Presented in "Celebrating Success: 25 Years United Nations Convention on Contracts for the International Sale of Goods" (Collation of Papers at UNCITRAL -- SIAC Conference 22-23 September 2005, Singapore), published and copyright by the Singapore International Arbitration Centre at 169-177. Reproduced with permission of the SIAC.
By Yoshihisa Nomi [*]
After 25 years of experience among the Contracting States the United Nations Convention on Contracts for the International Sale of Goods ('CISG') has proved itself to be a promising basis for the future development of the law of international sales. Especially important is the large number of cases in the Member States which makes the CISG not only rich in its content but also enhances the predictability of the consequences from applying the CISG to the disputes.
But at the same time there are some problems to be discussed. One of the problems for the CISG is how to increase the number of Contracting States. Another problem is the future vision of the CISG, in other words, the balance of uniformity and diversity.
As for the first problem, i.e. the problem of increasing the number of Contracting States, it is necessary to analyse and understand why some countries hesitate to accept the CISG. There are two different groups of countries which still have not joined the scheme of the Convention.
The first group is the United Kingdom, Japan and some other industrialised countries. Their shares in the world trade are large and have bargaining power. Therefore, they do not feel uncomfortable without the CISG. Rather they are able to insist on their own interests against their trading partners in the negotiation process. They can usually choose the law of their own country as the governing law of the contract and also make the trading partner agree to an arbitration clause with the place of arbitration favourable to them. Therefore, it was difficult, at least in Japan, to explain the advantages and the necessity for the unification of international sales law to the practising people in the business.
The second group of countries is located in Asia, Africa and South America. The reason why these countries do not join the CISG is probably not the same. This paper will not be covering the African and South American countries. The discussion will be limited to Asian countries, and only from the perspective of trading statistics available in Japan. The statistics on trading in Asia show an increase in volume of international commercial transactions in the whole [page 169] Asian area. This will, as discussed later in the paper, prove the necessity for the CISG.
As for the second problem of the future vision of the CISG regime, discussion on the balance between the idea of unification and the value of diversity will be necessary. The importance of diversity under the CISG regime has already been discussed by Professor Luke Nottage in his paper submitted to the CISG conference at Vienna in Spring 2005. The importance of this aspect should be emphasised especially in Asia where diversity of culture, including legal culture, is rich.
Thus, in this paper, first, the reason why Japan has not accepted the CISG will be explained. Second, the impact of the changes in international trading in Asia will be analysed, particularly the impact toward Japan. Third, some reflection on the future vision of the CISG in the Asian region will be made.
II. WHY JAPAN DID NOT ACCEPT THE CISG
The reason why Japan did not accept the CISG cannot be found in any official document. The following analysis is based on secondary materials and from the author's personal experience.
Before searching for an answer to this question, it might be useful to have a brief look at the process of law-making in Japan. Draft laws are presented to Parliament either by the Cabinet or by members of Parliament. International treaties and Conventions to be ratified are presented by the Cabinet to Parliament for approval. In Japan where the Prime Minister is elected by the majority of the Parliament, most of the Bills presented by the Cabinet will be approved by Parliament and become law. Therefore, it is critically important in the process of legislation that the government takes up the plan. In the case of the CISG, it was important that the Ministry of Justice include it in its legislative plan. In the 1980s, the Ministry of Justice did set up an informal working group to study the CISG. But after studying the Convention for a year or two, the Ministry of Justice suspended the plan to move to the second step. As mentioned above, a formal explanation for abandoning the plan was not made clear. But probably the lack of a driving force in Japan to support the unification of international sales law was at least one of the reasons. [page 170]
Against the CISG there were two different opponents. The first group was made up of the people in international trading practice. They are, for example, the legal division of a big trading company or lawyers engaged in drafting international contracts. The other group consisted of those who thought the CISG was theoretically alien to the Civil Code of Japan.
The first group of people, the business people in trading practice, did not want any change to the present law. They had been practising for years using the same contract samples. It is understandable that they did not welcome the new rules which may lead to a change of their practice. New rules will bring uncertainty and new risks into their practice of international commerce. This they wanted to avoid by all means. So without thinking of the kind of consequences the new rules of the CISG would bring into their practice or what kind of new risks would emerge, the people in the practice rejected from the outset the idea of unifying the international sales law. It would, however, be an exaggeration to say that all the people in the practice were against accepting the CISG. There were indeed some experts in international trading who supported the CISG regime. However, their voice was not big enough to persuade the Ministry of Justice to take the next step for legislation.
