CISG and Harmonization of Asian Contract Law

Luca G. Castellani ∗

Introduction

International trade and investment are commercial operations of critical

importance for economic development that pose peculiar legal challenges. Cross-border
transactions require the conclusion of several contracts (e.g., relating to sale of goods,
transport, financing, dispute resolution), each of them with one or more foreign
element; international investments demand a dedicated legal framework to ensure
predictability of their various phases. The adoption of uniform commercial texts is
commonly seen as the most effective method to ensure that modern, efficient and
predictable legislation is enacted.

Recognizing such needs, the United Nations General Assembly has established in
1966 the United Nations Commission on International Trade Law (UNCITRAL), tasked
with the goal to pursue the "progressive harmonization and unification of the law of
international trade". 1 In taking such step, the General Assembly recognized that
different legal provisions in the various jurisdictions constitute a major obstacle to
international trade; it further affirmed that international trade is an important element
in the promotion of friendly relations among countries, thus contributing to the
achievement of peace and stability; and it stressed that developing countries would
particularly benefit from “the betterment of conditions favoring the extensive
development of international trade”, including the widespread adoption of uniform
trade law.

Since sale of goods contracts are widely recognized as the backbone of

international trade, it is not surprising that attempts to prepare a uniform text for such
contracts began already around 1930. After a stop due to Second World War, work
restarted and led to the adoption of two treaties in 1964, the Uniform Law on the
Formation of Contracts for the International Sale of Goods (ULF) 2 and the Uniform Law
on the International Sale of Goods (ULIS). 3 ULF and ULIS represent a significant
intellectual effort; however, they did not attract broad participation from States due
also to the fact that their drafting process had taken into account mostly Western
European legal traditions. As the need for such text remained compelling, it was decided
to assign the task to UNCITRAL in light of its universal composition ensuring a

∗
Luca Castellani Head, UNCITRAL Regional Centre for Asia and the Pacific, Incheon, Republic of Korea. The
views expressed herein are those of the author and do not necessarily reflect the views of the United
Nations.
1
United Nations, General Assembly Resolution 2205 (XXI) of 17 December 1966 (“Establishment of the
United Nations Commission on International Trade Law”).
2
United Nations, Treaty Series, vol. 834, p. 169.
3
United Nations, Treaty Series, vol. 834, p. 107.

1
comprehensive and inclusive approach.

Thus, one major early achievement of UNCITRAL was the conclusion in 1980 of
the United Nations Convention on Contracts for the International Sale of Goods (“CISG”,
or “the Convention”), 4 preceded in 1974 by the Convention on the Limitation Period in
the International Sale of Goods (the "Limitation Convention"). 5 The Limitation
Convention was eventually amended in 1980 to align its provisions on the scope of
application with those of the CISG, which it complements functionally.

The relevance of the CISG for international trade

The CISG provides a modern, uniform and fair regime for the settlement of
disputes relating to the international sale of goods, introducing certainty in commercial
exchanges and thus decreasing transaction costs. It is therefore considered one of the
core treaties in international trade whose universal adoption is particularly desirable.6
The adoption of its provisions, which were specially tailored for cross-border exchanges,
assists in more efficient contract management and may lead to a more equitable result
in case of litigation.7

The CISG has currently 79 States parties, 8 representing all legal traditions and
levels of economic development. Those States include most major trading countries,
accounting for more than two-thirds of global trade. In fact, the CISG is a key
component of an enabling environment for international trade. Moreover, the CISG has
an enabling effect on cross-border exchanges with respect to bilateral and regional free
trade agreements.

