This article was written by Ashwin Jain, pursuing the Diploma in International Contract Negotiation, Drafting, and Enforcement Course from LawSikho, and edited by Koushik Chittella.

Introduction

CISG, or the United Nations Convention on Contracts for the International Sale of Goods, is a treaty between the contracting states that governs the sale of goods across international borders. Contracting states are those member states of the United Nations that have signed and ratified the CISG in their local jurisdictions. As of 2024, it has been adopted by 97 contracting states of the UN. Some of these states include Argentina, Australia, Bahrain, Brazil, Canada, China, Finland, France, Germany, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Saudi Arabia, Singapore, and the United States of America (USA). The CISG was adopted in the sixth special session of the General Assembly of the United Nations in the year 1980. It was considered that the development of international trade on the basis of equality and mutual benefit would develop friendly relations between the States. It was also opined that the adoption of uniform rules for international sales of goods would remove legal barriers to international trade and further promote international trade.

Applicability of CISG to an agreement

As the name suggests, the CISG is applicable to international transactions and not domestic transactions. It is applicable in two cases;

1. When the states are Contracting states, or
2. Upon application of principles of international law to any transaction, the resulting location lies within a contracting state.

Thus, in any transaction wherein the parties are transacting from a contracting state or upon application of principles of international law, the municipal law applicable to the contract is that of a contracting state. Further, while determining the applicability of the CISG convention on any contract for the sale of goods, it should be indicated either in the contract, any information disclosed prior to the execution of the contract, or from previous dealings between the same parties that the place of business of the parties is in different states. Although the parties are in fact from different contracting states, if the contract is silent or it is not determinable from any information disclosed either in the present contract or any previous dealing between the same parties, it shall be disregarded while determining the applicability of the CISG convention. Also, the nationality of the parties and the civil and commercial character of the parties will be disregarded while assessing the applicability of the CISG convention. According to Article 2 of the CISG Convention, it also does not apply to the transactions mentioned below:

1. The goods purchased for personal or household use. The seller must not know, nor is the seller supposed to know, that the buyer is purchasing the goods for personal and household use.
2. Goods purchased by auction;
3. On execution or otherwise by authority of law;
4. Purchases of stocks, shares, investment securities, negotiable instruments, and money;
5. Purchases of ships, vessels, hovercraft, and aircraft;
6. Purchase of electricity.

Goods only bought for personal or household use shall be considered an exclusion from CISG’s application. If the goods bought are capital goods like plant and machinery, such purchases can be considered to be covered under the CISG treaty. It also provides various kinds of exclusions from the ambit of the CISG convention. In Article 2(A), it is mentioned that only goods purchased for personal or household use are excluded from the applicability of the CISG convention. If capital goods like custom built machines and equipment are purchased from an international seller, for use in the plant or factory of the buyer, the CISG convention may be applicable to such a transaction. Also, all trading transactions wherein the goods will not be consumed shall lie within the domain of the CISG convention.

As per the Convention, all goods sold that will have to be manufactured by the seller/supplier before being supplied to the buyer shall be considered sales. The exception to this rule is given under Article 3(1) of the CISG Convention, which mentions that when the buyer provides substantial materials for the production or manufacture of the goods that shall be sold by the seller. The CISG Convention is also applicable in cases where the goods supplied by the seller also include labour or other services provided by the seller. The exception to this is when the majority of the obligations on the part of the seller consist of the supply of labour or other services rather than the supply of goods.

In summary, the application of CISG provisions on an agreement is contingent upon the fulfilment of the following conditions;

1. Any party to the agreement belongs to a contracting state, or the application of private international law will lead to the application of a law of a contracting state.
2. Only agreement for the trade of goods that does not include specific exceptions mentioned in Article 2.
3. The agreement should be primarily for sale of goods in case of supply of goods along with the services.
4. The buyer should not provide substantial materials as raw materials for the production of goods by the seller.
5. The parties to the agreement should not expressly exclude the applicability of the provisions of the CISG.

What happens when CISG provisions are applicable

CISG provisions provide a variety of benefits, such as clarity with regards to the obligations of parties irrespective of their jurisdiction, cost savings, and the reduction of time in negotiations. This includes negotiations with regards to the governing law of the agreement, flexibility and party autonomy in the application of the provisions, and consistent terminologies for agreements across jurisdictions, which results in convenience while interpreting the agreement. Once the state ratifies CISG, it is bound by the provisions of CISG. The provisions of the CISG become analogous to the provisions mentioned in the domestic law of the state. After the ratification, domestic courts as well as any arbitration institution wherein the law governing the agreement is a contracting state under the CISG will apply the CISG provisions to the agreement. 