The majority from the trading practice seemed to be reluctant to accept the CISG, though an attempt to gather information and investigate the opinions was never made.
The argument of those who were reluctant to accept new rules was the new risk theory, as mentioned above.
But this was not convincing. For large trading companies there was nothing to worry about.
They usually have a legal division in the company with capable staff. It would not be difficult for them to check and investigate the meaning of the Articles of the CISG. They could also easily trace the cases reported in the Member States. Besides, if they did not want their contract to be ruled by the CISG they could opt out of the CISG. So the argument that the CISG would cause new risk in the practice was not convincing at all. However, the fallacy remained unchallenged.
The Ministry of Justice probably had their own worries. They might have worried that ratification of the CISG would lead to a revision of a large part of the Civil [page 171] Code of Japan, though what the Ministry of Justice thought at that time cannot be proved by any documents. Confronting the problem of whether to accept the CISG or not, there were three choices for the Ministry of Justice. First, they could have decided not to accept the CISG. Though such a decision seems simple, it is in fact not simple at all. This would bind their hands if they later wanted to join the CISG regime. Therefore, a simple rejection of the CISG was not a clever choice. Second, they could have decided for the ratification of the Convention. But if they accepted the CISG, how to integrate it into Japanese law was the next question. Logically it is possible to have two different laws for domestic and international sale contracts. But this would increase confusion in the practice and also cause difficult problems on how to explain theoretically the relation of the two legal systems. Thus, to give a go sign for the CISG, the Ministry of Justice had to plan the future revision of the Civil Code. This would be a long and burdensome task for the Ministry of Justice. And they were not ready to promote such a grand plan nor did they have the manpower for this task. Third, the simplest choice was to postpone the decision, which was actually the choice made by the Ministry of Justice.
III. CHANGE OF CIRCUMSTANCES
1. Background changes in Japan
One of the problems in Japan is that the courts in Japan do not have much experience in solving legal disputes in international commerce. Probably many judges do not even have a chance to hear an international trading case in court. Therefore, it is not easy for them to understand the difficulty and the uncertainty of the conflict of law approach, the traditional way of solving an international dispute. Most of the cross-boarder issues coming to the Japanese courts are family law matters such as marriage, divorce and succession. It is estimated from the database of cases that only about 100 to 200 cases are related to international contracts. From 1994 to 2005 there were about 30 cases related to international contracts. There might be more disputes, but because most of the international contracts have an arbitration clause, they usually do not appear before the court. If a dispute arises it will go to an arbitration tribunal. A case involving a large company is even rarer in the courts. If there were many experienced judges in Japan who could explain the difficulties and the drawbacks of the conflict of law approach, things might have been different. Lawyers may have had different opinions since some of the lawyers were experienced in international trading. But they did not speak out for a change of rules in international sales. The lawyers involved in international trading were similar to those people in the business. They were reluctant to accept a change of rules or indifferent to the new international rules. [page 172]
To sum up, the legal professionals, including both judges and lawyers, were indifferent with regard to joining the CISG or were not experienced enough to realise the real difficulties in the traditional approach of conflict of law. They were not enthusiastic about the CISG and, therefore, could not be the driving force to push the CISG onto the government's legislative agenda.
After 15 years from the establishment of the working group to discuss the possibility of accepting the CISG, the legal culture in Japan is now changing. Since 2000, the government has established a special committee to discuss the judicial reform plan. The committee has concluded that the number of lawyers should be doubled within 10 years. The number of lawyers is already beginning to increase. They will serve not only as lawyers in law firms but also as in-house lawyers in large companies.
Also a change of attitude amongst companies can be seen. The need to manage legal risk has driven companies to think about legal matters more seriously. Once a dispute arises between the parties they will bring the case before the courts. This corresponds to the increase in the number of legal disputes shown in the statistics. As for the international trading disputes, even though the arbitration clause will prevent many of the cases going to court, still a certain number of cases will be heard in the courts and judges will learn more about international trading and its problems.
2. Changes in Japan's trading partners
More dramatic changes are being seen in international commerce in recent years. There are interesting facts to be found in the foreign trade statistics of Japan from 1990 to 2004.
