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THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS: NEW ZEALAND'S PROPOSED ACCEPTANCE (1992)

I. Introduction

THE CONVENTION

1. This Report concerns the United Nations Convention on Contracts for the International Sale of Goods adopted in 1980. . . .The uniform law which it states regulates first the formation of international sales contracts and second the rights, obligations and remedies of the buyers and sellers under those contracts. When it applies, it avoids the often complex problems of first ascertaining the applicable law in accordance with conflict of laws doctrines, and second determining what is required by the applicable foreign law once it has been ascertained. ln the words of John Honnold, a principal author of the Convention, "The half century of work that culminated in the 1980 Convention was sustained by the need to free international commerce from a Babel of diverse domestic legal systems", Documentary History [1989].

2. The Convention is increasingly applicable to world trade as more and more States accept the Convention and make the rules of the Convention part of their law. They. . .engage in about 60 percent of the world's external trade, and they include most of New Zealand's major trading partners among them Australia. . . . The Convention applies to sales contracts between parties in different Contracting States States which have accepted the Convention) and also, ingeneral, to such contracts between parties in different States if the contracts are governed by the law of a Contracting State. The consequence of that latter means of application is that many international sales contracts involving New Zealand businesses are probably already governed by the Convention (see paras 38-39).

THE QUESTIONS CONSIDERED IN THIS REPORT

3. The first question which arises for New Zealand is whether it should accede to the Convention and enact legislation to implement it. A related question is whether understanding of the Convention is sufficiently widespread through the business and professional communities. If it is not, what can be done about that? As just indicated, that second question is already a practical one for New Zealand business. It will become even more pressing if, as a result of an affirmative answer to the first question, the Convention becomes more widely applicable to New Zealand external trade.

4. This report is designed to provide background to the Convention and a description and evaluation of the rules it states (including some indication of the differences between the Convention and existing New Zealand law) (see chapters 2 and 3). The description and evaluation should help provide a basis for a better understanding of the Convention . . . The fourth and final chapter gives the Commission's reasons for supporting accession to the Convention and the enactment of implementing legislation.

NEW ZEALAND EXTERNAL TRADE: FUNDAMENTAL CHANGES IN DIRECTION AND APPLICABLE LAW

5. For well over a century New Zealand's external trade was mainly subject to a uniform set of legal rules. The trade was essentially within the British Empire (later the Commonwealth) and especially with the United Kingdom and was governed by a combination of (a) the "law of England" (including legislation and based in significant measure on the law merchant which had governed European and Mediterranean trade in earlier times) which became applicable in many colonies on their foundation and (b) major British commercial statutes enacted in the nineteenth century which were adopted with no or little change throughout the Empire.

6. Significant differences have developed between United Kingdom law and the law of the former colonies and between the law of the former colonies themselves. Local circumstances and changing trading relationships led to distinct legal developments. More recently, Britain’s entry into the European Community has led to both major changes in trade patterns and a different direction for its legal development.

7. The following table clearly demonstrates some of the major changes in New Zealand's trading partners. It sets out the percentages of trade (export and import) over the past 60 years with the United Kingdom, Australia, the United States, Japan and others.

NEW ZEALAND'S CHANGING EXTERNAL TRADE RELATIONSHIPS
United KingdomAustraliaUnited StatesJapanOthers
%E:I %E:I %E:I %E:I %E:I
1930 81:47 3:8 5:18 :1 11:26
1940 90:47 :16 3:12 :2 6:23
1950 66:61 2:12 10:7 1: 21:20
1960 53:44 4:18 13:10 3:3 27:25
1970 36:30 8:21 16:13 10:8 30:28
1980 14:14 13:19 14:14 13:13 46:40
1990 5:9 20:21 14:18 17:16 44:36

Department of Statistics: New Zealand Official 1990 Yearbook;
Overseas Trade 1990 ( 1991 )

The regional figures are also striking; 28 percent of New Zealand's external trade is now with five northern Asian economies (Republic of Korea, China, Hong Kong, Japan and Taiwan), 18 percent with the European Community (including the United Kingdom), and 18 percent with North America. There are also important trade links with other countries in Asia (Indonesia, Malaysia and Singapore), Latin America (Mexico), Middle East (Iran) and Eastern Europe (Russia). New Zealand export trade is accordingly now potentially subject to a great variety of legal systems, some very different from the legal systems of New Zealand and those of the small groups of States with which New Zealand traded for so long.

8. Increasingly therefore there is a need to be aware, in international commercial dealing, of the significant differences that may exist between New Zealand law and that of the other country (or countries) involved. There would be little need for concern were New Zealand law to apply to every transaction but this will not be the case. The parties will often agree to apply a foreign law, and New Zealand business will often have to agree (and in many cases, should agree) to the application of the law of another country. If no law is expressly chosen, it will be for the relevant conflict of law rules of the State where the question may be litigated to identify the governing law which will often be a foreign law.

9. The uncertainties and potential costs associated with transacting business under unfamiliar laws increase the risks of international commerce, and are likely to reduce its efficiency. There may be uncertainty

  • whether the particular law applicable in the case will vary according to the forum in which the issue is determined ("forum shopping"),
  • whether different laws may apply in respect of different aspects of the one transaction,
  • about the law which is applicable to all or part of the contract, or
  • about the substance of the applicable foreign law.
  • 10. Even in those many cases where there will be no doubt about the applicable law, the significant costs of determining the substance of that law and its effect on the transaction will remain to be paid. The substance of the applicable law may also be unsatisfactory. A widely acceptable and accepted, uniform, and generally understood set of rules avoids all of those problems.

    INTERNATIONAL TRADE LAW

    11. Problems such as those just mentioned, together with the associated impediments to trade and resulting costs. have for some time led to international responses. The responses take a variety of forms. for instance through multilateral or bilateral treaties, recommended models, or unilateral actions (including legislative actions) taken by governments or by relevant trade organizations. Those responses relate to matters such as

  • (a) jurisdiction over commercial and civil matters and the enforcement of judgments and arbitral awards given in such
    matters,
  • (b) uniform choice of law rules, aimed at ensuring that the same system of national law is applied wherever the proceedings are
  • brought,
  • (c) uniform substantive law aimed at ensuring the same result wherever proceedings are brought, and
  • (d) uniform or standard terms of contract or practices, voluntarily accepted by the parties to the particular transactions.

  • 12. National actions within (a)-(c) might be taken to give effect to a treaty obligation of the State, as with legislation relating to arbitration (para (a)), or the Warsaw Convention on carriage by air (para (c)). There may be a unilateral national law reflecting widely accepted principle, as with choice or law rules relating to bills of exchange (para (b)). Or the parties might use a standard form of agreement or terms designed to determine the basic obligations, as with World Bank loans or the standard terms developed by the International Chamber of Commerce (para (d)).

    13. This action has also for some time been promoted and facilitated by international bodies, set up by States or less formally, and with broad or sectoral responsibilities. . . . One which is of major significance both generally and for this Report is the United Nations Commission on International Trade Law (UNCITRAL). The preamble to the resolution of the United Nations General Assembly setting up that body 25 years ago articulates the reasons for international action in this way:

    The General Assembly,

    . . .

    Considering that international trade co-operation among States is an important factor in the promotion of friendly relations and, consequently, in the maintenance of peace and security,

    Recalling its belief that the interests of all peoples, and particularly those of developing countries, demand the betterment of conditions favouring the extensive development of international trade,

    Reaffirming its conviction that divergencies arising from the laws of different States in matters relating to international trade constitute one of the obstacles to the development of world trade,

    Having noted with appreciation the efforts made by intergovernmental and nongovernmental organisations towards the progressive harmonisation and unification of the law of international trade by promoting the adoption of international conventions, uniform laws, standard contract provisions, general conditions of sale, standard trade terms and other measures,

    Noting at the same time that progress in this area has not been commensurate with the importance and urgency of the problem, owing to a number of factors, in particular insufficient co-ordination and co-operation between the organisations concerned, their limited membership or authority and the small degree of participation in this field on the part of many developing countries,

    Considering it desirable that the process of harmonisation and unification of the law of international trade should be substantially co-ordinated. systematised and accelerated and

    that a broader participation should be secured in further progress in this area,

    Convinced that it would therefore be desirable for the United Nations to play a more active role towards reducing or removing legal obstacles to the flow of international trade,

    . . .

    (GA resolution 2205 (XXI) of 17 December 1966)

    14. UNCITRAL in the subsequent 25 years has acted to give concrete meaning to these broad purposes. To mention just two matters relating to Law Commission work, UNCITRAL promoted acceptance of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and it prepared the 1985 Model Law on International Commercial Arbitration. The 1958 Convention was given effect in New Zealand by the Arbitration (Foreign Agreements and Awards) Act 1982; and the Law Commission's recent report on Arbitration (NZLC R20 1991) is based on the 1985 Model Law and would continue to give effect to the 1958 Convention and as well to the 1923 and 1927 agreements relating to arbitration drawn up within the League of Nations. That Report briefly describes some of the more recent work of UNCITRAL, and recalls a 1985 General Assembly resolution which reaffirms that the mandate of UNCITRAL,

    as the core legal body within the United Nations system in the field of international trade law, [is] to coordinate legal activities in this field in order to avoid duplication of effort and to promote efficiency, consistency and coherence in the unification and harmonisation of international trade law. (See NZLC R20 paras 55-59.)

