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International Sale Of Goods Under Cisg
Regulating The International Sale Of Goods Under The Cisg
Explain the concepts of fundamental breach and nachfrist under the CISG, and their importance in regulating international sales. In light of your analysis (and referring to the CISG in general), does the CISG adequately protect the interests of an ‘innocent' party where the other party is in breach of contract?
What Is The CISG?
There are a number of conventions which relate to the international sale of goods including the United Nations Convention on the Limitation Period in the International Sale of Goods 1974, the International Institute for the Unification of Private Law (UNIDROIT) Convention on Agency in the International Sale of Goods 1983, and the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Procurement of Goods, Construction and Services 1994.
The United Nations Convention on Contracts for the International Sale of Goods 1980 (CIGS) is the main convention for the International Sale of Goods. The CISG is an international set of rules designed to provide clarity to most international sales transactions involving the sale of goods. The CISG went into effect on January 1, 1988, with the United States as a party. Most Western countries are now signatories to the CISG. The CISG can be both a discretionary and mandatory set of rules. It is discretionary when both parties agree to be bound by its rules; it has mandatory application when the parties do not choose to use it but become bound to it by virtue of its automatic application. As a result of the mandatory application of the CISG, most international sale of goods contracts with parties in western countries will be subject to the CISG, unless specifically excluded in accordance with the CISG's terms.
The purpose of the CISG is to make it easier and more economical to buy and sell raw materials, commodities and manufactured goods in international commerce. Without the Convention, there is greater room for uncertainty and disputes. The trading law of one country often differs from that of another. In international transactions, there is often doubt about which nation's law is in control. Where there is doubt about the rules that apply, the parties cannot be sure of their rights and obligations. Such uncertainty breeds inefficiency and mistrust.
The CISG does not deprive parties to the contract of the freedom to form their contracts to their specifications. Generally, the parties are free to modify the rules established by the Convention or to agree that the Convention is not to apply at all.
Domestic law also affects the International Sale of Goods provided that no inconsistency arises between the application of these domestic laws and the performance of the country's obligations under any international conventions: See Williams v The Society of Lloyd's and Hi-Fert Pty ltd v Kiukiang Maritime Carriers Inc.
Fundamental breach, sometimes known as a repudiatory breach, is a breach so fundamental that it permits the aggrieved party to terminate performance of the contract, in addition to entitling that party to sue for damages. When a contract of carriage by sea is breached, the defaulting carrier must recompense the shipper or consignee for the damages suffered according to the terms of the contract, and the applicable common law or civil law, or the applicable international convention - The Hague, Visby, or Hamburg Rules, or the Multimodal Convention.
The problem is complicated in carriage of goods by sea cases, because of the long-established principle of geographical deviation, and because the international conventions on carriage of goods have legislated in part on fundamental breach, in respect of geographic deviation, misrepresentation by the shipper and unjustified deck carriage. Moreover, fundamental breach does not fit conveniently into the traditional principles of either the common or the civil law.
There can also be a fundamental breach by the shipper, and this is specifically referred to in the Hague and Hague/Visby Rules, but not specifically dealt with under the Hamburg Rules or the Multimodal Convention.
In English law, fundamental breach was first examined by the House of Lords in the Suisse Atlantique case , wherein they decided that a contract can be voided if a breach of a fundamental term can be found. That is, a breach of a condition that "goes to the root of the contract". This approach is known as the Rule of Law doctrine.
At the Court of Appeal level in Photo Productions Ltd. v. Securicor Transport Ltd., Denning championed the Rule of Law doctrine and extended the rule in the Suisse Atlantique case to apply to all exemption clauses. However on appeal to the House of Lords Lord Wilberforce effectively overturned the Rule of Law doctrine and instead maintained a strict Rule of Construction approach whereby a fundamental breach is found only through examining the reasonable intentions of the parties at the time of the contract.
Concept Of Fundamental Breach Under The CISG
‘Fundamental breach' is defined in article 25 of the Convention, which provides as follows:
“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”
This provision of the convention describes ‘fundamental breach' in three ways; the first is that a fundamental reach is determined by looking at the result of the breach, rather than the nature of the term breach; the second is that the definition of ‘fundamental breach' under article 25 is qualified by the requirement that the detrimental effect of the breach must be foreseeable by the breaching party; and finally, that CISG Art., 25 appears to require an ability to foresee the extent of the detriment flowing from the breach.