In 1990, 32% of Japan's exports was to the United States. The share of exports to the East-Asian countries (Asian NIEs = Korea, Hong Kong ,Taiwan, Singapore; ASEAN 4 = Indonesia, Thailand, Philippines, Malaysia) including China was 29%, and the share of exports to the EU countries was about 10%. However, in 2004, the US share dropped to 22%. Over the same period, China's share rose from 2% to 13%, and the share of all Asian countries including China rose up to 46.9%. Asia is now Japan's largest trading partner and this trend is expected to continue in the future.
Statistics on Japan's imports also show the same trend. China is now in the year 2004 Japan's largest trading partner with a share of 20.7% of Japan's total [page 173] imports. In contrast, the United States, the largest exporting country to Japan in 1990, is now in 2004 the second largest with the share of 13.7%. Asian countries all together including China have now in 2004 a 43.1% share of Japan's total imports. Trade with the countries in the Middle East and Africa is also growing in volume, though the share is smaller than the trade with Asian countries.
This change of circumstances will influence the trading practice in Japan. Japan is now more and more aware of the diversity in Asian countries. Large companies in Japan have already increased their personnel in their legal divisions to cope with the new situation. However, even for them it would be difficult to gather the necessary legal information of each Asian country. Even though it would be possible to acquire information of all Japan's trading partners, it would be tremendously costly and time consuming and, therefore, not efficient for a business. For a smaller company the situation is more difficult. It would be almost impossible to gather information by itself. Thus, today trade and industry associations offer help to these smaller companies. But again it is a problem of efficiency. It is really time for Japanese companies to think seriously about what is the most efficient way of drafting international contracts. Whether to use the traditional method of conflict of law or to rely on a uniform law such as the CISG is the question.
|2004 Export from Japan, |
Value by Country (1,000 Yen)
3. Change of power structure in world trading
Another important change of circumstances is probably the change in the bargaining power of Japan and other Asian countries. This may not yet be so evident, but the sign of changes are to be seen everywhere.
A decade ago Japan still maintained its bargaining power over other Asian countries. Therefore, Japanese companies were able to insist on choosing Japanese law as the governing law of the contract. As for the arbitration clause, the situation was slightly different. Because of the flexibility of the arbitration procedure, especially because the parties were able to appoint an arbitrator, Japanese companies did not insist so strongly to set the place of arbitration in Japan, and either Hong Kong or Singapore was often chosen as a compromise. But when it was possible they chose Japan as a place of arbitration because it was more advantageous and matched the interest of the Japanese companies.
Today, however, Japan's bargaining power is declining. Already against the oil producing countries, Japan lost its bargaining power long ago. It is usual that in a contract for the import of oil, the OPEC countries insist on choosing their law as the governing law of the contract and also the place of arbitration is set in their countries.
The balance of bargaining power is changing not only against the OPEC countries but also against China. There are many cases where Chinese companies insist on choosing Chinese law and the arbitration tribunal in China. In many cases, the Japanese companies have had to make a compromise. A specialist on arbitration, Mr Tatsuya Nakamura, analysed in his lecture that the arbitration rules in China is not favourable for Japanese companies (he was referring to the old arbitration rules which were amended in the year 2005). According to the arbitration rules (the old rules) in China, arbitrators must be appointed from the list prepared by the China International and Economic Trade Arbitration Commission ('CIETAC'). There were some specialists of foreign nationality on the list, but the listed specialists were not sufficient for the parties to appoint an appropriate arbitrator from the list. In not a small number of cases Japanese companies had to be satisfied with Chinese arbitrators for disputes with Chinese companies, which was obviously not advantageous for the Japanese companies. This arbitration rule has been changed with effect from May 2005. So now it is possible for the parties to appoint a qualified individual of any nationality not limited by the list prepared by CIETAC. In any case, the point is that even under the old arbitration rules Japanese companies had to agree with the Chinese parties to hold the arbitrations in China, which is a clear sign of decline of Japan's bargaining power. [page 175]
As for trading with other Asian countries, materials are more limited. It would seem that Japan does not always have the initiative. In many cases in the trade with Asian countries Japanese companies are ready to compromise with regard to the arbitration clause. They will agree to set the place of arbitration in Singapore or in Hong Kong. This is because the arbitration rules are similar in almost every country and the flexibility of the structure of the arbitration allows the parties to appoint the arbitrators and to agree the language used in the tribunal etc. All these make it easier for the Japanese companies to agree to the arbitration being held in Singapore or in other reliable places.
