OSUNA GONZALEZ Y ASOCIADOS, S.C.
ABOGADOS - ATTORNEYS AT LAW
A Mexican Law Firm Specializing in Cross-border Dispute Resolution and Arbitration
By Alejandro Osuna
It has been over twenty five years since the United Nation’s Convention on Contracts for the International Sale of Goods (“CISG” or “Convention”) came into effect, and yet, many businessmen and lawyers on both sides of the border are unaware that it even exists, not withstanding the fact that 73 nations have ratified it.
The CISG was drafted by a working group created by the United Nation’s Commission on International Trade Law (UNCITRAL), under the chairmanship of the late Professor Jorge Barrera Graf, one of Mexico’s brightest legal minds. The work took over a decade to complete, but was finalized when a meeting was convened in the Spring of 1980 in Vienna, Austria, to discuss the final details of what was to become the CISG. The final text was adopted on 11 April of 1980, and became effective in the US in 1988 and came into effect in Mexico the following year. It has also been ratified by Canada, making the international sales for the NAFTA Marketplace.
Rule of Application
As a general rule, the CISG will apply when buyer and seller are located in different Contracting States (art. 1(1)(a)), unless the parties effectively opted out of the Convention (See CISG art. 6). Special care should be taken if the parties want to opt out. Case law on the Convention has decided that there need to be that clearly excludes the CISG. For example, language such as the “laws of Mexico will govern” has been deemed not be an effective exclusion since Mexico is a State that ratified the Convention, and thus, is one of the “Laws of Mexico”. The CISG can also apply by way of the rules of private international law, unless the State has made an article 95 declaration (such as the US) which excludes it application under these rules. In cases where one of the parties is not from a Contracting State, the parties may opt-in, but the effectiveness of such a choice of law clause would depend on domestic laws, though this right has been generally recognized throughout the world.
Pursuant to its wording, the CISG applies to contracts for the “Sale of Goods”, though not defined, means tangible goods, although there is authority saying that it may apply to software provided it is sold in tangible media, as opposed to downloaded software.
The Convention’s article 2 excludes certain sales from its scope. Sales of goods for personal use are generally excluded, out of the concern that it could impair certain protections afforded under domestic consumer protection laws. Also excluded are auctions sales, and sales made by operation of law (court ordered auctions, goods sold by governmental authorities, etc.). Sales of negotiable instruments and money are excluded, because these are in fact rights incorporated to paper (usually rights to receive money or corporate rights), though an exception should be made to the sale of documents that represent goods, such as bills of lading or warehouse receipts. Also excluded from the CISG are sales of ships, aircraft, and hovercraft. However, these can be made to be governed by the Convention due to its article 6 which allows parties to exclude it or to establish exceptions to it. The CISG also excludes sales of electricity.
Scope of the Convention
Pursuant to article 4 of the CISG, it governs the formation of the contract and the rights and obligations of the seller and buyer stemming from said contract. Though expressed briefly, these are big words when it comes to obligations and rights, since it excludes most if not all of the domestic provisions that would have otherwise been governed by Article 2 of the UCC, or by the Mexico’s Commerce and Civil Codes.
Some Changes brought on by the CISG
From both the Mexican Law and the US law perspective, the changes brought on by the coming into force of the Convention are not negligible. For a U.S. lawyer, some of the most obvious differences rest on the fact that the Convention does not have a writing requirement. A contract can be verbal and it existence and contents can be proven by witnesses, a big departure from the UCC. (See UCC Section 2-201 and compare to CISG arts. 11 and 29). The Convention also does away with the UCC’s parole evidence rule (See UCC Section 2-202 and compare to CISG art. 8). For an interesting case highlighting the differences between the UCC and the CISG on the parol evidence rule, see MCC-Marble Ceramic Center v. Ceramica Nuova D'Agostino, United States 29 June 1998 Federal Appellate Court [11th Circuit].
From a Mexican perspective, the Convention has major differences vis-à-vis Mexican Law. Some of the most notable is the fact that in cases where the parties did not agree on a date or place for payment, a formal demand is required under Mexican Law. The CISG specifically does away with this requirement under its article 59, and makes it clear that payment is due at the time the seller places the goods or documents controlling them at buyer’s disposal (See CISG art. 58). Regarding this important change, see Banks Hardwoods California LP v. Jorge Angel Kyriakidez Garcia), decision of 30 August 2005, City of Tijuana, State of Baja California, Mexico, Sixth Civil Court of First Instance. This change has caught more than one Mexican lawyer and judge off guard.
