Turkish Law Blog
The Importance of the CISG in International Trade
The United Nations Convention on Contracts for the International Sales of Goods (CISG) is a multilateral treaty developed by the United Nations Commission on International Trade (UNCITRAL) and it establishes a uniform approach to international sales of goods. It has been adopted by many countries all over the globe. As of date, over 90 countries have ratified, approved, acceded to, or succeeded to the CISG. Lao People’s Democratic Republic is the most recent member: Lao People’s Democratic Republic acceded to the CISG recently, in late September 2019. Within this framework, it is perhaps important to note that the United Kingdom, as a major forum for international arbitration has not adopted the CISG as of date.
The CISG is the “fruit” of many efforts to harmonize international trade laws and eliminate cross- border transactional difficulties. The CISG brings a “common understanding” to the negotiation table and it is a synthesis of the contractual concepts of common law and civil law.
The “subject- matter” of the CISG is limited; it only applies to goods and excludes services. It has been stated under article 3(2) of the CISG that the CISG “does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.” (Article 3(2) of the CISG). As such, similar to the U.S. Uniform Commercial Code (UCC) Article 2, hybrid contracts that mainly consist of services as their main obligations are not governed by the provisions of the CISG.
Similarly, some quasi- goods or categories of goods have also been excluded from the subject- matter of the CISG. Accordingly, under article 3(1), if the party ordering the goods undertakes to supply a substantial part of the manufacturing material necessary to produce such goods, these contracts fall outside the scope of application of the provisions of the CISG. However, any other contract for the supply of goods which are yet to be manufactured is covered by the provisions of the CISG. In addition, it should also be noted that the CISG does not apply to personal and household goods, intangible property such as stocks and negotiable instruments and vessels such as ships and aircrafts. This has been set forth under article 2 of the CISG: Article 2 of the CISG states that the CISG does not apply to “sales: (a) of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use; (b) by auction; (c) on execution or otherwise by authority of law; (d) of stocks, shares, investment securities, negotiable instruments or money; (e) of ships, vessels, hovercraft or aircraft; (f) of electricity.”
There has always been some hindsight when it comes to the scope of application of the CISG. Many practitioners and trading parties are unaware of the scope of application. The scope of application of the CISG has been set forth under article 1. Accordingly, the CISG applies to parties executing a sale of good contract and when either the parties are from countries of contracting countries or when the private international law rules lead to the application of the laws of a contracting country.
As already stated, parties to a contract may not always necessarily be aware, nevertheless, the CISG provisions “automatically” can apply to them if they are both from signatory countries. In such case, parties can explicitly derogate from or modify the terms of the CISG, however it will need to be in accordance with article 6. The CISG Advisory Council has issued an opinion about exclusion of the CISG (CISG- AC Opinion No. 16). Generally speaking, the Advisory Council has stated that any exclusion provision should bear a clear intent and exclusions made after the execution of a sales contract will still be governed by the formation of contract provisions of the CISG.
The CISG also applies when the private international law rules lead to the laws of a signatory country. However, in such case, “automatic” application may be eliminated- particularly, if the said signatory country has made a reservation under article 95 of the CISG. An article 95 reservation is when a country makes a declaration at the time of ratification, approval or accession to the CISG that it will not be bound by the CISG when the private international law rules lead to the application of its laws.
The scope of application of the CISG is complex under an article 95 reservation and has been subject to many scholarly discussions. Moreover, the CISG Advisory Council has issued an opinion (CISG- AC Opinion No. 15). The said Advisory Council Opinion states that “Article 95 CISG makes clear that this reservation merely removes the declaring State's obligation under public international law to apply the Convention in accordance with Article 1(1)(b) CISG. Making use of the reservation does, on the contrary, it itself not prevent the courts in the declaring State from applying the Convention.” (CISG- AC Opinion No. 15). As can be noted from the said Opinion, the CISG Advisory Council is in favor of the application of the CISG, as such, the courts may deem to find it necessary to apply the CISG based on various reasonings, even when signatory countries have opted out under Article 95.
Finally, as known by practitioners, generally speaking, contractual law principles are based on party autonomy. Therefore, due to party autonomy, the parties may opt in to the CISG. In other words, even if the pre- requisites of the application of the CISG have not been fulfilled, a contract may still be subject to the provisions of the CISG when the parties determine it as applicable law.
Application of the CISG by courts vary throughout the globe. European civil law courts have seemed to have been more progressive in adopting the CISG spirit, while the U.S. federal district courts have been slow and reluctant: In the earlier years, U.S. courts preferred to apply the Uniform Commercial Code (UCC) Article 2, which also governs the sale of goods. However, in the recent years, -generally speaking- the CISG has been acknowledged by the U.S. federal district courts, as can also be noted from recent case law of 2019.
In the Sunrise Foods International Inc. v. Ryan Hinton Inc. case dated 8 August, 2019, the federal district court of Idaho ruled that “The CISG applies if the parties are incorporated in signatory countries, the contract does not explicitly opt out of the CISG, and the contract is for the sale of goods.” (2019 WL 3755499). Similarly, in Zodiac Seats US LLC v. Synergy Earo Corp. case dated 23 April, 2019, the Texas federal district court cited the BP Oil International, Ltd. v. Empresa Estatal Petroleos de Ecuador case of 2003 and stated that “The CISG "creates a private right of action in federal court" and "applies to `contracts of sale of goods between parties whose places of business are in different States . . . [w]hen the States are Contracting States.” (2019 U.S. Dist. LEXIS 68456). Finally, in a very recent case (Ningbo Yang Voyage Textiles Co. v. Sault Trading) dated 10 September, 2019, the New York district court found that the CISG applied to the dispute because both China and the United States were signatory countries to the CISG. (2019 U.S. Dist. LEXIS 155405.)
Turkey is a relatively new signatory country to the CISG. Turkey has adopted the CISG in 2010 and it became effective later in the year in August 2011. As opposed to other European civil law countries, Turkish court cases referring to CISG is sparse. However, this is also because many parties signing international sales contracts with their Turkish trading counterparts generally choose commercial arbitration as a forum. Within this framework, it should be noted that arbitrators at international arbitral tribunals frequently apply CISG and disputes relating to Turkish parties is not an exception.
The spirit behind the CISG is not only to harmonize laws, facilitate cross- border sales and reduce transaction costs, but the underlying spirit is to bring a mutual understanding amongst people and nations. It is true that the CISG facilitates contract negotiations by making it easier for parties and attorneys from different jurisdictions to understand each other. It is also true that the CISG is a way to avoid the application of complex conflicts of law rules and accordingly, it is a means to avoid ending up in a jurisdiction that one was unaware of and would not have preferred to have been subject to. However, the CISG “spirit” is also about connection between the nations of the world, it is a way to facilitate dialogue amongst parties from particularly different cultures. The more practitioners become aware of it, the more law schools incorporate the CISG into their curriculum, the more the CISG will be integrated into international trade practices. As a result, the barriers to international trade will disappear.