The Case for The United Nations Convention on Contracts for the International Sale of Goods

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The Case for The United Nations

Convention on Contracts for the

International Sale of Goods

A literary review on the issues and need for renewal and expansion of the CISG. Cas Klokman

S3121852

Faculty of Economics and Business University of Groningen

Supervisor: Mrs. T.J. Kooijenga, LL.M.

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ABSTRACT

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INTRODUCTION

Within every interaction an exchange can be found. Whether these exchanges concern tangible or intangible benefits, voluntary exchange is always associated with economic value: “what gratifies less is abandoned in order to attain something that pleases more” (Mises, 1998, p.97). The value of the exchange is assigned according to the assessment of the different parties involved within the transaction. Whenever this exchange involves the transaction of money, this exchange becomes a sale; the most basic form of economic exchanges. However, with different parties one can assume different expected and preferred outcomes as a result of these exchanges, as each party has their own agenda. Therefore, with these economic exchanges comes a need for mutually accepted rules and agreements that make sure that each party receives their desired outcome of the exchange. These rules and agreements can be shaped in the form of contracts, or other legal instruments that ensure that both parties fulfil their part.

With the globalization of modern business, multiple organizations are expanding their operations abroad. Thus, the aforementioned legal instruments need adaption to facilitate these international transactions as well. Luckily, this need not be to much of a tedious job as there are different legal instruments that companies can utilize in terms of, international contracts in business. One of these instruments is the United Nations Convention on contracts for the International Sale of Goods (CISG), otherwise known as the Vienna Convention, which facilitates international trade among the 93 countries, or contracting states, that ratified the convention.

Although these types of legal instruments provide a basis for both parties to maintain an agreement, often enough the contracts’ rules are either unintentionally or deliberately disregarded, and with this negligence come multiple issues. Reviewing several case studies as well as previous reports on the subject of the CISG reveals that many authors have touched upon the issues of the Parol Evidence Rule as well as the Concept of Consideration, offering an insight in the existing issues as well as remedies used by courts in the past. It appears that there is a need for a general overview of the specific aforementioned topics and how they affect the need for renewal and expansion of the CISG.

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that arise as a result of flaws within the legal instruments. To keep a narrow research objective, the only legal instrument that will be analysed is the Vienna Convention.

Furthermore, throughout the report, several case studies involving the CISG are analysed, as well as the chosen remedy, and lastly how the discussed issues might point to the necessity of renewal and expansion of the CISG in order to form a final assessment on the actual prosperity of the CISG. The main research question is thus:

“What are the central issues in connection to the United Nations Convention on Contracts for the International Sale of Goods and in what sense can previous research advise us on the renewal and/or expansion thereof?”

The remainder of this report is structured as follows. First, this report will study the history of the Vienna Convention and give a brief overview of its scope to create a better understanding of the convention. Furthermore, a literature review will be conducted to give deeper insight into the issues that are already mentioned in existing literature. Throughout this literature review, an analysis of case studies will give a better understanding of the practicality behind cross-border transactions and the aforementioned issues that arise with application of the Vienna Convention. The findings will be analysed with an eye on the ongoing debate concerning the need for renovation or expansion, finally resulting in the assessment on the overall accomplishment of the CISG.

GENERAL OVERVIEW OF THE UNITED NATIONS

CONVENTION ON CONTRACTS FOR THE INTERNATIONAL

SALE OF GOODS

I. History of the Vienna Convention

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Nations. (Farnshworth, 1984), after harmonization efforts for international law going as far back as 1920. Then, in 1930, legal experts from Western European countries came together under protection of the International Institute for the Unification of Private Law, better known as Unidroit, in order to form a uniform and harmonized law on the international sale of goods (Winship, 1982).

This led to the birth of the uniform law on contract formation, or the ULF, as well as a uniform law on substantive sales law, known as ULIS, which were adjoined to two conventions approved through a diplomatic conference in The Hague in 1964 (Winship, 1982). However, these texts had minimal impact on international commerce after they had come into force on 1972, as they were criticized for their inability to take into account trade problems occurring in overseas shipments, the inability to balance the rights and obligations of sellers and buyers, and lastly the difficulty with which the concepts and rules were composed (Winship, 1982).

