Introduction:
International trade and investment forms the bedrock for modern day commerce and a country’s economic development. In this context ‘sale of goods’ contracts have been acknowledged as the basic foundation of international trade. The increased volume of cross-country free flow of goods, owing to globalisation, has made it necessary for developing widely accepted trade practises and conventions so as to ensure effective and efficient negotiations between countries. While instituting the United Nations Commission on International Trade Law (UNCITRAL), it has been recognised that varied legal provisions of different countries form the major obstacle to international trade. Hence, liberal harmonization of various trade laws has been hailed as the only way to facilitate extensive development of trade law.
In pursuance of the above ideal, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) was instituted in 1980. It presents a contemporary uniform regime for the resolution of disputes involving international buyers and sellers. The main aim is to instill a degree of certainty and trust in commercial exchanges with a view to reduce transaction costs and business faux pas. [1] The provisions of the CISG are geared for cross-border exchanges, developing facilities to assist in more competent contract management which will ultimately result in equitable litigation results.[2]
Around 90 countries have ratified this treaty, including big trading countries like USA, China, Singapore, Germany etc. One of the major and most talked about absentee has been India. India has time and again refused to ratify the treaty citing the treaty’s incompleteness as the major reason for its abstinence. But, the problem lies deeper than mere technicalities. The adoption of this treaty, which will in effect replace the Sale of Goods Act, 1930, will lead to a legal restructuring and reshuffling and not a mere uniform harmonisation of domestic laws. This post seeks to elucidate on the characteristics of CISG which do not bode well with India’s domestic laws and will cause more harm than good to India’s international transactions if CISG is adopted.
Analysis
Ostensibly, the CISG boasts to be one of the most innovative and successful treaties in private international law. The CISG has various enabling clauses with the main objective being promoting the freedom of contracting parties. The Preamble to the CISG delineates its purpose to be the development of international trade based on a foundation of equality and mutual benefit.[3] Even though it deems itself to be a unified code which encompasses different social, economic and legal systems[4], it does not bode well with Indian jurisprudence because of certain fundamental differences.
Firstly, the introduction of “fundamental breach” in Article 25 poses its own difficulties. The Article states that “a breach of contract committed by one of the parties is fundamental if it 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.”[5] As has been observed by many scholars, this provision leads to a lot of uncertainty owing to its open-ended definition which makes it very difficult to predict when a breach can be held as fundamental. [6] It bestows upon the contract a great degree of arbitrariness which is further complicated by ascribing a subjective standard of forseeability of individual parties.
Secondly, Article 7 puts forward the concept of “good faith”. But, this Article is a stand-alone section as the entire treaty does not clarify what exactly constitutes good faith thus leaving it to varied judicial interpretations. It is not clear whether good faith applies to conduct of the parties or it is an indication of fair dealings. Since, Indian Law does not categorically recognise good faith at the stage of performance and enforceability of commercial contracts, this broad definition brings in fair degree of uncertainty.[7]
Thirdly, a combined reading of Articles 46, 47, 49 which relate to remedies for breach of contract by the seller, indicate that the buyer is entitled to claim damages only with regard to late performance or non-delivery and the subjective fundamental breach test. Thus, it robs the buyer of one of his most important statutory right under Indian domestic law and that is the right to reject the goods if they do not comply with the quantity or quality.
Fourthly, damages contemplated under the SGA relate back to sections 73 and 74 of the Indian Contract Act, 1872 (ICA). The counterpart of section 73 under ICA is Article 74 of the CISG which states that damages should be foreseen as a possible consequence while on the other hand, the ICA requires the law of damages to be a “probable result” of the breach committed therein. Thus, this wider provision significantly endangers the chances of the aggrieved party to claim damages, as s/he has a higher possibility of recovering stipulate damages under the Indian law. Similarly, the CISG does not provide for damages for injured feelings, Thus, the avenue for the aggrieved party to recover additional costs are barred. Since, Indian law leans more towards the aggrieved party, there will be strong opposition if the CISG is adopted.
Fifthly, Article 10(a) seeks a “closest relationship” test for deciding the place of the contract. This Article is ambiguous and can lead India to lose a significant amount of control in deciding where the dispute arose and which laws will apply. This becomes even more problematic in the context where the CISG does not stipulate a time or place for measuring damages. Indian law very strictly specifies the time for measuring damages. This becomes of paramount importance in international transactions, because price of goods tend to fluctuate rapidly thus, the time for measuring damages has a significant impact on the quantification of damages and transaction costs. [8] Even in cases if anticipatory breach, the duty to mitigate under CISG arises the moment the aggrieved party comes to know of the intent of breach whereas in India the question of mitigation arises only when the breach takes place or rescission effectuated.
