A Subsidiary Framework for the Conduct of International Trade in Goods - Research Paper Example

 Introduction The United Nations Convention on the International Sales of Goods (CISG), adopted at Vienna in 1980, is an international agreement developed by the United Nations Commission on International Trade Law (UNICTRAL) with the aim of trying to eliminate the ambiguity caused by different domestic laws regarding the international sales of goods. 1 What is contained in the CISG supersedes domestic trade laws to regulate contracts between various companies located in different countries of the world. Albania became the 74th State party to the CISG by its ratification of the CISG on June 1, 2010, after the United States of America had ratified the international agreement on January 1, 1988. By resorting to the provisions of the CISG to their international trade related activities, rather than resorting to domestic laws, it is possible for various companies dealing in international trade to alleviate speedily any misinterpretation of domestic laws. Now, the CISG applies to all international trade transactions involving companies located in ratifying countries, unless any agreements entered into specifically specify otherwise. 2 However, the CISG does not apply to the following: 3 4 Goods purchased for personal, family or household use, unless the seller is unaware of the intended use of any goods involved in an international transaction. Goods purchased in an auction. Execution, or otherwise of an authority of law in a country renders the subject inapplicable to application of CISG. The CISG is not applicable to transactions involving stocks, shares, investment securities, negotiable instruments or money. Transactions involving ships, vessels, hovercraft or aircraft do not involve the CISG. Cross border transactions involving electricity. CISG is not applicable to domestic sales. The CISG does not apply to situations where the buyer undertakes to supply a substantial part of materials necessary for production or manufacture. The CISG does not apply if preponderant part of obligations of a party who furnishes goods consists in the supply of labour and other services. The CISG does not apply to various types of questions that include the validity of the contract, the effect of property, and liability due to death or personal injury. The CISG contains an important provision in Article 6, which enables parties to “opt out” of application of its provisions, or to derogate from the application of its provisions. Thus, it is possible for the seller and the buyer to agree under the terms of Article 6 of the CISG to insert trade terms, such as the International Chamber of Commerce's Incoterms, vary a standard trade term, adopt a trade term that is local, or use a trade term in connection with the price rather than delivery, etc. Any variation to the CISG must be in writing and in accordance with Article 12 of the CISG, as stipulated in Article 6. 5 Thus, clearly, the insertion of a trade term in an agreement between two parties will have the effect of varying the application of CISG, and it is important to examine how insertion of trade terms will affect an agreement. It is possible to assert that CISG rules on passage of risk, limited as they are to sales contracts in which the parties have not used a trade term, vary greatly from the universal understanding of the rules applicable to trade terms. Thus, merely using a trade term may be construed as implying an intent to exclude articles 66 to 70 of the Convention and possibly, therefore, the entire Convention. This discussion presents a critical examination of the above-mentioned assertion. The impact of the use of trade terms in contract agreements should interest anyone with an interest in international trade. Passing of Risk The allocation of risks associated with the transfer of goods in international sales of goods is important for both buyer and seller because what is agreed can present harsh and unfair effects for a party should something go wrong. 6 The shipper, the consignee, the cargo owner and the carrier have rights and responsibilities that lead to transfer of title of goods, risks associated with goods and the delivery of goods. Often, in international contracts for sale of goods, parties are more concerned with the instant the risk associated with goods passes from seller to a buyer or from the shipper to the consignee. However, in the United Kingdom and in jurisdictions that where the United Kingdom law persuades, title and not risk is the important criteria for the purpose of taking suit. 7 In the CISG, Articles 66 – 70 regulate the passing of risk to help decide about which party, the seller or the buyer should bear the economic consequences in the event of damage, loss or destruction of goods due to an unfortunate incident. 8 9 Articles 67 – 69 of the CISG deal with the time of passing of risk passes from seller to buyer, and Article 70 elucidates the relation between passing of risk and breaches of contract by the seller. 