Simultaneously, other developments soon overtook the role of the ULIS and ULF as the United Nations established a Commission on International Trade Law known as UNCITRAL in 1965 (Winship, 1982). As they concluded that the 1964 convention would most likely not be adopted by the majority of states, the General Assembly of the United Nations appointed a new body to redraft the uniform laws. This text would then be revised from 1970 until 1980 when the General Assembly convened the diplomatic conference in Vienna of March and April in 1980 and introduced the CISG as we know it today.

II. Scope of the Vienna Convention

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formation rules (part 2) and substantive sales provisions (part 3) are combined states are free to adapt either or both parts when ratifying the convention.” (Winship, 1982), by virtue of Article 5.

However, not all transactions fall under the CISG as the following three topics are taken into consideration: it is only applicable to international transactions; it governs only commercial sale of goods; and it does not apply to specified types of questions (Farnsworth, 1984).

Firstly, within article 1(1) it states that the “Convention applies to contracts of sale of goods between parties whose places of business are in different states”. More specifically, when the countries in which the involved parties house themselves have both embraced the convention, Article 1(1a), and the rules of private international law lead to the application of the law of a Contracting state, Article 1(1b). In other words, Article 1 (1b) enables parties that do not have their business in Contracting States, but where decisive rules of private international law refer to the law of a Contracting state, to fall under the Convention (Enderlein, 1992).

Secondly, article 2(a) excludes the convention from any consumer sales: “goods bought for personal, family or household use.” Thus, the convention limits itself to the commercial sale of good in order to avoid any risk of impairing the effectiveness of national laws that are specifically designed to protect consumers (Secretariat Commentary on article 2 of the 1978 CISG draft). Furthermore, any transactions that are predominantly considered as a service are excluded in article 3(2) as these transactions would not be characterized as a true sale. Furthermore, unless the buyer supplies a considerable amount of materials the transaction is not excluded if the seller is to manufacture the goods.

Lastly, certain kind of questions are excluded such as; questions of validity on legal limits on what to sell, legal limits on who to sell to or to purchase from, and legal limits on how to sell (CISG art. 4(a)), questions of property and passing of property of the goods purchased (CISG art. 4(b)), as well as questions of product liability of the seller in case of death or personal injury caused by the goods to the buyer or any other person (CISG art. 5). In conclusion, the convention only governs the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract (CISG art. 4).

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As the CISG is already part of the legal heritage of trading nations, it is unlikely to be forgotten quickly and will likely be part of international transactions for the following decades. As economic circumstances, and thus international trade, are changing over time, the question arises whether the convention should be changed accordingly, rather than being seen as a fixed work. Therefore, it is essential to look at any area that requires renewal or perhaps expansion. Many literature works already speak of some of the shortcomings of the CISG, where the main issues include: the issues of a need for increased harmonization (Tripodi, 2015), the contradiction with the doctrine of consideration (Lutz, 2004), and the issues of time limits (Girsberger, 2005).

I. The Need for Increased Harmonization

As mentioned before, the CISG was an effort to promote the harmonization of international law in order to accommodate the international sale of goods. Before diving deeper into the details of this subject, it will be useful to separate between harmonization, uniformization as well as unification, in order to get a clear overview of the different definitions.

Firstly, harmonization can be described as “the convergence of national legislation on a given subject-matter resulting from different kinds of processes, including the adoption of model laws, directives or similar instruments” (Tripodi, 2015). In other words, harmonization is the adapting of national legislations towards a singular international legislation.

Secondly, uniformization is defined as “adoption, by two or more nations, of different kinds of international treaties containing uniform rules of common interest” (Tripodi, 2015). Here the two states will make use of multiple treaties that involve similar rules.

Thirdly, unification is “adoption, by two or more nations, of national legislation held in common, or of supranational regulations of mandatory observance, by means of mutual agreement” (Tripodi, 2015). To put it differently, both parties will agree to follow one legislation to solve the matter at hand.

