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This article has been written by Dibakar Banerjee, pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).

Introduction 

Due to the liberalisation of the economy, along  with the phenomena of  privatisation and globalization, to ensure fast development of international trade, the CISG was established (United Nations Convention on Contracts for International Sales of Goods) . It is a multilateral treaty that establishes a uniform framework for international commerce. The number of countries adopting CISG went high, as of 2020 it has been ratified by 94 countries representing  two thirds  of the world  trade. The CISG removes legal barriers and makes international trade smooth. It provides rules that govern the aspects of commercial transactions, such as contract formation, the means of delivery, parties obligations and remedies for breach of contract. .After that , the convention is automatically incorporated into the domestic laws of the contracting states and applies directly to the countries that have the relationship of transactions of goods and services. In this CISG, India also plays a major role in International trade business. So it’s becomes imperative to discuss and analyse the distinction between CISG and Indian Contract Act 1872. 

Unlike CISG Indian Contract Act is a law of land and is only applicable in India, it prescribes law relating to contract in India. In the age where globalization, international trade and investment are becoming the backbone of modern day commerce, the economic development of a nation is hugely impacted by above mentioned factors. With the increase in  cross border flow of goods trade oriented convention, effective and efficient negotiations between countries are needed for a hindrance free trade in global commerce. 

In India there are two laws that deal with the provisions and principles of sales of goods namely The Sales of Goods Act 1930 and the Indian Contract Act 1872 . The ICA has provisions for all contracts in India under which they are performed , while the SGA is a statute which expressly concerns itself with sales of goods .

On the other hand CISG ( The United Nations Convention on Contracts for International Sales of Goods)  was established in 1980 . It deals with principles and systems that resolve disputes between international buyers and sellers and lays down a modern, uniform and fair system for contracts for the international sales of goods. It is the foundation of all international trade across nations.  

In this article we will identify and analyse the distinctions that exist between the CISG and ICA and SGA, both their principles and application. This article overall brings out the fundamental  legal differences between the laws. 

Formation 

Formation refers to the creation of any contract and it identifies that  an agreement has legally been formed. 

Under Indian Contract Law, a legal contract for sales of goods is created when there is an offer to buy or sell any goods at a fixed price, and when that offer is accepted, then that goods can be delivered either immediately or in future date and the payment can be made in such as in lump sum or in installments. Any contract for sales of goods in India must fulfill the objectives that are there in Section 10 of ICA. In a valid contract there must be an offer and an acceptance of that offer, it must have a lawful object, a lawful consideration and must be enforceable under Indian law. 

On the other hand CISG deals with the formation of contracts under PART 2 from Article 14 to 24 also Articles 11, 13 and 29 highlights the formation of contracts. The CISG has adopted the ‘usual concept of contractual obligations, this concept stated that a contract shall be formed only as the result of two declarations of that is, specifically the offer and the acceptance. The offer can be accepted by statement or by conduct and proposal that indicates the goods it’s quantity and price is sufficient. 

Unlike Indian law, there is no requirement under the CISG that there must be consideration as there is an enforceable contract. Article 55 provides that where the price is not fixed between the parties expressly or implicitly then the price is charged at the time of the conclusion of the contract.

 

Breach 

‘Breach’ refers to the situation when a contract fails because the parties are not able to perform their obligations. When any situation comes where the terms are not honored and the commitments are not upheld, there it is said to be a breach of contracts. Parties to the contract are under an obligation to perform or offer to perform, their respective duties and promises as it is there in the contract, unless such performance is excused by the provisions of the ICA . ICA also provides that when a party has refused to perform or is unable to perform his promise then the other party may put an end to the contract,but if the other party signifies  that he can continue the contract then the contract survives. In ICA and SGA breach of contract provisions are more precisely discussed Section 12 (2) of SGA says that if the main purpose of the contract is breached which causes damage to the buyer then he has the right to terminate the Contract. 

But the concept of Breach is complicated under CISG. It gives primary importance to fundamental breach but also has provisions of non-fundamental breaches. Remedies provided under the Fundamental breach have rigorous consequences when the contract gets terminated. So when a contract gets terminated the party first must establish whether it’s a fundamental breach or not. Article 25 of CISG doesn’t provide difference between the two type of breach, Rather it’s simple states that “A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under 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”

Article 25 first provisions qualifies fundamental breach and determines the harm or damage caused by one party to the another. The second provision  provides Condition and allows the other party to private breach and to avoid the obligation by providing that it was not foreseen by the same person . There is a distinction between the elements relating to the aggrieved party and the elements that relates to the party in breach. It can be easily understood from the glance of the provision that the Indian laws are comparatively much more straightforward and does not draw difference between the kinds of breach.

