CISG – APPLICATION IN LEGAL PRACTICE IN VIETNAM
The United Nations Convention on Contracts for the International Sale of Goods (“CISG”), drafted and adopted by the United Nations Commission on International Trade Law (UNCITRAL), is a multilateral treaty that establishes a uniform framework for international commerce. The CISG has been recognized as the most successful attempt to unify a broad area of commercial law at the international level. The treaty facilitates international trade by removing legal barriers among state parties (“Contracting States”) and providing uniform rules that govern most aspects of commercial transactions, such as the formation of a contract, the means of delivery, parties’ rights and obligations, remedies for breach of contract, exemption from liability, etc.
On 18 December 2015, Vietnam officially ratified the CISG which took effect on 1 January 2017 and became the eighty-fourth state party to the convention. This means that any entities entering into contracts with Vietnamese parties should carefully consider if the CISG governs their transactions. In this paper, we will provide a comprehensive analysis of the CISG under Vietnamese law and guidance as to whether to exclude the application of the CISG when choosing Vietnamese law as the governing law of the contract.
Scope of the CISG
As its name expressly indicates, the CISG applies to contracts of sale of goods (as opposed to the sale of services). However, the CISG does not apply to sales of goods bought for personal, family or household use, stocks, shares, investment securities, vessels, aircraft, etc.
Even for contracts of sale of goods, the CISG does not govern every aspect of the transaction. It only governs the contract formation and the rights/obligations of the parties under the contract. However, Vietnam has reserved the CISG regulations relating to the form of sales and purchase of goods contract which provide that a contract does not need to be signed or be confirmed in writing or be subjected to any other requirement. Thus, the parties to international sales and purchase of goods contracts are still subject to the written form requirement in accordance with Vietnamese laws on commerce.
The CISG applies to contracts between parties whose places of business are in different countries where both countries are the Contracting States. It is the place of business not the nationality of the parties to be taken into account when determining the application of the CISG.
More specifically, the CISG specifies its sphere of application as follows:
1) When the States (places of business) are Contracting States; or
2) When the rules of private international law lead to the application of the law of a Contracting State.
The first scenario the CISG specifies is a contract of sale of goods between two different Contracting States (e.g., between Vietnam and Japan). If one of the parties has its place of business in a non-Contracting State, the CISG might not apply. However, if the parties choose the law of a Contracting State as the governing law of the contract, then the CISG will apply. For instance, the CISG might not apply to a contract of sale of goods between a Vietnamese party and an Indonesian party since Indonesia is not a Contracting State. Nonetheless, if such contract specifies the Vietnamese law as the governing law, then the CISG will apply as this is the case where “the rules of private international law lead to the application of the law of a Contracting State”.
It is important to check whether the CISG prevails the domestic law of the governing law State. Under Vietnamese law, the CISG will prevail if there is any discrepancy between the CISG and Vietnamese law. Enterprises should stay well-noted that the CISG can be applicable even if the sale contract does not specifically name the CISG as part of the governing law. It is also worth noting that the parties are free to exclude the application of the CISG when entering into a contract of sale of goods.
Comparison between the CISG and Vietnamese laws
There are many similarities between the CISG and Vietnamese law such as the recognition of the principle of freedom of contract, the principle of good faith-honesty, the principle of application of customs and commercial practice, the revocation of an offer, rights and obligations of the parties, and etc.
However, it should be noted that the CISG does not govern every issue that can arise from an international sales contract, e.g., issues concerning the validity of the contract, or the effect of the contract on the property in the goods sold. Questions concerning matters governed by the CISG but not expressly settled therein are to be settled in conformity with the general principles of the CISG on which it is based or, in the absence of such principles, by reference to the law applicable under the rules of private international law.
On the other hand, when there is conflict or non-conformity between the CISG and Vietnamese laws (or any other domestic laws), CISG shall prevail. In our experience of legal practice, especially in arbitration, we have recognised some of the most common and important issues that are covered differently under the CISG and the Vietnamese law, some of which are:
(i) Suspension of contract performance
Under the Civil Code of Vietnam, the party which is required to perform its obligation first has the right to suspend the performance of such obligation, if the other party’s ability to implement the contract has been severely impaired to an extent that the said obligation cannot be fulfilled as agreed, until the other party recovers the ability to perform its obligation or there are other security measures. According to the CISG, in addition to the contractual performance ability, a party may also suspend the performance of its obligations if it becomes apparent that the other party will not perform the contract as a result of his conduct in preparing to perform the contract. In this case, the CISG prevails the Civil Code of Vietnam, i.e., a party to a sale contract may suspend its performance when the other party declares that it will not perform a contract, or if it does not have any acts of preparation for performance of the contract, which are very common in practice.
(ii) Specific performance order
Vietnam’s Law on Commerce allows the aggrieved party to apply for a specific order of either repair or replacement of the defective goods. The CISG, on the contrary, clearly states that the aggrieved party may only require delivery of substitute goods if the lack of conformity in goods constitutes a fundamental breach of the contract. In other words, unless the breach is fundamental, repair is the only specific performance available under the CISG.
CISG’s solution appears to be more reasonable in terms of the interests of the breaching party. If the defect in the goods is repairable, the aggrieved party should allow the breaching party to repair the goods, rather than request for a new replacement of the goods, which would cost much more than just goods reparation.
(iii) Damage compensation
Under the Vietnamese law, compensatory damages include the actual and direct loss suffered by the other party due to the breach of the breaching party and the direct profit which the aggrieved party would have earned if such breach had not been committed, emphasizing on the “actual” and “direct” factor. . Under CISG, damages for breach of contract consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach, emphasizing on the foreseeability of such loss at the time of the conclusion of the contract. This means that the claimable damages under the CISG do not neccesarily have to be direct, e.g., loss of reputation, loss of business opportunity, legal fee, etc.
(iv) Interest rate on refunded amount
According to Vietnamese laws, in general, where a party is obliged to pay and makes late payment, it then must pay interest on the unpaid amount “corresponding to the late period”. Whereas, persuant to the CISG, in the particular case where the seller is bound to refund the price, he must pay interest on it “from the date on which the price was paid”. Since the date of payment and the date of the comitted refund can be different, this difference should be noted to best protect the rights and interests of the concerned parties.
Above are just a few differences between the CISG and Vietnamese domestic laws. However, it should be emohasized that these differences do not create an antagonistic conflict between the CISG and the Vietnamese law on the sale and purchase of goods. These two systems complement each other, and each system plays different roles: CISG is applied to international goods sale and purchase contracts, while Vietnamese law is applicable to domestic contracts.
CISG is a unified legal instrument that is widely applied accross the world and has greatly benefited many businesses. It creates a level-playing field and provides for much better negotiations with foreign contracting parties due to its widespread use and applicability. Embracing and adopting CISG regulations will save time and costs, as well as limit risks for Vietnamese businesses.
However, since CISG was drafted nearly 40 years ago, it does not yet have regulations governing new legal issues in international trade, e.g., e-commerce. In these cases, it is still possible to apply the basic principles of the convention for resolution. And although many major trading partners in the world are already members of CISG, there are still some important partners of Vietnam that have not joined this convention. Most notably are the United Kingdom, India, and most ASEAN countries.
Therefore, in order to successfully apply the CISG, enterprises should be careful and well-educated when referring to this convention.