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However, although the CISG aims towards enabling states with a uniform legislation for the international sales of goods, “the adoption of the CISG is only the preliminary step towards the ultimate goal of unification of the law governing the international sale of goods. The area where the battle for international unification will be fought and won, or lost, is the interpretation of the CISG’s provisions” (Felemegas, 2000). From the moment the CISG was enacted, there have been calls for more harmonization within the area of international contract law at UNCITRAL (Sorieul, Hatcher & Emery, 2013). This stems from the issue where different states often have their own interpretations of the Conventions’ rules. This ‘individual’ way of intertwining domestic or, more specifically, common laws with the International CISG causes traps for foreign parties as they might not be as aware of the domestic laws of the opposing party. Furthermore, the tangled laws increase the possibility of misunderstandings and thus errors. Within an article by Lutz (2004) the main issues that arise when combining domestic laws and the CISG in the form of the Parol Evidence Rule as well as the common law doctrine of consideration, become clear.

The Parol Evidence Rule

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Within the first case, Beijing Metals & Minerals v American Business Centre Inc of 1992, a Texas organization first handedly experienced the problems with the absence of a Parol Evidence Rule, as they tried to defend themselves of a Chinese organization claim by stating evidence previously negotiated orally that were not included within their written agreement (Beijing Metals & Minerals v American Business Centre Inc, 1993). In this case, the defendant was opinioned that the CISG oversaw the dispute, where the plaintiff relied on Texas law to resolve the issue. In the end, the Court of Appeals for the Fifth Circuit decided that the Parol Evidence Rule would apply without choosing the specific law that would be adhered as the court concluded that “discussing about whether CISG or state law applied to the parties’ contract would be unnecessary to its decision”. In this case, any testimony on basis of previously discussed oral terms was excluded under the Parol Evidence Rule. Thus, the Court made use of Texas law stating that “the Parol Evidence Rule generally bars enforcement of prior or contemporaneous agreements introduced to vary, add to, or contradict terms of a fully integrated written instrument.”

In another case, MMC-Marble Ceramic Center Inc Ceramica Nuova D’Agostino SpA (Kehoe, 1998), parties had agreed that the CISG would oversee their dispute. The United States buyer had agreed with the Italian seller through oral means that the standard terms of a contract would not apply, but as a dispute arose, the Federal District Court did not allow any evidence that was previously orally discussed, ignoring Article 8(3) of the CISG; “After engaging in a thorough analysis of how the CISG applied to the dispute before it, the district court tangentially observed that article 8(3) "essentially rejects ... the Parol Evidence Rule." This was a statement clearly contrasting to Beijing Metals & Minerals Import/Export Corp. v. American Business Center.

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Doctrine of Consideration

The doctrine of consideration has been defined by Sir Frederick Pollock (n.d.) as “An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable”. In other words, within common law, consideration is seen as a necessity for simple contracts and can be seen as anything of value that each party gives as a quid pro quo to reinforce their part of the contract.

Even within common law, the doctrine of consideration is far from clear, with courts applying the rules inconsistently because they are unwilling to enforce it or because they are unclear in their understanding of the topic (Ashley, 1913). Thus, in order to see the issues with consideration in relation to the CISG it is important to first get a better understanding of the concept of consideration itself: “Consideration is primarily the test of bargain, and may be defined as the thing which the promise gives or promises to give in exchange for the thing promised; not for the promise, as it is usually expressed.” (Ballantine, n.d.). In other words, consideration is the promise of both parties to partake in an exchange and thus neither party can withdraw. Within the CISG, the approach to consideration can be found in Article 29(1), where “(a) contract may be modified or terminated by the mere agreement of the parties.” This article contradicts the idea of consideration, as it allows both parties to terminate their ‘promise’. In other words, it removes adequate consideration to set up a contract in the first place, as parties are allowed to change the agreement, under consensus, at all times.

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example of the “black hole” function of the Article 4 of the CISG, where the District Court of New York “managed to request and find consideration in a CISG case although the convention rejects the requirement of consideration in Article 29 and abandons it in its formation rules”.

