On 1 April 2014, the United Nations Convention on Contracts for the International Sale of Goods (the CISG) entered into force in Brazil, following the country’s accession to the CISG on 4 March 2013. The CISG will now govern the sale of goods into and out of Brazil, bringing greater certainty for companies entering into transactions with Brazilian parties and reflecting the legal position in a number of significant trading partners. Among the 79 other states to have ratified the CISG are major international trading countries such as France, Germany, Russia, China, the US and Japan, as well as other South American states including Argentina, Chile and Peru. Brazil’s adoption leaves the UK and India as the only countries in the top ten world economies to have not ratified the CISG.
In this Law-Now article, we provide an introduction to the CISG, set out when it will apply to contracts involving Brazilian parties and consider what the CISG’s incorporation into Brazilian law means for contracts for sale into and out of Brazil.
Background to the CISG
The process of formulating a standard law for the international sale of goods began in 1930, and was one of the first tasks undertaken by the United Nations Commission on International Trade Law (UNCITRAL) following its creation in 1964. This process culminated in UNICITAL’s development of the CISG, which was adopted by the UN on 11 April 1980. Today, the CISG is considered one of the core conventions of international trade law. It operates as a uniform set of rules for the international sale of goods, governing the formation of the contract of sale and the rights and obligations of the seller and the buyer.
When will the CISG apply?
In considering whether the CISG will apply to a contract involving a Brazilian party, it is necessary to consider the nature of the contract, where the parties are based, the law governing the contract and whether the CISG has been expressly excluded.
The CISG applies only to the sale of goods, so will not be relevant where the contract is predominantly concerned with the provision of services. A contract for the manufacture or production of goods will be deemed a contract for sale, unless the party purchasing the goods is also supplying a substantial part of the materials being used. The CISG also governs only contracts between commercial parties, rather than consumer contracts: this is the most significant of a number of specific exceptions, which also include sales by auction, contracts for the sale of shares and other securities, and the sale of ships and other vessels.
As the CISG only governs the international sale of goods, contracts where all the parties are based within Brazil will not be affected. The CISG will apply internationally in two instances, the first being where the parties are both based in states that have ratified the CISG (“contracting states”). The CISG would therefore now automatically govern a contract between parties based in Brazil and Germany. The second instance is where, though not all of the parties are based in contracting states, the governing law of the contract is specified as that of a contracting state: e.g. a contract between parties based in Brazil and the UK and governed by Brazilian law.
Even where the CISG would otherwise apply, the parties are free to contract out of it. This can be indirectly achieved by specifying a governing law of a non-contracting state, such as choosing the law of England and Wales to govern a contract between Chinese and Brazilian parties. Parties are also free to derogate from specific articles of the convention by specifying this in the contract. Certain states have also derogated from particular articles of the CISG, which will not apply to parties based in those states. The US, for example, has excluded the application of the CISG though the parties’ choice of governing law, and a number of states have disapplied articles which are incompatible with national legislation requiring contracts for sale to be in writing. Brazil has made no such derogations, but the point should be borne in mind for Brazilian clients carrying out transactions with other contracting states.
What is the scope of the CISG?
The CISG is divided into four parts, the first of which deals with the application of the convention (as described above), and the fourth of which contains administrative provisions. The substantive provisions of the CISG are set out in Parts Two and Three: Part Two dealing with the formation of the contract, and Part Three setting out the relative rights and obligations of the buyer and seller. Areas covered include delivery of the goods, third party claims and the passing of risk between the parties.
What practical differences arise out of the CISG’s introduction?
In relation to those contracts which fulfil the criteria noted above the CISG will displace the Brazilian Civil Code 2002 (the BCC), which currently governs contracts for sale under Brazilian law and which will continue to apply to domestic contracts. Though the provisions of the CISG do not vary substantially from the BCC, the two do differ on certain points.
The differences most likely to have an effect in practice are those relating to the breach of the parties’ obligations. The CISG includes the concept of ‘fundamental breach’, which does not have an equivalent in Brazilian law. Similar to breach of a condition under UK law, a fundamental breach under the CISG is one which “results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract”, with the additional requirement that such a result must have been either foreseen or reasonably foreseeable on the part of the breaching party. Certain remedies, such as avoidance of the contract or requiring replacement of the goods, will only be available where a fundamental breach has been committed. This is in contrast to the BCC, which does not distinguish between different degrees of contractual breach. In Brazilian law, as a general rule, any breach will allow the party not in breach to claim damages and terminate the contract. A similar difference can be seen in the approach of the CISG regarding the time of delivery of the goods. The CISG specifically provides for the time for performance of a seller’s contractual obligations to be extended. No direct equivalent exists in Brazilian law, under which failure to perform on time would be sufficient to constitute a breach.
The CISG, then, generally makes it more difficult for international contracts for sale to be avoided on the basis of insignificant breaches: an approach arguably consistent with promoting commercial certainty for those entering into such contracts. It should be remembered, however, that the CISG also preserves the autonomy of the parties, and that the contract will take precedence where its provisions are inconsistent with the CISG. Where a party wishes to be able to terminate a contract following an event that may not fall within the definition of fundamental breach, therefore, this can still be specified as an event of default giving rise to a right to terminate, avoiding disputes or uncertainty over the degree of a breach.
What does this mean for contracts with Brazilian parties?
The entry into force of the CISG will give those entering into international contracts for the sale of goods a greater degree of legal certainty in dealing with Brazilian parties. It should help avoid issues regarding the choice of law for parties entering into agreements with Brazilian parties, particularly for those parties based in contracting states. Given that these include the majority of Brazil’s key trading partners, it is hopeful that familiarity with the relevant law will reduce the negotiation time and costs involved in entering into international contracts for sale. It should be remembered, however, that it is still necessary to consider whether the CISG will apply to any given contract, and whether the parties wish to derogate from it in any way; particularly in relation to the remedies arising upon a breach.