This article is written by Harshit Bhimrajka currently pursuing B.A.LLB (Hons) from the Rajiv Gandhi National University of Law, Patiala. This is an exhaustive article which talks about the international sales contracts and the convention related to it.
International Commercial Law is a body of principles, treaties, convention, domestic legislation, applicable rules and regulations, and customary practices that govern international trade or business transactions. The trade is qualified international when two or more countries are involved. There is a part of international commercial law that includes customary rules of evidence and procedure, customary commercial law, and general principles of international law and is commonly known as Lex mercatoria. International tools and instruments have identified contracts as “international” when the agreement is signed between two or more different states. International Commercial contracts can be related to sales, carriage, insurance, or financing, but contracts especially, those related to the sale of goods are regarded as the backbone of international trade. This article focuses on international commercial contracts especially, related to international sales under international commercial law and the most prominent convention on the international sale of contracts i.e. United Nations Convention on Contracts for the International Sale of Goods.
International Commercial Contracts
International commercial contracts are the agreement between two or more parties from different nations. According to Article 1(1) of the United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG) aka Vienna Convention (1980), the contracts are considered “international” when the parties concluding the agreement come from two or more different countries. Article 1(2) describes that more flexible definitions are possible, such as contracts involving a choice between the laws of different nations, or contracts with significant connections with more than one nation, or contracts affecting the interest of international trade.
The contracts are identified as “commercial” where each party is acting in the exercise of its profession or trade, as described in Article 1(1) of the Hague Principles. International business transactions between different nations governing international law and customs are generally termed as international contracts.
International Sales Contracts
The International Sale Contract is the most used commercial contract and among the governing trade relations between two different nations. The agreement includes the rights, duties, obligations, and remedies for breach of the parties to the contract. The parties can be either an exporter/seller or importer/buyer. The UN Convention on Contracts for the International Sale of Goods aka Vienna Convention is the convention that is widely used for these types of contracts. There are many other sources of uniform contract law that are used such as Uniform Law on the International Sale of Goods, the Principles of European Contract Law, and UNIDROIT Principles of International Commercial Contracts (2010).
The International Sale Contract should have details like quantity and type of product, delivery time, conditions of payment, price, governing body of law, the forum where the dispute has to be solved (if any arises), and the method of dispute resolution. If such issues are not covered under the agreement, then it will be filled in by the disputes resolving authority, often with surprising consequences. Some of the key details/clauses of the international sales contract are:
Description of Goods
This is one of the main clauses in a sale contract, as a buyer always prefers a detailed and more precise description of the goods from the seller and if the goods are not described precisely enough that satisfy the buyer, then those goods are unsatisfactory for the buyer’s commercial purposes. However, it is practical to foresee and permit slight deviations from that of the description.
The time and place of delivery should be mentioned as clearly as possible. International Chamber of Commerce published Incoterms Rules that provide reference points that are widely used throughout the world. They are standardized rules available for incorporation into international sale contracts solely at the parties’ discretion. The Intercom Rules are revised every 10 years. It informs sales contracts by defining obligations, risks involved, costs, etc. These rules are classified into 4 different classes: Ex, Free, Cost, and Delivery on the basis of which rules for the mode of transport and rules for sea and inland waterway transport is described. It basically allocates these following rules between the buyer and seller:
- The point of transfer and risk.
- International transport and administrative costs.
- Responsibility for customs, payment of import duties, and obtaining insurance coverage.
Parties should unambiguously mention the price and the contract currency in both numbers and figures. A provision explaining the method to determine the price should also be included if both the parties fail to agree on the price indicated. It is often useful to separately itemize the price charged for the goods, and the price of any seller supplied non-product services such as insurance and freight. There are two reasons for this. First, doing so reinforces the chosen delivery term (Incoterms) by clearly indicating what is and is not indicated in the total selling price; second, countries differ in their treatment on non-product charges for ad valorem duty valuation purposes.
Parties while deciding the terms of the contract have the freedom to choose anybody of law that applies to their international sales contract. This decision to choose the applicable law can present a sticky negotiation point since each party is familiar with their national law. Therefore, they are biased towards their domestic laws, but CISG is implemented to cover these situations. If the contract is silent about the applicable law, then CISG automatically applies, and different laws can be applied by specifying them in the contract.
