In our last newsletter of July 2009, we discussed how on 1 August 2009, the United Nations Convention for the International Sale of Goods of 1980 ("CISG") was scheduled to enter into force in Japan. Now that the CISG is in place in Japan, we discuss in this newsletter the development of the CISG, the perceived advantages and disadvantages of the CISG and how Japanese companies can elect to "opt in" or "opt out" of the CISG in respect of their international sales contracts.
Development of the CISG
To its supporters, the CISG has been an international success. It was not, however, an instant one. In the first eight years after the CISG was established it had no effect at all. Pursuant to Article 99(1) the CISG only entered into force when a minimum of 10 nations had ratified the CISG. It was not until 1988 that this condition was satisfied when a sufficient number of nations, including the US, accepted and ratified the CISG.
Between 1988 and the end of the century slow but steady progress was made with an increase in the number of countries acceding to the CISG. This increased the opportunity for parties to elect for the CISG to govern their international sale contracts but that opportunity was often not taken by commercial parties. There was, in many jurisdictions, a general lack of awareness and a certain lack of trust about the CISG on the part of both counsel and their business clients. Those that were aware of the CISG would often "opt out" of its application as a matter of course without any detailed consideration of whether their interests were really best served by doing so.
The last decade, however, has seen a marked acceleration in the number of parties using the CISG. Between 2001 and 2003 alone the number of recorded cases on one of the principal CISG case databases1 doubled, a trend that has continued in more recent years. The increased popularity of the CISG with contracting parties has in turn encouraged more and more national legislatures to ratify the CISG such that there are now, including Japan, 74 nation parties to the CISG. 2 To a large extent the CISG has therefore fulfilled the aim of its creators in establishing a widely available uniform law for the international sale of goods and it is generally considered to provide a balanced and 'neutral' system of rules, favouring neither sellers nor purchasers unduly.
Embracing the CISG: Advantages and "Opting in"
What then are the principal advantages for Japanese companies in taking advantage of the CISG?
First, the CISG offers a relatively established system of rules capable of applying in a consistent manner across different contracts governed by different systems of law. For those companies familiar and comfortable with its provisions, the CISG therefore brings a consistency of approach which would likely otherwise be lacking where companies are obliged to enter into different sales contracts with different customers, governed by the laws of different countries. 3
In addition to offering consistency, the CISG also offers a relatively predictable approach to determination of the parties' rights and obligations, and, therefore, to the resolution of disputes. Article 7 of the CISG stresses that in applying the CISG, regard is to be had to its international nature and to the need to promote uniformity in its application. In this way, the courts applying the CISG to resolve a dispute are encouraged to have regard for how the CISG has been interpreted before by other courts. Online databases of such decisions are therefore an invaluable resource for predicting how disputes between parties to a CISG contract will be resolved by the courts.
There may also be commercial advantages in agreeing to use the CISG. The CISG has proved particularly popular with commercial parties in jurisdictions such as China and Germany. Those Japanese companies willing to propose or accept the application of the CISG to their sale contracts with counterparties from these regions may therefore be at an advantage compared to their more reluctant competitors.
As for "opting in", little in practice needs to be done. We discussed in our previous newsletter the circumstances in which the CISG will apply to contracts involving Japanese parties and, where these circumstances apply, the CISG is generally applied to the contract automatically without the parties needing to specifically refer to the CISG in their contracts (although the parties may wish nonetheless to confirm the position for the avoidance of any doubt).
Disadvantages and "Opting out"
Any assessment by a contracting party of the relative merits of the CISG will depend upon the nature of the contract in question and a consideration in each case of what the alternative system of governing law for the contract would be. We discussed above the advantages of making use of the CISG to bring consistency across a number of different contracts subject to different systems of law, but if, for example, a Japanese party to an international sales contract has sufficient negotiating power to insist that Japanese law (excluding the CISG) is to govern the contract, then it may consider that applying the CISG would simply be an unnecessary complication.
Consideration should also be given to the dispute resolution provisions of the contract. If, for example, the contract elects for the jurisdiction of the Tokyo District Courts, it may be that Japanese law (excluding the CISG) will be preferred by parties nervous on the issue of how courts with no established experience applying the CISG will do so in their case. 4 On the other hand, if the dispute resolution provisions elect for international arbitration, arbitrators with extensive experience in resolving disputes under the CISG may be appointed.
As for "opting out", Article 6 of the CISG recognises that the parties to a contract otherwise subject to the CISG are generally entitled to exclude the application of the CISG in whole or in part. Specific drafting to this effect will, however be required. To exclude the operation of the CISG, it is not enough to state that the contract is governed (only) by "the law of Japan" as, since 1 August 2009, the law of Japan now includes the CISG subject to its terms.
The CISG has only been in force in Japan since 1 August 2009, and it will inevitably take some time to assess the full impact on Japanese companies active in the international sale of goods and to assess the extent to which such companies are embracing or excluding the CISG. For present purposes it is important that Japanese companies recognise that wherever they enter into an international sales contract subject to the laws of Japan (or the law of any other CISG Contracting State), or deal with a counterparty with its place of business in another CISG Contracting State, they should consider whether they wish to exclude the operation of the CISG and, if so, specifically provide for this in their contract wording.