Is exclusion the answer?
It is common to see a complete exclusion of the CISG in international supply contracts and it has been generally accepted that the one- or two-line exclusion of the CISG is adequate and appropriate in all circumstances to deal with the issue.
This article outlines some of the issues to be considered in confronting the CISG and challenges the adequacy of a simple two-line exclusion clause to deal with the issue. Interestingly, the cases in the USA relating to the CISG are on the increase, reflecting a trend towards greater use of CISG. It is therefore timely to revisit current practices in Australia.
Rather than a detailed analysis of all aspects of the CISG I have selected five issues for consideration in the context of the question of whether or not to exclude the CISG from the supply contract.
1 Identifying transactions to which the CISG applies
Unless the parties agree to exclude it in whole or in part, the CISG applies automatically to certain ‘international’ transactions. The trap is that it applies to transactions that may not, at face value, be considered ‘international’. The main test is whether the contact is between a buyer and seller who have their relevant offices in different contracting state, i.e. countries that are party to the CISG. Whether or not the goods travel across borders is irrelevant.
As a result, organisations should build into their contracting processes mechanisms for ensuring they identify contracts to which the CISG may apply.
2 Irrevocable offers
Under Australian common law, if an offer is made which specifies a time during which it is open for acceptance, that offer can be revoked at any time prior to acceptance. Further, under the CISG there are no requirements for the contract to be in writing or for consideration.
As a result, if the person in your organisation making an offer is not aware of the CISG and does not include an exclusion of the CISG, the contract may be concluded well before the deal reaches legal review. In that case, the opportunity to exclude is missed.
Organisations need to build consideration of the CISG into the offer process. This can be done with standard offer letters, education of the sales team, and early involvement of the legal function.
3 Passing of risk and contract simplification
In a recent list of the top 10 best practices in commercial contracting published by the International Association for Contract and Commercial Management, ‘an electronic contracting strategy’ appeared in item 6.
An election not to exclude the CISG, or an election to include the CISG even in situations where it does not apply automatically, can be one method of assisting with development of an electronic contracting strategy. It would assist with contract simplification, which is usually key to developing an electronic contracting strategy.
One example of an opportunity for simplification is the elimination of the risk clause in contracts of sale. Given that the CISG position of the passage of risk is more commercial than the position under the domestic Australian State and Territory Goods Act, the parties may be comfortable leaving out any mention of passage of risk of the contract of sale.
The CISG position on passage of risk is as follows:
If the good are sold in transit, risk passes at the time of conclusion of the contract, except in the following circumstances:
- If the circumstances indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage; or
- If the seller knew or ought to have known that at the time of the conclusion of the contract of sale the goods had been lost or damages but did not disclose that fact to the buyer, the loss or damage is the responsibility of the seller.
Where the contract of sale involves carriage of the goods:
- and the seller is not required to hand them over at a particular place, then risk passes to the buyer when the goods are handed over to the first carrier.
- and the seller is required to hand them over at a particular place, then risk passes to the buyer when the goods are handed to a carrier at that place.
Where the contract involves no carriage, risk passes to the buyer on the earlier of:
- when the buyer takes the goods over and
- when the goods are placed at his disposal and the time for the buyer to take the goods over has expired.
4 No perfect tender rule
There is no ‘perfect tender’ rule under the CISG. The buyer cannot reject the goods just because the goods tendered are not conforming. It is helpful to think of the CISG as being based around the concept of avoidance, not acceptance. The buyer can only avoid for fundamental breach, a concept abandoned by Australian common law.
The concept of fundamental breach requires an analysis of whether the breach deprives the other party of what they are entitled to expect from the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.
By way of example, assume a buyer contracted for kangaroo meat but beef was delivered, can the buyer avoid the contract? If the buyer wanted meat to sell to enable it to make a profit, the non-conforming delivery of beef would not entitle the buyer to avoid the contract. In this example, the buyer is not deprived of the opportunity it expected as it still gets meat that it can sell. The buyer’s remedy is damages, not avoidance of the contract.
If the CISG is not excluded, the parties should consider agreeing in the contract what they expect from the contract, to assist the analysis of what will amount to a fundamental breach.
5 Buyer’s remedy
Article 50 of the CISG should be considered carefully by buyers before agreeing to a complete exclusion of the CISG. Article 50 gives buyers a remedy which is potentially more advantageous than the damages remedy under Australian law.
The remedy allows the buyer to reduce the price it pays for the goods (if the buyer has already paid it, s/he is entitled to a corresponding refund), if the goods do not conform with the contract. The price may be reduced in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value the conforming goods would have had at that time. In a falling market, this remedy is more valuable than the usual damages remedy.
There are, of course, other issues to consider in relation to a decision whether or not to exclude the CISG. However, the five issues outlined above highlight the need to consider the implications of excluding the CISG. Also, the apparent trend in the USA towards using the CISG suggests that including, rather than excluding, the CISG, may6 be a new opportunity in the push for simplified and electronic contracting strategies.
By Warren Scott, Partner - Mills Oakley Lawyers
Mills Oakley Lawyers News
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