In this article, Kent France, a partner of Wynn Williams & Co, looks at a little known but important Convention affecting importers and exporters.
If you import or export goods, the chances are you will have been involved in a contract that is subject to the United Nations Convention on Contracts for the International Sale of Goods (CISG for short). The Convention governs thousands of contracts each year but surprisingly many people don’t know about it.
The Convention was finalised in 1980 by a United Nations Conference in Vienna.
It became part of New Zealand law in 1994 when the Sale of Goods (United Nations Convention) Act 1994 was passed. It is now part of our domestic law. When it applies, it replaces our own Sale of Goods Act 1908 along with a range of other common law principles.
The CISG is based on European law and has its roots in ancient Roman law.
Approximately 64 countries have adopted the CISG including most of the important trading nations except for the United Kingdom and Japan.
The CISG provides a framework of rules relating to contracts for the sale of goods, from the establishment of the contract through to termination for breaches of obligations. The CISG expressly avoids creating rules relating to when title or ownership of goods will pass from the seller to the buyer. This has been left for the parties to deal with between them.
Some of the concepts in the CISG are similar to those on which New Zealand domestic law is based. There are some important differences which importers and exporters must take into account if the CISG is likely to apply to them. The purpose of this article is simply to raise awareness of the fact that the CISG exists and applies to many, if not most, international contracts for the sale of goods. A discussion of all of the rules in the Convention would require a much more detailed analysis.
Which Contracts Does The Convention Apply To?
The Convention applies generally to the sale of goods between parties whose places of business are in different countries.
Goods bought for personal, family or household use are excluded, as are some other specific items such as investment securities, shares, ships, aircraft and electricity.
There is some debate about if and to what extent software is covered. The answer may depend on whether the software is purchased outright or whether the buyer is acquiring only a licence to use it. Issues are also likely to arise if the provision of the software is connected to its development by the vendor.
Services are generally excluded from the coverage of the CISG. There are questions to be resolved, however, if the services comprise, for example, manufacturing processes relating to the goods sold.
It is possible for design and build type contracts to be covered by the CISG if the transaction can be treated as a whole. The preponderant part of the transaction needs to be the delivery of goods. That could include the sale of a machine for a factory where the vendor also undertakes the installation and the training of the purchaser’s staff.
It pays to work through the elements of a sale or purchase contract with an adviser who understands the CISG, prior to finalising it.
When It Applies
The Convention applies only to contracts of sale of goods between parties whose places of business are in different countries:
- when the countries are parties to the CISG (such as New Zealand); or
- when the rules of private international law lead to the application of the law of a country which has adopted the CISG.
At its simplest, sales of goods between, for example, New Zealand and Australia or the United States of America are covered.
The nationality of the parties is not important. It is possible to have the odd result of a contract between a New Zealand company having a place of business in Sydney and buying goods from New Zealand being covered.
The second part of the test - whether the rules of private international law lead to the application of the law of a Convention country - can also have some surprising results. If, for example, an English trader sells goods to a trader based in New Zealand and the contract states that New Zealand law is to apply, then the CISG would still apply even though the United Kingdom is not a party to the Convention. It therefore pays to give some thought to the rules relating to the place of business of the trading parties.
Parties to a contract can agree that the CISG will not apply. It is also possible to adopt some but not all of its provisions.
The first reaction of many New Zealand exporters or importers and their lawyers is to try to opt out of the Convention because they are unfamiliar with it - but - it is not sufficient simply to write into a contract that New Zealand law will apply. The CISG is part of New Zealand domestic law. If the parties want to adopt New Zealand law and exclude the CISG it is necessary to say so expressly. This appears to be overlooked reasonably frequently, and not only in New Zealand. Sometimes that can be beneficial to New Zealandbased business people. For example, a New Zealand-based importer might contract to purchase goods from Canada. The contract may simply say that the law of British Columbia will apply. If that was the case, most New Zealand-based importers and their lawyers would be in the dark about the details of British Colombian law. If, however, there was no specific reference excluding the CISG, then because Canada and the province of British Columbia have also adopted the Convention, the CISG is likely to apply.
Many of the rules relating to the transaction would therefore be the same as they would have been had the parties agreed that New Zealand law would apply instead. It is important to remember, however, that that is not New Zealand domestic sale of goods law but the law as it applies to the Convention.
Ability To Pick And Choose
One of the advantages of being able to contract out of all or part of the CISG is that it can be used with other customary trading arrangements. That is an intentional feature designed to give flexibility. For example, the CISG provides its own rules about when risk relating to goods passes from the buyer to the seller. If other common trading arrangements, such as the rules published by the International Chamber of Commerce for the interpretation of trade terms (known as Incoterms) are used, then the specific Incoterm adopted can replace the particular rules in the CISG relating to passing of risk. If traders are familiar with the provisions of the Act they can consciously choose to apply some or all of it in tandem with other customary trading arrangements. In many other cases if the parties don’t specifically turn their minds to the application of the CISG, it will accommodate specific elements of the contract, which the parties have consciously decided to adopt.
The Convention has been established on an assumption that it will be applied uniformly in all countries. In theory a judgment by a court in Germany or China relating to the application of the CISG should be able to be applied to similar situations if they arise in New Zealand or the United States. It is only as a last resort that domestic law should be used as an aid to interpretation.
Over the years it has become apparent that domestic courts still tend to apply at least part of their domestic legal thinking to the interpretation of the Convention rather than adopt a truly international approach to interpretation.That is not surprising giving the training and cultural backgrounds of judges sitting in different countries. Lawyers involved in arguing cases under the Convention need to be aware of this.
Some Key Elements
There are differences in approach between the CISG and New Zealand domestic law. Some of them are:
- The Convention provides that if an offer indicates it is irrevocable for a particular period of time, then the offer cannot be withdrawn unless the withdrawal reaches the offeree before or at the same time as the offer. This is a significant departure from New Zealand law and is something that exporters and importers need to be careful about, particularly if the law that they are relying on has not been expressly stated from the outset of negotiations.
- The Convention places much more emphasis on keeping contracts alive rather than focusing on rights to terminate if goods are not provided within the time frame stated, or do not exactly comply with the specifications in the contract. The buyer and seller have rights to correct certain defects or failures within a reasonable time.
- In addition, if goods do not conform with the contract and the seller has not taken the steps available under the CISG to fix the problem, then the buyer can reduce the price to reflect the reduction in value to them of the goods that they have received. This is a very important difference between established Commonwealth legal principles and the European approach.
- The focus on keeping contracts going and allowing parties to rectify problems within a structured framework is intended to reflect the fact that goods may have been transported long distances. Taken overall, it may be better for the parties to keep the contract alive and look to a solution to the problem rather than have strict rights to terminate the contract requiring reshipment of the goods and further delays in supply.
- As a result some people take the view that the framework is not appropriate for certain types of goods such as commodities where, customarily, importance has been placed on a buyer’s right to reject goods if they do not comply with their requirements.
These are matters which traders need to be aware of when deciding whether to allow the CISG to apply by default or specifically adopt some other rules to govern their transaction.
In summary the CISG applies in many cases, even when the parties are not aware of it. It provides comprehensive and flexible rules to control the international sale of goods. Those rules are different in many respects from New Zealand domestic law and are intended to have a universal international application. We recommend that importers and exporters think about whether the CISG may apply to them each time a new contract is formed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.