CISG, Why India Should Not Opt For It

If I talk in corporate language UN Convention on Contracts for the International Sales of Goods Act (1980) (CISG) is like investing in a reasonably profitable venture (which appears so on the face of it), gains of which cannot be postulated and its discretion lies on some other hands. So how lucrative is it when it comes to the actual realization. This article centers the same.

The movement to unify the law relating to the international sale of goods which started in the 1920s gave birth to the UN Convention on Contracts for the International Sales of Goods Act, or CISG. It came into force on 1 January 1988, according to UNCITRAL[1] seventy four states have adopted the CISG. The Convention was adopted by a diplomatic conference in Vienna on 11 April 1980. It is a comprehensive legal code which sets out rules, inter alia, and primarily regarding formation of contract, obligations of buyers and sellers and remedies for breach of contracts. The purpose of the CISG is set out in the preamble"[2]:

... uniform rules which govern CISG and take into account the different social,
economic and legal systems would contribute to the removal of legal barriers in
international trade and promote the development of international trade.

The goal of commercial law is to promote predictability, certainty, balance and efficiency. These are viewed as being in line with the parties positions when entering every new transaction, namely without knowledge of potential outcomes should things go wrong.

Scrutinizing the Articles of the Convention, we can construe how justified are its purpose in context to the legal facet of the Indian market.

Two major trepidations arise from the situation. Firstly, are our Indian governing laws and courts ready to accept the UN convention of CISG? and secondly how appropriate is this international convention as compared to Indian domestic laws and any other applicable domestic laws? In the context of this, the brief note aspects such as - fundamental breach, good faith, intention, validity of evidence, closest point test are being deliberated.

Our directive principles sure do generously talk about recognition of international laws in Art 51(c) of the Constitution of India, but when it comes to the incorporation in our laws, it subdues its efficacy by lucidly suggesting in Art 37 of the constitution that none of our directive principles are enforceable in any court of law. So even if we ratify the convention how dependable is it in Indian context?

In Karan Dileep Nevatia, Proprietor v. The Union Of India(Citation: 2010(1)BomCR588, 2010(112)BomLR127, 2010(172)ECR1(Bombay)) case it was clearly held by the Honorable High Court of Bombay that an international treaty might have been signed by the Government of India but it cannot be binding on the states unless any direction under Article 253 is made by the parliament. In the same case reference was given to Maganbhai Patel's case, where the Constitution Bench quoted the relevant paragraphs from Oppenheim's International Law, 8th Edn., at pg. 40, which reads thus: "Such treaties as affect private rights and, generally, as required for their enforcement by English courts a modification of common law or of a status must receive parliamentary assent through an enabling Act of Parliament. To that extent binding treaties which are part of International Law do not form part of the law of the land unless expressly made so by the legislature". Therefore the ratio decidendi of Karan Dileep Nevatia case was that

“International Treaties ratified by Central Government do not by virtue of treaties alone have the force of law and for provisions of such treaties to have a binding force on Indian Nationals, Parliament has to enact a law under Article 253 of Constitution for implementation of provisions of said treaties.”

“If Parliament has not made any law in respect of an International Treaty under Article 253, delegated legislation cannot be struck down on the ground that it is contrary to a provision of an International Treaty and in such a situation delegated legislation cannot be made subject to an International Treaty.”

The Constitution exclusively cannot be held responsible for diminishing its effect but as a matter of fact Art 1 (1) (b) of the expressly states that the Convention applies only when the rules of private international law lead to the application of the laws of the contracting states. Thus unless there are any amendments made or bill passed to that effect superseding Art 37 the ratification of such a treaty holds ineffective. The only pacification is that while making new laws these directive principles will be kept in mind. Is this gratifying enough? And yet again the same question comes up to my mind how dependable is the CISG convention?