    A most important product of UNCITRAL is the United Nations Convention on Contracts for the International Sale of Goods to which we now turn.

    A BRIEF HISTORY OF THE CONVENTION

    15. We mention the origins of the Convention for two reasons. They help emphasise the objective of facilitating international trade. And, as indicated later, the drafting history may also be relevant to the interpretation of the Convention.

    16. The concern expressed over centuries about the barriers to international trade caused by national differences in the law of contract led in 1929 to the International Institute for the Unification of Private Law (UNIDROIT) sponsoring the drafting of a uniform law on the international sale of goods. The process was interrupted by the Second World War but was soon resumed and led to the adoption in 1964 by a Diplomatic Conference of two Conventions which set out a Uniform Law for the International Sale of Goods and a Uniform Law on the Formation of Contracts for the International Sale of Goods. Only 28 States attended the Conference and of them 19 were from Western Europe, three from Eastern Europe (but not the USSR), only Colombia from Latin America, only Japan from Asia, and only the United Arab Republic from Africa. The Conventions came into force eight years later, on their ratification by five States. The Conventions failed to achieve wide acceptance, with only seven European and two other countries becoming party to them.

    17. UNCITRAL faced a choice in its early sessions: should it promote acceptance of the 1964 Conventions (as it did with the 1958 Convention on Foreign Arbitral Awards, see para 14) or should it prepare a new text dealing with this vital matter? It adopted the latter course, very much as a result of the comments which it sought and received from States. To quote the Secretary of UNCITRAL at the time:

    It became evident [from the comments] that the 1964 Conventions, despite the valuable work they reflected, would not receive adequate adherence. The basic difficulty stemmed from inadequate participation by representatives of different legal backgrounds in the preparation of the 1964 Conventions; despite efforts by UNIDROIT to encourage wider participation these Conventions were essentially the product of the legal scholarship of Western Europe. [Honnold, Uniform Law 53-54, (1990)].

    18. By 1978 UNCITRAL had completed a draft Convention composed of parts on sales and on formation which were developed out of the two 1964 Conventions. The earlier drafts were prepared by a widely representative working group of States which was aided by the contribution as observers of a number of international organisations. The General Assembly of the United Nations convened a diplomatic conference to consider the draft Convention.

    19. That conference adopted the Convention at Vienna on 11 April 1980 without a dissenting vote and opened it for signature and acceptance. The UNCITRAL Secretary during the 1970s concludes his account of the process of the adoption of the text with the comment that:

    the spirit of consensus that had developed in UNCITRAL was maintained to the end of the Diplomatic Conference. Uniform Law 56.

    20. The Convention came into force on 1 January 1988 a little over a year after the tenth (and eleventh) acceptances . . .

    OBJECTIVES OF THE CONVENTION

    21. Two paragraphs of the preamble to the Convention set out objectives which can be related back to those stated in the resolution establishing UNCITRAL and quoted in para 13:

    Considering that the development of international trade on the basis of equality and mutual benefit is an important element in promoting friendly relations among States,

    Being of the opinion that the adoption of uniform laws which govern contracts for the international sale of goods and take into account the different social, economic and legal systems ould contribute to the removal of legal barriers in international trade and promote the development of international trade.

    22. The process of preparation of the draft Convention and the generally unanimous support for its provisions at the widely representative diplomatic conference which adopted it strongly suggest that those purposes have been achieved. That appears to be further confirmed by the subsequent acceptance of the Convention. The substantive rules are acceptable to and accepted by civil and common law jurisdictions, developed and developing countries, capitalist and socialist economies, and exporters and importers of agricultural and mineral primary products and manufactured goods. This is not a case of uniformity for the sake of uniformity. Rather the world trading community has made the practical judgment that this uniform law will facilitate international trade.

    23. To be acceptable the Convention must also take account of the special characteristics of international sale of goods contracts, especially the distances involved, the costs of transportation, the involvement of intermediaries, and the long term that many are to operate. One consequence is an emphasis in the Convention on the preservation of the contract notwithstanding default or other noncompliance. This means that the remedies (especially those available to buyers) are extended beyond those normally available under New Zealand law.

    24. The Convention recognises in major ways that the parties to such contracts may for good reason wish to exercise broad contractual freedom. Article 6 (which is discussed in chapter 3) enables them to exclude the application of the Convention and to derogate from or vary the effect of any of its provisions (with a limited exception if local law requires contracts covered by the Convention to be in writing). That means that if a trader wishes to have its national law applied - and the other party can be persuaded - the new rules in the Convention do not apply to the extent of that agreement. The very significant role of trade usages and practices between the parties is also expressly recognised by the Convention. In the absence of such agreements between the parties, the uniform rules do however apply.

    25. A major element in the successful application of the rules to remove legal barriers to and promote international trade is their uniform interpretation. The Convention takes a first step in the direction of avoiding divergent national interpretations by emphasisingthe international character of the rules, uniformity of application, the observance of good faith, and the application of the general principles underlying it (art 7 which is discussed in chapter 2). Another important feature of the Convention is its very limited use of technical legal terms and concepts. It is said to have the characteristics of simplicity, practicality and clarity. It is free of legal shorthand, free of complicated legal theory and easy for business people to understand. It is written in their language, Professor Sono, "The Vienna Sales Convention: History and Perspective" in the Dubrovnik Lectures 1, 7 [1986].

    26. Those various elements of the Convention, and other features involving changes from the present law, do at the same time present problems. Aspects of the Convention have provoked negative comment. The Convention may introduce uncertainties (although the uncertainty of the present legal position should not be underestimated). The next two chapters address some of those problems with the two purposes already indicated: to provide information and opinion relevant to the evaluation of the Convention and acceptance of it; and to help enhance understanding of the Convention. It will be important for those affected by the Convention to be aware of those problems, especially since parties have an almost unlimited freedom to amend or even to completely replace the rules in the Convention. The parties' practices, usages, standard terms and specific agreements can overcome most if not all of the perceived problems, and those methods will often be better and more effective than will be diverse national laws.

    27. Some of those uncertainties and criticisms have been stressed by those with whom the Commission has consulted. We are again very grateful for the comment we have received (almost all of it supportive of the proposed acceptance and implementation of the Convention) . . . [T]hat process of consultation was more limited than usual, principally because in this case the major consultation was that which had already occurred through international processes undertaken during a period of 50 years and especially within UNCITRAL in the 1970s and at the diplomatic conference of 1980 which adopted the Convention.

    II

    An Overview of the Convention

    28. This chapter explains briefly the main provisions of the Convention. It also notes major differences from New Zealand law. It considers in turn

  • varying acceptance of the Convention
  • the application and scope of the Convention
  • interpretation
  • the formation of contracts
  • the obligations of the parties and their remedies.

    VARYING ACCEPTANCE OF THE CONVENTION BY CONTRACTING STATES

    29. The Convention facilitates flexibility in the acceptance of the rules it sets out in two important ways. As already mentioned, the parties to the sales agreement can themselves by agreement vary or displace the uniform rules if they are otherwise applicable (art 6). Chapter 3 considers that important power of the parties. Here we note the prior power of States to become bound by less than the whole Convention. The basic rule is that States cannot make any reservations except those expressly authorised (art 98). The Convention authorises five different reservations (or declarations) . . .

    Territorial application

    30. A State consisting of territorial units in which different systems of law apply may confine the territorial extent of its acceptance (art93) . . .

    Only contracts between parties in Contracting States

    31. A State may limit the scope of application of the Convention to contracts between businesses in separate Contracting States, excluding the additional category of contracts which are subject to the law of a Contracting State, it being irrelevant in which two or more States the parties carry on their businesses (art 95; see art l(l)(b), discussed in paras 38-39.) China, Czechoslovakia, [and] the United States . . . have made that reservation . . .

    Exclusion of rules either about formation or about obligations

    32. A State can declare that it will not be bound either by Part II (about the formation of the contracts) or by Part III (about the obligations of the parties under the contracts). This power effectively means that the Convention (like the 1964 texts) can be divided into two, with States deciding to accept either the rules about the formation of international sales contracts or those about the operation of the contracts. The limited acceptance has a corresponding limiting effect for the operation of the Convention in relation to other Contracting States. So far, such declarations have been made only by Denmark, Finland, Norway and Sweden in respect of Part II concerning the formation of contracts. (There is a Nordic Convention on the formation of contracts.) Those States have also made the reciprocal declarations referred to in paras 34-35.

    33. The above three reservations may be made only at the stage of the final acceptance of the Convention. They cannot be made later. They can however be withdrawn - and thereby the full scope of application of the Convention can be achieved. By contrast. the following two reservations may be made at any time. It will be noted that the first is made by agreement with another State and operates only in relation to businesses in the two States in question.

    Accordingly the interests of other Contracting States are protected (or largely so) from the effect of the new reservation.