However, an approach was already developed to find a way out of this “black hole” dilemma. Based on Hannold’s (1991) approach, the convention displaces domestic law governing validity issues when its principles offer a solution on the same operative facts. In other words, although the convention does not specifically govern the validity of the contract, some of the articles may provide rules that would contrast with domestic laws on validity of the contract. The Secretariat commentary on Article 4 of the CISG confirmed this and stated that “In case of conflict the rule in this Convention would apply.” This notion offers a solution to the validity issue where it can be characterized according to domestic law and simultaneously it adheres to the conventions harmonization purposes.

Diversity as an Advantage

Lutz (2004) concludes that the intertwining of the Conventions’ provisions with common law concepts does not present a major obstacle to the courts. Both the issue of the Parol Evidence Rule as well as the doctrine of consideration have been resolved by clear court decisions that show that common law courts are actually able to incorporate the convention as a new agreement.

We must also take into account that there is neither empirical evidence on which we can base a compelling need, nor is there permanence of uniform law (Tripodi, 2015), as these are only mere assumptions. Further emphasizing on this point, there is no proof that the diversity in law or the intertwining of these legal systems proposes a hurdle to international trade, as organizations might even benefit from legal diversity: “diversity of laws per se holds advantages by facilitating a choice of law to suit a particular transaction, or even a particular sector” (Spagnolo, 2014).

II. The Issue of Time Limits

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seller and a German buyer of shoes (Germany 14 June 1994 Lower Court Nordhorn). This seller formed a sales contract containing remarks on delivery of the shoes, however, both buyer and seller could not agree on whether the delivery was actually late or not as the contract used the remark “before holidays, no later”, which does not constitute a fixed delivery date and, due to this ambiguity, did not give the buyer the right to the termination of the transaction. Within the seller’s contract it was provided that the buyer could avoid the contract following a notice demand. In this case the court held that the validity of the seller’s conditions was beyond the provisions of the convention, however, according to Koneru (1997), "[t]he inquiry should not have been whether such clause was valid, but rather whether the time fixed was a reasonable time."

Girsberger (2005) touches further upon this problem with a focus on Article 39 of the CISG. He firstly describes the issue of reasonableness of the time with which the buyer must give notice to the seller with regards to lack of conformity of the goods delivered Article 39(1): “The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.”

Furthermore, he describes the issue on how to continue when the cut-off period of Article 39(2) “must be brought in line with a (shorter) national statute of limitation”, where Article 39(2) states that: “ In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee.”

When discussing the conformity of goods, one must first establish the period in which the goods must be inspected to maintain the buyers’ rights. Secondly, the period of time in which the notice of defect(s) must be stated. In reality, distinguishing the two periods has proven to be more complicated. As stated in Article 37 (ULIS, article 39) Commentary point 1: “Article 37 states the consequences of the buyer’s failure to give notice of non-conformity of the goods to the seller within a reasonable time.” According to Girsberger (2005) the time-frames that are given in Articles 38 and 39 of the CISG that are defined as “reasonable time” are often confused.

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to be given.”. The only specification of time can be found in article 37(2) (ULIS, article 39) where it states that the buyer loses any right to rely on lack of conformity of the goods if there is no notice given within a period of two years from the date on which the goods were actually given to the buyer. As Girsberger (2005) mentions, the “reasonableness” of time has not been given, and has to be concluded based on individual circumstances of each case, leaving a lot of room for diversity.

