The United Nations Convention on Contracts for the International Sale of Goods (CISG)

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1 Rechtswissenschaftliche Fakultät Institut für Zivilrecht Wintersemester 2017 KU UN-Kaufrecht Uniform Sales Law The United Nations Convention on Contracts for the International Sale of Goods (CISG) José Angelo Estrella Faria

2 The United Nations Convention on Contracts for the International Sale of Goods (CISG) Introduction: Characteristics and Structure of International Sales Transactions Part I: Choice of Law and Dispute Settlement in International Contracts Conflicts of law in international contracts General principles and traditional rules EU and UCC default rules Choice of Law clauses Admissibility and Limitations International jurisdiction in contract matters Choice of court in international contracts Enforceability of choice of court agreements Effects on choice of law International Commercial Arbitration International framework for commercial arbitration Practical use of international arbitration Extent of party autonomy in choice of law

3 The United Nations Convention on Contracts for the International Sale of Goods (CISG) Part II: Overview of Differences in Contract Law Negotiation of international contracts Conditions for validity and enforcement Common Law and Civil Law requirements Conditions for substantive validity Contract form and interpretation Contract Formation Offer and acceptance Essential elements Pre-contractual Liability Performance and breach Notion of breach Termination of contract Changed Circumstances Supervening events Excuses for non-performance Remedies Damages Contract penalties and liquidated damages Specific performance Outlook: The CISG as Global Uniform Sales Law

4 Introduction: Characteristics and Structure of International Sales Transactions A bilateral contract supported by various ancillary transactions Sales contract Manufactured goods Commodities and futures Transport and warehousing (for delivery of goods) Single mode (sea, air, land) or multimodal Liner terms or negotiated contracts Credit contract (for payment of price) Documentary credit Credit transfer Insurance (against damage or default) Customs clearance

International Sales Transactions Contractual

5 9. Documents released Introduction: Characteristics and Structure of International Sales Transactions Contractual architecture of foreign trade Beneficiary Applicant 7. Payment to seller 5. Documents tendered Seller/Exporter 4. Shipment of goods 3. Confirmation of letter of credit 1. Credit open to the seller s benefit 2. Issuance of letter of credit Buyer/Importer 8. Credit payment Confirming bank 6. Documents forwarded Issuing bank 10. Funds transfer

6 Blue Sky One Ltd & O rs v. Mahan Air & Ano r [2010] EWHC 631 (Comm). Blue Sky 1,2 &3 Aircraft 3 (UK Flag) Blue Airways PK Airfinance (US) Mortgage Aircraft 3 (Armenian Flag) Mahan Air

7 Conflicts of laws in international contracts The proper law of a contract in common law Traditional English law: freedom of choice closest connection US law: choice of reasonably related law most significant relationship The closest connection test in civil law Place of performance (France, Germany) Nationality, domicile and place of formation (Italy, Spain) Uniform conflicts rules EU law: Rome I Regulation International conventions: Hague Convention on Law Applicable to International Sales of Goods, Hague Agency Convention

8 Conflicts of laws in international contracts Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) Article 3 Freedom of choice 1. A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. [ ] 3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.

9 Conflicts of laws in international contracts Rome I Regulation (continued): Article 4 Applicable law in the absence of choice is the law of the country: (a) where the party making the characteristic performance has its habitual residence: (i) contracts for the sale of goods; (ii) contracts for the provision of services; (iii) franchise contracts (franchisee); (iv) distribution contract (distributor) (b) where the property is situated (lex rei sitae): (i) contracts relating to a right in rem in immovable property or (ii) tenancy of immovable (more than six months, otherwise (a)); (c) where the auction takes place (for the sale of goods by auction); (d) that governs a multilateral system for multiple third-party buying and selling interests in financial instruments, for contracts concluded within such a system

10 Conflicts of laws in international contracts Rome I Regulation (continued): Article 5 Contracts of carriage To the extent that the law applicable to a contract for the carriage of goods has not been chosen in accordance with Art. 3, the law applicable shall be the law of the country of habitual residence of the carrier, provided that the place of receipt or the place of delivery or the habitual residence of the consignor is also situated in that country. If those requirements are not met, the law of the country where the place of delivery as agreed by the parties is situated shall apply.

11 Conflicts of laws in international contracts Rome I Regulation (continued): Article 9 Overriding mandatory provisions 1. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation. 2. Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum. 3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.

12 Conflicts of laws in international contracts US Restatement (Second) of Conflict of Laws 187(2). (1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which [ ], would be the state of the applicable law in the absence of an effective choice of law by the parties.

