Contracts of International vs. Domestic Sale of Goods Act

Discussion

The rapid expansion of global trade in recent times has made businesses to deal with the laws and customs of many states. Litigations at all times are costly everywhere, and quite often people doubt about fairness of legal rules and procedures exhibited in other countries. For this purpose therefore, there was strong reasons to provide business partners around the globe confidence to believe that they can use uniform laws that enable them to “play by the same rules of the game” and ensure that those who serve as judges to disputes are qualified and impartial. This effective legal rules and procedures substantially reduced the cost of doing international business. The United Nations in an effort in an effort to have a commercial code that most parties would feel not biased to their national interests adopted the “Convention on Contracts for the International Sale of Goods (CISG)”. The CISG was established through the United Nations Conventions to provide international sales legislation that is uniform.

Background to CISG

The CISG provides the most successful uniform laws applied in contracts internationally. Several countries that form an important part of the world trade have ratified CISG making this law except the United Kingdom and Japan. Through the CISG law, exporters are able to avoid litigation of cases in procedural stages relating to the laws that conflict, as it reconciles the variations existing between domestic laws of different jurisdictions. CISG law provides stakeholders such as contracting parties, courts, and arbitrators acceptable substantive rules that are acceptable. It is applicable to contracts dealing with commercial sale of goods entered into by contracting parties who have established areas of business in different countries that have ratified the CISG. It takes into consideration the location of the business as a matter of priority and not the citizenship of the parties involved.

Unlike the Sale of Goods Act, which applies to goods sold to the consuming public, CISG contracts apply only to commercial sales or sales between merchants. There are sales that are excluded from the CISG even among merchants; auction sales, consumer goods purchased for household or individual use, and contracts that are primarily for the supply of labor or other services. Consequently, parties to contracts that would normally be covered by CISG can choose another law to govern their contract for the sale of goods, if they so wish.

Comparisons and contrasts of CISG and Domestic law in Terms of Scope

Currently, the CISG accounts for two-thirds of all international sales law for world trade and, in practice it supersedes all domestic sales laws of many countries with which the UK does business with. The CISG gives parties who adopt its provisions with benefits of widely accepted and increasingly understood text. Parties to a contract under CISG are not deprived of the freedom of the contract. The CISG provisions merely act as a gap filter that governs the rights and obligations of parties where the contract is silent on this matter. Considerable differences exist between the contractual laws of individual countries, and therefore an understanding has to be found through the CISG. The CISG attempts to eliminate most obstacles to international sales contracts.

The CISG compares again differently from the Domestic Sales laws as it recognizes the basic principles of contractual freedom in the international sale of goods. The contractual freedoms on international sale of goods as contained in the domestic sales laws are rigid and inflexible. Under article 6 CISG, parties are enabled to exclude the application of the CISG and are accorded the right to select those sections of the CISG by which they are in agreement to be bound with.

The CISG language is stated plainly, that is, it restricts the use of technical concepts and legal jargons commonly used in domestic sales jurisdictions. It is significant to understand that the CISG has to relate with domestic sale jurisdictions in international business. Article 7 CISG provides reference to good faith. This article was enacted as a result of consensus sought due to the opposition to the application of good faith as a standard in the execution of the contract.

The applicability of the CISG is determined according to its own rules of application set as out in Articles 1 to 6 CISG. The CISG relies on the elements related to the parties to the contract and their connection to the contracting States to the CISG, and the transaction itself to determine its applicability. The domestic sales rules on the other hand, are used to determine the application of the CISG to the contract in situations where Articles 1 to 6 CISG leaves a gap or expressly allows the choice of law rules to be used.

Additionally, Article 1 to 6 of the Convention provides rules which restrict the scope of CISG besides the provision of rules of its application. These rules are of great significance because the unification of sales of different legal jurisdictions’ traditions through the CISG is only a partial one. The CISG seems only to regulate a section of the law, for instance aspects concerning contract sales and performance. Comparably, in practice, the domestic sales law which is determined by the private international law rules will be applicable together with the CISG. This section delves on comparing and contrasting the CISG and the domestic sales law in terms of; application requirements, contracting party autonomy, applicability of the CISG because of private international law rules, reservation against the application because of private international law rules.