Another important departure are the Convention’s various provisions allowing avoidance of the contract by way of a notice, which would allow a party to a cancel a contract in those instances where the other party has committed a fundamental breach of contract. Under Mexican Law, the general rule is that you have to sue to get a court declared rescission of a contract. Another important departure is that under Mexican Law, a party that is suing for breach must be current with its own obligations so that it may be entitled to obtain redress from a Mexican court. The Convention is more practical, and does not require such wasteful conduct (See CISG articles 71 and 73 on prospective non-performance). Mexican Judges have not fully grasped these differences, as evidenced in Agrofrut Rengo, S.A. (Chile) vs. Levadura Azteca, S.A. de C.V. (Mexico), a case that was wrongfully decided by the Mexican Courts at all levels. The case involved a Chilean seller of canned products, who had suffered a delay in delivering the goods. Using late delivery as an excuse, the Buyer decided to cancel some of the pending deliveries and refused to pay the price for the goods it did receive. The buyer then sued for the price of the delivered items, as well as for damages resulting from buyers wrongful avoidance, basically, the profits that it would have earned had the buyer paid for the goods. All of the courts denied the request for damages, because Seller had not provided evidence that it had in fact produced the goods, a precondition that is necessary under Mexican Law, but not under the CISG. In fact, the seller was actually under a duty not to produce the goods because he was obligated to mitigate his losses per article 77 of the Convention.
The biggest mistake committed by the Mexican Courts is the fact that the judges felt it necessary to run towards more comfortable turf, applying rules from the Mexican Civil Code that had been displaced by the Convention. Secondly, the Mexican Courts were obligated to consider the substantial amount of international case law that developed around the CISG, that even if it is not binding, judges and arbitrators are obligated to look at per article 7(1) of the Convention, with a view to promoting its uniform application. A quick review of the relevant cases could have alleviated this “homeward trend” exhibited by the judges, but again, it is not altogether clear whether this was even considered by counsel for Seller. Though many Mexican lawyers may be a bit skeptical as to whether judges will look at comparative case-law to interpret the CISG, a somewhat recent decision from the Mexican Federal Circuit Courts discussed that international case law interpreting human rights treaties could serve illustrate Mexican judges as to how to apply them. (See JURISPRUDENCIA INTERNACIONAL. SU UTILIDAD ORIENTADORA EN MATERIA DE DERECHOS HUMANOS. Amparo directo 623/2008. Procuraduría General de la República y otras. 23 de octubre de 2008 (Registro No. 168312). There should be no reason as to why the same criteria Could not be applied to those cases governed by the Convention, particularly because it contains a rule mandating that due regard be given to the need to promote its uniform interpretation.
Changes to the Rule Concerning Notice of Lack of Conformity of Goods
Another important departure, from the Mexican Law perspective, is the notice requirement in cases involving defective goods. Under Article 383 of the Mexican Commerce Code, after a buyer has received the goods, he has but 5 days to give the seller written notice regarding any lack of quality or quantity and 30 days for latent defects. Failure to give such a notice to seller will cause buyer to lose his entitlement to sue for damages. The CISG on the other hand, has flexible language that requires that a buyer give notice to the seller within a reasonable time after he became aware or should have become aware of the lack of conformity (See CISG art. 39). The fundamental difference is the moment at which the period to give notice starts to accrue. While under Mexican law the stop-watch starts to run upon delivery and fixes specific periods (5 and 30 days depending on the type of lack of conformity), the Convention’s stop-watch starts to run from the moment the lack of conformity was discovered or should have been discovered and does not distinguish between latent or hidden defects. This is so because often times, the buyer does not discover the defects until he has begun to sell the goods, or has put them through some sort of processing that makes their lack of conformity evident.
Why know the CISG?
As stated in a seminal article written by University of Pittsburgh Professor Ronald Brand, “[f]ailing to determine the law that governs a contract (particularly when it is the law of the United States) is probably malpractice. (See Ronald A. Brand, Professional Responsibility in a Transnational Transactions Practice, 17 J.L. & Com. 301, 336-37 (1998)). U.S. Lawyers should become aware of the Convention and hope to obtain at least some working knowledge of it. Mexican Lawyers should do the same. Though our professional liabilities are not as strict as in the U.S., we could still face lawsuits for “blowing” a case for not arguing the applicable law, and face civil liability from our own clients. Moreover, we will likely receive many cases where the parties failed to make a choice of law when contracting, making the CISG the law by default. Even in cases were we do negotiate the terms for our clients, we will not always get our way and have our UCC or our Mexican and Commercial and Civil Codes apply, so we better be prepared.
For questions or comments, write to Alejandro Osuna
Copyright, 2015, Osuna González y Asociados, S.C. All rights reserved.