Almost reflexively choice of law clauses in international supply contracts exclude the CISG. The unknown subject leads to an irrational defence. The following list of nine reasons in favour of the use of the CISG should help because anyone who excludes the CISG without legal counsel gives up an amazingly comfortable position.
1. The CISG is applicable in 94 countries
The United Nations Convention on the International Sale of Goods is a treaty under international law by the UN Commission on International Trade Law (UNCITRAL). 94 countries have now signed and ratified this international treaty, which means that the CISG has become national law in all of them. It is – inter alia – always applicable if two contracting parties that are from contracting states conclude a contract of sale of goods.
A look at the map of the member states shows that almost all exporting countries that are important to Germany are signatories of the CISG. More than 80 percent of German exports go to countries that have ratified the CISG.
2. (Almost always) applicable for the German exporter
Furthermore and often disregarded, the CISG is applicable “when the rules of private international law lead to the application of the law of a Contracting State”. These rules of private international law (or conflict of laws) have been harmonized within the EU. Almost always, the right of the exporter (seller) is applicable. Hence, the CISG is (almost) always applicable to German exporters by way of EU law.
With Portugal’s accession to the CISG (effective from 01.10.2021), Ireland is incidentally the only EU member state that is not a CISG contracting state. But even in cases where the German exporter supplies goods to an Irish importer, the CISG applies by virtue of law (conflict of laws rules). For the United Kingdom, which has completed its withdrawal from the EU at the end of 31 December 2020, a special situation applies, which I described in my article on the impact of Brexit on the applicable law and in the epilogue after the conclusion of the Brexit agreement.
3. Negotiations with foreign contracting parties
The CISG provides for much better enforceability in negotiations with foreign contracting parties due to its widespread use and applicability. Which Croatian, Argentinean or Australian contracting partner would use German domestic law without further examination? If, however, the contracting party makes clear that the CISG is an alternative, which is equally and simultaneously German, Croatian, Argentine and Australian law, contracts can be negotiated differently – mainly because the CISG is available in six official languages and unofficially in the languages of almost all contracting states.
4. The legal certainty of the CISG
Those who agree on the applicability of German domestic law feel safe, but such safety can be deceptive. Who can guarantee that their choice of law clause is enforceable worldwide?
In principle, all judges apply their own civil procedural law and their own conflict of law rules. In case of a lawsuit filed in Germany, the result can therefore be predicted with a considerable level of certainty. But who can give the exporter the assurance that the lawsuit will be filed in Germany? The exporter can be quickly sued in Argentina, Brazil, Canada or Japan with or without a choice of forum clause. The choice of law clause is then assessed according to the domestic rules and may be esteemed ineffective.
At the same time, the exporter could easily have trusted the validity of the CISG, which also applies in Brazil, Canada and Japan, and which is to be interpreted autonomously, i.e. as globally uniform as possible. To give up on this, especially against the background of all international legal uncertainties, is simply negligent.
In particular, the CISG as an international treaty prevails over domestic law. Those who use the CISG are spared from any changes in law abroad. More legal certainty cannot be achieved in foreign business.
5. Exclusion difficult – the “GTC trap”
The exclusion of the CISG fails regularly. German companies typically believe that a small reference to their General Terms and Conditions (GTC) in emails or written offers is sufficient. Generally, GTCs contain a choice of law clause (often excluding the CISG) and choice of forum clause. These companies are in for a rude awakening because both are invalid.
The CISG requires that the GTC’s full text needs to be provided to the other party before the contract is concluded. If this does not happen, the GTC are not part of the contract and choice of law clause (and also the exclusion of the CISG) is not effective. Incidentally, the same applies to the choice of forum clause in GTCs. Too many companies have made (and make) this mistake.
6. Strict liability for claims for damages
In terms of content, the CISG offers German importers a claim for damages similar to that of a guarantee. The CISG does not presuppose any fault on the part of the seller or a period for subsequent performance. The seller is liable for breaches of duty, including defects of the purchased item and even lost profit. And this happens by virtue of law. Such liability does not apply in German law and it even cannot be stipulated in GTC.
Why should the importer waive this claim, which is often simply not recognised because of a lack of knowledge of the CISG?
7. No regress for consumer goods sales
According to German law, a supplier, whose customers (entrepreneurs) sell to consumers, must accept that the provisions concerning consumer protection apply also in relation to his the entrepreneur (sec 478 of the German Civil Code or BGB). This prevents the entrepreneur from being subject to consumer protection regulations vis-a-vis the consumers, but at the same time not allowing the entrepreneur to be able to have recourse against the supplier because of the stricter trade law regulations. An unsatisfying situation for the supplier, which can hardly be changed because these regulations are mandatory.
It is different if the CISG is applied: The rules do not apply here. So why exclude the application of the CISG?
8. Withdrawal only in the case of material breach of contract
Withdrawal from (or avoidance of) a contract pursuant to the CISG is only possible if there is a material breach of the contract. According to the CISG, this only happens when the breach of a contract “results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract.” The threshold for withdrawing from a contract is therefore much higher than in German law, which excludes the right of withdrawal only if the defect is “trivial”. The CISG protects the seller because the cost of cancellation of a contract in cross-border business is much higher than in purely national business transactions.
Why give up on such protection?
9. Default rules
Does the CISG have advantages for the seller as well as for the buyer? This question gives rise to another question: Which advantages for which side? For which side – buyer or seller – is the CISG more advantageous?
This way of looking at things is not effective and originates from the idea of those who are still seeking an argument that relies on (known) law. The CISG consists almost entirely of default rules. If strict liability for defects is a deterrent to German exporters, contractual arrangements can be found for avoiding this, as well as, for limiting the right to withdrawal, which German importers fear.
It still holds true: The main reason for the rejection of the CISG is the fear of unknown legal instruments. It may happen that the right choice, in individual cases, is indeed the applicability of German domestic law and the exclusion of the CISG. In no case, however, should this choice be made blindly because, if applied properly, the CISG can lead to excellent results.