Some remarkable features of the CISG

The CISG is a text conceived specifically for international trade. Its fundamental

4
United Nations, Treaty Series, vol. 1489, p. 3. Additional information on the CISG, including its updated
status, is available on the UNCITRAL website at
http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html
5
United Nations, Treaty Series, vol. 1511, p. 3. Additional information on the Limitation Convention,
including its updated status, is available on the UNCITRAL website at
http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1974Convention_limitation_period.html
6
For an extensive list of arguments in support of India’s accession to the CISG, see Kartikey Mahajan and
Kanika Sanwal, The Case for a Uniform Sales Law and CISG in India, 20 International Company and
Commercial Law Review 359 (2009), at 364-367. Similar arguments may be found, e.g., in: Emmanuel
Laryea, Why Ghana should implement certain international legal instruments relating to international sale
of goods transactions, 19 African Journal of International and Comparative Law / Revue africaine de droit
international et comparé 1 (2011); Christian Nick, The Case for Ireland's Accession to the UN Convention
on Contracts for the International Sale of Goods, 32 Dublin University Law Journal 346 (2010); Eunice
Gichangi, The United Nations Convention on Contracts for the International Sale of Goods: a case for
ratification by Kenya, 1 Kenya Law Review 305 (2007).
7
John Y. Gotanda, Assessing Damages in International Commercial Arbitration: A Comparison with
Investment Treaty Disputes, Investment Treaty Law: Current Issues III 75 (British Institute of International
& Comparative Law, 2009).
8
As of 20 August 2013.

2
underlying principle is freedom of contract: parties are free to vary its provisions or to
opt out at will, as long as they can reach an agreement on how to do so.

Related to the principle of freedom of contract is that of freedom of form: the

contract for sale of goods may be concluded in any form, 9 unless the contracting State
has lodged a declaration to the contrary. Such principle reflects prevailing global
business practice. Both the principle of freedom of form and that of freedom of contract
stem from the desire to enable the engagement of individuals in binding legal relations
as they deem fit. Moreover, freedom of form has proven useful lately in facilitating legal
recognition of electronic means, whose ubiquitous use is nowadays prevalent.

Another paramount consideration reflected in the CISG relates to the fact that
cross-border trade typically involves more transaction costs than domestic one.
Transport charges are the most evident but not the only component of those additional
costs. Transaction costs further accrue in case of dispute. It was therefore deemed
advisable to preserve the effects of the contract insofar as possible, and to favor curing
any deficiency in performance rather than offering immediate contract termination. This
approach explains why under the CISG the contract may be declared avoided only if a
fundamental breach has occurred, and often after offering an additional opportunity to
perform to the part in default. Fundamental breach of the contract is a breach that
deprives one of the parties, in full or essentially, of its reasonable expectations: 10 if a
breach is not fundamental, other tools are at disposal to reestablish contractual balance,
including compensation of damages.

Benefits arising from the adoption of the CISG

The adoption of the CISG increases the predictability of the law applicable to the
contract for the international sale of goods, thus simplifying the resolution of disputes
arising from those contracts. Therefore, the CISG may contribute to decrease the
duration of litigation and to reduce associated costs, including judiciary workload.

a) The CISG avoids disputes on the choice of applicable law during contract negotiation

Parties to a contract usually prefer applying their own national law and choosing
their domestic forum in case of litigation. The party economically more powerful may
impose its choice. Alternatively, a compromise may be reached by choosing the law of a
third country.

Moreover, contracts for sale of goods concluded with parties located in a

developing country usually do not contain the choice of the domestic law of that

9
CISG article 11: “A contract of sale need not be concluded in or evidenced by writing and is not subject
to any other requirement as to form. It may be proved by any means, including witnesses”.
10
CISG art. 25: “A breach of contract committed by one of the parties is fundamental if it results in such
detriment to the other party as substantially to deprive him of what he is entitled to expect under the
contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same
circumstances would not have foreseen such a result”.

3
country as applicable law. This may happen for a number of reasons, ranging from the
difficulty in accessing that law to the distribution of bargaining power. Hence, the law
chosen will be the domestic law of the party located in the developed country or the law
of a third (economically developed) State, such as that of the seat of arbitration. In both
cases, the party located in the developing country is likely to have limited or no prior
knowledge of that law.