    Reciprocal variations

    34. Two or more Contracting States with the same or closely related legal rules may at any time declare that the Convention is not to apply to contracts of sale or to their formation if the parties have their places of business in those States. Similar provisions can be made in relation to non-Contracting States (art 94). As noted (para 32), only four Scandinavian States have taken advantage of this facility. We later record that around the time of its accession Australia considered - but rejected - the possibility of making such a declaration in relation to New Zealand (para 130).

    35. The Convention in a more general way recognises the power of the Contracting States in their relations with one another to depart from the terms of the Convention. Article 90 provides that the Convention does not prevail over any international agreements governing the same matters provided that the parties to the sales agreement have their places of business in the Contracting States to that international agreement.

    Contracts to be in writing

    36. The Convention does not require the contract to be in any particular form. However to gain the support of some planned economy countries, the Convention allows States, whose legislation requires sales contracts to be in writing, to declare that provisions of the Convention allowing the contract or steps relating to it to be other than in writing do not apply when a party has its place of business in that State (art 96). China, two South American and four Eastern European States have made this declaration.

    APPLICATION AND SCOPE OF THE CONVENTION

    37. The Convention states a uniform set of rules for the contracts which it governs. Those contracts are defined mainly by reference to two matters - the place of business of the parties and the subject matter of the contract.

    38. The parties are to have their places of business in different States (and to know that fact in respect of the other party) and either

    • those different States are Contracting States, or
    • the rules of private international law must lead to the application of the law of a Contracting State (art 1( 1)).

    It follows that, in terms of art l(l)(a), unless the parties otherwise agree, a sales contract between businesses in Toronto and New York is subject to the Convention since both Canada and the United States are Contracting States. By contrast, a contract between businesses in Sydney and Dunedin is presently subject to the Convention only if, as required by art 1(1 )(b), the contract is subject to the law of New South Wales or some other jurisdiction which is itself a Contracting State (or a territory within such a State).

    39. It follows from the second application provision that, as in the example, the Convention is already able to apply to New Zealand international sales contracts - particularly those involving Australia and major European countries. In general it applies if the contract expressly says that it is governed by the law of one of those countries or if one of those countries has the closest connection with the subject matter of the contract. This is subject to the reservation, made by only a handful of States, against this means of application.

    40. So far as the subject matter of the contract is concerned, the Convention does not attempt to provide a comprehensive definition of a contract for the sale of goods. Contracts for the supply of goods to be manufactured or produced are generally included while contracts preponderantly about the supply of labour or other services are not (art 3). The Convention expressly does not apply to consumer sales, sales by auction, sales on execution or otherwise by authority of law, and in three areas where there is likely to be a particular regime - shares and negotiable instruments; ships and aircraft; and electricity (art 2).

    41. As indicated, the substantive parts of the Convention govern only the formation of the sale contract and the buyer's and seller's rights and obligations arising from the contract. The Convention expressly states that it is not concerned with the validity of the contract or the effect which the contract may have on the property in the goods sold (art 4). The Convention also does not apply to the seller's liability for death or personal injury caused by the goods to any person (art 5). All those matters remain governed by the relevant system of law. The parties may be well advised to try to deal with them in the contract - to the extent they can.

    INTERPRETATION

    42. The Convention prescribes rules for the interpretation both of the Convention and of the statements and actions of parties to sales contracts.

    43. One threat to uniform law stated in a Convention such as this is to be found in differing approaches to the interpretation of the law in the courts of different jurisdictions. The Convention itself attempts to meet that threat by providing special rules of interpretation. Article 7(1) provides that

    In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

    Courts in a number of jurisdictions have emphasised such matters when interpreting similar conventions. So Lord Wilberforce (quoting Lord Macmillan) called for an approach, appropriate for the interpretation of an international convention, unconstrained by technical rules of English law, or English legal precedent, and on broad principles of general acceptation, James Buchanan and Co v Babco Forwarding and Shipping (UK) Ltd [1978] AC 141,152. See also for example the cases cited in Bianca 73-74. To that extent the first part of the direction in art 7(1) is not new. It repeats established practice. But it is well worth emphasising nonetheless, as appears from its inclusion in other uniform law conventions. It makes the practice binding on all courts resolving disputes about the meaning of the Convention. And it strengthens the tendency seen in the cases. An important practical consideration (not limited to this Convention of course) is promoting knowledge of national court judgments on thelaw stated in the Convention. UNCITRAL is addressing that matter. That promotion of knowledge should help achieve consistent interpretation and remove or reduce uncertainties in the operation of the uniform rules. The major commentaries . . . are also an important help in that direction. We consider the third element of the paragraph - the observance of good faith in international trade - in chapter 3.

    44. Article 7(2) goes on to deal with the problems of gaps in the text:

    Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.

    The first part of this paragraph continues the emphasis on uniform, international rules. The answers to interpretation questions are to be found if possible within the Convention and its underlying principles. There is not to be too precipitate a reference to a national system of law. It is a last resort. Such an emphasis on principle is seen by some as being a civil law emphasis; on this analysis, the common lawyer by contrast would look for a precedent. Such a view appears to us to be a misleading caricature. As the statement by Lord Wilberforce indicates and much recent judicial practice relating to statutory interpretation confirms, courts in common law jurisdictions very often search for the principles underlying the legislation they are interpreting. That emphasis is to be found in particular in cases involving the interpretation of treaties where, as well, there is the widely accepted approach to the interpretation of treaties to be found in the provisions of the Vienna Convention on the Law of Treaties.

    45. One of those provisions relates to the interpretation of multilingual treaties - a matter which is relevant here since, as the final paragraphs of the Convention indicate, it was signed in the six official United Nations languages and all are equally authentic. In accordance with the Vienna Convention art 33, multilingual texts are presumed to have the same meaning in each authentic text, and if there is a differenceof meaning which cannot be otherwise resolved the meaning which best reconciles the texts having regard to the object and purpose of the treaty is to be adopted.

    46. One example shows how that approach can be used to elaborate the meaning of the text. The Convention often uses the phrase "place of business". In other contexts such as company law, this and similar terms present difficulties. For instance can an hotel room be a place of business when used by a company representative who sets up briefly to transact business? Generally, common law courts have required a degree of permanency. The existence of this requirement in the Convention is reinforced by the French and Spanish versions which use the term "établissement" and "establecimiento".

    47. Another example arises from the exclusion, by art 2, of ships and vessels from the application of the Convention. Is a rowing boat a "ship" or "vessel" and therefore not covered? Perhaps it is not (although where is the line to be drawn) but some would say it falls within "bateau" in the French text, and, to anticipate the next point, the drafting history supports that wider reading.

    48. The Vienna Convention on the Law of Treaties deals as well with the use of the drafting history of a treaty in interpreting it. That Convention recognises the use of that preparatory work and the circumstances of the conclusion of the treaty (a) to confirm the meaning of the text determined in other ways or (b) to determine the meaning if the basic approach to interpretation leaves the text ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. That drafting history might also facilitate the search for the "international character" and the "need to promote uniformity" as called for in art 7(1), para 43.

    49. As noted in the report on Arbitration (NZLC R20 1991) para 205, such practices have also been adopted by courts in New Zealand and elsewhere. Professor John Honnold has now facilitated the process of using that material by publishing the documentary history in very convenient form, Documentary History [1989]. The commentaries make extensive use of the records. That material may in addition help a court determine the principles underlying the Convention for the purpose of art 7. We would however reiterate the proposition that

    the user of the statute book should in general be able to place heavy reliance on it. Extended references to material beyond its text should not be common (A New Interpretation Act (NZLC R17 1990) para 126).

    50. The Convention also gives directions on the interpretation of the statements and the conduct of the parties to the contract in issue. Its emphasis on fairness between the parties is evident in its provisions which are designed to ensure that effect is given to the intentions of the parties so far as they can be determined (arts 8 and 9). lf actual intent cannot be determined then a "reasonable person" test is applied with reference to all the circumstances of the case. The provisions would permit access to virtually any type of evidence (eg negotiations and subsequent conduct) as long as it were relevant. The parties are also bound by any usage or practice to which they have agreed or which they have established themselves. As well they are subject to widely known and regularly observed relevant usages in international trade - unless of course otherwise agreed. Those usages are of enormous practical significance in many areas of international trade. Many have their origins in practices which began long before the preparation of uniform law conventions and indeed before the establishment of the modern State with its distinct legal system andseparate commercial laws enacted as an expression of sovereignty, eg Berman "The Law of International Commercial Transactions (Lex Mercatoria)" (1988) 2 Journal of Int Dispute Resolution 235.

    FORMATION OF CONTRACT

    51. The rules in Part II of the Convention concerning the formation of a contract are in essence those of offer and acceptance. They do however differ in some respects from the law of New Zealand. For instance

  • (a) an offer can be made expressly irrevocable,
  • (b) an offer is also irrevocable if it was reasonable for the offeree to rely on the offer as irrevocable and the offeree has acted in reliance on it,
  • (c) an acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror; to that extent the postal acceptance rule would be abolished, and
  • (d) a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer can constitute an acceptance rather than a counter offer.
  • 52. Those changes appear to promote greater certainty and efficiency in international trade. (They might indeed be seen as attractive for local trade as well.) Thus (a) and (b) facilitate serious dealing; (c) removes the differences arising from different forms of communication and takes account of new technology; (d) avoids unnecessary steps where the original offeror acquiesces in the non- material variations and avoids the "battle of the forms". But, while none of the changes should present any difficulty or danger to those familiar with the new rules, care should be taken in respect of non- revocable offers; that change may be a trap for the unwary, see further paras 103- 104.