Sixthly, the element of intent as elucidated under Article 8 is very confusing and contradictory in the face of lack of official clarification. In an effort to “harmonize” common and civil law, it has obfuscated established trade practices in various countries with no concrete guideline. Article 7(2) or the gap-filling provisions lends no support to clear confusion instead baffles state actors thereby intensifying the prejudice. [9]
Apart from the aforementioned specific problems, the CISG suffers from certain universal lacunae which make its adoption even more cumbersome. The CISG does not address issues relating to the validity of the contract. It also does not have a supplementing legislation which addresses the same. Thus, issues like illegality, fraud, misrepresentation, tortuous liability et al of the contracts itself is missing. Hence, it fails to achieve one its main objective of uniform laws.[10] The language is extremely vague and wide which leads to more confusion than solutions. Presence of undefined terms which form key components of the law, leads to judicial arbitrariness as courts and tribunals interpret them according to their will, for in the international arena ,there is no hierarchy or principle of precedence. In the absence of institution of courts to look especially into the matters of CISG, every judgement passed in a particular jurisdiction gives rise to new interpretations and hence new perceived laws which automatically has a domestic bias. Thus, in reality there is no uniform international guideline, but it is reduced to a warped version of individual domestic laws, which happen to have stated international ramifications.
Conclusion
Even though India may not formally enact CISG, it can still be held accountable under CISG if it contracts with any of the contracting parties. It has also been argued that such an adoption will lead to increased and more effective trade. But, in the light of the aforementioned anomalies that CISG presently suffers from, India will face major disadvantages if CISG is adopted. It will not be a smooth integration of Indian laws with the CISG guidelines but rather will lead to an entire overhaul of the Indian commercial law jurisprudence which will lead to significant endangerment of accepted trade practices and will cause a cosmic shift in the status of the contracting parties. Thus, until a comprehensive review is undertaken of the CISG, it will not be wise for India to blindly climb onto the bandwagon and sacrifice its established commercial law jurisprudence.
This post has been authored by Swarna Sengupta, 2nd year student at the West Bengal National University of Juridical Sciences.
[1] Luca G. Castellani, CISG and Harmonization of Asian Contract Law, The Contribution of the United Nations Convention on Contracts, (Oct. 24, 2017, 07:30 PM), http://www.nysba.org/Sections/International/Seasonal_Meetings/Vietnam/Program_4/CISG_Paper.html
[2] John Y. Gotanda, Assessing Damages in International Commercial Arbitration: A Comparison with Investment Treaty Disputes, III 75, British Institute of International & Comparative Law, (2009).
[3] The United Nations Conventions on Contracts for the International Sale of Goods, Preamble, Apr. 11, 1980, 1489 U.N.T.S. 3, 59.
[4] Ibid.
[5] The United Nations Conventions on Contracts for the International Sale of Goods Art. 25, Apr. 11, 1980, 1489 U.N.T.S. 3, 59.
[6] Shishir Dholakia, Ratifying the CISG- India’s Options, Institute of International Commercial Law, (Oct. 23, 2017, 09:05 PM) https://www.cisg.law.pace.edu/cisg/biblio/dholakia.html#18.
[7] Antonios Piastas, The Potential Impact Of The CISG On The Common Laws Of England And The Republic Of Ireland: A Legal Anactataxis Or A Trivial Matter Of Implementation? The Lessons Of Comparative Law, 17, The Denning Law Journal, 43-62, (2005).
[8] Indraneel Basu Majumdar & Srishti Jha, The Law Relating to Damages Under International Sales: A Comparative Overview between the CISG and Indian Contract Law, Institute of International Commercial Law, (Oct. 23, 2017, 11:30 PM), https://www.cisg.law.pace.edu/cisg/biblio/majumdar.html
[9] Yashasvi Nain & Shashank Manish, Why India Should Opt for CISG, 4, ILJ (2011).
[10] Barry Nicholas, The United Kingdom and the Vienna Sales Convention: Another Case of Splendid Isolation?, Institute of International Commercial Law, (Oct. 24, 2017, 03:00 AM), https://cisgw3.law.pace.edu/cisg/biblio/nicholas3.html.
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