10 However, none of the previously mentioned Articles defines the term risk, and it is important to understand that, even if either or both of the two parties, the seller and the buyer, carry insurance to cover risks, it is still important to determine who carries the risk. 11 The CISG does not link passing of property of goods to passing of risk, because according to Article 4 of the CISG, the Convention only governs the obligations of the seller and the buyer arising from the contract of sale. Thus, the fact that the seller may retain documents controlling the disposition of the goods does not affect the passage of the risk. Normally, under the provisions of Chapter IV, Part III of the CISG, once the buyer has paid the agreed price, the risk passes to the buyer, unless an act or omission of the seller is responsible for the damage or loss of goods. Thus, the CISG rules related to passing of risk deal with only “accidental” loss or damage, including acts of God and acts of mortal third parties, including thieves or vandals, etc. However, because the general freedom of contract rule permits buyers and sellers to enter into a contract that derogates from or varies the CISG, it is possible for parties to mention CIF, CFR, FOB, CPT and CIP, etc. in writing depending on mutual agreement, especially when the carriage of goods is involved and arranged. 12 13 The concept of passing of risk has been important in every legal system since ancient times because this concept decides about very substantial risks in international trade. 14 The following three concepts associated with passing of risk are available, depending on the legal system, social circumstances and the agreement between the buyer and seller: 15 In the first concept, risk associated with goods passes to the buyer after the conclusion of the contract of sale. However, this concept is of limited value in international trade because often after the conclusion of a contract of sale, goods are still under control of the seller and a requirement exists for their transport to the buyer who is distant from the seller. The second concept associated with passing of risk on sale of goods stipulates that risk will pass to the party who has ownership of goods. However, despite ownership, goods will be in physical possession of other parties during transport to a buyer and this means that this concept of passing of risk is impractical for international trade. The third concept about the passing of risk suggests that risk passes with the physical possession of goods and this concept appears to be the fairest because the party who is in physical possession of goods is best able to provide security for goods. However, the buyer must make speedy arrangements to take possession of goods because an undue burden persists on the party who is in possession of goods belonging to another party. In international trade a requirement exists for transporting goods across vast distances and this means that physical possession of goods during transport is neither in the hands of the buyer nor the seller, but in the hands of a carrier responsible for transporting them. Thus, under the CISG, risk passes to the buyer after a seller has delivered goods to the carrier, which has taken over physical control of the goods. However, because it is possible for a buyer to sell goods in transit to other parties, the CISG allows for passing of risk to a buyer of goods that are in transit at the conclusion of contract of sale for such goods. A Critical Examination of Implications for the Use of a Trade Term for CISG Contracts It is important to note that the CISG is a minimalist text and does not give a specific definition of trade terms because trade terms are constantly evolving and changing. 16 Thus, if a precise definition of terms of trade were to be included in the CISG, this would have required modification and change at a later stage. Thus, it is possible to conclude that the intent of the CISG included providing an opportunity to those who enter into agreements for the supply of goods across international borders to define their mutually agreed terms of trade. This means that if parties agree mutually to terms of trade, the utility of the CISG persists despite the exclusion of Articles 66 – 67 of the CISG. Surely, the guidance that the CISG provides for contract formation, in Part II of the convention document, the obligation of the sellers under Chapter II and the obligations of the buyer mentioned in Chapter III are not completely abrogated if a trade term is used by a buyer and a seller. Thus, it is clear that an exclusion of the entire convention is not necessarily the result of using a trade term, even though a buyer and a seller may write whatever contract agreement they want for sale of goods. Derogation from the CISG when using a trade term is limited to the issues dealt with by the trade term, and it is clear that, unless a buyer and a seller want to write an entirely new contract that clarifies all issues covered in the CISG, parts of the CISG can continue to apply. 17 The common obligations of the buyer and the seller are important for all parties to a sale contract because passing of risk, fundamental breach, anticipatory breach and matters related to adequate assurance are important in any sale. 18 Simply, because of application of a trade term to make the contract clearer to everyone and to better specify the obligations of the parties to a contract will not mean that a requirement exists to exclude the entire CISG. If parties want to exclude the entire CISG, their rights pertaining to freedom to enter into contracts means that they can agree upon a detailed contract that will specify all aspects of the transaction, their mutual responsibilities and rights as well as applicable remedies without referring to the CISG. In the case of B.P. Oil International, Ltd. v. Empresa Estatal Petroleos De Ecuador, the buyer refused to accept delivery of goods dispatched under CFR trade terms, claiming that the goods did not conform to contract specifications. 