Sample Term Paper on: Is The CISG A Success?

Running Head: IS THE CISG A SUCCESS?

Introduction

     Many business people and law practitioners consider the Convention on Contracts for the International Sale of Goods (the CISG or the Convention) a success for promulgating a set of legal standards used by many to structure international commercial transactions. The CISG provides a common point of reference among the various legal regimes of the world and enhances predictability in the resolution of international disputes, as well as in negotiations among private parties. This predictability and commonality in commercial transactions contributes to the CISG's warm reception by the international legal and business communities.

     One reason many consider the CISG a hallmark in international law is its wide acceptance and ratification by countries around the world. The CISG applies to contracts of sale of goods between parties whose places of business are in different States and governs issues involving the formation of a contract for the sale of goods and the rights and obligations arising therefrom. Its provisions address a multitude of issues often raised in international commercial contracts; everything from how an offer or acceptance may be made to how to resolve problems of non-conformity of goods, remedies, and damages for breaches of contracts. It is a self-executing treaty and is therefore part of the domestic law of each Contracting State . Yet, parties may choose to avoid application of the Convention or to vary from any of its provisions in their private contracts. (Robert B. von Mehren & David W. Rivkin, Sept. 1999)

     The Convention's wide range approach to transactions in goods also makes the CISG a success in international commercial law. In order to succeed, international commercial law must provide a level of predictability and certainty to contractual legal issues, allowing parties to structure their business transactions. Parties may successfully navigate international commercial waters when they are certain that their agreements will be legally binding and they understand how those agreements will be interpreted, if ever challenged. To apply laws in the international business community successfully, laws and rules must be consistently reliable. The CISG provides this needed reliability for contracts involving the sale of goods.

     Although the Convention effectively tears down international legal borders and addresses many international commercial transactional issues, the CISG is nonetheless limited in scope with respect to the types of commercial transactions that it governs. It is surprising that in the present global economy, this monumental international convention applies only to "contracts for the sale of goods" and, by its own terms, fails to account for the ever-increasing role of service industries and service-related contracts. As a result, the CISG is an inadequate medium for the constantly changing international legal environment and therefore only has limited utility with respect to international transactions. (D.A. Walsh & K.W. Ryan, 1997)

Advantages And Disadvantages

     International transactions are no longer limited to those involving the sale of goods. Rapid advances in technology, communication services, and information systems allow multi-national companies to extend their businesses throughout the world, globalizing regional economies and changing the manner in which business is conducted. In the international context, simple contracts for the sale of goods are now mired with service-oriented provisions as issues concerning the licensing of technology and know-how, various distribution, agency and franchise requirements and restrictions, sales performances, and the transfer of trademarks and trade secrets create a more complex and intricate relationship between what has been traditionally known as the "buyer" and the "seller." Services are becoming an increasingly important part of international transactions, and contracts are no longer clearly categorized into separate groups either as "contracts for the sale of goods" or "contracts for the performance of services.”

     The international business community needs a predictable structure to govern legal issues--regardless of whether a contract is for the sale of goods or for the provision of services. The CISG fails to provide this needed predictability in that it only provides a legal structure for transactions involving the sale of goods and fails to take into account the increasing number of service transactions. The limited scope of the CISG creates uncertainty in the international legal community, and this uncertainty will continue to grow as long as it is unclear where and when the CISG will apply. If the CISG is to continue to have an impact on international commercial law, it is important that it address key issues in the contemporary international economy. By failing to account for the impact of service industries, and by specifically ignoring the increased role of services in international transactions, the utility and perpetual viability of the CISG is questionable. (Peter Winship, 1991)

     Despite its problems in the current international environment, this Article nonetheless recognizes that the CISG is a living document intended to unify international commercial law. It thus recommends that when deciding whether the CISG should govern a particular transaction that includes service-oriented provisions, the CISG should be broadly interpreted in a manner that is consistent with the goals and the language of the Convention. Such an approach will provide the predictability that is necessary within agreements that contemplate services and will facilitate a logical, flexible, and unified approach to the international application of the CISG.