In such cases, the cost of applying unfamiliar provisions can be significant. In

particular, contractual management poses great challenges when the applicable rules
are little known. This may lead to involuntary non-compliance and, in case of dispute,
hinder the possibility of a settlement. The problems are magnified if limited access to
qualified legal counseling is available, as is often the case for small and medium-sized
enterprises.

The CISG is a uniform supranational text and, as such, it is neutral with respect
to the domestic laws of the parties to the contract of sale. The duty of uniform
interpretation (art. 7) further strengthens that neutral character and reinforces the
confidence of commercial operators in its application. Hence, its use as applicable law
helps avoiding discussions on the choice of the law of the contract. Moreover, the ability
of the CISG to balance conflicting interests makes its provisions acceptable to all parties.
In addition, information on the CISG’s interpretation and application is readily available
in several languages, and when the CISG is already in force in the States where the
parties have their place of business, those parties are already familiar with its provisions.
All of these elements concur to enable efficient contractual management and, if need be,
dispute resolution.

b) The CISG simplifies the application of private international law rules

In other cases, the contract for sale of goods does not contain a choice of law.
Companies located in developing countries and, in general, small and medium-sized
enterprises usually cannot afford qualified legal counsel and therefore are more likely to
neglect that choice.

Absent a choice, the court or the arbitral panel needs to identify the law
applicable to the contract by virtue of the rules on conflict of laws. Such exercise is often
complex and time-consuming. Moreover, it might lead to the application of different
laws depending on the forum seized, due to the difference in private international law
rules adopted in the various jurisdictions, thus affecting legal predictability.

The CISG applies directly to contracts concluded between parties with place of
business in contracting States absent a different choice by those parties. This avoids
recourse to rules of private international law to determine the law applicable to the
contract, adding significantly to the certainty and predictability of international sales
contracts and eliminating procedural disputes. Thus, dispute resolution may be quicker
and more efficient.

4
 Assessing the use of the CISG…

a) With respect to formal adoption

The CISG has been formally adopted by 79 States in 33 years. A few more States
have completed internal procedures and the deposit of their instrument of accession is
forthcoming. The CISG remains the second most adopted treaty in the field of
international trade law, after the Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, 1958 (the “New York Convention”).11 In these terms alone, it is
difficult to deny that the CISG is a success, and one that is becoming more evident as
States join it at regular pace.
However, a more accurate analysis may highlight further interesting trends.
State parties to the CISG are mostly in the Northern Hemisphere and in Latin America,
but the CISG has so far received only limited acceptance in Africa and Asia. 12 This is
particularly unfortunate given that, as a result, the benefits arising from the CISG are not
available to merchants in many developing countries.
Recent accessions to the CISG are particularly significant: Brazil, Japan and
Turkey are among the newcomers. Those States are major traders and regional hubs. An
imitation effect on smaller countries is likely to happen.
In order to support that trend, it is imperative that the importance of the CISG is
fully acknowledged. This importance is not limited to predictability of commercial law
and the smooth functioning of trade mechanisms to foster economic development, but
it extends to good governance and the rule of law. International actors, especially aid
donors, should assist in bridging capacity and awareness gaps that prevent broader CISG
adoption.

b) With respect to actual use

One frequent remark on the relevance of the CISG relates to its actual use.
Indeed, it is often said that practitioners advise their clients to opt out of the CISG as a
default choice. This practice has created a perception by commentators that the CISG is
a remarkable piece of legal theory with limited practical impact.

However, this hearsay evidence is not substantiated by actual figures, which

actually indicate a change in the actual use trend with a prevalence of “opting in” in

11
United Nations, Treaty Series, vol. 330, p. 38.
12
Indeed, all major trading countries in the Northern Hemisphere are already a party to the CISG, with
the exception of the United Kingdom, where the discussion over the accession to the CISG is well
documented: S. Moss, Why the United Kingdom Has Not Ratified the CISG, in 25 Journal of Law and
Commerce 483 (2005-2006); A. Mullis, Twenty-Five Years On – The United Kingdom, Damages and the
Vienna Sales Convention, in Rabels Zeitschrift für ausländisches und internationales Privatrecht, 2007, p.
35; R.S. Borges, The United Kingdom and the UN Convention on Contracts for the International Sale of
Goods (CISG): to Ratify or Not to Ratify?, in 14 Journal of International Maritime Law 331 (2008).

