Buying or selling goods internationally?

POSTED BY Karl Stolberger
01 November 2016

posted in Business | International | United Nations Convention

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Sale of Goods (United Nations Convention) Act 1994 - (The United Nations Convention on Contracts for the International Sale of Goods)


The Convention is a regime for international sales of goods (domestic sale of goods contracts come under the Sale of Goods Act 1908). It was the result of international negotiations stretching back to the late 1920s and is a compromise between common law (e.g. NZ) and civil law (e.g. European) legal systems. Notwithstanding that the Act been the law for some time its effect is often overlooked.

The Convention applies to contracts between buyers and sellers of goods whose places of business are in different countries where either: those countries have signed up to the Convention, or the law of a country that accepts the Convention is found to be the governing law of the contract.

International transit of the goods isn’t necessary e.g. the Convention would apply to a sale by an Australian firm to a New Zealand firm of stock already present in New Zealand.

Most of New Zealand’s main trading partners are parties, a notable exception being the United Kingdom.


What are the main differences?

The Convention makes two notable changes to the law on contract formation as generally understood:

  • A contractual offer can’t be withdrawn if it provides a fixed time for acceptance or is otherwise expressed to be irrevocable. This may well accord with commercial practice, but isn’t necessarily the law outside the Convention.
  • In certain cases what would normally be a counter-offer (and hence a rejection of an offer) can be deemed an acceptance.

Further, a contract can be modified or terminated by mere agreement of the parties. This may reflect commercial practice, but under the law as it generally applies difficulties can arise if there is no consideration (reciprocal benefit) for the variation or termination.

The Convention doesn’t affect the passing of property in the goods (which may depend on the law of the place where they are) but does provide for risk, which on the whole passes on delivery.

Part III, lays down, a detailed regime dealing with the rights of buyer and seller on breach of a contract. These are briefly summarized below. Most of what is contained in the Convention is quite sensible and often corresponds to what buyers and sellers would do anyway, but the detail with which the rules are specified means that careful regard should be had to the wording of the Convention if a dispute arises or may arise.


Buyer’s Rights

If goods are defective the buyer may reject them and "avoid the contract" if the breach is "fundamental". This is probably in the end not too much different from to the position in respect of sales not governed by the Convention. But it requires that the buyer serves a notice specifying the breach within a reasonable time, and in any case within two years of delivery and the right is in general lost if the goods cannot be returned by the Buyer in the condition in which they were received. The requirement that the notice specify the breach may sometimes prevent rejection subsequently being justified on another ground. A buyer who has the goods must then take steps to preserve (or in the end sell) the goods on behalf of the seller and may have to account for benefits derived from them.

The buyer’s rights can extend to:

  • Requiring performance: if the breach is fundamental this may include a demand for substitute goods. If the breach is not fundamental the buyer can require repair (but note that the seller is also entitled under carefully specified rules to remedy defects even after the date for delivery, and even sometimes against the wishes of the buyer).
  • Reduce the price: this is a civil law based remedy which may give different results to a damages claim, especially where market prices change.
  • Exercise the rights above in respect of part non-conformity or non-delivery which is not usually a right under the general law, even though the seller may allow it.

The buyer can also sue for damages.

If the goods are not delivered the buyer can set a time for delivery (a notion coming from German law – the so-called "quasi-nachfrist”) and if there is no performance proceed as above. But this must be done in accordance with the rules: in particular, a person who has taken this course has to stick to it.

A buyer who is reasonably doubtful as to the seller's ability to perform may also sometimes suspend performance until it gets adequate assurance of performance (it is not clear what happens if such assurance is not given), or avoid the contract if it "is clear" that there will be a fundamental breach by the seller. Equally, of course, the buyer may find these remedies unexpectedly exercised against him or her.

The seller may be protected from a claim by the Buyer by proving an impediment beyond his or her control (force majeure).

If the buyer recovers the price back there is an entitlement to also recover interest.


Seller’s Rights

If the buyer refuses to take delivery the seller may seek an order of the court that the buyer do so. While a court in the common law tradition, such as New Zealand, might be somewhat reluctant to grant such an order, a court elsewhere might readily do so.

The seller may also avoid a contract for fundamental breach or set a time limit (corresponding to the buyer's right to do so) and avoid if it is not complied with.

The seller may also exercise the powers as to adequate assurance of performance e.g. suspend operation of the contract until it receives adequate assurance that the terms of the contract will be met. Meanwhile it must take steps to preserve the goods. There is also a right, similar to that under general law and available to both buyers and sellers, to terminate where one party makes it clear that it will not be performing its obligations under the agreement.

The seller may have a defence of force majeure to a claim by the buyer.

If the buyer wrongfully refuses to pay, the seller can sue for the price with interest.

The right to claim damages is also a remedy available to the seller.


Documentary sales

The Convention was not drafted with much reference to documentary sales and needs adaptation. Two particular problems are worth noting.

  • Documentary sales require strict conformity of documents. This links with letter of credit requirements. The rights of rejection ("avoidance") for goods may not be strict enough for documents, and the seller's right of substitution or repair/replacement may be totally inappropriate.
  • The rules as to risk are over-simple and may not always be appropriate to documentary sales, in particular, where goods are bought afloat.

The usual answer given to this sort of problem is that the Convention can be excluded in whole or in part and is subject to trade or agreed usage. But this means that those who may be involved in a sale covered by the Convention should be cautious as to whether its rules are appropriate and should consider the extent to which it should be excluded.

Overall Assessment

Much the Convention is good, sensible, an improvement on the non-Convention law and a formulation of what people tend to do anyway. But once things are set down in detail difficulties can arise for those who do not comply. A particular trap is the two-year time bar under which any reliance on non-conformity of the goods (including using the non-­conformity as a defence) is barred unless a notice has been served within that period.

The Convention is replete with requirements for service of notices and action within a reasonable time, placing a premium on prompt action and decision.

The provisions are quite complex. Notwithstanding the remonstrations in the Convention that questions which are not settled by its text are to be determined by application of the general principles on which the Convention is based (and not having regard to local domestic law) some of them will be understood and interpreted differently in different countries. For example, in civil law countries where there is a breach of contract emphasis tends to be on the right of the innocent party to insist on performance. In common law countries it is more on the right to terminate the contract and/or sue for damages.

Those who have well-tried contracts of a specialised nature would probably be best advised to exclude the Convention. It is best to do so clearly. Questions of implied exclusion are likely to be difficult, especially as regards the remedial provisions. Thought needs to be given to the terms of the Convention when formulating international sales contracts so that proper consideration can be given to the extent to which it should be excluded in individual cases. The Convention does however offer a potentially neutral solution where the domestic sales regimes of two contracting parties differ and agreement cannot be reached on the application of a particular set of rules.

Image courtesy of NFarmer.

POSTED BY Karl Stolberger
01 November 2016

posted in BusinessInternationalUnited Nations Convention

VIEWED 2028 TIMES

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