Last week I wrote about the freedom of contract in Vietnam, here, and only briefly touched on an important international convention which Vietnam acceded to a few years ago. The Vienna Convention for the International Sale of Goods, or CISG for short, is an important set of rules for anyone buying goods from Vietnamese producers, manufacturers, or exporters.
WHAT IS CISG?
In the late 1960s, the international community got together and started developing a unified set of contract principles that could apply to the sale of goods across borders. At the time the world was beginning its half century road towards globalization and international shipment, and sale/purchase of goods was becoming increasingly common. With each country having its own set, and sometimes many sets, of contract rules the UN decided to promulgate rules for sales contracts that could be adopted by every country and applied by the parties to such contracts. In this way they hoped to limit disputes and legal costs for cross-border businesses as well as ease the complications for negotiations and eventual dispute resolutions that would inevitably arise.
The Convention, originally signed in 1980, has since been acceded to by 93 parties around the world. On 18 December 2015 (and having entered effect on 1 January 2017), Vietnam acceded to the convention thus allowing parties to contracts for the international sale of goods to declare such contracts governed by the set of rules enumerated in the convention. CISG has been so successful that when I went to law school we studied it side by side with the local contract laws of California. One hundred and one articles long, CISG governs the formation of contract, the sale of goods, performance and avoidance of obligations, passage of risk and remedies for both parties. It provides an essentially comprehensive set of rules for the creation, performance, and enforcement of contracts related to the international sale of goods.
There are several reasons why CISG is important and why, as a seller or buyer of goods to be shipped across Vietnam’s border it is a good idea to consider CISG as an alternative to the application of local Vietnamese law. From the ease of contracting to increasing understanding between the parties to the transparency of dispute resolution application of CISG is beneficial to foreign purchasers but also to Vietnamese sellers.
According to a document prepared by the Vietnam International Arbitration Center, or VIAC, prior to Vietnam’s accession to the CISG convention, the benefits for Vietnamese companies of CISG include:
- cost savings in negotiating applicable law provisions,
- reduction of costs and difficulties of applying foreign law to transactions as there will no longer be a need to research foreign law in order to comply to foreign counterparties’ demands,
- elimination of the need to analyze conflict of laws at an international level during dispute resolution processes as CISG will automatically apply in most cases,
- provision of access to modern rules drafted with modern issues in mind,
- equalization of the playing ground as both parties have to deal with a “foreign” or international law rather than giving one party the advantage of their own jurisdiction’s rules, and
- unlike in some countries CISG was designed to balance equality and justice between the buyer and seller and thus the rules are more fair than many country’s contract laws.
Man of these advantages also accrue to foreign buyers seeking to enter into contracts for sale of international goods from Vietnam. Rather than having to negotiate the application of a foreign law that might be more developed and, thus, more beneficial to a foreign purchaser they can rely on CISG as an internationally agreed set of rules to guarantee and protect their interests in a less developed market. This reduces legal fees and stress during negotiations as the set of rules governing the transaction can be assumed. In addition, CISG can be assumed to be understood by local courts should they be the venue for dispute resolution where foreign laws might be difficult to research and understand for local court officials. Thus, the entire process is simplified by having a multi-laterally agreed set of rules in place before negotiations even begin.
WHEN DOES CISG APPLY?
CISG has limited application. There are some types of manufactured goods that don’t fall under its scope and some other types of goods such as household goods or large machines that may also fall outside its scope. Here, I cite Professor Gizim Alper of Pace University School of Law who wrote as follows here:
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.”
The application of CISG, then, is not for everything, but if the goods contemplated fall within its scope, the next relevant question becomes
HOW DOES CISG APPLY TO MY CONTRACT?
Again I return to paraphrase VIAC’s pre-accession notes. According to that document there are four cases in which CISG will apply.
- When both parties are located in countries that are members of CISG,
- When according to the principles of private international law the rules of a country that is a member of CISG apply,
- When the parties to the contract agree that CISG will apply, or
- When the organ resolving a dispute decides to apply CISG.
These four situations are taken from CISG itself, where they are codified. Even if a contract would appear to fall within the jurisdiction of CISG, however, there is, as in Vietnam, a great deal of faith in the freedom of contract on the international stage. CISG itself states that the parties to a contract that otherwise may fall within the application of CISG may choose not to apply CISG. In article 6 of the convention is stated:
The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.
Article 12 refers to reservations made by countries as to the form of the contract and does not apply to Vietnam. Thus, parties to a contract for the international sale of goods with one party in Vietnam may choose not to apply CISG even if it would otherwise apply automatically, allow it to automatically apply in the case of contract with a party from another state that is a member of CISG, or choose to apply CISG with a party that is from a state that is not a member of CISG. It can act, therefore, as an optional set of rules to govern cross-border contracts for the sale of goods.
The use of CISG in Vietnam is beneficial for both sellers in the country and for purchasers buying from those local producers. It eliminates time, costs, and stress from the entire transaction and provides transparency and ease of communication between the parties. Not only that but it is considered the law of Vietnam and the courts are, therefore, familiar with its application. It puts Vietnam on a level playing field with foreign purchasers and in many other ways creates an environment for the easy exchange of goods across the border.
CISG, however, is based in international law and thus, despite the fact that local lawyers and courts should be familiar with it, may be still foreign to them. Vietnamese lawyers tend to be insular and not understand much about international law. Rarely have they actually read a convention unless they have specifically been called upon to do so in the course of their business. That means clients seeking to apply CISG and develop contracts utilizing CISG need to consult firms capable of integrating Vietnam’s international obligations into local contracts.
If you have questions regarding CISG or need to draft or review a contract relevant to CISG, please contact your lawyer at Indochine Counsel or get in touch via our website at www.indochinecounsel.com.