13 Conflicts of laws in international contracts US Restatement (Second) of Conflict of Laws 187(2) (comments) When the state of the chosen law has some substantial relationship to the parties or the contract, the parties will be held to have had a reasonable basis for their choice. This will be the case, for example, when this state is that where performance by one of the parties is to take place or where one of the parties is domiciled or has his principal place of business. The same will also be the case when this state is the place of contracting except, perhaps, in the unusual situation where this place is wholly fortuitous and bears no real relation either to the contract or to the parties. These situations are mentioned only for purposes of example. There are undoubtedly still other situations where the state of the chosen law will have a sufficiently close relationship to the parties and the contract to make the parties' choice reasonable.

14 Conflicts of laws in international contracts US Restatement (Second) of Conflict of Laws Law Governing in Absence of Effective Choice by the Parties (1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties [ ] (2) In the absence of an effective choice of law by the parties (see s 187), the contacts to be taken into account [..] to determine the law applicable to an issue include: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. These contacts are to be evaluated according to their relative importance with respect to the particular issue.

15 Choice of law in international contracts HCCH Principles on Choice of Law in International Commercial Contracts (Introduction) Choice of law agreements should also be distinguished from jurisdiction clauses (or agreements), forum selection clauses (or agreements) or choice of court clauses (or agreements), all of which are synonyms for the parties agreement on the forum (usually a court) that will decide their dispute. Choice of law agreements should also be distinguished from arbitration clauses (or agreements), that denote the parties agreement to submit their dispute to an arbitral tribunal. While these clauses or agreements (collectively referred to as dispute resolution agreements ) are often combined in practice with choice of law agreements, they serve different purposes.

16 International jurisdiction in contract maters Right to choose the competent court Traditional principle: court jurisdiction treated as a matter of public policy Modern trend: choice of court as an admissible exercise of party autonomy in commercial contracts Common exceptions: consumer, insurance, employment contracts International jurisdiction without choice of court Territorial jurisdiction: place of contract performance, contract formation or location of property Ad personam jurisdiction: nationality, domicile, place of business, place of incorporation, mere presence

17 Choice of court in international contracts Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ( Brussels I ) Article If the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction, unless the agreement is null and void as to its substantive validity under the law of that Member State. Such jurisdiction shall be exclusive unless the parties have agreed otherwise.

18 Choice of court in international contracts Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters ( Brussels I ) Article 25 (continued) The agreement conferring jurisdiction shall be either: (a) in writing or evidenced in writing; (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned.

19 Enforceability of choice of court agreements When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties settled expectations. A forum election clause, after all, may have figured centrally in the parties negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, the interest of justice is served by holding parties to their bargain. (Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, US Supreme Court,134 S.Ct. 568 (2013))

20 Enforceability of choice of court agreements Hague Convention on Choice of Court Agreements (2005) Article 5 Jurisdiction of the chosen court (1) The court or courts of a Contracting State designated in an exclusive choice of court agreement shall have jurisdiction to decide a dispute to which the agreement applies, unless the agreement is null and void under the law of that State. (2) A court that has jurisdiction under paragraph 1 shall not decline to exercise jurisdiction on the ground that the dispute should be decided in a court of another State. (3) The preceding paragraphs shall not affect rules - a) on jurisdiction related to subject matter or to the value of the claim; b) on the internal allocation of jurisdiction among the courts of a Contracting State. However, where the chosen court has discretion as to whether to transfer a case, due consideration should be given to the choice of the parties.

21 Enforceability of choice of court agreements Hague Convention on Choice of Court Agreements (2005) Article 6 Obligations of a court not chosen A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive choice of court agreement applies unless - a) the agreement is null and void under the law of the State of the chosen court; b) a party lacked the capacity to conclude the agreement under the law of the State of the court seised; c) giving effect to the agreement would lead to a manifest injustice or would be manifestly contrary to the public policy of the State of the court seised; d) for exceptional reasons beyond the control of the parties, the agreement cannot reasonably be performed; or e) the chosen court has decided not to hear the case.

22 Effects on choice of law Commission Proposal for Rome I Regulation The parties may also choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community. However, questions relating to matters governed by such principles or rules which are not expressly settled by them shall be governed by the general principles underlying them or, failing such principles, in accordance with the law applicable in the absence of a choice under this Regulation. Rome I Regulation (final text, Preamble) This Regulation does not preclude parties from incorporating by reference into their contract a non-state body of law or an international convention.

23 International framework for commercial arbitration UN Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) Article II 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. [ ] 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed

24 International framework for commercial arbitration UN Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) Article III Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.

25 Practical use of international arbitration 90% of respondents indicate that international arbitration is their preferred dispute resolution mechanism, either as a stand-alone method (56%) or together with other forms of ADR (34%). Enforceability of awards is seen as arbitration s most valuable characteristic, followed by avoiding specific legal systems, flexibility and selection of arbitrators. (Source: Queen May University of London, 2015 International Arbitration Survey: Improvements and Innovations in International Arbitration

26 Practical use of international arbitration

27 Practical use of international arbitration

28 Practical use of international arbitration

29 Extent of party autonomy in choice of law ICC Arbitration Rules, Article 21 (Applicable Rules of Law) 1. The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate. 2. The arbitral tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages.