The concept of fundamental breach plays a crucial role within the remedial system of the U.N. Convention on Contracts for the International Sale of Goods (CISG), because the remedies available to the parties to a contract of sale depend on the character of the breach. The term ‘fundamental breach' is one of the central terms in the CISG. It fulfills several functions. Other
than avoidance of the contract, a fundamental breach entitles the buyer to require goods in replacement under Art 46(1) CISG. Furthermore, pursuant to Art 70 CISG, a fundamental breach of contract leads to the consequence that Arts 67 to 69 CISG, articles that govern the passage of risk under the CISG, do not impair the remedies available to the buyer. In other words, if, for example, there was a fundamental breach of the contract by the seller, the buyer may still require delivery of substitute goods under Art 46(2) CISG, despite the fact that the goods had been destroyed by a fire at the buyer's premises after the risk had passed.
Under the CISG the performance of the contract for the international sale of goods involves the same sort of issues as performance of the contract for domestic sales. The rights and duties of the buyer and seller have to be considered along with delivery, the passing of property and risk. In addition there are also the interests of carriers, agents and other third parties involved in an international sale.
Due to its extreme nature, the CISG reserves avoidance to such special cases, as non-performance (fundamental breaches) of the contract. This restriction, however, can be bypassed (or extended) in the case of non-delivery of the goods even without establishing that the failure constitutes a fundamental breach by use of a special mechanism. In the case of
the CISG, while fundamental breaches make avoidance available immediately, non-fundamental non-delivery allows for avoidance if the aggrieved party has fixed a curative period for performance; a so-called “Nachfrist period”, and the breach has continued throughout that period. Thus the CISG allows for an “upgrade” of post-Nachfrist non-fundamental non-delivery to allow for avoidance.
In making avoidance of the contract available only in cases of fundamental breach, the CISG seems to deviate from commercial practices that allow parties to reject goods, and more importantly, documents that fail to strictly conform with the contractual specifications, even if that discrepancy is of little practical significance. Such practices are prevalent in documentary transactions such as CIF, and in particular such that involve documentary credit such as a “unclean” documents e.g., bill of lading. Under the fundamental breach rule it would seem that such rejection would not amount in itself to avoidance but instead to a demand for cure which, if unmet, may then constitute a breach allowing avoidance. However, two considerations mitigate the apparent difference between the fundamental breach and strict compliance approaches to avoidance of contract. The first is contractual, namely the parties' general freedom to stipulate what breaches would count as fundamental. In documentary transactions, strict documentary compliance may simply be agreed upon. The second has to do with the function of custom, usage, and commercial practices. Under CISG Art. 9(2), parties are generally bound by prevalent usages. This general principle would certainly apply to the construction of fundamental breach under CISG Arts. 25 and 49.
Concept Of Nachfrist Under The CISG
The CISG Art. 49(1)(b) allows for avoidance of the contract even for some non-fundamental breaches (or, under a different construction, for what may be termed “constructed fundamentality”). The mechanism in such cases is of two tiers. First, the aggrieved buyer sets an additional, curative period of reasonable length for the seller to perform, a so-called “Nachfrist” period. Upon the seller's failure to tender curative performance throughout a Nachfrist period (or, under conditions tantamount to anticipatory breach, even during it) the aggrieved buyer may avoid the contract. Thus these non-fundamental breaches are “upgraded” through the use of the Nachfrist mechanism to the status of avoidance-justifying breach.
Curative periods are set by the aggrieved buyer under CISG Art. 47. The aggrieved buyer may resort to remedies during the curative period (such as damages), but not avoid the contract, unless the party in breach declares that no curative performance is forthcoming. The main constraint applying to Nachfrist periods is that, to allow for eventual avoidance of the contract, the period must be of contextually reasonable length to allow the party in breach to cure its non- performance. Under CISG Art. 47(1), curative periods must be of “reasonable length.”
The Nachfrist mechanism may also be used in cases of uncertainty as to the fundamentality of the seller's breach. While avoiding the contract post-Nachfrist delays the avoidance, the seller's continuing breach becomes “upgraded.” As a consequence, the buyer who is apprehensive about assuming the risk involved in unlawful avoidance may significantly reduce his exposure if he follows the Nachfrist venue.
