Convention on Contracts for the International Sale of Goods - Assignment Example

1. Examine the role played by the Convention on Contracts for the International Sale of Goods (1980) (CISG) in regulating international sales. Does it provide an effective basis for the establishment of legal relationships between buyers and sellers within different jurisdictions? Please discuss by reference to the CISG, its various Articles as well other relevant literature and jurisprudence. ************************************************************* Introduction The Convention on Contracts for the International Sale of Goods (1980) (CISG) was developed with a vision to provide a modern, uniform and fair regime for contracts involving the international sale of goods. Hence, the CISG contributes immensely to introducing certainty in commercial exchanges and lowering transaction costs.1 The effectiveness of the CISG lies in the fact that the Convention is not concerned with the effect the contract of sale may have on the ownership of the goods being sold. However, the Convention does regulate the delivery of the goods in accordance with the obligations in the contract of sale. Under this, the seller must transfer ownership of the goods to the buyer. Hence, although the convention does regulate obligations relating to delivery and taking delivery, it does not resolve the issue of transfer of ownership of the goods.2 This paper looks at these issues in detail by evaluating various articles of the CISG. Relevance of the CISG The CISG is the backbone of international trade in all countries in the sense that it offers modern uniform legislation for the international sale of goods that is applicable whenever contracts for the sale of goods are finalised between parties with a place of business in contracting states. In such cases, the CISG may apply directly, thus avoiding the other option of rules of private international law to determine the law that is applicable to the contract – which significantly raises certainty and predictability of international sales contracts.3 Role of CISG in regulating international sales The role and effectiveness of the CISG can be understood by interpreting article 6 and article 9 of the CISG. According to article 6 of the CISG, the Convention is never imposed on parties. Thus, parties can choose to exclude it whole or in part as stated under article 6: “The parties may exclude the application of this convention or, subject to article 12, derogate from or vary the effect of any of its provisions”.4 In addition, hierarchy of law puts the contract just below the provisions of national law on public order as well as validity of the contract, but above the CISG.5 This can be judged to be a weakness of the Convention, as some parties may opt not to involve the Convention, and hence act contrary to the Convention’s stipulations. In terms of usage and practices, article 9 of the CISG recognises a pace for usage and practices that bind the parties involved in a contract. The parties are bound by usage and practices because they are often regarded to be incorporated into the contract. Such usages and practices prevail over the CISG.6 The strength of the CISG however lies in article 1 (1) and article 7 (2). According to article 1 (1), the CISG, when it applies, prevails over national law. This arises from the fact that article 1 (1) states that when the convention applies it supersedes national law.7 In addition, the CISG normally prevails over national law in as far as international contracts are involved. This can be interpreted from article 7 (2) of the CISG, which states that “Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.”8 This means that international contracts involving sales of goods are generally guided by the provisions of the CISG and this is a basis for an effective dealing between sellers and buyers. Part II of the CISG regulates the formation of international sales contracts, and thus enhances the relationship between buyers and sellers. Generally, offers under the CISG are revocable until an acceptance is dispatched, unless the offeror indicates the offer is irrevocable or the offeree has a reason to rely thereon.9 It can be said that the CISG largely clings to the conventional “mirror image” rule which holds that a contract is valid only if the offer and acceptance correspond in every aspect. This is reinforced through article 15 (1) that states: “An offer becomes effective when it reaches the offeree”10 and article 15 (2) that states: “An offer, even if it is irrevocable, may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer.”11 Part III of the CISG, which is titled “Sales of Goods”, has the substantive rules that are of most significant practical application for international export and import transactions. This part also defines the obligations of the parties in a contract, their rights and remedies for breach. Importantly, it is identified that the key the performance of the seller is that the appropriate goods must be delivered to at the right time and the right place, as stipulated by the contract and the CISG supplementary or default rules. Unless otherwise agreed, the