CISG only deals with sales of Goods, Its scope is exclusive of certain aspects like contractual capacity, illegality, fraud, tortious liability etc. which are a common matter of dispute amongst parties. Barry Nicholas, a scholar on this subject remarked that the CISG 'would not therefore achieve one of the main objectives of the uniform laws'[3]. Therefore, from a common man perspective the first contemplation that creeps in is that when parties do need a resolution manner for these issues, why have another governing law. The whole purpose of CISG is to harmonize and simplify the contracting situation between countries governed by different laws holds contrary.

There are many a legal uncertainties caused by broadly formulated rules containing many undefined and new terms which have to be developed in the international arena by courts and arbitral tribunals without any hierarchy and no principles of stare decisis. Infact, the concept behind CISG to bring about legal unification or solve the problems created by diverse laws and conflicting issues has rather created diverse interpretational approaches and tradition. Courts of different countries, partly due to imprecise language, have interpreted provisions of the CISG inconsistently, further hindering the object of uniformity and simplification. A learned author comments:

“A major problem with CISG is that it is, in a sense, international law applied locally. This inevitably puts a local tint on CISG interpretation. The fact that there is no international court that administers CISG is identified by Ronald A Brand and Harry M Flechtner as one of the most 'serious obstacles to achieving the uniform international sales regime at which CISG aims'. The parochialism of domestic courts coupled with their suspicion of foreign judgments that may be differently decided at home is undoubtedly a major impediment to uniform application of CISG.[4]”

Even in matters containing arbitration, as per the UNCITRAL rules, the 1996 act under Section 34 also states that an award passed by a foreign court of competent jurisdiction can be refuted by an Indian court and will not operate as res judicata between the parties thereto on a number of grounds. These often include the dispute falling under arbitration agreement or procedural issues, such as improper composition of arbitral tribunal or bias and fraud. Even in the past, the Supreme Court of India has interpreted the international arbitration matter in a narrow manner [5]. In a recent decision [6], the Supreme Court held that as far as domestic awards are concerned, any incorrect interpretation of Indian law would fall under this category and the Courts would be required to set aside domestic arbitration awards if there was a wrong interpretation of Indian law and will be regarded as a null and the trial "corum non judice". In case of foreign court judgments other than arbitration Section 13 and other conditions mentioned in Sec. 11 of Code of Civil Procedure, 1908 Act as the factors for non compliance by the Indian Courts.

Shifting to the second part of our concern, the term 'fundamental breach' is defined in Article 25 of the CISG as one which: '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.' The breach as to when it will be regarded as fundamental is beyond comprehension.

The CISG deprives the buyer of his statutory right under the domestic law to reject the goods when they do not conform to the quantity or quality. The Indian trading bodies and their legal advisers would find the anomalies in the CISG rules troubling because of the imprecise language of the CISG and introduction of the 'fundamental breach' concept (in Article 49). Even so is Article 8 which makes the act very much susceptible to discrepancies. The intent clause brings about in the judgments the role of representation contravening the actual value. Article 7, brings about an even more perplexing situation is aspect of ‘good faith’. CISG is absolutely silent about the interpretation of good faith, whether it is good faith with respect to the conduct of the parties or its suggesting towards fair dealings. Article 7(2) generally referred to as gap-filling provision is actually acts as the pandemonium. Again it steers us to the lap of an arbitrary territory and is thus very subjective as per the situation. Other international laws like UNIDROIT Principles and the Restatement, Principles of European Contract Law(PECL) also apply good faith as an interpretative principle but it additionally mentions that it is imposed as a duty upon the parties conduct.

CISG brings in a great risk through its Article 11, which says that any contract of sale need not be in writing. Even inclusion of witness is proof enough. Now in certain cases when the dispute between the contracting parties does not fall within the ambit of CISG then consequentially the case will be governed by private international laws, or conflict in Laws or domestic laws of either party. This leads to such uncertainty, firstly because the parties have no written document and secondly the parties end up being in an entirely new purview of laws. Another interesting observation is that, Article 8(3) allows contractual intent to be evidenced by any and all means. Article 12 does allow Contracting States to opt out of Article 11’s specific elimination of writing requirement as evidence of a contract or any intent but does not speak to Article 8(3)’s permissive language. This conflict may create some ambiguity in determining whether non-written evidence might indeed still be permissible under Article 8(3), despite a declaration under Article 96 pursuant to Article 12.

