In the case of cross-border sales contracts for goods, it often happens that the contracting parties do not expressly stipulate (in writing) the law applicable to the contract or that the choice of law has not been made effectively because, for example, the general terms and conditions (GTC) of a contracting party with a choice of law clause have not been effectively included. If a dispute subsequently arises, the question of the place of jurisdiction and the applicable law often has to be addressed.
This article discusses this issue and clarifies the correct determination of the applicable law.
APPLICABLE LAW FOR CROSS-BORDER SALES CONTRACTS
Applicability of the UN Convention on Contracts for the International Sale of Goods
The United Nations Convention on Contracts for the International Sale of Goods (CISG) regulates the international sale of goods between companies from different contracting states. It came into force in 1988 and has been ratified by more than 90 countries, including the USA, China, and Germany. The CISG takes precedence over the applicable conflict of laws of the individual contracting states (e.g., the Rome I Regulation). However, conflict of law rules do apply when it comes to the applicable law in relation to non-contracting states. It also applies outside the material scope of application of the CISG. The same applies to substantive gaps in the CISG. However, many legal practitioners are not familiar with the CISG and its regulatory content, which is why the CISG is often contractually excluded without first examining whether its provisions might not even be more favorable for their own position and interests in individual cases.
Material Scope of Application
The CISG governs contracts for the purchase and sale of goods between parties located in different contracting states. The buyer and seller must be entrepreneurs. The goods in question are defined as movable items, such as cars, electronic goods, and even livestock. It primarily regulates the rights and obligations of the contracting parties, in particular with regard to the delivery of the goods and payment of the purchase price. However, purchases of goods for private use (consumer transactions), sales of land, ships, aircraft, electricity, and services are excluded from the scope of application.
Territorial Scope of Application
The CISG applies automatically if both contracting parties are located in contracting states or if the rules of private international law refer to the law of a contracting state of the CISG. The latter is also the case if the parties declare the law of a contracting state to be applicable by means of a choice of law clause.
Temporal Scope of Application
It applies if the contract was concluded after the CISG came into force in the countries involved.
Waiver Possibility
The parties can exclude or partially change the scope of application of the CISG by contractual agreement—e.g., also through general terms and conditions. Freedom of contract therefore applies with regard to the applicability of the CISG.
Regulatory Content of the CISG
The CISG is divided into four parts. The first part regulates the scope of application and the general provisions. This covers the conditions for application and the basic principles of the convention. The second part contains the conclusion of a contract by offer and acceptance. The third part then stipulates the rights and obligations of buyers and sellers and the legal consequences of breaches of contract, such as damages, contract termination, and reduction. Finally, the fourth part contains organizational and administrative provisions, such as the accession of further states to the agreement.
Advantages and Disadvantages for Buyers and Sellers
Whether the CISG is more advantageous or disadvantageous for a contracting party than the respective national law of the contracting parties cannot be answered in general terms but should be assessed on a case-by-case basis.
Compared to the German law governing sales contracts, the CISG offers the buyer the advantage that, in the event of a breach of contract for defects, the buyer is entitled to a no-fault, guarantee-like claim for damages against the seller in accordance with Art. 45 I (b) CISG, which is extensive with regard to the scope of damages. For the seller, on the other hand, the CISG has the advantage over German law that the buyer can only withdraw from the contract in the event of material breaches of contract, as rescission of the contract is the ultima ratio in the CISG. In German law, it is sufficient for a withdrawal from the sales contract that the defect is not insignificant. The CISG also has stricter requirements for subsequent performance than German law.
Of course, there are also advantages to using the CISG that benefit both contracting parties equally. For example, it is advantageous for both contracting parties that the provisions of the CISG can be modified almost entirely by the contracting parties by contract and adapted to their needs. In addition, the CISG is available in almost all languages spoken worldwide, which makes costly and error-prone translations unnecessary. Finally, the CISG is also attractive for the contracting parties because it represents a standardized law that is understandable for both contracting parties and predictable in its legal consequences.
Applicability of the Conflict of Laws
If the CISG is not applicable, has been effectively excluded, or does not contain any provisions regarding the details of the contractual relationship—for example, for the question of the statute of limitations—the legal assessment shall be based on the applicable conflict of laws.
In the case that sales contracts are connected to the laws of different countries, for example, the Rome I Regulation applies, see Art. 1 para. 1 Rome I Regulation. Art. 3 para. 1 of the Rome I Regulation allows the parties to freely choose the applicable law. This must be made expressly or be clear from the circumstances of the case.
However, if the parties have not made a choice of law or if the choice of law is ineffective, e.g., because a choice of law was made in the general terms and conditions and these were not effectively included in the contract, the applicable law is determined in accordance with Art. 4 Rome I Regulation. According to Art. 4 para. 1 a) Rome I Regulation, the law applicable to sales contracts is the law of the country in which the seller’s habitual residence is.
CHOICE OF LAW THROUGH GTC
As mentioned above, the applicability of the CISG can be excluded by individual contract or by general terms and conditions, Art. 6 CISG.
In the case of international sales contracts, to which the CISG is generally applicable under private international law, the question arises in particular as to whether an exclusion of the CISG in the GTC has been effectively included in the contract. This is also assessed in accordance with the provisions of the CISG.
However, the CISG itself does not contain any explicit provisions on the question of whether the GTCs have been effectively incorporated into the contract, which is why the general provisions on the conclusion of contracts in Art. 14 et seq. CISG apply, and it must be clarified by interpretation whether these provisions have become part of the contract.
Customs between the parties and international trade practices must also be taken into account in the interpretation. It is generally recognized that the contractual partner must have the opportunity to get to know the content of the GTC in a reasonable manner. The inclusion must therefore be apparent for the contractual partner. In addition, the text of the GTC must be sent or otherwise made available to the contractual partner.
The reason for these high requirements is that there are considerable differences in the content of GTC in the various national legal systems and the contractual partner should know what they are agreeing to before the contract is concluded. In addition, it is also easy to provide the contractual partner with the text of the GTC before the contract is concluded. Another prerequisite for effective inclusion is that the GTC are also available in the language of the contract.
SUMMARY AND PRACTICAL ADVICE
As described above, the CISG is generally applicable to sales contracts for goods between two companies based in contracting states, unless otherwise agreed.
If the parties prefer the CISG not to be applicable, they should explicitly exclude it and agree on a different choice of law. If a choice of law is included in the GTC, the contractual partner must agree. Furthermore, the GTC should be sent to the contractual partner in the language of the contract before the contract is concluded.
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