In our newsletter of August 2008 (Japan Dispute Avoidance Newsletter number 72) we discussed how on 1 July 2008 the National Diet of Japan had acceded to the United Nations Convention for the International Sale of Goods of 1980 ("CISG"). Following this accession, the CISG is due to enter into force in Japan on 1 August 2009.
We have been speaking to a number of our Japanese clients in relation to the coming into force in Japan of the CISG and they have expressed a wide variety of views as to the benefits or otherwise of the CISG, the application of which can be excluded by the express agreement of the contracting parties.
In this newsletter we look in more detail at the CISG, what types of transactions it applies to and in what circumstances the CISG applies to companies selling and buying goods internationally.
Contracts covered by the CISG
The CISG is a multilateral international treaty. Its main aim is to promote international trade and reduce international trade disputes by creating a uniform law which governs contracts for the international sale of goods.
There is no definition of "goods" in the CISG. However, it is stated in the CISG that contracts for the sale of "goods" include goods to be manufactured and also so-called "mixed" contracts for both the provision of goods and also the provision of services (including labour) provided the provision of such services does not make up the predominant part of the contract. 1 Generally speaking, certain types of sales (such as for example consumer sales, auctions and the sale of maritime vessels) are excluded from the scope of the CISG. 2
Legal advice should be sought when trying to determine whether the subject matter of an international contract can be deemed as "goods" for the purpose of the CISG as it is not always clear (as is sometimes the case with contracts concerning software, given that it is not always clear whether such agreements are contracts for the sale of goods or the provision of services.)
Aspects of International Sale of Goods Contracts not covered by the CISG
The CISG does not apply to all aspects of international sale of goods transactions. The aspects where it does not apply are commonly referred to as CISG "gaps". For example, whilst Article 78 of the CISG contains provision for a party who is owed money in arrears under the sales contract to claim interest on the outstanding amount, the CISG does not stipulate how such interest is to be calculated or what the applicable interest rate shall be.
Over 300 of the many court cases regarding interpretation of the CISG examine the issue of interest and how it should be calculated. This demonstrates that this "gap" in the CISG has in practice generated problems for contracting parties which subsequently required deliberation in court/arbitral proceedings (although in many of these cases, issues in addition to interest were the subject of deliberation by the court/arbitral tribunal). 3
To attempt to deal with CISG "gaps", the CISG provides that such "gaps" issues should be resolved by the relevant court/arbitral tribunal in conformity with the "general principles" on which the CISG is based. 4 Where a court/arbitral tribunal is unable to obtain an answer by such reference to the "general principles" of the CISG and in circumstances where the relevant sales contract contains no express governing law clause, such court/arbitral tribunal is required to resolve the "gaps" issue by reference to the "law applicable [to the sales contract] by virtue of the rules of private international law",5 in other words, the system of national law which otherwise governs the sales contract.
When does the CISG apply?
It should be remembered that once a State becomes party to the CISG, the CISG in effect becomes a part of the law of such State. For example, once the CISG becomes law in Japan after August 2009, if a Japanese company enters into an international sale of goods contract with an overseas company and Japanese law is the governing law of the contract, the CISG will automatically apply as the CISG forms part of the laws of Japan.
That said, given the numerous scenarios of international transactions, the rules as to when the CISG applies and does not apply are a little complex. However, the position can be generally summarised as follows.
The CISG applies to contracts for sale of goods between parties whose "places of business" are in different States:
- and both States are Contracting States to the CISG (namely, such States are parties to the CISG and the CISG has come into force as a law in such States) (Article 1(1)(a)); or
- in circumstances where the applicable rules of private international law mean that the law of a Contracting State shall apply to the sales contract (Article 1(1)(b)). 6
The "nationality" of the parties (i.e. where the headquarters of a company are incorporated) is not determinative in establishing what is the "place of business". Rather, the test is what place of business of the contracting party has the "closest relationship to the contract and its performance".7
Further, there is a reservation provision in the CISG (Article 95) which allows a Contracting State to declare at the time it becomes party to the CISG that such State will not be bound by Article 1(1)(b) (as mentioned above). The effect of a State making such declaration is that the declaring State will only apply the CISG to a sales contract where the contract counterparty's "place of business" is also located in a Contracting State. Notably, the USA, China and Singapore have made such an Article 95 declaration. At the time of acceding to the CISG on 1 July 2008, Japan had not made such a declaration nor is Japan expected to do so at the time the CISG comes into force in Japan.
Examples of when the CISG applies
The following are some examples of when the CISG will apply. These examples are not exhaustive as there are a number of different scenarios where the CISG may apply. Further, it should be remembered that parties are free to expressly agree to exclude the application of the CISG. Indeed, in the governing law clauses of their international sales contracts many global companies have traditionally expressly excluded (and continue to exclude) the application of the CISG from their contracts.
Example 1 "Both parties located in different Contracting States"
The simplest example is when both contracting parties have their "places of business" located in different Contracting States. In such case, the CISG will apply (unless the parties have agreed otherwise). For example, if a party whose "place of business" is in China and a party whose "place of business" is in Singapore enter into a sale of goods contract (the goods for which fall within the scope of the CISG) the CISG will apply as China and Singapore are both Contracting States.
Example 2 "One party located in Contracting State, the other not"
If one party's "place of business" is located in a Contracting State but the other party's is not, whether the CISG shall apply depends upon whether Article 1(1)(b) applies (namely, whether the "rules of private international law lead to the application of the law of a Contracting State") and whether an Article 95 reservation applies. For example, if after August 2009 a company in Japan executes a sales contract with a company in the UK and Japanese law is the governing law of the sales contract by application of the private international law rules of Japan (or England) or by virtue of an express Japanese law governing law clause in the sales contract, the CISG shall apply to such sales contract even though the UK is not a Contracting State.
Conversely, if a company in the USA has a sales contract with a company in the UK and US law is the governing law of the sales contract, the CISG shall not apply because even though the USA is a Contracting State, the USA has made an Article 95 reservation which prevents the CISG applying where the contract counterparty's "place of business" is not located in a Contracting State.
Example 3 "Neither party located in Contracting State"
The CISG can also apply to a sales contract where neither of the parties have their "place of business" in Contracting States. For example, if a sales contract between parties with their "place of business" in two non-Contracting States contains a dispute resolution clause providing for dispute resolution by the Australian courts, the CISG would apply to the sales contract by operation of Article 1(1)(b) of the CISG in the event that the application of Australian rules of private international law by the Australian courts concluded that Australian law governs the sales contract. (Australia is a Contracting State).
The expected entry into force on 1 August 2009 of the CISG is an important development for Japanese companies with international operations and Japanese companies would be well advised to understand the possible implications of the CISG on their businesses.