First, the CISG application requirements dictate that the contracting parties have their respective places of business in different States. This is provided for in Article 1 (1) CISG. The domestic sales laws on the other hand do not insist on this requirement. The CISG under Article 10 outlines specific rules for situations where one or both contracting parties have several places of business. Article 10 (a) CISG provides that, in the case of several places of a contract, the branch which has the closest connection to the contract and its performance is determinative.

Most industrialized nations are currently governed by the UN Convention on CISG, when they conduct international transactions. The scope of CISG application is determined by articles 1-6. Contracts that fall within CISG scope are laid down in articles 1, 2, 3 and 6. The extents to which these provisions are governed are provided for in the Articles 4 and 5. This determines the parts of the sales law and the general law of contract that is governed by the CISG.

The scope of CISG application is defined by the geographical criteria in terms of CISG article 1 in conjunction with article 10 CISG and substantive criteria in terms of articles 1 (1), 3, 4, 5 CISG. The application of article 10 (a) without reference to nationality, civil or commercial character of the parties or of the contract, place of incorporation determines the geographical criteria, and the places of business.

As long as parties to the sales contract are contracting members, the CISG contracts will remain enforceable even if the forum directs the use of the law of a third country such as the law of the country in which the contract was to be performed. However, this could be nullified only if the suit occurred in a third country that has not ratified the Convention. It would also be null and void if the process of the private international law practiced in that country would use the law of the forum, as its own law, or the law of the fourth non-contracting State to the contract. Additionally, this principle is applicable when contracting parties from CISG member states decide on the law of a contracting State as the law of the contract. In this case, the CISG provisions shall be applicable despite the fact that parties to the contract have not stated specifically the convention.

Second, the principle of party autonomy is determined by article 6 CISG. It also allows the exclusion of the application of the convention from changing the effect of any of the provisions. The provisions of the CISG are often not applied as a result of the decision made by parties to use the domestic law of a contracting State to be the law applicable to the contract. A contravention of the CISG occurs when the provisions of the contract provide rules which vary from the Convention. Additionally, the possibility to exclude or vary the provisions the parties may also agree to the CISG even though their contract does not underlie the CISG because of the missing conditions of application.

Third, the CISG strictly applies only to contracting States that have ratified the Convention. It also applies if at the time of the conclusion of the contract, the States had ratified the Convention into their domestic or national laws. With rising increase of States ratifying the Convention, the application of the CISG through Article 1 (1) (a), namely that the CISG automatically applies to contracts of sale of goods between contracting parties whose places of business are in different CISG member States, has become more and more the norm. Hence, meeting the requirement of “places of business of the contracting parties in different member States” makes the CISG generally applicable to the contract between the parties.

Under Article 14 (4) CISG, the application of the CISG turns on the place of business of the parties to the contract. The question of the nationalities of the parties is irrelevant. The article does not provide for an inquiry into whether a contracting party meets the legal obligations of a particular State in respect of the State being a merchant. The fact that nationality does not play a role in determining the applicability of the Convention is an advantage for the use of the CISG rules since it releases parties from an inquiry into the nationality of other contracting parties.

Comparatively, the domestic laws such as the UCC rules in regard to “who is a merchant,” outlines the sometimes rather difficult inquiry into this matter. Merchants are regarded as professionals in business under the UCC rules. The two types of merchants are distinguished under Article 2-314 UCC where a merchant is considered to be someone selling a specific good and possessing knowledge about it.

As part of the domestic law of the referred member state, Article 1 (1) (b) CISG is a distribution provision which divides the law of the member state in the area of sales of goods into different strands: one, sale of goods relating to the domestic sale of goods contracts including special consumer protection laws; and two, sale of goods law relating to international sale of goods contracts. Therefore, there is similarity of CISG under Article 1 (1) (b) to Article 2- 102 UCC in its action.

The subject matter of the CISG is limited to the contract formation as demonstrate in article 4 CISG and several other Articles in the Convention. The Articles also indicate the rights and duties of contracting parties arising from such contract. Therefore, any application of the CISG requires the consideration of member states, member states with Article 95 reservation, and non-member states exist side by side. Confusing situations can occur if the CISG is applicable only because of private international law rules. However, the function of Article 1 (1) (b) is understood as being one of distributing the contract law of member states.