    53. The Convention addresses the definiteness of the offer and contract, a matter of some controversy in the preparation of the text. Article 14 (1) requires the offer to be "sufficiently definite". It has that quality if "it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and price". If that is a statement of the necessary (and not simply of sufficient) conditions then it appears to prevent open price contracts and related quantum meruit argument. In support of that, one eminent commentator has called attention to the insistence of some legal systems (including those of France and the USSR) that the price be either determined or objectively determinable at the time of the formation of the contract, Nicholas [105 LQR 212 (1989)]. That insistence might also be seen as going to the validity of the contract, a matter not covered by the Convention (para 41). But, as Nicholas also points out, art 55 may provide the answer. That provision reads:

    Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered. In the absence of any indication to the contrary, to have impliedly made reference to the price ordinarily charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned.

    That suggests that art 14(1) states only some of the conditions of definiteness. Furthermore. any relevant practice on usage applicable between the parties might fill any gap about price (art 9, para 50). See however paras 92-94.

    OBLIGATIONS AND REMEDIES GENERALLY

    54. Part II of the Convention, just considered, should answer the question: Is there a contract? If there is, Part III, now to be considered, deals with the parties' rights, obligations and remedies. Its five chapters set out in a systematic way

    • general provisions applicable throughout the part (including provisions about remedies),
    • the obligations of the seller and remedies for breach of those obligations,
    • the obligations of the buyer and remedies for breach, the rules for the passing of risk,
    • provisions common to the obligations of the buyer and seller.

    The Convention sets out a unified set of rules to deal with the operation of the contract and achieving of the sale. Once again it emphasises the contract made by the parties. Thus the second and third chapters on the obligations of the parties each begin with parallel provisions; the parties must take the actions "required by the contract". As Professor Honnold says, it is not significant that the Convention mentions the contract. What is significant is the fact that the expectations of the parties (as shown by the language of the contract, the practices of the parties and applicable usages) are so consistently the theme of the Convention, Uniform Law 63, [1990].

    55. The provisions on remedies give special weight to the characteristics of international sales, including the costs of transport, the complications of distance, and the problems of handling rejected goods in a foreign country. The rules emphasise saving the contract, for instance by narrowly defining fundamental breach, and by enabling the seller to cure the breach. An aggrieved party facing nonperformance can also fix a final, additional reasonable period of time for the party at fault to perform, a borrowing of Nachfrist from German law (paras 63(d), 67(b) and 117). Default beyond that period is a ground for avoidance.

    56. The emphasis on saving the contract is also to be seen in the relatively narrow definition of fundamental breach; only such a breach or failure to comply in the extended time just mentioned can justify avoidance of the contract. A breach is fundamental, according to art 25,

    if it results in such detriment to the other party as substantially to deprive him of what he is entitled to 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.

    "Fundamental breach" under the Convention is quite distinct from the concept with the same name under English law; that concept was developed to enable an aggrieved buyer to escape contractual provisions denying the buyer's rights. By contrast the Convention uses the phrase primarily as the central element of the right to declare the whole contract avoided (arts 49(1)(a) and 64(1)(a); see also arts 46(2), 51(2), 70, 72 and 73).

    57. Part III also of course reflects broader characteristics of the Convention as a whole; it is a document which is intended to be durable, it is the product of very extensive international collaboration, and accordingly it is flexible, capable of development (through the application and interpretation of courts around the world; and business practice which is free to exclude or vary it), and free of "the awesome relics from the dead past that populate in amazing multitude the older codifications of sales law, an unromantic place" (Rabel, "The Hague Conference on the Unification of Sales Law" (1952) 1 Am J Comp L 58, 61).

    OBLIGATIONS OF THE SELLER AND RELATED REMEDIES

    58. The seller must deliver the goods, hand over any documents relating to them and transfer the property in the goods as required by the contract and Convention. That basic set of obligations and the related remedies are spelled out in the three sections of chapter II.

    59. Section I (arts 31-34) regulates the delivery of the goods and the handing over of documents. According to a leading English commentator, these relatively detailed articles do not seem likely to cause difficulty for English lawyers (Nicholas [105 LQR 220 (1989]). As noted, the transfer of property in the goods in accordance with the sales contract is not regulated by the Convention, art 4, para 41.

    60. The basic obligation in section II (arts 35-40) on conformity of the goods is that

    The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.(art 35(1))

    Conformity is spelled out in terms of fitness for ordinary purpose and for any particular purpose known to the seller, unless the buyer did not reasonably rely on the seller's skill and judgment. The wording of the obligations differs from the Sale of Goods Act 1908 - there is no talk of conditions and warranties for instance - but the substance appears not to differ in any significant way.

    61. The rules relating to the consequence of non-conformity are however new. They are the result of major contention at Vienna in the preparation of the text, contention resulting from differences in national law and national interests. The buyer loses the right to rely on a lack of conformity of the goods unless notice is given

    (a) within two years of the actual handover of the goods (unless there is a contractual guarantee fixing a different time which might be longer or shorter), or
    (b) within a reasonable time after the discovery of the lack of conformity
    whichever is the earlier (art 39; see also arts 40 and 44).

    62. The seller is also under a general obligation to deliver goods free of any right or claim of a third party including intellectual property rights (arts 41 and 42). Again the buyer loses the right to rely on those obligations of the seller by failing to give notice within a reasonable time of knowledge of the defect. In this area there is no outer time limit (art 43). If the buyer has a reasonable excuse for not giving the notice required by the provisions in respect of conformity and third party rights, the buyer may reduce the price in accordance with the remedy provisions (considered next) or claim damages (except for loss of profit) (art 44).

    63. The buyer's remedies include and extend beyond those available under the present law. The Convention first sets out rights to compel performance and later deals with damages (paras 74-76):

    (a) The buyer can require the seller to perform the contractual obligations (art 46(1)). That right, like others relating to required performance, is subject to the qualification that a court is not bound to enter a judgment for specific performance unless it would do so under its own law in respect of similar contracts of sale not governed by the Convention (art 28).
    (b) The buyer can require the delivery of substitute goods in a case of non-conformity involving a fundamental breach and if timely notice is given (art 46(2)).
    (c) The buyer can require repair in the case of non-conformity unless this is unreasonable, again if timely notice is given (art 46(1)).
    (d) As noted, the buyer (and the seller too) may fix an additional, reasonable time for the other party to complete the contract (arts 47 and 63).
    (e) The buyer may declare the contract avoided if the seller's failure is a fundamental breach, or in a case of non-delivery the seller does not deliver the goods within the period fixed in terms of (d) or declares that it will not do that (art 49, see also art 51). Again the seller has parallel rights in the event of fundamental breach or failure to comply with the notice by the buyer (art 64).
    (f) The buyer may reduce the price in the case of non- conformity (art 50).

    64. The seller has, in parallel to (b) and (c), a right to cure any deficiency in performance, before or after the time fixed for performance (arts 37, 48). The latter right is subject to reasonableness limits - of time, convenience and certainty - and to the right to damages.

    65. The Convention also regulates partial and excessive performance (arts 51-52). Those provisions differ in detail from existing law (which in its English manifestation has been widely criticised). They are part of a broader set of provisions designed, as indicated, to remove impediments to trade and to help preserve the contracts covered by the Convention. For instance a shortfall in quantity can justify a declaration of avoidance by the buyer only if the failure is a fundamental breach of the contract and in the case of excess performance only the excess can be rejected. By contrast, the Sale of Goods Act s 32 allows the buyer to reject the whole delivery in either case.

    OBLIGATIONS OF THE BUYER AND RELATED REMEDIES

    66. The basic obligation of the buyer is of course to pay the price for the goods and take delivery from them as required by the contract and the Convention (art 53). The Convention provides for the determination of the price when it has not been fixed or according to weight (arts 55-56 and para 53) and for the place and time of the payment (arts 57-59).

    67. The seller's remedies again are divided into specified rights and damages (considered later, paras 74-76). The specified rights are

    (a) to require the buyer to pay the price, take delivery and perform its other obligations (art 62).
    (b) to fix an additional period for performance (art 63 para 63(d)),
    (c) to declare the contract avoided for fundamental breach or non-compliance with the requirement under (b) (art 64, para 63(e)).

    68. The Convention gives a further remedy to the seller if the buyer fails, in breach of the relevant contract, and following reasonable notice, to specify the form, measurement or other features of the goods. The seller can make a specification which becomes binding if the buyer does not make a different specification within a reasonable time (art 65). This provision has to be related to the obligation of the party to mitigate the loss resulting from the breach the party is relying on (art 77, para 74).

    THE PASSING OF RISK

    69. The risk in general passes from the seller to the buyer at the time of the handing over of the goods to the first carrier (art 67). The risk in respect of goods sold in transit passes at the time of the conclusion of the contract (art 68). And in other cases the risk passes when the buyer takes over the goods or the goods are placed at the buyer's disposal (art 69). (But of course parties in New Zealand often separate these elements.) The Convention departs from the general rule in the Sale of Goods Act that risk passes with title. The Convention does not regulate transfer of title but clearly identifies the decisive facts which enable the parties to determine the appropriate arrangements including insurance. The parties can of course agree to a different arrangement and the relevant trade usage may also lead to a different result (arts 6 and 9, eg para 90).