19 CFR trade terms refer to Cost and Freight, requiring the seller to arrange for dispatch of goods purchased by a buyer by sea to a port of destination and to furnish the buyer with documents necessary to obtain goods from a carrier. However, the United States Fifth Circuit Court of Appeal ruled that it was necessary to test the goods for conformity before risk of loss passed to a buyer at the port of shipment in accordance with Article 67 of the CISG. Thus, it is clear that the United States Fifth Circuit Court of Appeal did not exclude Articles 67 of the CISG merely because the buyer and the seller had agreed to a trade term CFR in their sale agreement. In addition, the United States Fifth Circuit Court of Appeal asserted further that Article 9(2) of the CISG enables incorporation of trade terms into a CISG contract for sales of goods and many Incoterms, or standard trade terms, do not have a global usage. 20 Thus, the insertion of a trade term into a sales contract is by itself possible because the CISG permits this and therefore, it is not possible to suggest that by incorporating a trade term, exclusion of the CISG will result. It is important to understand that the first and supreme principle of European contract law is the freedom granted to parties to enter into contracts and similar approaches exist elsewhere. 21 Thus, buyers and sellers can enter into any form of contract they want to for international sale of goods, but courts must interpret contract terms that impinge on passage of risk of loss. Article 68 of the CISG contains a rule or a provision that has no equal in Incoterms or terms of trade, that of passing of risk when goods in transit are sold to another party. 22 It is important to understand that Incoterms or terms of trade are only concerned with the relationship between the first seller and the first buyer, with no clauses pertaining to a situation in which the first buyer sells to another party while the goods are in transit. In addition, the CISG contains several other rules that refer to the conduct of a buyer when deciding about the modification of general rules for passing of risk. Thus, it is clear that the CISG contains material, rules and clauses that are useful for parties involved in international trade, and it will not be prudent with anyone to want to exclude the CISG simply because they want to make their trade relationship clearer by inserting a trade term in their agreement for sale of goods. The CISG does not by itself present rules for the interpretation of trade terms, even though it permits the buyer and the seller to enter into mutually agreed agreements involving trade terms. 23 It is important to understand that with further development in container transport, new multi-modal transport documents will emerge, leading to new trade practices, trade terms and new thinking for passing of risk in international sales of goods. Thus, the CISG provides a subsidiary framework for the development of the previously mentioned trade terms by replacing national statues to bring about uniformity and harmony. Without the CSIG, the diversity of opinion found in national thinking would have impeded international trade and efforts to harmonise management of risks in international trade. Thus, to assert that by introducing a trade term the CISG is somehow an attempt to exclude the entire convention will appear to be ridiculous when the CISG is presenting a framework for the future and encouraging the development of new trade terms in line with the requirements of the future based on the evolution of transport for international trade. However, the CISG does recognise that radical developments in thinking associated with international trade may result in new ways for contracting for international sales of goods and the CISG permits complete leeway for such an evolution. The CISG does not rely on national legislations or traditional legal concepts to decide about the way in which parties manage passing of risk by mutual agreement, preferring instead to focus on practical realities. Anyone who reads the CISG critically will agree that although the rules mentioned for risk allocation lean towards the practical, they lack clarity and comprehensiveness at some points. 24 A conclusive definition for "delivery", "first carrier", or "indicative circumstances" is lacking in the CISG, and this means that it is possible for parties to present divergent interpretations. In addition, the CISG lacks rules on sale of bulk goods or containerisation, despite a substantial growth in containerisation in international trade. Thus, because many parties will use Incoterms in their sales agreements because of their practicality, simplicity and clarity the risk sharing mentioned in the CISG will not apply. However, Incoterms do not deal with all issues that may arise in a sale agreement involving international trade because Incoterms only deal with passing of risk and payment for goods aspects. Thus, the CISG and Incoterms must coexist together in the real world, with the CISG providing guidance on other issues apart from passing of risk and payment for sales of goods. It is clear that by including Incoterms or terms of trade, an exclusion of the entire CISG is not possible, even though CISG Articles related to passing of risk cease to apply. Court cases related to international trade presented in the Pace Law School CISG Database, illustrate the fact that the CISG and trade terms can exist together as stipulated by the CISG itself, which permits parties to a sale contract for international sale of goods to decide about their own trade terms. 