     Traditionally there has been a division in international trade regulation between industries based upon the selling of goods and those dedicated to the provision of services. Contract law, which regulates private commercial relationships, has also adopted this distinction. What exactly is the difference between "goods" and "services" and why does such a distinction exist?

     The term "goods" is usually defined as tangible and moveable items. The definition of services, however, is more amorphous. It has been suggested, not entirely in jest, that services include all things which can be bought and sold but which you cannot drop on your foot. Service industries encompass almost all businesses that do not deal directly in the transfer of tangible items. This includes, but is not limited to, the banking, insurance, advertising, financial, consulting, accounting, medical, and legal, entertainment, tourism, and computer technology industries. While all of these industries are extremely important in the international forum, none of them deal in the transfer of tangible items. In monitoring international trade, governments often rely on a "goods" versus "services" analysis.

     When measuring exports, nations often distinguish between exports based on goods sold and exports based on services performed ("trade in goods" as opposed to "trade in services"). Government data on the international trade in services tends to be poor, while data for trade in goods is usually specific and reliable. While the import and export of goods are monitored by customs officials, services are not. Government industry regulations also indirectly adopt a "goods" versus "services" distinction. Service industries are often heavily regulated by governments (e.g., the securities, banking, and insurance industries), while industries involving the sale of goods are given more autonomy from governmental control. (D.A. Walsh & K.W. Ryan, 1997)

The Distinction Between "Services" And "Goods"

     The distinction between "goods" and "services" exists in other areas of the law as well. Laws regulating transactions between private parties adopt a similar framework. In the United States , article 2 of the Uniform Commercial Code (U.C.C.) applies to transactions involving the sale of goods. "Services" are not included under the coverage of article 2 and were deliberately omitted, except where suitable by analogy. Commercial codes of other countries adopt similar distinctions. Conversely, the regulation of contracts involving services is scattered among statutes governing specific industries and, in common law countries, in judicial decisions.

     As with domestic regulation, at the international level the interest of international legal organizations in the unification and harmonization of laws applicable to trade in services has been, in the main, quite different from the interest they have shown in international trade in goods. The CISG, for example, only applies to international sales of goods and for the most part, excludes transactions in services from its coverage. (Steven Walt, 1991)

     Several reasons exist for this distinction in commercial law between "goods" and "services." The first is historical. The drafting of the CISG and the U.C.C. took place over forty years ago, and comparable codes in other nations date back even further, when economies were based primarily upon the production and supply of goods. It is understandable, then, that in the process of creating uniform commercial laws, emphasis was placed upon the type of transactions taking place in the business world at that time.

     The second reason for a distinction between "goods" and "services" is based on the view that it is unnecessary to regulate the international trade of services. A "service" transaction has historically been thought to involve an activity which requires the producer and the consumer to be at the same place at the same time. Until recently, service industries often operated within a localized area and were not international in scope. The international trade of goods, on the other hand, has been occurring for hundreds of years. International trade laws, therefore, have traditionally focused on the sale of goods, where regulation was needed, rather than on services, which were local in nature. (Peter Winship, 1990)

     Third, the inherent nature of service transactions is seen as less conducive to uniform regulation. Service businesses and the contracts used therein often contain "unique" and "personalized elements" that prevent lumping them into a single category. Services are subject to large variations in quality which are difficult to measure. Goods are tangible, while services rarely offer a physical end product. Goods may be loaded on a ship or plane and delivered to another country. Services, on the other hand, are not transportable by themselves and are dependent on the movement of people and information for their delivery. Contracts for goods are judged by objective standards such as quality and quantity, while contracts for services are measured by subjective standards based on a purchaser's satisfaction. These differences have the effect of creating a perception that goods and the contracts involved in their sale are easier to regulate and enforce. (Peter Winship, 1999)