Retention of Title
The retention of title clause is the most common clause in an international sale contract. This clause provides that the seller retains the title of the goods until the full price is paid by the other party, and the seller also may reclaim the goods if the buyer fails to pay the purchase price. This clause is the simple retention of the title clause. There is also an extended variation of the clause under which the seller seeks to extend his title to the proceeds from any sale of goods and any other indebtedness owed to the seller by the buyer. Apart from this, a transfer of ownership clause must also be specified in the contract, except for vessel shipments made under a negotiable marine bill of lading where both ownership and possession rights reside in the original shipment document.
The contract must contain a dispute resolution clause which describes that if any disputes arise then by which mode it is to be solved. The parties to the contract have the option of litigation and arbitration. Arbitration is a more attractive mode of dispute resolution as it is speedy and cost-effective as compared to litigation. Most arbitrations take place under the arbitration institution that offers a pre-established set of rules as the applicable law to govern the procedure. The most common and experienced institution is the ICC International Court of Arbitration. If the parties opt for arbitration then they should specify the place of arbitration and language preferred and if they opt litigation then the national or municipal courts in which a lawsuit has to be filed should be specified in the contract.
Inspection of Goods
The parties should have a clause of inspection, and the goods must be inspected before shipment aka pre-shipment inspection along with this the parties should indicate the place and the company of inspection. The goods should be inspected at both ends- first by seller and then by the buyer. Sometimes the inspection of the goods is a part of the government’s requirement, so before drafting the contract, the requirements of the government of each nation have also been taken into consideration.
If any Incoterm rules are used, then parties have to determine who is responsible for providing insurance cover but outside of the Incoterm. Generally, the goods are insured while exporting then it is better to specify in the contract which party will bear the insurance costs.
It is common for the parties to include the force majeure or hardship clause in an international sales contract. This clause excuses the party from the failure of the obligation of the contract because of impediments beyond their control or inevitable, or which are reasonably unforeseeable such as the outbreak of war, pandemic, earthquake, etc.
The parties should include a clause in the international sale contracts requiring the important list of documents and especially exporters should be meticulous in the management of export documents. The most important is when the payment is made in the form of a letter of credit.
The United Nations Convention on Contracts for the International Sale of Goods (CISG)
This convention is finalized in six official languages of the United Nations at the UN Conference on Contracts for the International Sale of Goods held at Vienna in 1980 and it came into force in 1988 initially with eleven contracting states. The CISG is a project of the UN Commission on International Trade law which also created two substantive international sales conventions- Uniform Law on the Formation of Contracts for the International Sale of Goods and the Convention relating to a Uniform Law for the International Sale of Goods. CISG has been the most successful attempt to unify a broad area of commercial law at the international level. This convention aims to reduce hindrances in international trade, by creating modern substantive rules governing the rights and obligations of the parties to the international sales contract. The CISG governs international sales contracts if either of the conditions is fulfilled:
- Applicable law of a contracting state is led by the Private International Law, or
- Both parties are located in the Contracting States.
This provides autonomy to the contracting states to derogate any CISG rule or exclude the applicability of CISG entirely in favour of different laws.
The following matters are addressed by provisions of the CISG:
- The role of practices and the usage of international law that are established by the parties;
- Detailed interpretation of the parties’ contract;
- The revocability, features, and duration of the offers made;
- The effectiveness of offers as well as the effect of attempts to alter in an acceptance;
- Some update or changes in the international sale contract;
- The buyer’s obligations to take delivery, to examine delivered goods, and to give notice of any claimed lack of conformity;
- The buyer’s remedies for breach of contract by the seller, including rights to demand delivery, to require repair or replacement of non-conforming goods, to avoid the contract, to recover damages, and to reduce the price for nonconforming goods;
- The seller’s remedies for breach of contract by the buyer, including rights to require the buyer to take delivery and/or pay the price, to avoid the contract, and to recover damages; etc.
There are no special tribunals or courts which are created for the CISG. It is applied and interpreted by the national courts and arbitral institutions that have the jurisdiction over transactions governed by the Convention with an aim to maintain its international character and uniformity.
International Trade has become very significant in this era, as many countries exchange goods and services from each other. There are many conventions and treaties related to international commercial contracts, especially international sale contracts, which are applied in international trade and are regarded as beneficial for the parties to the contract. These conventions help to ensure the integrity of international law by maintaining uniformity and fairness in international trade. Parties should take some points or clauses into consideration while preparing the contract for sale with mutual consent. This article discussed the need for these clauses in detail and some brief introduction of the most adequate and prominent convention- CIGS.
“The international trade should be fair, not free.”
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