5
certain jurisdictions, such as China.13

Moreover, and most importantly, comments on the opting out rate miss the
central issue: opting out does not take place against the CISG provisions, but in
accordance with those provisions. In other words, the guiding principle of the CISG is
party autonomy: the CISG has no hegemonic ambition. If parties believe that they can
find a more efficient contractual framework for their transaction, the CISG encourages
them to do so. Of course, if parties – or, better, their counsels – decide to opt out
without proper case analysis, they shall face the consequences of an inefficient choice. 14

c) As a source of inspiration for other legislative projects

Recently, academic (and not only) discussions on the CISG have been revived by
the introduction by the European Commission of a Proposal for a Common European
Sales Law (CESL). 15 The importance of the CESL outside the European Union should not
be underestimated: in fact, the CESL, in its current draft, could apply also to commercial
transactions involving small- and medium-sized enterprises not based in the European
Union.16

While many issues could be discussed with respect to the interaction between
CISG and CESL, one point that seems relevant is that the basic structure of the CESL
owes much to the CISG. It is indeed clear that there is a lineage between the two that
runs through a number of other legislative texts, such as the UNIDROIT Principles of
International Commercial Contracts, the Principles of European Contract Law and the
Draft Common Frame of Reference.17 Those texts are well-known to academics, but
their impact on legal practice is limited when not altogether excluded by their nature.
They have in common that they significantly build on the CISG, though that intellectual
debt goes sometimes under-acknowledged.

These are mostly European endeavors, but since Europe has historically inspired
several important legal models, such experiments are followed closely and give rise to

13
Lisa Spagnolo, Green Eggs and Ham: The CISG, Path Dependence, and the Behavioural Economics of
Lawyers’ Choices of Law in International Sales Contracts, 6 Journal of Private International Law 417 (2010).
On opting out in the US, see Harry M. Flechtner, Changing the Opt-Out Tradition in the United States. U.
of Pittsburgh Legal Studies Research Paper Series No. 2010-10.
14
Lisa Spagnolo, The Last Outpost: Automatic CISG Opt Outs, Misapplications and the Costs of Ignoring
the Vienna Sales Convention for Australian Lawyers, 10 Melbourne Journal of International Law (2009)
141-216; Schroeter, Ulrich G., To Exclude, to Ignore, or to Use? Empirical Evidence on Courts’, Parties’ and
Counsels’ Approach to the CISG (With Some Remarks on Professional Liability) (to be published in Larry di
Matteo, GLOBAL CHALLENGE OF INTERNATIONAL SALES LAW, forthcoming OUP 2013; available at SSRN:
http://ssrn.com/abstract=1981742 or http://dx.doi.org/10.2139/ssrn.1981742).
15
Proposal for a regulation of the European Parliament and of the Council on a Common European Sales
Law, Brussels 11.10.2011 COM (2011) 635 final.
16
The CESL could apply also to transactions of non-EU commercial entities with consumers based in the
European Union. In this case, however, national or EU law already applies.
17
Hein Kötz, Contract Law in Europe and the United States: Legal Unification in the Civil Law and
Common Law, 27 The Tulane European and Civil Law Forum 1 (2012).

6
imitators. The most remarkable in Asia is the private project aimed at preparing the
Principles of Asian Contract Law (PACL). 18 It is, of course, exclusively to Asians to decide
whether regional specificity requires dedicated texts on contract law. However, if such
endeavor is undertaken, the recommendation to carefully consider existing global
standards in doing so and to ensure that regional legislation would smoothly interact
with that at the national and the global levels does not seem inappropriate.