Nachfrist

As one of the main attempts of the CISG is to keep the contract standing as long as there remains a possibility to perform the contractual obligations, one of the offered remedial actions with regards to the issue of time limits is the procedure of Nachfrist (Zeller, 2001). Liu (2005) briefly describes the Nachfrist procedure as “a companion of the remedy of specific performance which states the right to require performance of the contract by the non-performing party and which anticipates the aid of a court or arbitral tribunal in enforcing that right.” The Nachfrist procedure thus allows the non-performing party additional time to execute the contractual agreement after the original contractual due date has expired and furthermore ensures aid of a court or arbitral tribunal in enforcing that right (Liu, 2005). Although the aggrieved party might prefer to make another transaction with a third party as this additional time might be too large of an inconvenience for the aggrieved party to afford, the Nachfrist procedure holds an advantage to them as well. According to the Secretariat Commentary on Article 43 of the CISG it may not be certain that a delay in performance means a fundamental breach of contract, and thus avoidance of the contract might not be justified, as article 43 of the CISG states that: “Unless the buyer has received notice from the seller that he will not perform within the period so fixed, the buyer may not, during that period, resort to any remedy for breach of contract”. The Nachfrist procedure offers certainty that the aggrieved party will still receive their end of the contract and reduces uncertainty with regard to waiting times.

Noble Month

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in different domestic legal systems. She noticed how ‘the German legal system has traditionally been restrictive with regard to the relevant notice periods, (while) others such as France and the United States have been much more liberal.’ Thus she introduced the “noble month” rule; which stated that as a means of compromise, a vantage point of one month would be defined to avoid any diversity issues within international transactions. Girsberger (2005) uses the case of the German Supreme court (BGH) in 1995 as an example, where a German buyer of mussels from New Zealand found that, after an inspection, the mussels did not comply to the German guidelines. The notice, however, was given over six weeks after discovery. In this case, the Court adhered to the “noble month” by stating that a notice could still be given within four weeks after discovery of the defect in order to accommodate different international laws.

Although the “noble month” rule has made an appearance in several cases, it is not yet established as an international standard as some individual cases might still benefit from rules specified specifically for their situation. In any case, it gives a general solution to the uncertainty that comes with the CISG undefined “reasonableness of time” if any court wishes to adhere to a more international, uniform practice of law.

CONCLUSION

With the increasing internationalization of business, trade has more than ever been in need of a uniform, harmonized system of law that would offer generalized solutions to any situation even though states might adhere to different domestic laws. The United Nations Convention on Contracts for the International Sale of Goods was formed as a means of fulfilling this need. However, when constructing such a general legal instrument, the interpretation of its provisions and divergence from domestic laws has shown to pose issues in multiple cases.

The main point of criticism is the need for increased harmonization, and specification of the provisions in order to increase harmonization, within the CISG. As different states have different interpretations of the CISGs’ provisions, issues with diversity arise, as foreign parties might not be aware of the domestic parties’ laws and thus get trapped in a legislative web.

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be legally accepted. As the convention did not include such a rule and, in contrast, offered Article 8(3) which states that consideration must be given to all relevant circumstances, including previous, oral, negotiations. Most courts thus use their own domestic laws to solve any disputes between different parties, as these domestic laws are more often specifically defined through the Parol Evidence Rule. Even though Article 8(3) currently offers a solution as courts have ruled in favor of this article and rejecting the Parol Evidence Rule, it is only partially a usable provision as it is not specifically defined.

The second issue talks about the doctrine of consideration. Consideration in most domestic laws usually implies that both parties partake in a contract on basis of a promise, where both parties cannot withdraw from the promise of exchange, however within the CISG, article 29(1) it is stated that parties can modify or withdraw from the contract if they both agree on how to do so, therefore reducing the validity of any contract adhering to the CISG. Although the convention does not concern itself on the validity of the contract, some of the articles may provide rules that would guide the use of domestic laws in order to resolve issues concerning validity.

The issue of the definition of reasonableness of time is a reoccurring phenomenon throughout literature. Specifically, the lack of definition is the problem, where multiple articles do not give a fixed period in which parties should notify defects of received goods for example. As different international legal systems are either stricter or more liberal, this

imprecise definition would cause an uncertainty amongst courts on what time period to adhere to. A current solution is the “noble month” rule by Schwenzer (2001), which states that as a means of compromise a vantage point of one month would be defined to avoid any diversity issues. Furthermore, the Nachfrist procedure gives any aggrieved party certainty on their part of the contractual agreement whenever the due date has not been met by the non-performing party.