Where a member state, because of an Article 95 reservation, has made Article 1 (1) (b) CISG inapplicable, then the member states signals that it wants, when the private international law rules refer to its law, not that the CISG applies, but rather the domestic sale of contract law applies. In such a case, the Convention can only be applied if the requirement for the application CISG turns on place of business of the parties to the contract. Respect has to be accorded to the decisions of a national assembly in the “reservation of a member state” even if it is a foreign court whose private international law rules lead to the law of a reservation member state.

Fifthly, the Convention and the domestic sale law compares differently in terms of contracting parties autonomy. The principle of contracting party autonomy in domestic sales law guarantees contractual freedom compared to CISG rule, as provided for under Article 6 CISG. Hence, the parties to the contract have the discretion of avoiding the CISG wholly or in part. This may be influenced by the choice of a different law or by the express rejection of the CISG without other choice of the law. The domestic sales laws deal expressly with the possibility of an implied exclusion unlike the CISG.

The choice of a domestic law should automatically be seen as excluding the CISG and only the domestic sale of goods law to be applicable. A gain, there must be a clear indication that that was the contracting parties intention. For instance, there must be a stipulation that a particular domestic law concerning liability of material defects should apply to the contract. Domestic Sales Law stipulates that evidence of negotiations can be summoned before a court of law when interpreting a choice of law clause according to Article 8 (3) CISG.

Comparison and Contrast of CISG and the Domestic Law in Terms of Substantive Ambit

CISG compares differently with the domestic sale rule in terms of the formation of the contract and the rights and obligations of the buyer and the seller arising from the contract. The Ambit of the CISG is limited under Article 4 CISG. Contractual matters arising outside the substantive ambit of the CISG have to deal with according to the domestic law which is determined by the private international law of the forum.

These “external gaps” contrast with “internal gaps” which are gaps within the substantive law regulated by the CISG. In regard to some areas, the application of the CISG is explicitly excluded. In regard to some areas the CISG has “intentional” gaps because States could not agree on how to regulate a particular matter. Under the substantive ambit, the CISG and domestic law compare and contrast according to; contract validity requirements, transfer of property, compensation for personal injury and death, and compensation for damage to property.

CISG and the Domestic Sales of Goods Act can also be compared substantively in terms of risk avoidance. The CISG, for instance, does not contain any provision that governs the transfer of property despite of its ability to avoid risks or damages. The Domestic Sales of Goods Act on the other hand has detailed provisions specifying when the transfer of property or title occurs. However, the CISG provides a clear basis on which relevant arrangements including insurance can be made available, even though it does not have regulations in the transfer of property or the passing of title. Under the CISG, risks on losses or damages generally pass on the handing over of goods to the carrier or incase of direct delivery to the buyer.

It is important to note that the CISG provisions insist on sustaining and maintaining contracts through performance by the contracting parties. CISG does not make it easy for contracting parties to end the contract in case of breach. This is significant particular in the area of avoiding or reducing economic wastes of goods that arise when a contract is terminated leaving commodities that neither party would need.

The CISG and the domestic law compare differently in terms of contract validity requirements. For instance, the CISG under Article 4 (2) (a) specifically excludes matters of contract validity from the scope of the CISG unless they arise with the matters of offer and acceptance which is regulated in part II CISG. The domestic law on the hand applies to the contract with respect to matters such as capacity to contract. Second, the CISG has no provisions that deal with the transfer of property of the goods sold and the necessary requirements of such transfer.

As with the requirements in respect of a valid payment, the domestic law applicable governs the transfer of property. Third, under Article 5 CISG excludes from the scope of the Convention, the sellers liability for death or injury caused by goods. This is because the CISG does not incorporate product liability. Four, the CISG and the domestic law compare agreeably in terms of compensation for damage to property. Article 5 CISG does not exclude damage to property in the scope of CISG.

