Why you should not
always exclude the CISG
from you contract
In our daily work, we frequently advise companies doing business globally. When working with such international contracts, an important question frequently raised is which country’s law shall apply to the contract; the country where Party A or Party B operates, or a “neutral” third country’s law? This might even be a central topic during the negotiations of a contract, since the applicable law will apply if a certain matter is not fully taken care of in the contract. However, these difficult discussions could to some extent easily be avoided, as there is an international convention, containing provisions applicable to international contracts of sale of goods.
The United Nations Convention on Contracts for the International Sale of Goods, usually referred to as CISG, is somewhat of a global success, and has been adopted by over 90 states throughout the world. It gives businesses from different countries the opportunity to apply provisions on international trade, that are easily accessible to all parties involved.
When the convention is applicable, it handles both contractual and trade matters. For example, there are provisions regarding the formation and modification of a contract, the parties’ respective responsibilities and obligations during the business, breach of contract and remedies.
The CISG applies automatically when the parties’ places of businesses are in different contracting states, or the rules of private international law result in the application of the law of a contracting state. That is, if the parties have not agreed to exclude the application of it, which we have noticed is very common. This is of course possible, but not always suitable.
Why not exclude the CISG?
In most international businesses, the parties tend to regulate as many matters as possible in their contract, as they want to be able to gain control over the business they are entering into. However, even in the most comprehensive contracts, not all situations that might occur can be dealt with, since no one can predict the future.
When discussing which law to choose to govern the contract and matters not handled in it, the parties will often have conflicting interests. However, if the CISG applies, there are important contractual and trade provisions that are easily accessible for both parties, and quite neutral to their nature. It is also possible for the parties to deviate from the convention, so the parties can simply evaluate the provisions of the convention and agree on necessary variations. An important example is the section on liability and damages in the convention, which is technically unlimited and which the parties, especially the seller, normally want to avoid. Instead of avoiding the CISG as such, the contract can exclude for example consequential damages, thus limiting the effect of the convention in this respect.
When entering into an international contract, the application of the CISG comes with many benefits. It will be equally easy for the parties to find lawyers that have been educated in, and are able to give advice on, the convention. As the convention is available in several of the world’s most spoken languages, and there is a lot of case law available, it is easier to understand and apply than a domestic sales of goods act of a foreign country, which either one, or maybe even both parties, have less knowledge of.
The use of the CISG allows both you and your business partner to apply provisions that you have equal possibilities to access, research, evaluate and understand, while maintaining your freedom of contract. Hopefully then, both you and your business partner will be comfortable in the contract, which results in a better business relationship and future together.
We believe that if more companies, and lawyers, refrained from excluding the CISG simply by habit, and instead evaluated it on a case by case basis, this could result in improved business relations, and last but not least, more experience and knowledge of the CISG, that everyone involved in international business would benefit from.