To answer the research question “What are the central issues in connection to the

United Nations Convention on Contracts for the International Sale of Goods and in what sense can previous research advise us on the renewal and/or expansion thereof?”, it can be

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REFERENCES

Literature

Ashley, C. (1913). The Doctrine of Consideration. Harvard Law Review, 26(5), 429. doi: 10.2307/1326089

Ballantine (n.d.), D.H.W. Contracts, 7 Commercial Laws of the World, 8i

Berman, P. (2016). The inevitable legal pluralism within universal harmonization regimes: the case of the CISG. Uniform Law Review - Revue De Droit Uniforme, 21(1), 23-40. doi: 10.1093/ulr/unw001

Enderlein, F; Maskow, D (1992), International Sales Law, Commentary on the United Nations Convention on Contracts for the International Sale of Goods. Oceana Publications.

Farnsworth, E. (1984). The Vienna Convention: History and Scope. The International

Lawyer, 18(01), 17-20.

Felemegas (2000). The United Nations Convention on Contracts for the International Sale of Goods: Article 7 and Uniform Interpretation 13.

Girsberger D (2005). The Time Limits of Article 39 Journal of Law and Commerce, Vol. 25, 241-250.

Mises, Ludwig von. (1998). Human Action: A Treatise on Economics. Auburn: Ludwig von Mises Institute.

Koneru P (1997), "The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles", 6 Minnesota J Global Trade 105 n 189.

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Liu, C. (2005). Additional Period (Nachfrist) for Late Performance:

Perspectives from the CISG, UNIDROIT Principles, PECL and Case Law. LL.M. of Renmin University of China.

Lutz, H. (2004). The CISG and Common Law Courts: Is There Really a Problem?. Victoria University Of Wellington Law Review, 35(3), 711. doi: 10.26686/vuwlr.v35i3.5711

Schwenzer (2001), supra note 6, at 17, with further references; see also GERNY, supra note 6, at 152 et seq.; Shuttle Packaging Sys., L.L.C. v. Tsonakis, No. 01 C 691, 2001 WL 34046276, at *1

Scott, Robert E.; Kraus, Jody S. (2013). Contract Law and Theory. New Providence: LexisNexis. ISBN978-0-7698-4894-5

Sorieul, Rénaud; Hatcher, Emma; Emery, Cyril (2013). Possible future work by UNCITRAL in the field of contract law: Preliminary thoughts from the Secretariat. Villanova Law Review, Vol. 58, No. 4, pp. 491–507.

Spagnolo, Lisa (2014). The CISG as Soft Law and Choice of Law: Gōjū Ryū? Available at: http://ssrn .com/abstract=2418091.

Treitel, G. H. (1995), The Law of Contract (9 ed, Sweet & Maxwell, London) 176-177.

Tripodi, L. & Bergsten, E. (2015). Towards a New CISG. The Prospective Convention on the International Sale of Goods and Services. Brill | Nijhoff.

United Nations Convention on Contracts for the International Sale of Goods, Vienna, 11 April 1980, S.Treaty Document Number 98-9 (1984), UN Document Number A/CONF 97/19, 1489 UNTS 3.

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Zeller, B (2001), Buyer's notice fixing additional final period for performance: Remarks on the manner in which the Principles of European Contract Law may be used to interpret or supplement Articles 47 and 49(1)(b) CISG, available at:

http://www.cisg.law.pace.edu/cisg/text/peclcomp47.html

Case studies

Amtsgericht Nordhorn, (14 June 1994) 3 C 75/94 available at http://cisgw3.law.pace.edu/cases/940614g1.html

Beijing Metals & Minerals v American Business Centre Inc (1993) 993 F 2d 1178 (5th

Cir).

Bundesgerichtshof, Germany, (8 Mar. 1995), available at http:// cisgw3.law.pace.edu/cases/950308g3.html (CISG-online.ch case 144).

Geneva Pharmaceuticals Technology Corp v Barr Laboratories Inc (2002) 201 F

Supp 2d 236 (SD NY).

The Case for The United Nations Convention on Contracts for the International Sale of Goods