25 In the case of China 27 November 2002 High People's Court of Ningxia Hui Autonomous Region (Xinsheng Trade Company v. Shougang Nihong Metallurgic Products), the High People's Court of Ningxia Hui Autonomous Region first determines the validity of a contract by ensuring that it is not in violation of the CISG. Only after the High People's Court of Ningxia Hui Autonomous Region has decided that a valid contract exists because the contract does not violate the CISG and Chinese law, the court decides about the passing of risk associated with a FOB trade term agreed on by the Chinese seller and a Japanese buyer to rule against the Chinese seller. 26 Thus, it is clear that inclusion of a trade term in a contract for international sale of good will not exclude the CISG, even though the concepts related to passing of risk for the trade term replace relevant provisions of the CISG pertaining to passing of risk in Articles 66 – 70. In another case involving the sale of jasmine aldehyde by a seller to a buyer in China on CIF New York basis, the China International Economic & Trade Arbitration Commission (CIETAC) ruled that despite the fact that the buyer and seller had agreed to insert the trade term CIF into their contract, CISG applied to claims of damages by the buyer. 27 The buyer had claimed that the jasmine aldehyde shipped by the seller had deteriorated due to high temperature in transit, and the seller had not performed its due obligation by not directing the shipping company to ensure that the jasmine aldehyde be shipped at the right temperature. Although under CIF, the risk passes to the buyer once goods cross the ship’s rail at the port of lading, because the seller did not notify the shipper of the requirement to maintain the jasmine aldehyde at the right temperature, Article 66 of the CISG applied because the seller had failed to discharge its obligations with due diligence. CIETAC found that the seller had indeed not discharged its due diligence duties by only telephoning the shipping company, because mere telephone calls are not a sufficient notice to a shipper to store a cargo of jasmine aldehyde at the right temperature, when the buyer had sent fax messages urging the seller to ensure that jasmine aldehyde be stored appropriately. Thus, CIETAC ruled that because both United States of America and the People’s Republic of China are contracting states to the CISG, the CISG applied to the dispute and the seller must pay damages to the buyer even though insertion of CIF term in the contract agreement for the international sale of goods existed. Thus, it is clear that insertion of a trade term in a contract for international sale of goods does not exclude the CISG. In the light of the previous discussion and the court decisions mentioned in the discussion, it is clear that although the CISG permits both buyers and sellers to agree mutually to the insertion of a trade term in their contract agreement for international sale of goods, the exclusion of the CISG will not result by this. It is true that by inserting a trade term in a contract agreement for international sale of goods, the risk passing provisions of the trade term apply in preference to the risk passing provisions of the CISG, but the CISG deals with much more than mere passing of risk, to provide a framework for the conduct of international trade. Thus, it is not possible to exclude completely the CISG by inserting a trade term in an agreement for international sale of goods. Conclusion The CISG presents a subsidiary framework for the conduct of international trade in goods to remove the disharmony presented by national statutes and differences that had existed in thinking about the conduct of international sale of goods. However, in addition to trying bringing about harmony, the CISG also caters to the right of parties to contract agreements on international sale of goods to enter into a contract of their choice and to let parties further elucidate their rights and obligations by inserting a trade term in their contract agreements. The CISG must cater for future developments in trade terms and developments in container transport that will permit the emergence of new multi-modal transport documents for the future. Thus, the CISG is not restrictive about insertion of trade terms in contract agreements for international sale of goods. However, the CISG deals with more than the passing of risk and payment for goods aspects of international trade and this means that the CISG must coexist with trade terms, or Incoterms, in the real world to cater for issues going further than passing of risk and payment for goods aspects of international sale of goods. Thus, it will be wrong to suggest that by inserting a trade term in a contract agreement for the international sale of goods, exclusion of the CISG will result, even though concepts related to passing of risk for the trade term replace relevant provisions of the CISG pertaining to passing of risk in Articles 66 – 70. (This page intentionally left blank) Bibliography / References Appelbaum, Richard P., Felstiner, William L. 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