Substantive Comparisons and Contrasts of CISG and domestic Sales law

This part of the discussion identifies and provides analysis of the most significant comparisons and contrasts that exist between the Convention and the Domestic Sales Act. Competent legal advice is necessary to help in providing relative comparisons and contrasts between the CISG and the Domestic Sales Acts such as the UCC of the U.S. in regard to any transaction of international nature. These comparisons and contrasts involves the substantive concerns of; statute frauds or oral contracts, battle of the forms, warrantees and disclaimers of warrantees, perfect tender rules, Notice for non-conforming goods, unilateral price reduction, and lastly the CISG gaps.

First, the CISG compares differently from the Domestic Sales laws in terms of the statutes of fraud. In the CISG Convention, there is Statute of Fraud in contrast to UCC code for international sales. The CISG allows oral contracting in international business dealings as provided for under the CISG Article 11. It may be proved by any other means, including witnesses.” This means that contracts covered under CISG Convention need no writing to be valid. This is however, subject to some exceptions for those signatory States that exempts themselves under Article 96 CISG. These countries specifically reserve the right to demand writing for sales contracts. In regard to purely executory contracts, an American business contracting, for example, in countries that opted to retain a writing requirement, would still be governed by a writing requirement. When the US ratified the CISG, it did not opt out of the CISG oral contracting rules.

The oral contract under the Domestic Sales Act will be enforceable on contracts valued at less than $500 USD. The CISG recognizes oral contracting only in contrast to UCC which prohibits oral contracts. The terms of an agreement become more accurate and specific by means of parties putting their agreements in writing. This also brings about the possibility of the dealing between the parties less prone to the resulting disputes. In comparison and contrast, the CISG does not compel the parties to provide a formal written agreement with respect to “statute fraud” in international transactions in contrast to the UCC code. For instance, under Article 11 CISG, a written sales contract must not be necessarily be completed or witnessed in writing. In the absence of exceptions, it is permissible under the CISG for oral modifications to be performed on sales contracts.

The “mirror image rule” has been adhered to by most national jurisdictions, for instance, under common law of the UK and the civil law of France. In comparison, both the CISG and domestic sales of goods laws require the parties to the contract to abide by the terms and conditions stated in the sales contract. In this effect, the law under the CISG Article 19 (3), which defines, “additional or different terms.” Thus, almost all offer or acceptance differences that appear to be material alterations are interpreted as no contract was formed.

The offeror could ignore the importance of a contrary acknowledgement and act as if a contract has been formed. In this case, the offeror may have agreed the offeree’s proposed terms. The terms of the offeror by not objecting, that is, not even orally, could lead under CISG Article 19 (2) to a contract, with the terms of the so called acceptance rather than the offer. Moreover, trade usage, course of performance, and industry standards are openly important under CISG.

Second, the important aspect of comparison between the CISG and the Domestic Sales of Goods Act relates to the offers which cannot be revoked and counter-offers. Under the Domestic Sales of Goods law, there are a number of restrictions to the rights of the offeror to withdraw the offer in circumstances where consideration has not been given by the offeree. This is so despite the offer being expressed to be irrevocable. Domestic sales jurisdictions regard an offer that has been varied as a counter-offer and hence would stand revoked. The CISG has an exception under article 19 which provides that a reply to an offer with materially alteration that do not affect the terms and conditions of the contract constitutes a valid contract and not a counter-offer. However, this is subject to the absence of an objection by the offeror that is timely.

The provisions of articles 19 CISG would do away with the problems associated with the domestic Sales of Goods Act of battle of forms. Under the CISG an offer is assumed enforceable the time there is a sign of the offer reaching the offeror. The Convention facilitates serious transactions, discards the variations arising from different forms of communication and embraces technology. CISG Article 9 (1) states that any reply to an offer purporting to be an acceptance but containing “additions, limitations or other modifications,” is a rejection and a counter offer. Additionally, CISG Article 19 (2) states, “a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or sends a notice to that effect.”

Similarly, even before the advent of the UCC principles, the common law followed the “mirror image rule.” This can be interpreted in terms of varied responses from terms of the purchase order, to result to a counter offer and not an acceptance. No contract could be performed and either party could “opt out” of the contract, as long as the parties did not perform. However, the delivery of goods can be made by the seller to the buyer who subsequently receives them despite the variances in the terms and condition in the forms. The domestic sales of goods law assume a contract to be binding immediately a transaction is performed and completed.