Non-Performance During Nachfrist Period
A buyer who suffers a non-fundamental non-delivery, may, under CISG 49(1)(b) go the two-tier way: first, fix an additional period for performance according to CISG Art. 47; then, if the seller fails to perform accordingly, avoid the contract. However, under CISG such strategy is limited to cases of non- delivery only, i.e., situations that, in the sale of goods contracts, would often constitute fundamental breach anyway. Professor Schlechtriem considers the non-delivery in CISG Art. 49(1)(b) to extend by analogy also to the failure to transfer documents of title, the argument being that in typical contexts goods without appropriate documentation cannot be legally possessed: they have been delivered physically perhaps, but not legally, which is tantamount to non-delivery. Scholarly controversy emerged from the fact that the language of CISG Art. 49(1)(b) - “in case of non-delivery” - does not seem to clearly require that the non-delivery itself be the breach for which the additional time is fixed, so that it may conceivably be another non-performance (e.g., non-conformity of goods or of documents). Thus the question is whether CISG Art. 49(1)(b) also covers breaches other than non-delivery, committed under circumstances of non-delivery. For instance: assume that the breach in question is the seller's failure to deliver a certificate of origin as required by the buyer and specified in the contract. The buyer may then proceed to set a curative period according to CISG Art. 47(1), namely, extending the timeframe for obtaining the certificate. Let us assume that the certificate is required well ahead of the delivery of the goods and that although the goods were not yet delivered within the Nachfrist period, that in itself is no breach. Is the buyer able to declare the contract avoided according to CISG Art. 49(1)(b), assuming Art. 49(1)(a) does not apply? While some legal systems extend Nachfrist-base avoidance of contract to non-fundamental breaches in general, commentators warn, that while the CISG's Nachfrist mechanism allows an aggrieved buyer to exert pressure upon a defaulting seller, “the Nachfrist avoidance procedure was not to be extended any further than the essential obligation of delivery.” The CISG Art. 49(1)(b) is therefore not designed to allow aggrieved parties to bypass the fundamentality requirement of the CISG Art. 49(1)(a) for any reason other than non-delivery of goods, or, as suggested above, also of documents of title. Any other conclusion would erode considerably the dependence of avoidance on the fundamentality of breach, as it would suffice to set a Nachfrist period for any breach and then declare the contract avoided upon the continuing failure to perform. Professor Schlechtriem adds that drawing analogies from non-delivery to other kinds of non-performance is jurisprudentially dubious, for where no gap exists there is no justification for expanding the scope of the clause by analogy - there is here no gap to be filled, but rather a positive apparatus privileging non-delivery over all other breaches. Commentators likewise note that the non-delivery must be complete non-delivery in order to allow application of CISG Art. 49(1)(b); partial performance is not non-performance.
Because of the “point of no return” status that delivery has in sales transactions, and in international sales, where risks to the seller pursuant post-delivery avoidance are especially acute, non-delivery is a prerequisite for CISG Art. 49(1)(b) to take hold. Thus the delivery of “non-conforming goods” and that of “wrong goods” is to be treated, under CISG Art. 49(1)(b) as well as under CISG Art. 49(2) in the same category, namely they both put the parties in the category of “goods delivered”. Recent case law tends to regard these traditional categories as points on a single continuum, which the CISG endorses.
Anticipatory Breach During Nachfrist Period Under The CISG
Under CISG Arts. 49(1)(b) and 49(2)(b)(ii) the buyer may avoid the contract even before the additional fixed period has elapsed, in cases where the seller himself declares that he will not perform within that period (this is also the rule set in CISG Art. 49(1)(b)(iii), governing avoidance of the contract during a curative period initiated by the breaching seller under
CISG Art. 48(2). These clauses are tantamount to avoidance for anticipatory breach, with the double distinction, that they apply only within CISG Art. 47 periods, and that the information pertaining to future non-performance must originate from the seller himself, and not come by the buyer's way from incidental sources. In this it differs from the provisions of CISG Art. 72, which allows avoidance of the contract if “it is clear” that a fundamental breach is to occur: e.g., a careful buyer may discover non-conformity through proper inspection prior to delivery. “Clear” appears to be a mid-level degree of certainty, between the lower-level “it becomes apparent” of CISG Art. 71 (which allows for suspension of performance in cases of anticipatory breach) and the highest-level of CISG Art. 49(1)(b), (2)(b)(ii) and (iii) which requires a declaration by the seller. Note however, that even the stricter provisions in CISG Art. 49 do not require that the said declaration be a specific one directed at the seller to the effect that the buyer will continue defaulting on this specific transaction. While under CISG Art. 26 a declaration of avoidance - a legal act - must be made by notice to the party in breach. This is not necessarily the case with declarations of continuing default made by the party in breach. A general declaration of insolvency, for instance, should fulfill the “declaration” requirement of CISG Art. 49(1)(b), (2)(b)(ii) and (iii), unless accompanied by a specific communication to the contrary (even an insolvent seller may go ahead with a transaction that will eventually generate value for distribution in eventual bankruptcy).
Protection Of An ‘Innocent' Party Under The CISG
Both buyer and seller have certain protections under the CISG.