The Henan High People’s Court in the case Ideal Rulo ve Firça Sanayi A.S. v. Xinyang Hengda Pork Processing Co., Ltd.” held that, although the application of the ‘closest connection test’ by the Luohe Intermediate People’s Court to determine the Chinese law as the applicable law was incorrect, the application of the Chinese law as the applicable law in the present instance as the parties expressly chose the Chinese law exclusively while arguing their cases before the Luohe Intermediate People’s Court and the same was not objected to during appeal to this court.

In the case of P.H. PODLASIAK Andrzej Cylwik vs. Yiwu Entuo Import and Export Firm, the Intermediate People’s Court, Jinhua, held that the dispute arose from a contract of international sale of goods, and the parties were residents of the member states of the CISG. Thus, the CISG should prevail in the absence of an express choice of law. It was also held in the same case that since both parties made reference to Chinese law before the court of first instance and no objection was made with regards to the applicable law, it can be considered an implicit choice of law by the parties regarding this foreign-related civil relationship. For this reason, this court maintained the decision of the lower court while improving upon its reasoning.

In these cases, the act of not utilising CISG treaty provisions to argue the case has been considered an implicit mutual consent of the parties to exclude the applicability of the CISG provisions. In any other case, the CISG provisions would be applicable, as the People’s Republic of China has also been a signatory to the CISG convention since 1988. The CISG Provisions are not a complete code that governs every dispute that arises between the parties. For instance, whether the consent provided by the parties is valid is not provided within the CISG treaty provisions, and in what circumstances can a contract be voidable by any party or be void ab initio. The provisions of the CISG are applicable to a dispute relating to any contract between the parties if any of them belong to a contracting state and the parties did not expressly refuse the application of the CISG provisions to the agreement. 

Applicability of domestic laws to the agreement

According to Article 7(2) of the CISG, for the provisions of the applicable domestic law to be applicable to an agreement governed under the CISG, the following conditions must be fulfilled:

1. The question of law or fact should be related to a matter that is governed by the CISG convention.
2. The provisions of the CISG convention should be unable to expressly decide the question of law or fact.

CISG and domestic laws

Once such a question of law or fact is discovered, wherein the provisions of the CISG treaty fall short of providing a concrete answer, references shall be made to the general principles on which the CISG treaty is based. If such principles are absent or do not provide an answer to the question of law or fact, in that case, a reference can be made to the applicable rules of private international law. 

Thus, when agreements are interpreted and adjudicated upon the basis of the provisions of the CISG treaty, references may also have to be made to the principles of private international law and domestic law as applicable to the agreement as per the rules of private international law. This creates ambiguity and uncertainty in the minds of the parties and deters them from adopting the CISG treaty provisions to govern their cross-border contracts. Also, the rules and principles on which the CISG provisions are interpreted are so obscure that they fail to produce a uniform interpretation consistently. The CISG Convention allowed selective application of the CISG provisions by many contracting states, which resulted in inconsistent outcomes for uniform application of the CISG treaty provisions. When compared to a domestic law, CISG lacks a procedural law, which provides certain standards like burden of proof, standard of proof, and the flow of proceedings. In the case of CISG, these questions are in the domain of the arbitral process or dispute resolution, which results in ambiguity and uncertainty, leading the parties to choose a domestic law that provides greater certainty and predictability. 

Since there is no common forum, court, or tribunal for the resolution of the disputes that arise from the agreement governed by the CISG regime, the interpretation and application of the CISG provisions depend upon the interpretation of these provisions by the judges of various national courts. The judges of the national courts are also not bound to accept the judgements previously delivered by the court or forum of a different nationality. This will negate the principle of stare decisis in such cases and add another dimension of unpredictability to the final outcome of any proceedings wherein the agreement is governed by the provisions of the CISG. Also, to add to this confusion, there is no appellate body or provisions for appealing the judgment provided by the court or tribunal. Because of this, the interpretation of the CISG provisions can not be uniform and will always be dependent on the judge/arbitrator who shall be presiding over the proceedings.