Third, the CISG and UCC compare similarly in their provisions for warrantees. Despite of the similarities in their provisions for warranties, they vary significantly in terms of their “disclaimers of warranties.” However, the CISG does not have provisions that can be compared to the procedures of disclaimers that sellers are not authorized to use under the domestic laws. For instance, under domestic sales of goods jurisdictions, a disclaimer of a sales warranty that is implied must state in writing the “merchantability”. The domestic sales laws propose formalistic language such as no “warranties can extent beyond the description of the face thereof.” The Convention on the other hand, is less formal and appears to allow the disclaimers of warranties as long as the “parties have agreed” in writing or orally.

Fourth, the CISG and the domestic sales jurisdictions also compare differently in terms of “the firm offer rule.” The CISG firm offer rule does not, as the domestic sales jurisdictions do, require a signed writing requirement. However, this has exceptions in those countries that specifically require written contracting. Furthermore, the creation of the CISG firm offer is more casually established than under the UCC. Under the CISG Under Article 16(2), an offer cannot be terminated: if it indicates whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.”

Last but not least, the CISG and UCC compare in terms of the CISG influence on domestic sales contracts. The developments and reforms of domestic sales contracts through several channels have been influenced by the CISG. The obvious example is the implementation of the European Commission directives such as the Sale of Consumer Goods Directive, which applied certain concepts that showed conformity given form by the CISG. In some countries, the CISG has been entrenched, not only for international sales, but also as their domestic sales law. Most Scandinavian countries provide a good example of States that have enacted the CISG Sales law for both International and domestic sales, nevertheless, they have some differences in their respective implementations.

Does the UK need to adopt the CISG?

The majority of the United Kingdom’s major trading economies such as China, Australia, United States of America, European Union member States, and Canada are signatories to the United Nations Convention. These economies provide the most significant export market to the United Kingdom. However, these facts have not adduced the United Kingdom to ratify the CISG. This section attempts to discuss the important reasons that have made the United Kingdom to remain outside the ambit of the CISG.

The attitude of the United Kingdom towards the adoption of the CISG is an important matter that needs to be considered. The United Kingdom was one of the active countries that formed the CISG at Vienna in 1980 and was fully involved in the discussions that led to the final text. It was also among the only nine countries that brought into force the two Hague Conventions of 1964; relating to ‘a Uniform Law on the International Sale of Goods’ (ULIS), and to a Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF). Yet, the United Kingdom has remained non-committal to ratify the CISG.

It is important to note that the UK is not governed by a uniform law. Laws formulated frequently in the UK apply both in England and Scotland, however, non-statutory legislation is applied and administered differently by courts in each jurisdiction. The UK common law forms the bed rock of the English system of jurisprudence and influences greatly the Scottish private law. Many countries overseas apply the UK common law. This provides the UK an edge in international arbitration and litigation. Perhaps the UK has not ratified the Convention as it is perceived as a threat to her influence in international arbitration and litigation.

The United Kingdom has not ratified the Convention partly because parliamentary time available for matters of law reform is not sufficient. The United Kingdoms failure to adopt the CISG owes more to a lack of sufficient interest to provide the project the momentum it required than to any organized opposition or dislike of international developments. The United Kingdom’s law has the reputation of being sensitive to the requirements of the commercial activity and UK courts handle a large body of suits involving international parties. It is possible that the replacement of the UK Law by uniform law will make the UK a less attractive location for the settlement of disputes, especially in view of the very high cost of litigation there.

But there is more to legal practice than litigation. The legal life in the UK is dominated by practice in the city of London, whose major law firms are international and by no means confined to the practice of the common law. Some no doubt would welcome the lowering of legal barriers that operate as legal impediments to the legal activity with the corresponding expansion of uniform legal activity.