goods do not to the contract unless they are both fit for the ordinary purposes and for and any specific purpose that the seller is informed of at the time of contracting. Further, the buyer’s obligations relate not only to timely payment, but also to acceptance of the goods.12 This highlights the significance of both the seller and the buyer to the terms of the contract regardless of their areas of jurisdiction. The CISG also ties the passing of risk to the last significant act by which the seller completes delivery. In essence, accidental loss of the goods after the risk has passed to the buyer does not discharge the buyer’s obligation to pay the price. This gives confidence to seller who is thus not necessarily liable for damages caused by handling of goods at the buyer’s place (especially where long distances are involved) and the buyer would claim for unwarranted damages from the seller. This is aptly stated in article 25 of the CISG: “A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.”13 This article thus makes each party in a sale of goods contracts responsible enough when handling goods under their jurisdiction, either as a seller or a buyer. The CISG also provides for what can be done in case of a breach of the contract – that a contract can be terminated in case there is a “fundamental” breach of the terms as mentioned in article 51 (2) and article 70. When these issues are clearly understood by both the seller and the buyer, it is likely that they will be more cautious to avoid gratuitous breaches of international contracts and hence promote international trade. There are also provisions that deal with specific issues. For instance, article 57 (1) (a) states that unless otherwise stipulated, the buyer must pay the purchase price “at the seller’s place of business”.14 This is very important given that price issues are often misunderstood and cause long tussles between the buyer and seller especially where long distances and different jurisdictions are involved. Article 38 (1) adds to this by stating that buyers have to make payment promptly and that payment is timely when it is received by the seller within the period of time following delivery of the goods to the buyer which is necessary for the goods to be examined.15 This puts the seller under an obligation to make timely delivery of goods, and the buyer to make payment within the stipulated timeframe. In conclusion, the CISG plays a significant role in regulating international sales of goods. This ranges from the definition of a contract to other issues such as payment for goods. As the CISG applies to many contracting states, many parties in contracts are likely to engage it, thus promoting the relationship between buyers and sellers and enhancing international trade. Question 4 International business negotiations such as that between Aussie Super Cruises Ltd (ASC) located in Perth, Australia and Best Maritime Builders Ltd (BMB) located in Tokyo often conclude with the execution of a letter of intent or letter of understanding that is signed by one or both parties. The parties are morally bound by what they have signed and his form part of the agreement or contract. For instance, a contract of sale must be signed to show that there is an agreement between the seller and the buyer regarding the sale of particular goods. The contract should record and reflect the intent of the parties, that is, everything that they have agreed between them. Further, other items that need to be shown in contract include the agreed goods, the agreed time of delivery, the points of delivery, the agreed method of payment, the amount to be paid as well as other pertinent terms. In view of the present case between ASC and BMB, there is evidence that such agreement was reached between the two parties; hence there is a contract between them. ASC showed the intent to purchase engines advertised by BMB on its website. In turn, BMB supplied the quotations and ASC agreed to the terms and sent an order with the provision: “FOB Perth, Incoterms 2010.” The contract was formed on 18 May 2011 at BMB’s location in Japan when BMB agreed to the terms stated by ASC in their order of ship engines. The details of the contract between the two parties are in tandem with article 11 of the CISG which states that “A contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.”16 In the case of ASC and BMB, there was a series of correspondence between two parties, which culminated in the delivery of orders made by ASC as per the terms agreed by two parties. As the ship engines were shipped under the provisions of Incoterms 2010, there is little that ASC can do with regard to the engines’ performance. Essentially, Incoterms define the rights and obligations of sellers and buyers concerning transportation and delivery of goods as well as distribution and passage of risks linked to a sales contract. The Incoterms only deal with the obligations which the two parties of a sales contract owe each other and do not deal with other issues such as insurance or financing, and do not apply to contracts of carriage. In addition, Incoterms by no means define all the obligations but are limited to the