Success And Shortage Of CISG

     Regardless of the analytical Separation of "goods" and "services," services are indeed becoming an integral portion of trade in the United States as well as in other countries. The World Trade Organization estimates that in 1995, Consistent with the persistent globalization of the world economy occurring in recent years, world trade in commercial services exceeded $1.2 trillion, an increase of fourteen percent from the year before. According to a United Nations study done in the mid-1980s, trade in services comprised about one-fifth of total world exports while Service transactions constituted more than half of annual foreign direct investment. The recent inclusion of free trade protection for services in the Uruguay Round and under GATT illustrates the world's recognition that services play an increasingly significant role in international trade. In the United States , Cross border imports of goods have consistently exceeded exports, thereby creating a deficit in the trade of goods balance. By contrast, crossborder exports of services have consistently exceeded imports, creating a large surplus in the service trade balance. (Peter Winship, 2001)

     The volume and growth of U.S. cross-border service exports have consistently exceeded those of imports in recent years, yielding a services trade surplus in 1995 that grew to $68 billion and offset thirty-five percent of the merchandise trade deficit. The aggregate number of services in the U.S. economy rose from 48% in 1950 to over 70% by the late 1980s, making services the single largest sector of commerce in the United States . In fact, service industries accounted for 76% of the U.S. gross domestic product in 1993. The U.S. service sector also accounts for 78% of the U.S. work force. The United States has seen 86% of its job growth in the service-producing sector within the last twenty years. A 1991 U.S. Congressional report estimated that trade in services accounted for 25% of all world trade, for $90 billion in U.S. exports, for 60% of total U.S. output, and for 90% of growth in U.S. employment since 1980. The U.S. International Trade Commission estimates that in 1995, cross-border service exports increased by 8% to $177 billion.

     The rising importance of service industries can be explained by the fact that traditional manufacturing industries are being replaced by businesses based upon technological information and communication systems. Today, information is transmitted over vast distances in efficient, inexpensive, and reliable ways, making technological industries central to the world economy. Businesses are centralized, specialized, and capable of efficiently operating across geographic and national boundaries. As this phenomenon increases, more and more service positions are created that are based on specialized knowledge and the manipulation and processing of technology and information.

     An increase in technology, however, is not the sole reason for the increase of service industries in world trade. Service industries are not merely replacing industries based in the trade of goods, but are also becoming an integral part of the production process of hard goods. The idea that personal contact is necessary for transacting business is disappearing, as face-to-face contractual negotiations and orders for the purchases of goods are quickly being replaced by facsimile machines and network communications. Communication and technological services are therefore rapidly becoming more important to the production of goods.

     In addition, finished products that were once manufactured by a single company are increasingly being produced by several manufacturing firms. Today, manufacturers are able to purchase individual components from companies around the world rather than having to manufacture each component themselves. By relying on others to produce individual parts and perform labor services, manufacturers are able to efficiently produce higher quality goods for mass consumption. Firms working together to produce a single good will also frequently sell their labor and services to one another. Therefore, even in manufacturing industries that center on the sale of goods, services are becoming increasingly integral to the process.

     On the international level, the growing role of services is even more pronounced. Even in a transaction where the ultimate goal is to sell or constant attempts by manufacturers to secure the cheapest Cost of production. Purchase goods, services often prove to be a collateral, if not an integral, part of the transfer of the goods. It is not uncommon for a contract for an international sale of goods to include specific provisions regarding insurance, letters of credit, and contracts of carriage--all of which become more complex when addressed on an international scale. Moreover, where the locations of the buyer and the seller are not geographically close, intermediaries may be far more involved than in typical domestic sales of goods. In order to develop a market abroad, goods often must be advertised, making the assistance of advertising and public relations firms necessary. The services of lawyers may be required to examine the laws of foreign markets, including health, safety, and other regulatory standards. The services of translators may also be needed in order to ease difficulties caused by foreign languages. Accountants and financial experts may be needed to keep track of complex financial transactions. Finally, if a transaction involves technologically complex equipment, support and expert services may also be required.

     Since the success of international transactions often heavily relies upon the use of various services, dependency upon such services increases. In addition, many of the reasons for the increase in the use of services in domestic transactions apply equally well in the international context. Thus the increase of service-related industries is inevitable in today's world economy.

