniformity in its application and the observance of good faith in international trade’. Second, questions not expressly settled by the CISG are to be determined ‘in conformity with the general principles on which it is based’. Third, in the absence of those general principles, questions are to be settled ‘in conformity with the law applicable by virtue of the rules of private international law.’ Steps two and three establish the mechanism to fill gaps in the CISG. This paper will focus on step one.