    PROVISIONS COMMON TO THE OBLIGATIONS OF SELLER AND BUYER

    Exemption - Impossibility

    70. While chapter V deals mainly with remedies, arts 79 and 80 deal with exemptions arising from impossibility and breach by the other party. Article 79 deals with the very difficult issue of the excusing of a non-performing party because of impossibility or some such cause.Paragraph (1) of that provision states the basic rule:

    A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

    The article operates however only to prevent an action in damages (see art 79(5)). It does not bring the contract to an end. However, if a failure to perform is a fundamental breach, the other party may declare the contract avoided.

    71. The article was difficult to prepare and has since given rise to criticism. For instance the wording is vague and imprecise. One commentator has called on national courts to see the provision in the context of both the Convention as a whole and the practices of international trade. The more sophisticated and widespread international commerce becomes, the more difficult it is to say that a party could not reasonably have been expected to take the particular impediment into account (B Nicholas in [Galston & Smit, Eds, International Sales, 5-14 (1984]).

    72. Article 80 states the basic proposition that

    A party may not rely on failure of the other party to perform, to the extent that such failure was caused by the first party's act or omission.

    It can be seen as a particular manifestation of good faith. Its relationship to other provisions in the Convention including art 79 and those concerning remedies is also the subject of some controversy, eg [Honnold] Uniform Law 553-556 [1990], [Bianca-Bonell Commentary 596-600 (1987)].

    Anticipatory breach

    73. A party faced with the prospect of failure to perform by the other party may be able to suspend the performance of its obligations or declare the contract void. The suspension right arises if "it becomes apparent" that the other party will not perform "a substantial part" of its obligations as a result of (a) a serious decline in its ability to perform or creditworthiness or (b) its conduct under the contract (art 71). The right to avoid for anticipatory breach arises if "it is clear that one of the parties will commit a fundamental breach" (art 72).

    Damages

    74. The basic right to damages is stated in terms of foreseeability:

    Damages for breach of contract by one party consist of a sum equal to the loss, including the loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters which he then knew or ought to have known, as a possible consequence of the breach of contract (art 74).

    That appears to conform with the basic rule of damages in Hadley v Baxendale (1854) 9 Exch 341, 156 ER 45 - a rule which we emphasised in reports last year on aspects of damages (NZLC R 18 and R19). We have already noted the obligation of a party relying on breach to mitigate the loss (art 77, para 68).

    75. The Convention also states two special rules for damages after avoidance of the contract - where the buyer has bought goods in replacement or the seller has resold; and where there has been no such purchase or resale (arts 75-76).

    76. A party is entitled to interest from the party who has failed to pay the price or any other sum that is in arrears (art 78). The Convention provides no basis for the calculation of interest.

    Effect of avoidance

    77. When a contract is avoided

    • the parties are relieved of their contractual obligations subject to payment of damages,
    • the contract remains binding to the extent of its provisions for dispute resolution or matters consequent upon avoidance,
    • restitution of goods delivered or money paid may be claimed
    • the buyer must account to the seller for all benefits received from the contract goods,
    • the seller must pay interest on any price refund (arts 81, 84).

    78. A buyer may not avoid a contract unless restitution of the goods delivered can be made, but other remedies remain available (arts 82-83 ).

    79. The party in possession or control of the goods must take reasonable steps to preserve them. Limited rights of sale apply where there is unreasonable delay in remedying the breach or where the goods are perishable or too costly to preserve (arts 85-88).

    III

    The Convention in Practice

    INTRODUCTION

    80. This chapter discusses some of the principal legal issues arising in practice from the preparation and application of a contract for the international sale of goods. While the chapter emphasises the Convention, the main points considered arise even in the absence of the Convention.

    81. That fact is to be balanced against the fact that some provisions of the Convention would introduce new law or appear to be complex. As well, the Convention provides a single body of widely accepted law which should be uniformly developed and interpreted and which would supersede in practice the sales law of many of the countries with which New Zealand trades. To the extent that the new law presents problems, they would relate just to that single conventional regime. That specific focus should reduce significantly the transaction costs arising from the present involvement with many other separate systems of law.

    82. This chapter considers in turn some of the practical issues relating to

    • the application of the Convention
    • the validity of the sales contract
    • the use of legal concepts
    • formation of contracts
    • third party rights
    • remedies
    • force majeure
    • exclusion and variation of the rules of the Convention.

    APPLICATION

    83. Whether the Convention applies to a particular contract turns first on the provisions of the Convention, briefly discussed in paras 31, 37-39, and second on the attitude of the parties - for they can exclude or vary its application. Here we consider three matters:

    • the closest relationship test for the place of business, a central element in the first ground for application, under article 1 (1)(a),
    • the determination of the governing law of the contract - the second means of application of the Convention, under article 1(1)(b),
    • the possibility of the implied exclusion by the parties of the rules of the Convention, if they are otherwise applicable.

    Whether the parties should exclude or vary the application of the Convention is considered at the end of this chapter.

    Closest relationship test

    84. The "closest relationship" test of art 10 may be decisive for the application of the Convention where one or more of the parties have more than one place of business and especially where one of these is in the same State as that of the other party. The basic test in that case is the place of business which has the closest relationship to the contract and its performance having regard to the circumstances known or contemplated by the parties. Parties in this position should address the problem before contracting if the test appears difficult to apply in the circumstances. They might consider using the additional means of application provided by article l(l)(b).

    85. In cases of doubt the interpretation provisions may assist. We have seen that they favour recognition of the international nature of the contracts and the correct approach to interpretation may be expected to favour rejection of a precipitate reference to domestic law.

    Governing law

    86. If the parties have their places of business in different States which are not Contracting States, the Convention applies only if the rules of private international law lead to the application of the law of a Contracting State (article l(l)(b)). That is to say, although the Convention is designed to minimise the relevance of different national legal regimes, it does not (and cannot) entirely remove their relevance. The proper law of the contract will always be relevant to matters such as the validity of the contract which are not dealt with by the Convention. It is also determinative where article l(l)(b) is the only basis on which the Convention could apply. There is risk in entering into international transactions without identifying the proper law. The Convention removes some of those risks, especially when the businesses are in two different Contracting States. But if that is not so there may be risk and uncertainty. That can however be removed if the parties address the choice of law issue and expressly and clearly set out their agreement in the contract by way of a choice of law clause.

    87. The rules of private international law of most jurisdictions will normally give effect to such a choice of law clause provided there is no breach of the public policy of any relevant jurisdiction. If a choice of law clause is used to attempt to circumvent non-derogable aspects of the State law (eg export bans), public policy will often require that the clause be avoided. Clauses which apply different law to different aspects of the contract and those which choose a law having no connection with either party may also fall under suspicion. But in general, the parties have considerable autonomy.

    88. Subject to public policy considerations, a choice of law clause may also be used to exclude operation of the Convention (art 6). It may (again subject to matters of public policy) apply the law of any State in substitution.

    89. Care should be taken with the drafting of the choice of law clause (or a clause taking advantage of art 6) if the intention is to exclude the Convention. So a simple reference to the law of New South Wales might properly be read as including the law stated in the Convention; it is after all expressly made part of the law of New South Wales. The provision might instead refer specifically to the local, domestic (or the internal, substantive) law of the jurisdiction in question and might as well expressly exclude the Convention, eg Kritzer [Guide to Practical Applications of the UN Sales Convention] 100-101 [1989] quoting a clause recommended by two American experts.

    Exclusion of Convention by implication

    90. Article 6 of course stresses the broad freedom of the parties. It was possible for the Convention to accord that freedom in part because of its limited scope; it does not regulate the validity of the contract, prejudice the rights of third parties, extend to consumer contracts or deal with product liability. It does nevertheless cover critical aspects of international commerce. Does art 6 mean that the rules on those aspects may be set aside merely by implication? Or is something more called for? The commentaries on the provision (which draw on its history) confirm the plain meaning - that art 6 does not require an express provision. But there is obviously considerable advantage in making the exclusion or modification express; in that event, the matter is clear, the particular governing law is likely to be identified by such a provision (with the consequent advantages of that course), and the history of the provision discourages too easy an inference of implied exclusion. The intention to exclude would be found by application of the interpretation provisions of the Convention, eg [Bianca-Bonell Commentary] 51-52, 55-58 [1987]. And some provisions of the Convention, such as those directions on interpretation, would be very difficult to exclude.

    THE VALIDITY OF THE SALES CONTRACT

    91. The Convention, we have noted several times, is not concerned with the validity of the contract. That proposition does not stand alone. Rather it appears as an explanation of the positive statement in art 4 that the Convention applies (only) to the formation of the contract and the rights and obligations of the buyer and seller under it. That statement of the positive scope of the Convention gives some indication of what might be left to fall within the excluded range of "validity" issues.