The CISG has been in existence since 1980 and has been available for private parties since 1988. Although it provides a neutral set of rules that provide rights and obligations to the parties in a balanced manner, the CISG failed to become the default international law for the regulation of cross-border contracts. This is because it does not possess the complete spectrum of rules and regulations to cover all foreseeable issues that arise in cross-border contracts, which results in ambiguity and reliance on domestic laws as per the rules of private international law. 

How to avoid the applicability of CISG provisions

Parties seeking to ensure that the provisions of the CISG treaty do not apply to their cross-border agreement for the sale of goods can do so by explicitly excluding the CISG in their contract. This exclusion can be achieved through a clear and unambiguous clause in the contract that expressly states that the United Nations Convention on Contracts for the International Sale of Goods (CISG) shall not apply to the agreement.

Including a specific clause in the contract that excludes the CISG is a common practice to avoid its application. This clause should clearly state that the parties do not intend for the CISG to govern their contract for the sale of goods. By including this exclusion clause, the parties can choose to apply a different set of laws or rules to govern their agreement, ensuring that the CISG does not inadvertently become the governing law. Additionally, parties should ensure that the choice of law clause in their contract clearly specifies the applicable law that will govern the agreement. By designating a specific national law or a different set of rules to govern the contract, the parties can effectively exclude the application of the CISG and establish the legal framework under which their cross-border agreement will be interpreted and enforced.

In summary, to prevent the provisions of the CISG treaty from applying to their cross-border agreement for the sale of goods, parties should include a clear exclusion clause in their contract that expressly states that CISG will not govern the agreement. Additionally, specifying the applicable law in the choice of law clause will further solidify the exclusion of CISG and establish the legal framework for their contractual relationship.

Conclusion

The CISG is a model, impartial, and balanced set of rules that can help parties when they are negotiating the governing law of an agreement. However, in ninety-seven contracting states, CISG is applicable by default, which can complicate the dispute resolution process and create variable outcomes. As CISG only covers limited topics, the agreements on which CISG is applicable have to rely on the domestic law mentioned in the agreement or the state that will be determined as per the rules of private international law. If the law determining the dispute resolution proceedings cannot be ascertained prior to the execution of the agreement, it will lead to variable and predictable outcomes. In addition to the above, the principle of stare decisis is not necessarily applicable to the CISG provisions, and it may lead to an unpredictable interpretation of the provisions, abandoning the established judicial precedent on any subject. This deters the parties from adopting the CISG as the governing law of the agreement in cases of cross-border sales. Because of the above issues, CISG did not become the default law for the cross-border sale of goods.

References

• United Nations Convention on Contracts for the International Sales of Goods UNITED NATIONS PUBLICATION Sales No. E.10.V.14 ISBN 978-92-1-133699-3 available at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/19-09951_e_ebook.pdf
• Ideal Rulo ve Firça Sanayi A.S. v. Xinyang Hengda Pork Processing Co., Ltd. Case no. (2017) Yu Min Zhong No. 1119 decided by High People’s Court of Henan (China) on 15^th October, 2018, indexed as CISG-online 4113 English abstract: https://cisg-online.org/files/cases/10027/abstractsFile/4113_27217868.pdf original judgement: https://cisg-online.org/files/cases/10027/fullTextFile/4113_91867057.pdf
• P.H. “PODLASIAK” Andrzej Cylwik v. Yiwu Entuo Import and Export Firm Case no. (2018) Zhe 07 Min Zhong No. 5356 decided by Intermediate People’s Court Jinhua, Zheijan Province (China) on 09th November 2018, indexed as CISG-online 4116 English abstract: https://cisg-online.org/files/cases/10030/abstractsFile/4116_33511053.pdf original judgement: https://cisg-online.org/files/cases/10030/fullTextFile/4116_87066385.pdf 
• The application of the CISG in Chinese Arbitration – Special Report on CISG@40 Celebration Conference by Wang Chengjie, Vice President and Secretary General of CIETAC, 25^th June, 2021 at Beijing available at: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/the_application_of_the_cisg_in_chinese_arbitration-special_report_by_wang_chengjie_english_version.pdf
• Facing the Truth: Seeing the Convention on Contracts for the International Sale of Goods as an Obstacle to a Uniform Law of International Sales by James E. Bailey; Article 1, Volume 32, Issue 2 1999, Cornell International Law Journal available at: https://scholarship.law.cornell.edu/cilj/vol32/iss2/1/