The seller's remedies under the CISG are expressed in a number of categories including; requesting the buyer to perform his or her contractual obligations under Art 62., fixing an additional period of time for the buyer to perform (nachfrist) under Art 63; requesting ‘specific performance' under Arts 28 and 62; declaring the contract avoided under Art 64; suspending the performance of the contract under Art 71; avoiding the contract on the ground of an anticipatory breach under Art 72; and claiming damages under Arts 74-78.
The buyer's remedies under the Convention can be divided into the following categories; requesting the seller to perform his or her contractual obligations under Art 46; fixing an additional period of time for the seller to perform under Art 47; requesting a court to order specific performance under Arts 28 and 46; declaring the contract avoided under Art 49; reducing the price of the non-conforming goods under Art 50; refusing to take an earlier delivery under Art 51; refusing to take delivery of a greater (or lesser) quantity under Art 52; suspending the performance of a contract under Art 71; avoiding a contract on the ground of an anticipated fundamental breach under At 72; avoiding a contract in proportion to the defective installments under 73; and claiming damages and interest under arts 74-78.
For the international sales of goods under the CISG, the buyer must examine the goods within as short a period of time as is practicable in the circumstances and give the seller notice of any non-conformity with the quality, quantity, description and other CISG requirements. If the breach is fundamental, the buyer may declare the contract avoided. The buyer may also require the seller to remedy the lack of conformity or fix an additional period of time for performance of the seller's obligations (these remedies being in addition to an action for breach of contract). If goods do not conform, the buyer may accept the goods and reduce the price proportionately.
If the seller delivers a quantity of goods greater than the contract quantity, the buyer may take or refuse delivery of the excess. Any part of the excess taken must be paid for at the contract price.
What remedies does the buyer have against the seller for non-delivery of the goods? The CISG Convention provides for the buyer, at its discretion, to grant the seller a grace period. The buyer may terminate the contract where the non-delivery amounts to a fundamental breach.
What are the main remedies of an unpaid seller against the buyer? Does the unpaid seller have any rights over the goods themselves? The CISG Convention allows an unpaid seller still in possession or control of the goods to retain, and under certain conditions resell, them. The Convention obliges the seller to take reasonable steps to preserve the goods in these circumstances.
Regulating International Sales
Until quite recently, international sales were hardly “international” at all in legal terms: the party with the greater bargaining power, often the buyer, would generally impose its standard terms and its own national law. If the parties came from different legal cultures, for example, from civil law and common law countries, then understanding and negotiating contract terms were even more difficult. These factors did nothing to foster trust, and therefore hindered international trade development. In recent decades, however, much has been done to “level the playing field”. This sporting metaphor is not entirely out of place, as it captures the effect of instruments that help contracting parties to obtain balanced and easily comprehensible contract terms.
The key initiative was the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG). The convention has been adopted by more than 50 countries. For countries that have not yet adopted the convention, parties wishing to conduct international trade can still base their contract on the principles in the convention. The CISG proposes a broadly worded standard set of rights and obligations for both buyer and seller, including the options open to them if there is a problem with the contract. Since 1994, the CISG has been accompanied by the UNIDROIT Principles of International Contracts. This wide-ranging set of principles seeks to cover a much broader range of contracts than just sales. As with the CISG, it provides valuable assistance to a party trying to find internationally accepted wording for any given contract term. Indeed, the CISG and UNIDROIT are increasingly seen as tools that can be turned to at the negotiation stage when trying to counter oppressive terms proposed by the other side. These instruments also help to harmonize international trade terms by reducing to a minimum the role to be played by a national system of law. In other words, if the parties use the CISG or UNIDROIT Principles as the basis for their contract terms, then relatively little remains under the authority of national “governing law”. It would be wrong, however, to conclude that one can do away with “governing law”. There are always matters that are a question of public policy at law and cannot be varied by the parties, thus, for example, the scope of a provision regulating the “liquidated” damages payable in the event of delayed performance is not entirely at the discretion of the parties. There are also key questions that neither CISG nor UNIDROIT address such as the transfer of title in the goods sold, for example. Nevertheless, these instruments provide a very useful guide to firms when drafting an international sales contract. Two basic model sales contracts The reader might well retort that this is all very well, but that specialist assistance remains appropriate in order to produce the contract itself. So what should businessmen or women do if they do not have an international lawyer at hand? What they need are model contracts, and it is good to be able to report that balanced international models are available. This article refers to only two of them: the International Chamber of Commerce (ICC) Model International Sales Contract for Manufactured Goods; and the International Commercial Sale of Perishable Goods Model Contract proposed by ITC. Each model