The United Kingdom does may not need to ratify or adopt the CISG because ULF does not encourage the courts to refer to domestic case laws under Article 7 (2). If the United Kingdom adopts the CISG, it would contradict section 14 (3) of the Sales of Goods Act of the United Kingdom. The adoption would create unprecedented confusion in courts on whether to accept contractual decisions from oversees even if those decisions are contradictory to the interpretation of section 14 (3) of the United Kingdom domestic Sales Act. Another important reason why it may not necessary be for the United Kingdom to ratify the CISG is the absence of a hinterland for the CISG laws. There are no developed case laws or civil codes that are general that provides the basis for sales codification contained in the CISG.

The United Kingdom may not also be obliged to ratify the CISG since the later is conspicuously silent on issues of general law of contract. A special contract such as a sale depends upon for sustenance on the general principles of the law of contract. A gain the CISG preserves the general market initial risk allocation in case of varying price items which may not be the standard subject matter for contracts under the CISG. The CISG tends to concentrate on the “Instant contract” and thus appearing to prohibit consideration of issues that the United Kingdom courts in sales cases.

The rules under CISG move a step further than the role intended originally under the UCC cure in Article 2, which were meant to deter opportunistic avoidance of contracts. CISG therefore, seems to allow cure even if the seller commits a breach of the contract, and at the same time it is not explicit on what happens on a contract whose breach has decided by the buyer before the seller is accorded the opportunity to remedy.

Finally, the United Kingdom may not require ratifying the CISG because the later does not set out the principle of certainty in contracting. In the instant cases, the principle of certainty is invariable to be bought at the cost of some flexibility and fairness. Parties under CISG are allowed in a mild manner to depart from its provisions and therefore provide for termination rights that are stricter.

Additionally, the CISG guarantees individual parties to dissipate the uncertainty surrounding the period of performance from the other party. This allowance of extra period of reasonable time for performance by the other party in the CISG may in the event of breach at the end of that period enable the other party to avoid the contract. Failure to perform within the period stipulated to be a fundamental breach is not fore seen in the CISG. The United Kingdom law on the hand expresses the value of the autonomy of the parties to the contract in no uncertain terms when underwriting the rights of parties to characterize the contract terms and conditions.

In sum, despite of the many perils in the CISG, the United Kingdom is not likely able to shield its business people from the scope of the CISG in future. This is because the Convention has gained an apparent popularity world wide. In the years since its inception, CISG has been ratified by countries accounting for over two thirds of all world trade, and in addition many cases on CISG have been decided globally. It is also important to note that the value of United Kingdom’s trade internationally has increased considerably. It is against this back drop that businessmen from the UK will encounter the CISG in their international business transactions.

For this reason, the United Kingdom in future should stop its isolation from the Convention in order to protect its business people. The continued isolation from the Convention will enable the UK courts to contribute to the development of CISG jurisprudence in a limited manner, where the proper contract law incorporates the CISG. The United Kingdom can best protect its business people in future by ratifying the CISG and contributing in the development of global business norms.

Furthermore, the adoption of the CISG will provide important benefits to the UK’s exporters and importers of manufactured goods and the raw materials. The issue of selecting the domestic law for parties negotiating in cross border sales contracts is more challenging. Logically, parties in negotiations would prefer their domestic sales laws to be applied because they are familiar with them. This can be very confusing in the contact of international business and thus, making the CISG uniform rules ultimately vital. The CISG attempts to remove or eliminate these barriers to foreign contracts by putting into place substantive rules that are internationally accepted which contracting parties, courts and arbitrators may rely.

The ratification of the Convention by the UK would enable the British business people to buy and sell internationally the raw materials, goods, and manufactured items with ease and economically. The United Kingdom will be spared with the burden of costs and involved in negotiations and entering into international agreements. The CISG provides uniform sales laws applied internationally acceptable to all contracting parties.

Conclusion

The impact and consequences of the CISG provisions are still new. The CISG is gaining support globally as national economies have embraced globalization. Hence, United Kingdom business people can longer take advantage of the UK domestic sales of goods law and forum selection due to the competitive environment. The attitude of having the United Kingdom contractual choice law as the only alternative is long gone as the nature of transactions are changing. The continued isolation of the UK from CISG terms and conditions will risk its business people to lose competitive business opportunities internationally.

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