    92. Those possible issues are many: contractual capacity, mistake, export and import regulation, illegal and unconscionable contracts for instance. It will not always be clear whether a particular challenge relates to validity or to matters covered by the Convention. Open price contracts present an example. We have already noted that the definiteness requirement of art 14(1) might be softened somewhat by art 55 (para 53). But might there not be a prior argument that the contract is void and that accordingly those provisions do not begin to operate?

    93. Professor Tallon refers to the French courts holding to be void, contracts providing for payment of the price usually charged for similar goods at the same place or providing for a tentative price, the actual price being that of the list price in effect at the time of delivery. The decisions, he says, might be justified by reference not only to the Civil Code but also to broader public policy considerations of the protection of a weaker party, Galston 7-11 to 12. The view might be taken that under French law this matter concerns the validity of the contract and not its formation and accordingly falls outside the scope of the Convention and any curative effect of art 55. The view in New Zealand might be the opposite. The determination of the law governing that issue may accordingly be decisive.

    94. Parties contemplating a continuing arrangement for the supply of goods need to have regard to both the validity and definiteness issues if they are not intending to determine the price from the outset. They might have to give greater specificity to the means of and criteria for price determination. The international approach to interpretation demanded by art 7 (paras 42-50) may also help resolve the issue.

    THE USE OF LEGAL CONCEPTS

    95. Chapter 1 mentions the direct, practical and simple character of the Convention (para 25). That was a major consequence of the international collaborative process that was followed in preparing the text. Some familiar concepts and related legal expressions have disappeared as a consequence; risk passes (it is not transferred) on the handing over or taking of the goods (not on their délivrance as under the 1964 Convention and not on property passing) Warranties and conditions make no appearance. And consideration too appears to be absent in some contexts when the common law might require it.

    96. The Convention depends in important ways on standards such as reasonableness and good faith. They are of course familiar ideas and concepts. They can however suggest a lack of certainty and precision. They might be seen as undermining the terms of the contract as agreed between the parties and as threatening the security of international commerce. Those concerns cannot be answered in a completely comprehensive way. But two broad answers can be given, one relating to the powers of the parties, the other to the characteristics of law in this area.

    97. The first is found in the parties' freedom, stressed in art 6 and emphasised elsewhere in the Convention, to write the contract in their own terms. They can displace any uncertainty with their own special law. The course of relations between the parties and relevant trade usages may also help achieve that greater certainty (arts 8 and 9).

    98. The second set of answers to the concern recalls the parallel role of such standards in related areas of our law. Standards of reasonableness are of course common. They lie at the heart of obligations of due care. Similarly the Sale of Goods Act 1908 requires the payment of "a reasonable price" if none is fixed and no procedure tor determining it exists (s 10(2)); see also ss 16 (reasonably fit for purpose), 36 (reasonable opportunity of examining), and 20, 31(3), 31(5), 37, 39 and 57 (all about "reasonable time" - a common feature of the Convention). Consider as well the broad standards and powers included in the contract statutes.

    99. Statutory references to good faith are probably less frequent. It does of course have a prominent role, at least potentially, in the Convention (see art 7 quoted in para 43). But, again to take just the one example, The Sale of Goods Act uses it, as a synonym for honesty, in respect of the rights of third parties; ss 25, 48 and 2(2). Again we have to keep in mind that the rules are international. They are not to be seen purely in a national context.

    100. The requirement in art 7(1) that the Convention be interpreted to promote not only uniformity but also the observance of good faith in international trade represents a compromise. In Honnold's words:

    (a) Some delegates supported a general rule that, at least in the formation of the contract, the parties must observe principles of "fair dealing" and must act in "good faith";
    (b) Others resisted this step on the ground that "fair dealing" and "good faith" had no fixed meaning and would lead to uncertainty.
    The text does not of course impose good faith as a distinct obligation of the parties. Rather it is solely to be used in interpreting the Convention. What does that add to the uniformity and principle directions in art 7? Professor Honnold has suggested possible uses, for instance in respect of the performance demanded within the additional reasonable period. Professor Schlechtriem links good faith to the frequent references to reasonableness, [Honnold] Uniform Law 147-148 [1990].

    101. The broad standards in the Convention relate as well to two of its basic characteristics: it is intended to be durable, a base for vast international commercial activity; but a base which the parties are free to put to one side or to modify if they so desire (to return to the first point about the extensive freedom of the contracting parties, para 97) (Kritzer [Guide to Practical Applications of the UN Sales Convention] 108-114 [1989]).

    FORMATION OF CONTRACTS

    102. Some of the issues arising from open priced contracts have already been considered, paras 53, 92-94. Here we mention aspects of the Convention provisions relating to irrevocable offers and counter offers which are novel, novel that is to New Zealand lawyers.

    103. Under New Zealand law an offer can be irrevocable only if the offeree has given consideration. lf no consideration has been given, an offer which is expressed to be irrevocable can be revoked subject now to the broad controls on misleading and deceptive conduct in the Fair Trading Act 1986. As noted in para 51, art 16(2) qualifies the general rule stated in art 16(1) that an offer may be revoked at any time up to the dispatch of the acceptance:

    (2) However, an offer cannot be revoked

    (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or
    (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer.
    104. If follows that an offer which is simply intended to lapse after a fixed time is likely to be interpreted under art 16(2)(a) as irrevocable because it states a fixed time. If that possibility is not intended, care should be taken in the drafting of the offer. The potential effect of art 16(2)(b) in respect of implied irrevocability could also be met by explicit drafting of the offer. But, depending on the circumstances, the commercial interests of the offeror might of course be enhanced by the greater certainty of dealing that arises from irrevocability. It is significant that the law of major trading countries including the United States and much of Europe is consistent in this respect with the Convention.

    105. Under New Zealand law an acceptance which varies the terms offered is a counter offer, not an acceptance. Article 19 begins with that principle.

    (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter offer.
    But it then goes on to qualify the principle.

    (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

    (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

    106. These two paragraphs recognise the fact that in many transactions the standard form used by the seller will differ from that used by the buyer. The law has to attempt to deal with "the battle of the forms". The above provisions are designed to maintain the contract - in the absence of timely objection by the offeror - if the differences between the offer and "acceptance" are immaterial. As Honnold points out, although legal doctrine in many countries conforms with the principle stated in para (1) of art 19, there is evidence of courts upholding contracts by finding that the alleged deviation in the "acceptance" was not really inconsistent with the offer in the light of commercial practice or good faith, or was a request for a modification of an agreement, or had been waived by the proposer or accepted in silence by the other party, Uniform Law 230 [1990].

    107. The new provisions in arts 19(2) and 19(3) do highlight the need for care in contract management - a need which is present now of course - and they help facilitate the formation and performance of contracts when the arguments against that course do not have real commercial merit.

    THIRD PARTY RIGHTS

    108. The Convention, to repeat, regulates the rights and obligations of the buyer and seller. "In particular" it is not concerned with the effect which the contract may have on the property in the goods sold (art 4(b)). That matter, including the rights of third parties, is essentially left to national legal systems (although there is the 1970 UNESCO Convention on the means of prohibiting the illicit import, export and transfer of ownership of Cultural Property; and UNIDROIT and the Commonwealth Secretariat are doing related work in that area and more broadly; and, on choice of law rules, there is a 1958 Hague Convention on the Law Applicable to the Transfer of Title in International Sale of Goods which has not yet come into force).

    109. The parties should give attention to the time of the passing of property in terms of the relevant domestic law or the provisions in the contract. Relevant trade terms will often continue to govern the matter. That position is not directly affected by the Convention, although the significance of the passing of property is reduced by the Convention rules relating to the passing of risk - reduced, that is, for those legal systems which link the passing of risk to the passing of property. As already noted, under the Convention risk in general passes on the handing over of the goods to the first carrier or to the buyer if it is taking direct delivery. That set of rules provides a clear basis on which relevant arrangements, including insurance, can be made, para 69.

    110. Article 30 states the basic obligation that the seller "transfer the property in the goods . . . as required by the contract and this Convention". Articles 41 and 42 spell that out. Under the former:

    The seller must deliver goods which are free from any rights or claim of a third party, unless the buyer agreed to take the goods subject to that right or claim. . . .

    Article 42 makes more detailed provision concerning a third party right or claim based on industrial property or other intellectual property. Article 41 corresponds with the seller's obligation under s 14 of the Sale of Goods Act, and appears to extend beyond it to "claims". Any departure from the obligation must be based on agreement and not merely on the knowledge of the buyer (which is sufficient in respect of industrial and intellectual property). The agreement, it is accepted, can be implied. There may nevertheless be obvious advantages in dealing with this matter expressly in the contract. Consider for instance the position of the buyer who must pay before goods are released from a warehouse or carrier.

    111. The obligations of the parties to one another under art 42 depend on whether they knew or could not have been unaware of the right or claim of the third party based on their intellectual or industrial property. "Could not have been unaware" appears to be close to actual knowledge. It can be contrasted with "ought to have known" or "discovered" which is used in several other provisions of the Convention (such as art 39(1) on non-conformity). While the latter formula appears to impose a duty to investigate the former may not. eg [Honnold] Uniform Law 308 [1990]. Compare similarly s 16(2)(b) of the Sale of Goods Act. Prudence might nevertheless dictate inquiry in some circumstances, and either party might be well advised to deal expressly with the issue where such rights or claims are likely.