responds to concerns of contracting parties for the type of transaction in question. Thus, for example, since perishable goods are liable to deteriorate quickly, ITC's International Commercial Sale of Perishable Goods Model Contract proposes that the buyer should be entitled to terminate at a relatively early date in the event of late delivery. The contract also foresees a rapid expertise procedure to deal with disputes regarding the quality of the goods. In comparison, ICC's Model International Sales Contract for Manufactured Goods does not provide for an early fall-back cancellation date for late delivery because it would not be justified for manufactured goods. Both provide contract terms ready for use; all the parties need to do is add the relevant details of their own commercial deal, such as name, address, description of goods, and price and payment terms. Both promote harmonization of international contracting practices through use of identical vocabulary and common reliance on the CISG and ICC Incoterms (International Commercial Terms - standard trade definitions). The ITC model contract has been prepared with the aim of limiting the clauses that must be completed by the parties. It has fall-back provisions for everything except key information as to the parties' identity and the description of the goods. The object here is to dispense with the need for a lawyer as far as possible. This is not to say, of course, that lawyers should be kept out of international contracts. They should certainly be used if a party foresees altering the equilibrium that these model contracts seek to propose, or to go further and “pick and choose” from the terms proposed in various instruments in order to assemble a contract. Obviously, there is nothing wrong with drafting a contract afresh. But international sales call for specialist experience. Every attempt has been made in the ICC and ITC model contracts to allow businesses to avoid having to turn to specialists. Keep in mind, however, that the usefulness of the model forms is liable to be considerably reduced if they are substantially modified without specialist advice.
Is CISG Protection Of An ‘Innocent' Party Adequate?
Australia is a party to the CISG Convention and it has had the force of law in Australia since 1st April 1989. The CISG is enacted into Australian law through the Sale of Goods (Vienna Convention) Acts passed in each Australian State and Territory. The CISG applies to all contracts of sale of goods between parties whose places of business are in different Contracting States or where the law of a CISG Contracting State is the proper law of the contract. Its application may be excluded or modified by the parties.
Clauses exempting or excluding liability are generally enforceable. They must not, however, defeat the main object of the contract; such clauses risk being ineffective where the goods are ultimately destined for consumer use. The Trade Practices Act and State and Territory Fair Trading Acts operate to protect consumers and/or penalise suppliers and importers in this context. An example of this is division 2A of the Trade Practices Act which prohibits any limitation or exclusion of liability where goods have been supplied to consumers that are of un-merchantable quality.
It is suggested that the CISG supplies a default rule in articles 31 and 57, which allows parties to reduce their costs of contracting. A uniform law will reduce the costs of contracting as there is no need to bargain around initial allocations. This concept has found its intellectual heritage in the coarse theorem that suggests that the law should be structured in a way that it reduces the costs of contracting. The CISG has been structured in a way, as a uniform law promotes certainty, and furthermore, it should appeal to parties as an alternative formulation. It could be argued that the default rule in the CISG due to its ‘international flavor' would be the one parties would select with full information and costless contracting and hence become an ‘untailored default rule'. The advantage of such a rule would be that it would overcome the problems of courts misconstruing interpretations of conflict of laws if the parties opted out of a standard default rule. This is so because not only the substantive law but also the choice of laws rule are contained in the same uniform rules and hence an interpretation would rely on the same principle, namely article 7.
Central to the suggestion that the CISG provides a choice of laws rule is that courts have the ability to give a uniform effect to contracts where the parties have not made an express choice as to the applicable forum and hence applicable law. The CISG does not completely overcome the problem of forum shopping, but reduce it significantly. The second point is that the CISG will overcome anomalies produced by varied domestic private international law rules, as a uniform default rule is created. The third point is that courts do make mistakes and the CISG offers a uniform and simplified approach to the choice of the governing law, which, no doubt, will enhance predictability and reduce the costs of contracting. Nothing explains this fact better than arbitral decisions. Many arbitration rules require arbitrators to take account of trade usage and provisions of the contract. Simply put, arbitral procedural rules allow arbitrators to choose the applicable substantive law in cases where parties have not made a relevant express determination. As seen in an ICC decision, the CISG was chosen despite the fact that neither of the parties had their place of business in a contracting state. There is no better source to determine the prevailing trade usages than the terms of the UN Convention on the International Sale of Goods. Arguably, a choice of laws decision has been made but the crucial point is that the CISG was viewed as the ‘best fitting' solution to a trade dispute. In summary, the CISG has the ability to view ‘the proper law of the contract as a supplement to contractual bargaining and is therefore the first step in making the choice of laws more transparent, more efficient and more pragmatic.
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