Finally, the CISG remains a powerful source of inspiration also for national law
reform. This was the case in the People’s Republic of China and seems to be the case as
well in the ongoing reform of the Japanese Civil Code.

In this respect, it should again be noted that the lack of legal resources might
prevent States from fully considering the legacy of the CISG in their legislative reform
efforts. Indeed, currently there is widespread awareness of the importance of modern
legislation to enable commercial exchanges. However, that awareness usually focuses
on dispute resolution: thus, for instance, countries that intend to open up their
economy to foreign trade are usually advised – and rightly so – to become a party to the
New York Convention. They are not yet recommended to become a party to the CISG in
order not only to take advantage from all the benefits listed above but also to build local
capacity in the field of contract law, which eventually can be useful also for domestic
law reform. This is a perspective that clearly needs to be included in the prevailing
discourse.

The CISG in South East Asia: status and perspectives

South East Asian States are an integral part of East Asian supply chains, which
span from Japan to Australia. Those supply chains are structured and constantly
fine-tuned to maximize profits: their efficient management is a priority, and diversity of
applicable laws may create uncertainty in the applicable legal framework, thus
increasing transaction costs. The fact that East Asian commercial law is eclectic, having
been influenced by European models of common and civil law, and, in the civil law, as
vastly different as are the French and the German legal systems, by US common law, by
local sources and by Islamic law further increases the challenges in identifying the
applicable law and ascertaining its content.
Moreover, East Asia has not chosen to pursue close regional economic
integration, along the lines, for instance, of the European Union. Rather, it seems
oriented towards a looser harmonization model under which free trade agreements are
complemented by an enabling legal environment built on the voluntary adoption of
global uniform texts by States.19 In other words, East Asian States seem to hesitate in
transferring legislative competence to a supranational entity.

18
Shiyuan Han, Principles of Asian Contract Law: An Endeavor of Regional Harmonization of Contract Law
in East Asia, 58 Villanova Law Review 589 (2013).
19
Thus, the States members to the North American Free Trade Agreement (NAFTA) and to the Dominican
Republic – Central America Free Trade Agreement (CAFTA-DR) have de facto adopted certain UNCITRAL
texts, such as the New York Convention or the CISG, as their common law for international trade.

7
 The Association of Southeast Asian Nations (ASEAN) probably represents the
most advanced experiment in economic integration in the region; however, its reach has
not yet directly covered the law of international business transactions. Harmonization
and, sometimes, unification is therefore pursued through the adoption of uniform
global standards.
In the field of international sale of goods, ASEAN has adopted the important
ASEAN Trade in Goods Act (ATIGA), which needs to be paired with the CISG in order to
effectively facilitate regional exchanges. 20In fact, the two treaties are complementary,
as they deal, respectively, with private law and public law aspects of that trade.
Moreover, the accession to the CISG by all major East Asian trading nations outside
ASEAN 21 provides a significant example and incentive to ASEAN Member Nations.
It seems therefore likely that Singapore will not remain alone in ASEAN as a
State party to the CISG for much longer. Vietnam has taken the lead in that respect since,
after thorough consideration and a public consultation process, the Prime Minister has
in January 2013 made a decision to move in that direction. Thailand might follow soon
given the interest expressed in that country, and positive signs towards CISG adoption
may be seen in Indonesia and the Philippines, too. Hopefully, once the movement
towards accession reaches a critical mass, it will involve all ASEAN member nations, thus
providing a major contribution to the establishment of a global sales law.

20
Bruno Zeller, Facilitating Regional Economic Integration: ASEAN, ATIGA, and the CISG, in Ingeborg
Schwenzer and Lisa Spagnolo (eds.), TOWARDS UNIFORMITY: THE 2ND ANNUAL MAA SCHLECHTRIEM CISG
CONFERENCE, The Hague, 2011, 255-267.
21
With reference to East Asian supply chains, as defined above, these nations include Australia, China,
Japan, New Zealand and the Republic of Korea.