aspect of transportation and delivery and do not deal with important issues such as transfer of ownership, breaches of contract or their impacts.17 Further, according to Hinkelman, Incoterms do not cover goods before or after delivery, do not define remedies for breach of contract, and do not protect a party from his or her risks of loss.18 The CISG does not apply in this case because the CISG does not apply to sales of ships. It is stated in article 2 (e) that “this convention does not apply to sales of ships, vessels, hovercraft or aircraft.” However, it is important to note that in some legal systems the sale of ships, vessels, and aircraft are sales of “goods” while in other legal systems some sales of ships, vessels, and aircraft are assimilated to sales of immovables. In addition, in most legal systems at least a number of ships, vessels and aircraft are subject to special registration requirements. The rules that specify which ones must be registered differ to a large extent. Thus in order not to raise questions of interpretation as to which ships, vessels and aircraft were subject to this convention, especially in the purview of the fact that the relevant place of registration, and therefore, the law which would govern the registration, might not be known at the time of the sale, the sale of all vessels, ships and aircraft was excluded from the application of the convention.19 There is further evidence that the CISG does not apply in the case because the parties did not expressly state that it would apply, although it would, considering the place where the contract was concluded, given that both Japan and Australia are parties to the Vienna Convention. But this point is cancelled by the fact that the goods in question are ship parts. The course of action available for ASC would be arbitration and litigation. Although litigation might produce a fairly concrete result, it is highly expensive and time-consuming process for resolving dispute. Thus, it is advisable to pursue a more practical and cost-effective way of dispute resolution – through an arbitration process. Though it is not cheap, it is fairly less costly compared with litigation, and is as binding as a judicial procedure. With arbitration, the parties can choose a neutral forum where to conduct the arbitration proceedings. In addition, it is possible to obtain enforcement by virtue of the New York Convention. Another advantage of arbitration is the ability to keep the procedure and the result of the award confidential. This is because confidentiality is provided in some institutional rules, and can be expanded by the parties’ agreement to require individuals involved in the arbitration to be bound by a confidentiality agreement. Many companies like confidential procedures because they do not want details divulged about their company and its business operations, or the kinds of disputes they are engaged in, nor do they want a potentially negative outcome of a dispute to become public20 – which most likely is the case of ASC and BMB. References United Nations Commission on International Trade Law (UNCITRAL), “1980 - United Nations Convention on Contracts for the International Sale of Goods (CISG),” Proceedings of the UNCITRAL - VIAC Joint Conference: "Celebrating success: 25 years United Nations Convention on Contracts for the International Sale of Goods (CISG)", 15-16 March 2005, Vienna, viewed 21 May 2011, Alexander von Ziegler, Transfer of Ownership in International Trade (2nd edition), Kluwer Law International, 2010, p. 390, viewed 21 May 2011, UNCITRAL, “United Nations Convention on Contracts for the International Sale of Goods,” United Nations, Vienna, November 2010, p. 3. Pace International Law Review, Review of the Convention on Contracts for the International Sale of Goods (CISG): 2005-2006, Sellier European Law Publication, 2007, p. 6. viewed 21 May 2011 Joseph M. Lookofsky & Herbert Bernstein, Understanding the CISG: A compact guide to the 1980 United Nations Convention on Contracts for International Sale of Goods, (3rd edition), Kluwer Law International, London, 2008, p. 6, viewed 21 May 2011, http://books.google.com/books?id=ya17iVtzQokC&printsec=frontcover&dq=Understanding+the+CISG:+A+compact+guide+to+the+1980+United+Nations+Convention+on+Contracts+for+International+Sale+of+Goods&hl=en&ei=DrvYTbHWD4qwhQfuxumwBg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCkQ6AEwAA#v=onepage&q&f=false Walther Hadding & Uwe-Helmut Schneider, Legal issues in international credit transfers, Duncker & Humblot, 1993, p. 46, viewed 21 May 2011, George Mc Guire, Handbook of Humanitarian Health Care Logistics, George Mc Guire, New York, p. 434 , viewed 23 May 2011, Edward G. Hinkelman, Dictionary of international trade: Handbook of the global trade community includes 21 key appendices (6th edition), World Trade Press, Washington, 2005, p. 253. viewed 23 May 2011, Pace Law School Institute of International Commercial Law, “Guide to CISG Article 2,” August 29 2006, viewed 21 May 2011, Margaret L. Moses, Principles and practice of international commercial arbitration, Cambridge University Press, Cambridge, 2008, p. 3-4, viewed 21 May 2011, Read More