Focusing towards Article 10, it seems as if its unclear with the meaning of the concept ‘closest relationship’ of the place of business to the ‘contract and its performance’. UNCITRAL as well as the Vienna Conference have avoided clarifying the meaning of closest relationship. Indeed, quid iuris where the contract is concluded at one place of business and has to be executed at another one? For example, the parties may know that the contract being negotiated and concluded in State A is to be performed in State B, where the seller has another place of business. Article 10 does not give any indication as to which of these criteria should prevail. Here again too much flexibility is provided further creating ambiguity for the judge or the arbitrator to adapt this provision to the particular requirements of different international contractual relations. Applying this rule in a case where an Austrian buyer purchased goods from the Swiss branch of a company with headquarters in Liechtenstein (notably: a non-Contracting State), a Swiss court held the contract was governed by the CISG, since it was the Swiss branch which had the closest relationship to the contract and its performance(lex loci contractus)[7]. Again leading to same point that signing such a deal, makes India highly susceptible to losing its control over jurisdiction.

Further, the part of Article 10(a) which states that in establishing ‘the closest relationship’ regard is to be paid to the circumstances known or contemplated by the parties at ‘any time’ before the conclusion of the contract, appears to be too wide. The meaning of ‘habitual residence’ as used in Article 10(b) may be another controversial issue. The Convention does not define it, although it refers to it in another of its provisions (Article 24). Since ‘habitual residence’ is a situation of fact, it cannot be a purely legal concept. There are, however, divergent views about the factual situations which it is supposed to denote. This and quite a few terms have been left to be interpreted by arbitration tribunals and courts of law, bringing in the local preconception failing to provide an internationally uniform judgment.

Considering another scenario where India has ratified CISG. A particular contracting state contracts with India, India being the buyer. No specific decision is taken regarding delivery of goods. As per Article 31(a) the obligation of the seller ends with the delivery of goods to the first carrier. Under a situation where the delivery between the buyer and the seller is through any middle source, India loses the right to approach its courts for interim relief. ‘The closest point’ test applied in CISG creates various unknown situation. In case of a dispute in the above stated example the discretion lies on the court of the place of the first carrier.

The costs of negotiating the law governing an international contract depend to a great extent on the importance that the parties attach to the issue and their awareness of the consequences of the choice of the applicable law. Eventually, India's international traders and their legal advisers must assess if the CISG meets the Standards as there are several questionable elements. A good contract law is one that enables the buyer and the seller to approach their lawyer requesting him to predict, as far as possible, what a court would do if a dispute were to arise. It is, therefore, important for businesses to consult with knowledgeable legal counsel before negotiating or entering into such contracts for more efficiency and predictability in the event of litigation.

It is prudent that we spent a little more in formulating a better contract agreement with our international clients rather than depending solely and wholly on a, though internationally standardized but still vague sales of goods act and spending a colossal owing to the ambiguity of this international law. Assessing it all, I infer that signing up for CISG will further complicate the business transactions between Countries, all that is required is improvisation and careful formulation of international contracts, begetting clear contracting terms and thus healthier and welcoming International relations.

[3] The United Kingdom and the Vienna Sales Convention: Another Case of Splendid Isolation?' available at http://www.cnr.it/CTDCS/frames9.htm, and also at www.worldcatlibraries.org
[4] Monica Killian, 'CISG and the Problem with Common Law Jurisdictions.
[5] See Renusagar Power Co. Ltd. V.General Electric Co., 1994 Supp(1) SCC 644
[6] ONGC v. Saw Pipes, (2003) 5 SCC 705
[1] http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html
[2] United Nations Convention on Contracts for International Sale of Goods (April 11 1980) 1489 UNTS 3 (CISG).
[7] the decision of Bezirksgericht der Saane (Switzerland), 20 February 1997, CLOUT Case 261 [reported at http://www.cisg.law.pace.edu/cisg/text/casecit.html

The  author can be reached at: shachipandey@legalserviceindia.com