CISG – Is It A Success?

     At the international level, the effects of an outdated law can be devastating. The purpose of an international convention like the CISG is to provide answers to legal problems that arise in the international context. In order to succeed, a convention must provide predictable interpretations of legal issues and be uniformly applied by individual nations and courts. If an international law does not provide clear answers for practical problems, its use will diminish as parties, courts, and governments alternatively turn to domestic laws to solve their problems. The result is that international commercial law becomes far less influential and the extreme case, serves no useful function in resolving commercial disputes.

     By failing to account adequately for the influence and growing importance of services in international transactions, the CISG threatens to become obsolete. By excluding services from its coverage, questions arise as to when and where the Convention should apply. Whenever uncertainty arises, parties and courts are more likely to refer to domestic laws which they believe provide predictability, rather than the CISG. The fewer transactions to which the CISG applies, the less it will be viewed as a uniform commercial law upon which business can rely. The less it is viewed as a uniform law, the less likely business people will voluntarily choose the CISG to govern their transactions. This vicious cycle can eventually result in making the CISG an antiquated law that represents the way things used to be, rather than a living document that provides certainty and utility in solving the commercial problems of today and tomorrow.

     Even if a court determines that the CISG governs a particular transaction, a lack of international uniformity may render a court's decision unclear and unsupported by legal precedent. Courts will in turn make fictitious distinctions, manipulate facts to reach what appear to be sensible solutions, fail to analyze correctly the facts, and even fail to apply the CISG at all. In the United States, courts wrestling with the question whether to apply article 2 [of the U.C.C.] to . . . transactions have reached inconsistent results, often unsupported by any clear rationale and frequently predicated upon outdated pre-Code law. This outdated characterization of "goods" in the U.C.C. and the uncertainty of its application have resulted in recent efforts to amend the U.C.C., illustrating attempts to expand the benefits of sales laws to other commercial areas.

     The structure of modern international business transactions further magnifies the dangers demonstrated above. International transactions, inherently more complex because they cross national borders, rely heavily on services in order to be successfully completed. A company entering or expanding into a foreign market may use foreign affiliates, agents, franchisors, distributors, traders, merchants' and/or wholesalers. The use of these intermediaries inherently involves "service"-oriented provisions which govern the relationship between the seller and the intermediary. The expanded role of services in international goods transactions therefore confuses the issue as to whether the CISG should apply.

     Typical distributorship relationships, in which producers sign a contract with another party to sell their products in a defined territory (either on an exclusive or non-exclusive basis), provide an example. A distributor arrangement that takes place within the borders of one country may only address issues concerning the sale of goods from the producer to the distributor (such as delivery, title to goods, transportation of the goods, or defined territory). In the international context, however, contracts merely transferring title or possession of goods will not satisfy the concerns of either party because additional protection is required to guard against the risks associated with international sales. As a result of these risks, pure distribution agreements are rare in international transactions. (Mc Graw, 2001)

     International distribution contracts address a multitude of issues in addition to the transfer of goods. Issues concerning the territory within which the distributor may sell the products, provisions for advertising and public presentment of the goods, product licensing and development, the issuance of permits and licenses from foreign governments, non-competition, and trademark matters are often raised. A typical contract for the international sale of goods contains many additional issues, taking it outside the scope of a traditional contract for the sale of goods. The question is then raised: Does the CISG govern these types of contracts?

     International agency contracts also raise questions of CISG governance. Agency contracts, whether domestic or international, tend to be more service-oriented than distributorship contracts. The success of the agent rests on the agent's ability to sell products on behalf of the owner/principal, and therefore the agency agreement often includes various service-oriented elements, arguably taking it outside the scope of the CISG. However, an agent may also purchase or take possession of the goods on behalf of the owner/principal in a manner similar to typical contracts for the sale of goods. In these relationships, while the service portions of the contract are important, the ultimate purpose of the transaction is to facilitate the sale of "goods" to an eventual end user. While the service elements may be more readily apparent in an agency contract than in a distributor contract, it may still be unclear whether the CISG should govern an agency contract.

