According to the Australian Department of Foreign Affairs and Trade, in the 2014-2015 financial year Australia exported and imported approximately AU$256bn and AU$270bn worth of goods respectively. It is clear that trade on this scale requires some form of international regulation. The United Nations Convention on Contracts for the International Sale of Goods 1980 (Vienna Convention), to which Australia is a Contracting State, attempts to provide uniform regulation while also taking into account different social, economic and legal systems. It is hoped this form of uniform regulation will remove legal barriers in and promote the development of international trade.

Application of the Vienna Convention and the ‘opt out’ culture

The Vienna Convention has a broad application. It applies to contracts for the international sale of goods if:

  1. the parties have places of business in different Contracting States (article 1(1)(a));
  2. the parties have places of business in different States, and the rules of private international law leads to the law of a Contracting State (article 1(1)(b));
  3. the parties agree that the Vienna Convention applies, even if neither party is from a Contracting State; or
  4. the relevant contract does not contain a choice of law clause, and an arbitral tribunal determines the Vienna Convention applies as the appropriate law (for example, article 21(1) of the ICC Rules of Arbitration 2012).

At present, the Vienna Convention has 84 Contracting States which includes some of Australia’s largest trading partners such as China, the United States, Japan and the Republic of Korea. However, there are some notable exclusions to the list of Contracting States including Indonesia, India and the United Kingdom. In Australia, the Vienna Convention has been implemented into domestic legislation through sales of goods legislation in each state and territory, as well as section 68 of the Australian Consumer Law in Schedule 2 of the Competition and Consumer Act 2010 (Cth).

Article 6 of the Vienna Convention allows parties to exclude its operation or vary its provisions. A discussion paper released by the Attorney General’s Department,Improving Australia’s law and justice frameworkA discussion paper exploring the scope for reforming Australian contract law (2012), found that although empirical data is limited, Australian businesses have made relatively little use of international principles (including the Vienna Convention) when entering into international contracts. Similar ‘opt out’ cultures exist outside Australia with 55% of lawyers in the United States and 42% of German lawyers generally opting out of the Vienna Convention.[1]

Notwithstanding these statistics, the Vienna Convention has continued to be used in other countries such as China and Switzerland. This has resulted in the Vienna Convention becoming a well-tested body of law. It may now be time to reconsider whether Australian lawyers and commercial parties entering into international sale of goods contracts should continue to subscribe to the ‘opt out’ culture.

Should parties continue to opt out of the Vienna Convention?

There is no correct answer as to whether parties should continue to opt out of the Vienna Convention. The decision of a party to opt out will be dependent upon all of the circumstances relevant to the contract, the goods sold and its contracting party(s).

The Vienna Convention certainly has some benefits for international contracting parties:

  1. it has been customised and standardised to meet the requirements of international transactions due to longer transport distances and cultural differences, in contrast to often anachronistic and localised domestic sales law;
  2. it provides a neutral legal mechanism accessible in several languages, rather than the party with the least bargaining power most likely required to agree to and research the law of an unfamiliar jurisdiction;
  3. its use for over 35 years has resulted in a well-known and well-tested area of law in both arbitral and court proceedings; and
  4. the obligations imposed by the Vienna Convention do not impede upon the parties’ freedom of contract, allowing parties the ability to agree the rights, obligations and risks of the transaction.

Notwithstanding these benefits, there remain fundamental issues which parties should consider before deciding whether to opt out.

The Vienna Convention is the result of compromise rather than a search for international best practice. As a heavily negotiated legal instrument, compromises were made to ensure its passing, leaving some provisions unclear and/or incomplete. For example, article 78 provides interest is payable on sums in arrears, but does not specify the rate of interest or how this is to be determined. Another example is article 25 which introduces the concept of ‘fundamental breach’ couched in vague terminology, allowing a party to ‘avoid’ a contract should the defaulting-party fail to perform its obligations amounting to a ‘fundamental breach of contract’.