Damages

‘Damages’ means the compensation that is caused due to the breach , loss or injury. It seeks protection against the interest. Under ICA, the general principle is to figure out damage that is caused, that is the innocent party is placed at a position where he would be if the contract has been performed. Two types of damage can be claimed by the Non-Defaulting Party 

  1. Direct damage : It is fair and reasonable and considered arising naturally, in a usual course of things, from such breach of contract itself and
  2. Consequential damage: It reasonably be supposed to have been in the contemplation of both the parties and there is more probability of breach of the contract. 

As per CISG, Article 74 tells us that it is only the party in a breach who is required to foresee the loss as a possible cause if there is a breach of contract. The obligor cannot free him from the obligation under Article 79 by proving that he has not foreseen that failure to fulfill the contractual obligations and the loss that would actually occur. 

The CISG has mentioned the ‘Doctrine of Mitigation’ especially in Article 77 but that rule is also reflected in Articles 85 and 86, which deal with the preservation of the goods after a breach. Article 77 clearly states that losses include loss of profit. It sets and imposes a legal obligation on the injured party to themselves to mitigate the loss. 

On the other hand, ICA damages are compensatory and not penal in nature. The sections in ICA provide that the loss or damage arising out from the breach of the contract can be taken in. Two principles for the compensation are found firstly that is the where the money can substitute the loss incurred, the aggrieved party is to be put in the same position as it would have if the contract been performed, and the second principle is that it imposes a duty on the defaulting party to take reasonable steps to mitigate the consequences which arise as a result from the breach of the contract. 

Frustration 

Frustration simply means a contract that is incapable of being performed. It’s an unforeseen situation that occurs subsequent to the date of the contract, in which performance is either legally or physically impossible to perform by either party. 

In ICA there are no provisions that expressly define frustration of contract, but Section 56 of the act states that ” an agreement to do an act impossible in itself is void ”. When any act becomes unlawful or could not be prevented then for that reason the contract becomes void. When the whole purpose of the contract is frustrated due to an event that is unexpected by both parties and it makes the terms of the contract impossible to perform. 

On the other hand, Article 79 of CISG deals with the exemption of a party’s liability when the party failed to perform his obligation of the contract due to an event that was out of his control. The CISG doesn’t have anyone rule of exemption, like the civil law system, the convention also provides extended rules on excuses to all aspects of a party’s performance. The conclusion is that CISG and the Indian Contract Act with Sales of Good Act have different provisions and principles in the law which they choose to adopt trade. 

Should India join CISG?

The pros

Indian sales law i.e. The Sale of Goods Act, 1930 was written by Britishers during colonialism, dating it way old to suit the present needs of the commercial transactions. Since the drafting of this act, there have been changes in the very idea of lex mercatoria. The way parties view and what constitutes Party autonomy for them has evolved over time. Moreover, with the introduction of modern techniques like means of transport, technology has drastically changed. Also, significant changes have taken place in modes of entering into contracts. Due to these changes, it is not suited for modern and contemporary commercial contracts. Therefore, CISG is important for us as it is universal in nature and drafted in several languages that making it more accessible and comprehensible to international commercial parties across the globe. Moreover, it is not outdated as the sale of goods act in India and thus takes into consideration the present-day requirements. CISG contains provisions pertaining to the interpretation of contracts which are considered wider than the rules focussed on by common law.

The cons

The introduction of “fundamental breach” in Article 25 poses its own difficulties. The article states that “a breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under 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.” As has been observed by many scholars, this provision leads to a lot of uncertainty owing to its open-ended definition which makes it very difficult to predict when a breach can be held as fundamental. It puts a great degree of arbitrariness in the contract. Moreover, by ascribing a subjective standard of foreseeability of individual parties, the contract is made more complicated.

Conclusion


The fact that the CISG has been “the most successful international document so far” cannot be denied. The need of the hour requires that Indian traders have to familiarise themselves with the laws of many other foreign countries. Is it not level-headed to offer them the prospect of subscribing to a single homogeneous law, tailored as they see fit. CISG does precisely that.

It is desirable to follow complete legal and management reassessment of procurement and sales procedures to be followed under the new system by international persons and their legal advisors. An increasing number of countries ratifying and increasing draw on is made of the CISG. Such traders require identification of clients and conditions in which use of the CISG is preferable to overuse of domestic law. Additionally, the opportunities, inadvertently and unknowingly, to develop into subject to the CISG remains very real. Failure to think clearly about the choice of governing law issues at the time of contracting is quite expected to lead to disagreeable surprises in the occurrence of a dispute.”

References


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