     Whether international distribution and agency agreements are contracts for services (governing the services provided by the agent/ distributor to the principal/seller and therefore outside the scope of the CISG) or contracts for goods (addressing the issues surrounding the transfer of title of the goods and therefore falling under the CISG) is uncertain. No international convention equivalent to the CISG exists to govern and resolve disputes that arise out of distributor and agency relationships. It is therefore unclear what law should govern the enforcement of these types of contracts. How these contracts are characterized can be important to the determination of the law that will govern their interpretation.

     Agency and distribution issues are examples of the ambiguity inherent in determining whether certain types of contracts are for the sale of goods or for the provision of services. CISG governance issues also arise in barter transactions (or counter trade transactions), where the contract price is to be paid in something other than money. Leasing contracts and consignments are also questionable. Contracts for software, which involve the sale of a tangible asset (the software), also contain provisions concerning licensing and the transfer of technology, and are therefore ambiguous as to CISG governance.

     CISG application to transactions in which title is retained for purposes of security, or in other transactions, such as settlement agreements, contracts for unfinished goods, unsevered minerals or crops is also uncertain. These examples represent only a small portion of the many types of contracts that are becoming more common in international commerce but where CISG governance is unclear.

     As evidenced by the preceding examples, the nature of international transactions has changed since the drafting of the CISG. The changing face of the industries that make up world trade, as well as the manner in which companies carry out their business and the type of relationships involved in international trade, make the line between contracts for the sale of goods and contracts for the provision of services increasingly blurred. While statisticians and economists now group goods and services together as a way to evaluate overall economic performance, commercial laws governing these private transactions have failed to follow suit. These laws, including the CISG, operate on the assumption that their coverage need only extend to transactions involving the sale of goods. While these laws are predictable and stable for the limited purpose they serve, they inadequately function within growing areas of commerce. In order to be an influential international convention, the CISG must somehow adapt to these changes.

Using The CISG As A Vehicle For Chance

     Will the international legal community continue to ignore the increasingly important and constantly expanding area of service transactions in commercial law? A number of options have been proposed in order to address the growing gaps in international commercial law, specifically with respect to the problems presented by the CISG and its failure to consider service transactions. An international convention solely dedicated to addressing service contracts is one alternative, although not presently feasible. While domestic laws may be readily amended, international laws are more difficult to amend through the international legislative process. It took over thirty years to ratify the CISG, and the final draft was a product of a long and arduous negotiating process between the members of the United Nations Commission on International Trade Law (UNCITRAL). Undertaking another convention to cover the wide range of areas involving various service industries may not, therefore, be realistic. Revising the Convention to accommodate additional areas of commercial law is also not a reasonable alternative, due in large part to amendment difficulties.

     While it is possible to rely on other international conventions when interpreting and enforcing commercial agreements involving services, such conventions do not provide the CISG's ability to harmonize international commercial law. The CISG's strength and influence stems from the fact that it is a self-executing treaty, unlike many other international commercial conventions. The CISG applies as if it is the domestic law of each Contracting State and provides individuals residing in a Contracting State with the ability to enforce their rights or demand performance of another party's duty by referring directly to the rules of the Convention. When confronting an issue involving the international sale of goods, nations with differing laws are therefore able to apply identical law and legal principles. This binding and mandatory nature of the CISG allows it to have a great influential effect on the domestic laws of many countries, as well as on the laws of the international community. (Alan Stewart, 1998)

     On the other hand, many parties choose to have their transactions governed not by the CISG, but by restatements of international law or by procedures established through private arbitration. Yet while the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) and the ICC Rules of Arbitration provide parties with alternative dispute resolution options, neither is binding law. These rules have limited influence in international law because their use requires that parties to a particular transaction voluntarily "opt in" for them to govern. The resulting inconsistency in the use of these conventions makes their application arbitrary. Moreover, the lack of sufficient ratification of other international conventions has resulted in fewer viable alternatives in the international legal community.