The change of circumstances for Japan will also have an influence on the present practice with regard to international sale contracts, particularly the conflict of law approach. The conflict of law approach is facing a deadlock. Under the severe competition in the Asian market, especially in the market of automobiles, computers and other high technology products, it is becoming more and more difficult for Japanese companies to make the other party agree to Japanese law as the governing law of the contract. It may not be so difficult for a large company but for small and medium-sized companies it is difficult to maintain the initiative. In such a deadlock situation, the need for another solution is urgent. Here, the CISG seems to have a chance to appeal its advantage.
4. Meaning of the CISG for Japan
Under the new situation the practice in Japan will probably enjoy more benefits from the CISG in the long run rather than suffer the disadvantages of uncertainty and risk. Today, not only small companies but also large companies in Japan are reconsidering the trading practice in the Asian region. More than ever is the climate in Japan favourable for joining the CISG regime. Once, the reluctance in the practice was an obstacle to the acceptance of the CISG in Japan, but not any more.
The problem to be considered now is more theoretical, i.e. whether the CISG can fit properly into the present legal system of Japan.
One way of adjustment is simply to have two sales laws in Japan. One for the domestic sale contracts and the other, i.e. the CISG, for the international sale contracts. The majority of the academics rather thought that this is not a clever solution to the problem. It would cause more confusion in the business. It would also make the management of contracts in the business more difficult and burdensome, especially when the key concepts such as fundamental breach in the CISG are different from that in the Civil Code. But the coexistence of two different sales laws is not necessarily bad, because it can promote uniformity at the international level and also respect and protect domestic values at the same time if necessary. [page 176]
The other alternative for Japan is to integrate the CISG into the domestic law by changing the Civil Code. There already exists a plan to revise the Civil Code in Japan. But it is not because of the CISG, rather because the Civil Code is getting too old to meet the needs of the economy and society today. This could be an opportunity to integrate the CISG into the Japanese civil law system.
Which of the two solutions is better for Japan is difficult to say. On the one hand, changing the Civil Code for the sake of the CISG may not be so easy. For example, the binding power of an offer and the dispatch doctrine of acceptance as rules of formation of a contract in the Civil Code are deeply rooted in the traditional merchant law in Japan. On the other hand, considering the fact that most of the provisions of the contract of sale in the Civil Code were transplanted from western laws such as German law or French law, changing these provisions may not cause any pain to Japan.
5. Future of the CISG in Asia
With the recent development of the Asian economy and international trading, it is becoming more and more important that not only Japan but also the other Asian countries accept the CISG as the basis for cross-boarder trading in Asia. Asia needs a common basis for international commerce all the more for its diversity. But if unification of law means elimination of diversity, it may not be the right choice for Asia. Historical, cultural and social diversity among Asian countries and the differences in the legal systems based on the diversity is valuable for Asia.
To find a solution which allows coexistence of uniformity and diversity is especially important for Asia. In this context it is important to understand that to accept the CISG does not necessarily mean to unify the domestic laws with the international standards. As discussed above, as one of the solutions to integrate the CISG into the Japanese law system, coexistence of rules for international trading and rules for domestic sales seems to be an interesting solution not only for the practice but also from the theoretical point of view. [page 177]
* Yoshihisa Nomi is a Professor of Law at the University of Tokyo where he specialises in tort, contract and trust law. Professor Nomi is President of the Japan Association of Private Law. He is also a member of the Law Reform Committee in the Ministry of Justice and was a member of the former Working Group on the CISG in Japan.
1. Luke Nottage, 'Who's Afraid of the Vienna Sales Convention (CISG)? A New Zealander's View from Australia and Japan.
2. Niibori Satoshi, Kokusai Toitsu Baibaiho (Uniform International Sales Law).
3. Ministry of Finance, Trade Statistics of Japan, <http://www.customs.go.jp/toukei/info/index_e.htm>.
4. Tatsuya Nakamura, Solution of International Trading Disputes, <http://www.pref.hokkaido.jp/keizai/kz-bkkry/koen/nakamura-t.html>.