Hidden risk in international sales contracts: the (in)exclusion of CISG
Do you supply or plan to supply your products to trading partners abroad? In such a case, a choice of law clause is an essential part of your terms and conditions. Likewise if you purchase goods from abroad. However, some wordings are not able to trigger the intended consequences, which can cost you dearly.
(on the photo: the ARROWS Prague team together with several colleagues from the tax and accounting firm ARROWS tax)
What is the Vienna Convention on the International Sale of Goods (abbreviation CISG)?
The CISG is an international treaty that contains the legal regulation of a purchase contract between business people. It contains, among other things, the conditions for the formation of a sales contract, the rights and obligations of the parties or rights from defective performance.
Without further ado, the CISG rules under Article 1 apply in preference to any other law when it comes to a contract of sale concluded between entrepreneurs from different states that are parties to the CISG (there are less than a hundred of them to date, including the Czech Republic).
Indirectly, the CISG may also apply in cases where the legal rule determining the law applicable to a particular sales contract points to the law of a state that is a party to the CISG, regardless of the domicile of the parties.
It is the broad applicability of the CISG that is its domain. However, businesses generally have only limited experience with the CISG's treatment of sales contracts, which can become costly. However, the application of the CISG can be excluded, as is usually the case in international business, typically by a provision in the business's public terms and conditions ("T&C").
In addition to a modest awareness of the CISG rules, other reasons for excluding the CISG include (i) the lack of regulation of certain essential issues of the purchase (e.g., transfer of title) or (ii) the broad interpretation of selected institutes in certain jurisdictions (e.g., according to German courts, the buyer is obliged to grant the seller additional time to perform even in the event of late performance, not only defective performance, based on the interpretation of Article 47 CISG).
CISG exclusion
Businesses may exclude the application of the CISG either in the GTC or in the specific sales contract together with the determination of the applicable law. It is in your interest to choose a law with which you or your lawyer are familiar, typically the law of the country in which you are established.
But beware! Referring to the law of a particular state as a whole (e.g. "The law applicable to this contract of sale is Czech law.") does not exclude CISG under Article 6, according to case law and academics.
Meanwhile, legal uncertainty limits your ability to reduce your own exposure to risk and breeds non-negligible additional costs. In the extreme case, you will no longer be able to successfully recover your claim.
In order to exclude CISG, an explicit exclusion of its application in the GTC or a specific purchase contract or a reference to a specific legal provision within the selected legal system (e.g. "This contract is governed by Act No. 89/2012 Coll., Civil Code") is required.
Legal service in supplier and customer relationships with an international element
At ARROWS, we have many years of experience in setting up legal relationships for businesses operating internationally. We successfully create a stable legal environment for entrepreneurs and thus save them the money and time needed for their further development.
If you have any questions, we are at your immediate disposal.
Adam Weisser contributed to this article.