30 Extent of party autonomy in choice of law HCCH Principles on Choice of Law in International Commercial Contracts (commentary) 3.1 Arbitration statutes and arbitration rules commonly allow for the parties' choice of "rules of law" (see Art. 28(1) UNCITRAL Model Law; Art. 21(1) ICC Rules). In those instruments, the term "rules of law" is used to describe rules that do not emanate from State sources. The opportunity to choose "rules of law" has not typically been afforded to parties litigating before national courts. Article 3 broadens the scope of party autonomy in Article 2(1) by providing that the parties may designate not only State law but also "rules of law" to govern their contract, regardless of the mode of dispute resolution chosen.

31 Extent of party autonomy in choice of law As the principle of party autonomy in the law of contract is recognized by most countries of the east and West, none of the legal systems raises a theoretical objection to an attempt of the parties to a contract to go to the extreme and to adopt a legal regulation which makes redundant a reference to a national system of law. [ ]. Experience shows that a practically workable degree of autonomy can only be achieved if the autonomous regulation is complemented by an arbitration agreement. (Clive Schmitthoff, International Business Law: A New Law Merchant, in Cheng (ed.) Clive Schmitthoff s Selected Essays on Internaitonal Trade Law, Dordrecht/Boston/London: Martinus Nijhoff, 1988, 31-32)

32 Part II: Overview of Differences in Contract Law The negotiation context of international contracts Connections to laws, policies and political authorities of more than one country Currency, monetary considerations and logistics Greater exposure to government interference and changes of circumstances Frequent concerns in international contracts Different standards and usages to assess performance Government interference (embargoes, export/import controls) Unforeseen events (strikes, war, terrorism) Different types and standards for awarding damages Ineffective or unexpected remedies for breach of contracts Slow and costly enforcement procedures

33 Part II: Overview of Differences in Contract Law Drafting international contracts Cultural and legal differences Different drafting styles and traditions Tendency towards self-contained contracts Evaluation of risks and risk mitigation mechanisms Usefulness of checklists, standard forms and guides Importance of choice of law and dispute settlement Common objectives of the parties Clearly defined rights and obligations Foreseeability and mitigation of risk Encouragement of performance Limitation of damages Enforceability of contract Efficient dispute resolution mechanism Predictability of outcome

34 Part II: Overview of Differences in Contract Law Conditions for validity and enforcement Common-Law and Civil Law requirements The common law doctrine of consideration The French theory of cause The German system Conditions for substantive validity The civil law principle of good faith and its implications The common law doctrine of unconscionability Contract form and interpretation Freedom of form and interpretation in civil law The common law statute of frauds and parol evidence rule

35 Part II: Overview of Differences in Contract Law Contract Formation Offer and acceptance Completeness and revocability of offers Time of effectiveness of offer: receipt v. mailbox rule Essential elements Price determination and open-price contracts Implied terms and default obligations Pre-contractual liability Good faith and culpa in contrahendo in civil law Pre-contractual reliance: exceptional remedy in English law

36 Part II: Overview of Differences in Contract Law Performance and breach Notion of breach Unitary notion vs. specific categories of breach Anticipatory breach as remedy Termination of contract Right to terminate Generally available Limited to fundamental breach Procedure for termination Termination by notice Automatic termination Termination by judicial order

37 Part II: Overview of Differences in Contract Law Changed Circumstances Supervening events Changes of circumstances and pacta sunt servanda in the common law Rebus sic stantibus and contract adaptation in civil law Excuses for non-performance The doctrine of frustration Force majeure

38 Part II: Overview of Differences in Contract Law Remedies Damages Foreseeability of damages Duty to mitigate Contract penalties and liquidated damages Liquidated damages in common law Penalty clauses in civil law Specific performance The general common law rules Conditions for specific performance in civil law

39 Outlook: The CISG as Global Uniform Sales Law Harmonisation of international sales law early work Hague conventions CISG Status and importance Historical background: the progress towards unification of international sales law The work of UNIDROIT and the 1964 Hague Uniform Laws Reasons for developing a new regime Work of UNCITRAL 1980 Vienna Diplomatic Conference Practical importance of the CISG Uniform instrument largely accepted in various legal systems Contracting States account for approximately 2/3 of international trade in goods Supplements international trade customs and usages (such as Incoterms)

40 Outlook: The CISG as Global Uniform Sales Law Status of ratification of the CISG

41 Outlook: The CISG as Global Uniform Sales Law Further information on the CISG United Nations Convention on Contracts for the International Sale of Goods (CISG), in force since 01/01/1988 ( Current stage of ratification of the CISG (87 States) ( International case law on the CISG (

REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL. of 17 June on the law applicable to contractual obligations (Rome I)

REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008 on the law applicable to contractual obligations (Rome I) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN