The United Nations Convention on Contracts for the International Sale of Goods (CISG) contains "uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems". Its objective includes the "removal of legal barriers in international trade and the [promotion of] the development of international trade"
There are over 90 contracting States to the CISG. Australia has been a contracting State for more than 30 years. The CISG is in force in each of the Australian States and Territories pursuant to equivalent uniform legislation (in Victoria, the Sale of Goods (Vienna Convention) Act 1987 (Vic)).
The CISG applies to many contracts of sale between Australian businesses and overseas entities, often without those parties realising. It is important in unprecedented times such as the COVID-19 pandemic for parties to understand if their contract is subject to the CISG and, if so, what rights and obligations arise from it.
When does the CISG apply?
The CISG applies to contracts of sale where the parties have a place of business in different contracting States and those States are Contracting States or the rules of private international law lead to the application of the law of a Contracting State. The analysis is not always simple, potentially involving complex conflicts of legal principles. There is added complexity where a Contracting State has acceded to the CISG with an authorised reservation or declaration.
Finally, the CISG can also become part of a contract where the parties (irrespective of whether they have a place of business in a Contracting State) specifically choose the CISG to govern their agreement.
The CISG applies to a broad range of contracts, but specifically excludes contracts for the sale of goods bought for personal or household use, to contracts for the sale of shares or other securities, to contracts for the sale of ships or vessels and contracts for the sale of electricity. It does not apply to contracts for services. Under the CISG, "[c]ontracts for the supply of goods to be manufactured or produced are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production".
Article 6 provides that parties "may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions". It is generally accepted that, where it would otherwise apply, the parties' agreement to exclude the CSIG must be recorded in an express term in the contract. Terms of the contract or agreement which are inconsistent with the CISG are one example of a derogation from the CISG.
What is the scope of the CISG?
The 'rules' of the CISG govern the formation of the contract and the respective rights and obligations of the buyer and seller under that contract. This includes delivery of goods, conformity of goods, third party claims, payment, passing of risk and damages for breach.
Exemption from damages
Most importantly, in the current business environment, the CISG sets out the parties rights and obligations where there is a failure to perform. Article 79 provides a party with an 'exemption' from liability for damages in limited circumstances.
Pursuant to Article 79 (1):
"A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences."
There will be many millions of contracts falling within the scope of the CISG where performance has been disrupted by the global coronavirus crisis. Immediately after the World Health Organisation declared COVID-19 a pandemic on 11 March 2020, contracts around the world were scrutinised for their force majeure provisions. The doctrine of frustration was also considered, as international borders closed and quarantine restrictions imposed at ports and airports. Conversely, very little, if any, attention was focussed on the CISG.
It is unlikely (except for contracts concluded towards the end of 2019) that any business took into account, at the time its global supply contracts were finalised, that performance of those contracts would be interrupted by the global pandemic. It is likely that many businesses, in spite of having turned immediately to the provisions of their contract to determine how it responded to this event, have overlooked the potential application of the CISG provisions.
Businesses with cross-border contracts for the sale of goods need to take the following steps:
- Review the terms of the contract to identify whether the CISG applies. Look specifically to whether the contract contains a provision which expressly excludes the CISG (or derogates from it).
- Identify the country in which the parties to the contract have their place of business to check whether those countries are Convention States.
- Review the governing law clause (if any) in the contract. Identify whether the parties have chosen the law of a non-contracting State which might lead to the application of the CISG.
- Assess whether any failure to perform the contract is a consequence of the COVID-19 pandemic.
- If there is a failure to perform, assess whether this is caused by a third party's failure (and the third party's failure is due to the pandemic within the terms of Article 79).
- Check the date on which the contract was entered – if it was concluded early in 2020, there will be an argument that the parties "could reasonably [have been] expected to have taken the [pandemic] into account" within the terms of Article 79 (and where a third party is involved, this test needs to be applied also to the third party). In those circumstances, Article 79 may not assist.
- If the contract was concluded prior to the potential emergence of the pandemic (and neither party had special circumstances which meant that it ought to have been aware of it), consider whether Article 79 applies.
- If the CISG applies to the contract, the party who has failed to perform as a result of the pandemic, must give notice to the other party of the impediment (being COVID-19 or restrictions imposed in response to it) in order to avail itself of the exemption from damages.
- If notice is not received by the counterparty within a "reasonable time", the defaulting party may be liable for damages. It is important to note that the potential exposure to damages does not arise because notice has not been given, but because the other party does not receive that notice.
- It is also important to note that the exemption created by the application of Article 79 applies only for as long as the 'impediment' exists.
The commentary on Article 79 of the CISG is limited and there are no reported cases, as far as the author has been able to ascertain, in the Australian courts. International commentators suggest that Article 79 has limited application, largely because most impediments would be foreseeable by the parties when they are entering into the contract. The COVID-19 pandemic, however, might be viewed differently.
Professor Luke Nottage (Who's Afraid of the Vienna Sales Convention (CISG) – A New Zealander's View from Australia and Japan, 36 Victoria U. Wellington L Rev 815 (2005)) suggests that the framework of the CISG, including Article 79, "seems a distinct improvement on the English law of frustration".
As to how Article 79 might interact with an express force majeure provision in a contract, Joseph Lookovsky (Understanding the CISG, Fourth (Worldwide) Edition, 2012 Kluwer Law International) observes that:
"[n]ot uncommonly, an express force majeure clause in a contract will be interpreted as a modification of (or supplement to) the Article 79 default rule."
As a global instrument, the CISG is often misunderstood. However, it is now, more than ever, essential that businesses engaging in international trade come to terms with both its application and its potential benefits.
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.
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