    REMEDIES

    112. Remedies are critical in the effective operation of law in an area such as this. It is not surprising that the Convention gives them a great deal of emphasis, introducing, as already noted in chapter 2, a range of remedies not to be found in New Zealand law. There is already an extensive amount of relevant commentary, valuable to those who must work with the rules in the Convention.

    113. The Convention provides a unitary set of remedies designed to take account of the special characteristics of international commerce and directed at preserving the contract if that is practicable.

    114. The parties are free to adapt or even to supplant the Convention's remedies. One exercise of their contractual freedom might be to provide for methods of dispute settlement other than through the courts, for instance by conciliation, mediation or arbitration (on the last of which the Law Commission has recently reported, again on the basis of the relevant UNCITRAL text, Arbitration (NZLC R20 1991)).

    115. One major area of commentary and potential difficulty is "fundamental breach" (see also para 56). The definition would constrain the relative freedom of the buyer under New Zealand law to reject the goods (eg para 65). Again the parties may want to negotiate a more specific avoidance regime, but the Convention rules do have the advantage of preserving contracts where only minor irregularities in performance occur - subject still of course to a right to damages and to the giving of relevant notices (see para 117).

    116. Uncertainty about the application of the fundamental breach definition in a particular case also can be avoided by making use of the reasonable notice (Nachfrist) provision (para 55). The relevant constraint there on the aggrieved person's power of avoidance of the contract is that the extra time allowed must be reasonable. Calculating that period is probably easier than assessing the fundamental character of the breach.

    117. Remedies may also be lost if timely notice is not given - for instance of non-conformity, avoidance, defect in documents, and third party claims. These requirements are to be explained by the need for greater certainty in the international context. New Zealand businesses will need to ensure that their contract management procedures are such that rights are not lost through a failure to give that notice.

    FORCE MAJEURE

    118. The earlier comment on art 79 about impossibility of performance calls attention to the problems in the preparation and in the likely interpretation of this provision and also its limited effect (it prevents only an action in damages and does not affect other remedies paras 70-71)). It will also be recalled that the law regularly applied in granting specific performance by the court in question is to be applied in respect of international sales as well (art 28, para 65). Accordingly the not uncommon reluctance of courts in the common law tradition to grant that remedy may give greater scope in practice to art 79; see further [Honnold] Uniform Law, 551-552 [1990].

    119. Some comfort may also be drawn from the comment by Professor Nicholas that similar problems of the verbal statement of the rule and its actual application are present in most major legal systems. The formulations found in these systems are no more helpful than those in art 79. He puts the view of another expert in these words: "there are always some who hope that by multiplying words they may succeed in defining the undefinable and others, like himself, who know that this is futile." [Galston & Smit, International Sales 5-10 (1984)]. Once again if the parties to a particular arrangement can be sufficiently far sighted and can agree, they might be able to avoid some of the difficulties arising from art 79 (as from similar national doctrines) by specific terms in their contract.

    EXCLUSION AND VARIATION OF THE RULES OF THE CONVENTION

    120. Professor Honnold was quoted earlier as emphasising the significance of the fact that the expectations of the parties are constantly the theme of the Convention (para 54). They have very broad powers to vary or even displace the rules in the Convention. They might do that through their own contract or because of the particular or general usages relating to their trade (arts 6, 8, 9).

    121. Standard terms have been developed for use with particular goods (especially for commodities such as wool, grain or sugar). For more general use, terms such as FOB (free on board) and CIF (cost, insurance, freight) have evolved. Used alone, the latter terms rely largely on the common law for definition. The International Chamber of Commerce has taken these terms, revised them and published a set of standard definitions known as INCOTERMS (last revised 1990). The ICC definitions specify, for each term, the respective obligations of buyer and seller in matters such as export licences, type of insurance, cost of insurance and port of shipment. Thus, the term "FOB (Incoterms, 1990)" would import the relevant standard obligations into the contract rather than the common law understanding. This could be subject to any usage that has developed in the particular trade or region or between the parties.

    122. Standard terms such as INCOTERMS do not however generally define the whole contract. For instance remedies are not normally covered. A contract could therefore be constructed by employing a trade term to define transactional arrangements with the Convention providing the supporting law (including remedies). To the extent that the trade term displaces the default rules of the Convention (such as the definition of the place at which delivery is to occur) the incorporation will modify the Convention. Since the remedial provisions have been, in part at least, tailored to those default rules there is a possibility that the modification will upset the fit between obligation and remedy for its breach.

    123. Under art 49, avoidance is immediately available for fundamental breach. lf a breach of a particular element of the transaction would not amount to fundamental breach under the default rules of the Convention, but can be seen as fundamental under the trade terms used, then the effect of incorporation of the trade term may have unexpected results. It is not suggested that the use of trade terms should be discouraged - they obviously have great value in facilitating trade - but rather that the parties' contract be adjusted if necessary to take account, say, of the remedies in the Convention. No doubt those preparing and revising standard terms will also have regard to the relevant provisions of the Convention.

    124. Parties considering departure from the terms of the Convention have to consider competing considerations. On the one side they have the great advantage of the widely accepted and increasingly understood text. Using that text can avoid major difficulties which would otherwise arise during negotiation. (For example, which law should apply? What specific obligations and remedies should be created?) It gives the parties immediate access to the developing interpretation of the standard text, familiar to commerce around the world. They have the advantage of that unified law. But for very understandable reasons they may wish to write their own law, to supplement where there are gaps or obscurities and to displace where the law is not satisfactory for their purpose. They should assess the advantages which they foresee in their special arrangement against the values (including the growing certainties) of the uniform rules in the Convention.

    IV

    Accession by New Zealand

    NEW ZEALAND SHOULD BECOME PARTY TO THE CONVENTION

    125. The Law Commission supports the Government's intention to accede to the Convention, without reservations, and to promote legislation making the rules set out in the Convention part of the law of New Zealand. The reasons for that support relate, first, to the wide and growing acceptance of the Convention and, second, to its substance.

    Wide acceptance

    126. States which participate in more than half of New Zealand's external trade have already become parties to the Convention. The 34 Contracting States include Australia; the United States and Canada; France, Germany, Italy, the Netherlands and Spain; Switzerland; the Russian Federation; and China. Accordingly, the uniform rules set out in the Convention already apply to trade between parties whose businesses are in any two of those States, and, in addition, to international trade if the relevant contract is governed by the law of one of those States (if the places of business of the parties are in different States, whether Contracting States or not). That additional ground for the application of the rules can be excluded by reservation by the Contracting State, but only China, Czechoslovakia, the United States and Canada in respect of British Columbia have taken that action. The increasing rate of acceptance of the Convention is also significant. It took nearly eight years for the Convention to come into force, once 10 states had accepted it. In the following four years the number of States bound by it has trebled. They participate in about 60 percent of world external trade. Also significant, to refer to the preamble to the Convention, is the range of countries with different social, economic and legal systems to be found among the Contracting States - three important common law countries, five member States of the European Community, the Russian Federation (the USSR) and China, and other States from all continents and all major legal systems. It is however significant that important trading partners in South East Asia are not yet Contracting States. This is a matter that might be further addressed, for instance through governing law provisions in contracts and perhaps persuasion of those States to consider accession.

    127. There are two further features of the list of Parties (in addition to their great importance for New Zealand trade) that should be stressed. One is that the second ground for the application of the Convention - that the contract of sale is governed by the law of a Contracting State - means that the uniform rules set out in it already apply to much New Zealand trade. The Convention applies to an international sales contract to which a New Zealand firm is party if the contract is governed, for instance, by the law of Victoria, Bavaria or Ontario. It follows that New Zealand firms engaged in international trade and their lawyers should already be familiar with the Convention and its developing interpretation and application.

    128. Another significant feature of the list of Contracting States is that Australia has been bound by the Convention since 1 April 1989. Nearly 20 percent of New Zealand's external trade is with Australia. This figure has grown substantially (especially in terms of New Zealand exports) in recent years in the context at first of the New Zealand Australia Free Trade Agreement of 1965 and later of the Closer Economic Relations - Trade Agreement of 1983. The 1983 Agreement declares that its objects are:

    • to strengthen the broader relationship between Australia and New Zealand;
    • to develop closer economic relations between the member states through a mutually beneficial expansion of free trade between New Zealand and Australia;
    • to eliminate barriers to trade between Australia and New Zealand in a gradual and progressive manner under an agreed timetable and with a minimum of disruption; and
    • to develop trade between New Zealand and Australia under conditions of fair competition.

    129. Major steps have since been taken in accordance with the Agreement to remove or greatly lessen the standard barriers to trade such as tariffs, quotas, subsidies, and bounties. In 1988 the two Governments gave attention as well to the harmonisation of business law. "Differences in the laws and regulatory practices relating to business may impede the enhancement of [the closer economic relationship]," they said, "by inhibiting the creation of an environment conducive to the growth of trade in goods and services and the efficiency of both economies." Accordingly, the two Governments set up a process to examine the removal of any impediments to trade that may arise out of differences between the business laws and regulatory practices of the two countries.