     The CISG is a body of law that is mandatory and binding on member states and is therefore the best vehicle to address gaps in international law. The CISG, more than any other international commercial medium, provides a uniform set of rules which can influence the structure of commercial transactions and provide predictability in the interpretation of international contracts. The Convention, however, must remain an influential and viable body of law if it is to successfully address gaps in international commercial law. The CISG cannot remain influential if it is inapplicable to a majority of the commercial transactions occurring in the world today. The CISG, therefore, needs to be broadly interpreted so that it may encompass many of today's transactions. A narrow construction would make it inapplicable to many modern day commercial transactions and would only damage its potential for longevity.

     The flexibility of the CISG can be affirmed in the area of service transactions. The CISG should be viewed as an adaptable body of law that accommodates service-oriented contracts. The legislative history and language of the Convention support such an approach. The Sales Convention must be read and applied in a manner that permits it to grow and adapt to novel circumstances and changing times. Any expansion, however, must be implemented carefully and in accordance with the intent of the Convention. This raises two important questions: (1) How should the Convention be interpreted; and (2) How far can it be expanded? Disagreements regarding how closely courts should adhere to rules and procedures and the goals of treaty interpreters are primary reasons for non-uniformity of interpretation of international treaties.

     A primary goal of the CISG was to create uniformity in the application of international commercial law and to facilitate international transactions through the elimination of inconsistent treatment by different countries in various contractual obligations. The goals of harmonization and unification of international commercial law can best be realized by interpreting the Convention in a manner that will encourage its wide application. Universality is the primary policy concern in problems dealing with Convention applicability. Universality is furthered if the Convention text is widely applied and contracts for all but excluded materials are considered sales of goods. (Alan Stewart, 1998)

Conclusion

     The intent of the drafters of the CISG supports applying the CISG in a way that makes it applicable to the ever-changing world of international business. The drafters of the CISG sought to replace the multitude of foreign laws which were previously applicable to foreign transactions with a single system of internationally adopted uniform rules. These principles support giving a broad reading when determining the types of contracts to which the CISG should apply. When judges and lawyers are called upon to decide whether the CISG should apply in specific instances, deference should be given to a broad and wide effect of the CISG. This will allow the Convention to gain the importance and recognition which is needed if it is ever to have the effect that its drafters hoped. The ultimate applicability of the CISG should not depend on whether a specific transaction involves goods, services, exchanges in action, money or commodities. Rather, the focus of the applicability of the CISG should be whether the rules of the Convention make sense in each of the circumstances where those rules are applied. When this can be achieved, the CISG will truly present a useful tool in international commercial law. (David Broom, 2002)

     Alan Stewart, 1998. Commentary on Professor Kastely's Rhetorical Analysis, 8 Nw. J. Int'l L. & Bus. 623-639.

     D.A. Walsh & K.W. Ryan, 1997. Harmonisation and Standardisation of Legal Aspects of International Trade, 51 Austl. L.J. 608-620.

     David Broom, 2002. Private International Law and the U.N. Sales Convention, 21 Cornell Int'l L.J. 487-533.

     Mc Graw, 2001. The New Legal Regime for International Sales Contracts, 2 Rev. Int'l Bus. L. 107-113.

     Peter Winship, 1990. Energy Contracts and the United Nations Sales Convention, 25 Texas Int'l L.J. 365-379.

     Peter Winship, 1991. Domesticating International Commercial Law: Revising U.C.C. Article 2 in Light of the United Nations Sales Convention, 37 Loy. L. Rev. 43-92.

     Peter Winship, 1999. An Introduction to the United Nations Sales Convention, 43 Consumer Fin. L.Q. Rep. 23-33.

     Robert B. von Mehren & David W. Rivkin, Sept. 1999. Contracts for the International Sale of Minerals, 2 J. Int'l Arb., No. 3, at 49-67.

     Steven Walt, 1991. For Specific Performance Under the United Nations Sale Convention, 26 Texas Int'l L.J. 211-251.