This ambiguity and/or incompleteness results in greater unpredictability and uncertainty. Through inadvertently encouraging reliance on more familiar domestic legal concepts to give meaning to its terms or to fill-in the gaps, the wording of the Vienna Convention increases the possibility of inconsistent interpretations by judges and arbitrators from different jurisdictions. This is exacerbated by difficulties in translating terms from one language to another. For example, the translation of the terms ‘fundamental breach’ or ‘specific performance’ into six different languages is not merely a case of pure translation, but rather the more difficult translation of legal issues.

A further issue is the Vienna Convention’s interaction with Australian contract law. Similar to Australian contract law, the Vienna Convention requires an offer and acceptance prior to the formation of a contract. However, article 14(1) provides an offer will be made if it is “sufficiently definite” and indicates an intention to be bound. An offer is ‘sufficiently definite’ if it indicates the goods and fixes or makes provision for the determination of quantity or price, but does not need to include the place or time for delivery, insurance or security requirements.

The ability to have insufficiently definite offers causes complications in situations where purchase orders and invoices with limited detail flow between the parties. This was the case in Castel Electronics Pty Ltd v TCL Airconditioner (Zhongshan) Co Ltd[2013] VSC 92 where the court was required to determine whether purchase orders or signed and returned invoices constituted an offer and acceptance, or an offer and a counter-offer. It was argued that the purchase orders were not ‘sufficiently definite’ regarding key aspect of the orders such as shipment of the goods. However, the court found the documents amounted to an offer and acceptance, as the purchase orders listed the products by model, quantity required and the unit cost.

A further contractual issue with the Vienna Convention is found in article 8 which requires primarily a subjective, rather than objective, approach to contract interpretation whereby conduct is to be interpreted according to the party’s intent. If the other party was not and could not have been aware of the first party’s intention, then the relevant conduct is to be interpreted according to the understanding that a reasonable person would have had in the same circumstances. In determining the intent of a party on the understanding that a reasonable person would have had, all relevant circumstances of the case are taken into account including negotiations and established practices between the parties.

The difficulty in utilising different methods of contractual interpretation, applicable to any situation where the courts are utilising rules from different jurisdictions, was best described by Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101: “One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a continental system.”

This is particularly relevant in Australia where there is currently judicial uncertainty regarding the ability to consider pre-contract communications in contractual interpretation. Despite the ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 that evidence of surrounding circumstances is only admissible in instances of ambiguity, there have been recent decisions in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 and Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113, as well as the special leave application in Western Export Services Inc v Jireh International Pty Ltd(2011) 282 ALR 604, that contractual interpretation is determined by reference to a reasonable person with a knowledge of the surrounding circumstances known to the parties at the time the contract was entered into (amongst other things) i.e. without the need for ambiguity in the contractual terms. However, this issue has not been settled by the High Court.

Although the risk of a dispute is ultimately a function of the relationship between the parties and their risk allocation, and notwithstanding the benefits to the Vienna Convention, parties need to be aware that its application can lead to uncertain and unpredictable complexities in the event of a dispute.

Opting out of the Vienna Convention

Depending upon the other terms of the contract, an opt out of the Vienna Convention can be as simple as expressly stating the Vienna Convention does not apply. The courts will take a broad approach to an exclusion if the parties intended to opt-out of the convention’s operation. In Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4)[2009] FCA 522, the contract stated the contract was governed by “Australian law applicable under exclusion of UNCITRAL law”. The court held that notwithstanding the Australian sale of goods legislation which incorporates the Vienna Convention, the contract evidenced an intention to exclude the Vienna Convention from application through the phrase ‘exclusion of UNCITRAL law’.

However, opting out does not mean civil law concepts cannot be considered. In the same case, the court found that contractual terms referring to a “reasonable period of grace” and a “reduction in price” are civil law rather than common law concepts. The fact that the Vienna Convention had been excluded did not prevent the court from taking guidance from the civil law to understand these contract terms.

Conclusion

Prior to opting out of the Vienna Convention, parties must consider whether it is the right decision in light of the other party(s) places of business and whether this is a Contracting State, all the circumstances relevant to the agreement and the risk allocation under the contract. Any party that continuingly and blindingly opts out of the Vienna Convention may be missing an opportunity to provide regulation that is best suited to a particular transaction. In many transactions the Vienna Convention may be the better choice, but no law is perfect in every circumstance.

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