    130. In terms of that agreement, officials of the two Governments examined areas of law and practice in which "harmonisation" might be considered. In their June 1990 report to Ministers the officials addressed a "key harmonisation issue ... the law which applies to the sale in one country of goods produced in the other". Australia had acceded to the Sales Convention with effect from 1 April 1989. New Zealand, they reported, was considering accession. The differences between the Convention and the general law applicable in the two countries led to discussions whether Australia should make a declaration under art 94(2) in relation to New Zealand providing for a special regime to operate between them (see para 34). But, the report continues, Australia concluded after careful consideration that international uniformity should be encouraged, even between neighbours such as Australia and New Zealand. The consequence is that, as indicated, the Convention continues to apply to a substantial proportion of transtasman trade even without New Zealand accession. The report records the agreement of New Zealand officials, the Minister of Justice and the Law Commission that New Zealand should accede. Two reasons are given - the elimination of confusion and uncertainty about the applicable law governing bans Tasman trade, and. having regard to the growing number of Contracting States, the contribution to the development of international uniformity in this important area of commercial law (Report to Governments by Steering Committee of Officials, Australia New Zealand Closer Economic Relations - Trade Agreement. Memorandum of Understanding between the Government of Australia and the Government of New Zealand on Harmonisation of Business Law (June 1990) paras 12.01 - 12.06).

    131. We make three points about the result of this process. The answer in this case is uniform law, and not merely an approximation or harmony. The answer is multilateral ("international") rather than bilateral. And the commitments already given within the CER process probably mean that the question is really no longer whether New Zealand should accede, but when.

    The substantive rules

    132. The facts about acceptance just mentioned are probably in themselves decisive for New Zealand accession to the Convention. A large amount of New Zealand's external trade is subject to the rules in the Convention (and will probably be increasingly so) and at best it is inconvenient for much other trade to be subject to many separate sets of rules which may or may not be the law of New Zealand. There is also the fact that New Zealand law will no longer be able to draw on developments in major common law jurisdictions in the way it traditionally has, given that the rules in the Convention now apply in those countries - unless of course New Zealand has itself accepted the Convention.

    133. The facts about acceptance also show that a significant number of important trading nations have judged the substance of the rules to be satisfactory. To refer back to the preamble to the convention they see the rules as contributing to the removal of legal barriers in international trade and as promoting the development of international trade; Babel has been avoided. The Law Commission's study, reflected in chapters 2 and 3, leads it to the same conclusion. The complex, uncertain conflict of laws rules and the whole range of the separate bodies of law to which they direct attention will be replaced in most situations by a uniform system of rules which balance certainty and flexibility in the ways briefly indicated. The reform would be a particular instance of the principle stressed in the Law Commission Act 1985 of making the law as accessible and comprehensible as practicable.

    134. The Convention should also reduce the costs and uncertainties for New Zealand businesses engaged in international commerce. They will often be smaller and have less bargaining power than the foreign businesses with which they trade. They may as a consequence undertake to do more of their trading under foreign laws and may suffer greater cost as a result (if only the extra cost of getting advice on that foreign law). Were New Zealand to become a Contracting State more transactions would be governed by the Convention. Using the Convention as the governing law removes the advantage that the other trading partner has when the contract is subject to its familiar local law. The Convention law is equally accessible regardless of geographic location.

    135. There will as well be the savings for New Zealand businesses in the application of their growing understanding of the rules in the Convention which they should in any event be obtaining to a wider range of their external trade. They can accordingly be less worried about the potential or actual application of the law of Australia or Argentina, Iraq or Italy, Connecticut or Hessen. There will be a uniform widely applicable set of rules the application and interpretation of which will be clarified and developed over time by the courts and authorities of a great number of States.

    136. The process of clarification and development helps meet the concerns that can legitimately be expressed about the difficulties arising from the text of the Convention and from the changes it would introduce into our law. Every law has its complexities and the Convention has the advantage over most foreign law that it is fully accessible in New Zealand. The fact that most of our largest trading partners are already Contracting States not only increases the pressure for accession, but enhances the benefits arising from it.

    137. Accordingly, the Law Commission is strongly of the opinion that New Zealand should become party to the Convention. As a nonsignatory to the Convention it can become bound by the Convention by acceding to it, effective on the first day of the month 12 months after the deposit of its instrument of accession with the Secretary General of the United Nations (arts 91(3) and 99(2)).

    138. The Law Commission does not propose that the Government makes any reservations on accession (see paras 29-36). Only one possible reservation need be discussed here. Four States have limited the application of the Convention to situations where the two parties to the contract are in different Contracting States. That is to say, they exclude the possibility of the Convention applying simply because the law of a Contracting State governs the contract (art l(l)(b)). The states are...China, Czechoslovakia and the United States. We noted earlier the British Columbia legislation which will enable the reservation in respect of that province to be withdrawn, para 31. The United States has given two reasons for this position. (See US Senate 98th Congress 1st Session, Treaty Doc No 98-9; also in [Galston & Smit, International Sales, App. 1(1984)]). The first is that the rules of private international law on which applicability under art 1 (1)(b) depends are subject to uncertainty and international disharmony. That is true. But the uncertainty and disharmony can almost always be avoided by an express choice of law clause in the contract. And if there is no such choice of law clause exactly the same problem of determining that law arises if the Convention does not apply. If it does not apply and foreign law does there may then be the additional problems which arise from reference to a foreign legal system.

    139. The second United States argument relates to that prospect of the application of foreign law. Article l(l)(b), it contends, would displace United States domestic law more frequently than foreign law. It is true that United States domestic law will be displaced if the proper law is American - but by the Convention with its advantages. If the proper law is the law of the foreign non-Contracting State where the other party has its business then that law will apply whether art 1(1 )(b) is in effect or not. The associated United States argument is that its relevant domestic law, the Uniform Commercial Code, is relatively modern and includes provisions that address the special problems that arise in international trade. That comment cannot be made about the New Zealand sales law. It is essentially the United Kingdom Act enacted 99 years ago. The United States argument also refers first to the fact that, with the increasing acceptance of the Convention, article l(l)(a) will in any event have wider application (and article l(l)(b) would be less significant anyway), and, secondly, to the freedom of the parties to contracts not covered by article l(l))(a) to provide, by their contracts, that the Convention will apply. That freedom also of course can be invoked to make the Convention inapplicable.

    140. The Commission is also influenced by the fact that 30 of the 34 Contracting States have not made the reservation. Accordingly it does not propose a reservation in respect of art l(l)(b). To repeat, the New Zealand Government should accede to the Convention, without any reservations. That executive action is not however sufficient to change the law of New Zealand. As well, Parliament must enact appropriate legislation.

    PARLIAMENT SHOULD ENACT IMPLEMENTING LEGISLATION

    141. The relevant statutes enacted in other common law jurisdictions, for instance in the Australian states and territories and Canadian provinces, are very simple. Their form confirms that it is enough for Parliament to enact a Sale of Goods (United Nations Convention) Act to the following effect:

    • the rules in the Convention, scheduled to the Act, are part of the law of New Zealand;
    • the Act comes into force when New Zealand becomes bound by the Convention;
    • the Act prevails over other relevant law;
    • the Secretary of External Relations and Trade can give certificates (which have presumptive effect) about the Contracting States' treaty actions under the Convention.

    The statute could also provide that the parties to a contract to which the Convention would otherwise apply can exclude or vary that application. But article 6 already says that and this is a case in which the Convention should be fully part of the law of New Zealand without any statutory gloss which might stand in the way of uniform interpretation of the law the Convention states; see the similar comment by Professor Ziegel about the Canadian provisions, "Canada Prepares to Adopt the International Sales Convention" (1991) 18 Can Bus LJ 1, 3-4. The same reasoning has led to the conclusion that the statute should not provide that it prevails over other relevant law. Once again the Convention should be left to speak for itself in its general treaty context; and indeed article 90 indicates that the Convention does not prevail over other international agreements dealing with the same matter.

    142. By its very terms however the proposed Act will derogate in part from the Sale of Goods Act 1908 and other law, including common law, governing the sale of goods falling within its Part 1. That domestic law is based on an aged model as is recognised by the Consumer Guarantees Bill now before Parliament which would supersede it for consumer transactions. The Convention is of course not concerned with consumer transactions. However, the question arises whether it should extend to those other internal sales which will remain, covered by the Sale of Goods Act. (See eg [Honnold]Uniform Law 58-59 [1990].) The Convention takes a more practical approach than the older model, rejects some unnecessary concepts and introduces a more flexible range of remedies. Some aspects of the Convention may prove inappropriate in a domestic context and provisions which may have suffered through the need for compromise might be rejected in favour of provisions more suited to local conditions and practices. While this type of review would not be a necessary consequence of New Zealand's accession to the Convention, a degree of parallelism between the laws for international and domestic transactions is attractive. Should a manufacturer shipping goods from Whangarei be in a different legal position depending on whether the purchasing wholesaler is in Wellington, Wollongong or Wilmington? That question can be left for later consideration. In the meantime, the Law Commission recommends that legislation to the effect outlined in para 141 be enacted to facilitate New Zealand's accession to the Convention.


    Pace Law School Institute of International Commercia Law - Last updated May 26, 1998
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