Adopting the CISG – Hong Kong enhances its openness to international trade

The United Nations Convention on Contracts for the International Sale of Goods (better known as the CISG) provides a set of uniform rules for the cross-border sale of goods. Experience in other jurisdictions indicates that the adoption of a uniform and user-friendly set of rules should provide parties trading across multiple jurisdictions with greater confidence in their dealings. This should lead to lower transaction costs and greater certainty.

Use and effect

The CISG is one of the core conventions in international trade law. It was adopted in Vienna in 1980 and came into force eight years later. It forms part of the law of Hong Kong by reason of the Sale of Goods (United Nations Convention) Ordinance (Cap. 641) which was passed by the Legislative Council on 29 September 2021. Its introduction follows a six-month consultation amongst a wide variety of stakeholders that took place in 2020.

As of January 2022, there were 94 contracting states to the CISG in total, representing over two thirds of the global economy. These include some of Hong Kong's top trading partners, such as the mainland of China, the United States, Japan, Singapore, Vietnam, South Korea, Germany, France, the Netherlands, Italy and Australia.

The provisions of the CISG will prevail over those of existing Hong Kong law, subject to a right of parties to opt out. The CISG will apply to most contracts for the international sale of goods, subject to a few exceptions (see further below). It does not apply to contracts where the preponderant part is in respect of the provision of labour or services.

The Ordinance consists of only five sections and adopts the CISG in an unamended form in the Schedule. This preserves the original form and language of the CISG, which may encourage courts considering the application and interpretation of its provisions to refer and rely upon the extensive authorities and learned writings in other jurisdictions which have adopted the CISG.

Application

The CISG applies to a transaction if three requirements are met.

• There must be a contract for sale of goods (and will not apply where a "preponderant" part of the obligations consist of the supply of labour and other services, Article 3(2)).
• The contract is between parties whose places of business are in different states (Article 1(1)).
• The states concerned must either (a) be contracting states to the CISG (Article 1(1)(a)) or (b) the rules of private international law lead to the application of the law of a contracting state (Article 1(1)(b)). Some states have opted out of part (b) of this test, Hong Kong has not done so.

The CISG will not cover contracts between parties whose places of business are in Hong Kong and mainland China respectively, although it is understood that discussions are underway with respect to the possibility of a mutual arrangement, following favourable comment during the consultation. We wait to see how this might develop.

The CISG will apply to contracts of sale of goods, meaning items that are "moveable and tangible" at the time of delivery. This includes livestock, plants and materials, minerals and growing crops. The CISG does not include intangible rights such as intellectual property, company shares, assigned debts and so on.

Exclusions

Under Article 2, the CISG does not apply to sales:

• of consumer goods (i.e. goods purchased for personal, family or household use, unless the seller knew or ought to have known that the goods were purchased for any such use).
• by auction.
• on execution or otherwise by authority of law.
• of stocks, shares, investment securities, negotiable instruments or money.
• of ships, vessels, hovercraft or aircraft.
• of electricity.

The CISG governs the formation of a contract of sale and the rights and obligations of the seller and the buyer arising from the contract. The CISG is not concerned with the validity of the contract or its provisions; the effect of the contract on the property in the goods sold (for example, retention of title clauses) and issues to do with product liability (Articles 4 and 5).

There are some contracts that are expressly not covered by the CISG, including where a party orders goods to be manufactured yet undertakes to supply a substantial part of the materials necessary for the manufacture (Article 3(1)) and contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services (Article 3(2)).

Opting out

As form 1 December 2022, the CISG will apply by default to international contracts where the conditions are met. However, under Article 6, parties to the contract may agree to derogate from or vary the effect of any provisions within the CISG or exclude the CISG's application in its entirety. It is therefore important that clients consider whether they want the CISG to apply to their contracts and, if not, add appropriate language to their contracts.

Opting out can be done by parties expressly agreeing that the CISG is excluded, by including in their written contract provisions replacing some or all the CISG provisions, or by choosing the law of a non-contracting state as the applicable law.

Comparisons with existing Hong Kong law

There are some significant differences between the CISG and existing Hong Kong law.

Generally, the CISG is thought to be more "pro-contract" than existing Hong Kong law, providing remedies for breach that currently have no direct equivalent under Hong Kong law.

Practical tips for businesses

Generally, the CISG is considered to be pro-contract, helping create a valid and enforceable contract where lacuna might otherwise have given rise to uncertainty. Businesses should consider whether they wish to exclude any of the CISG's provisions and, if so, which. 

A contract of sale will fall outside the scope of the CISG if it is not apparent from the contract that the parties to the contract are located in different states at the time of contracting. Businesses are advised to make sure that the place of business is made clear in the contract of sale.

Businesses should consider including an "entire agreement" clause in the contract of sale, since any evidence can be used under the CISG to prove a contract. Article 11 states that "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."

A "no oral modification" clause should also be considered for inclusion so that parties cannot modify the contract terms or terminate the contract unless by written agreement. This is to counter the effect of Article 29 which states that "a contract may be modified or terminated by the mere agreement of the parties."

Once the contract is in place, and goods have been delivered, purchasers should make a note to inspect the goods as soon as practically possible in order to check for defects. The buyer should give a notice specifying any defects found to the seller as soon as practically possible.

In summary

The coming into force of the CISG has the potential to drive trade between Hong Kong and some of its major trading partners. It should also help to guard against Hong Kong businesses having to cope with foreign laws that may be unfamiliar.

The application of the CISG should help bolster the position of Hong Kong as a leading centre for dispute resolution services in the region. The CISG may also help to act as a bridge between different legal systems of Belt and Road Initiative (BRI) member countries and help Hong Kong to maximise the opportunities afforded by BRI. Around 45 per cent of the countries participating in BRI are contracting parties.

The CISG is often described as "pro purchaser" since buyers have a wider range of remedies available to them. These include requiring the seller to undertake repairs, offer price reductions or deliver replacement goods. These concepts derived from civil law and may explain the reluctance of some common law jurisdictions to adopt its provisions. Through our offices in France, Germany and Italy, Hogan Lovells has a wealth of experience in the application of the CISG.

Whilst businesses may expect to bear some costs in terms of reviewing their standard contracts, it will be important for them to understand the possibilities available to them starting 1 December 2022.

Authored by Timothy Hill and Nigel Sharman.