The Middle East conflict: Your rights under the UN Convention on Contracts for the International Sale of Goods

The war in the Middle East has the potential to disrupt supply chains across a range of commodities, consumables and other goods.

If international trading has been impacted by the war, including the closure of certain countries' airspace, parties who have entered into international sales contracts may have rights available under the United Nations Convention on Contracts for the International Sale of Goods (CISG).

The CISG has been adopted by over 97 countries around the world (including Australia).  It provides:

… uniform laws which govern contracts for the international sale of goods [taking] into account the different social, economic and legal systems …¹

The CISG applies to contracts for the sale of goods where the parties to those contracts have places of business in different States: (a) when the States are Contracting States; or (b) when rules of private international law leads to the application of the law of a Contracting State.²

It does not, however, apply to sales of particular goods, including stocks, shares, investment securities, negotiable instruments or money, ships (or other vessels) and electricity.³ Contracts for supply of goods to be manufactured or produced will be considered contracts for the sale of goods unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.⁴

Many parties involved in international trade are unaware that their contractual relationships may be governed by the CISG.  This is because the CISG will generally apply to a contract for the international sale of goods (if the other prerequisites in the CISG are met) unless it is expressly excluded.⁵

The CISG provides 'rules' governing the formation of the contract, the obligations of the seller and buyer, payment, delivery, breach of contract and the passing of risk.  

Article 7 of the CISG provides that the convention is to be interpreted with regard […] to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.  Relevantly, given the present uncertainty and associated risk arising from the conflict in the Middle East, it also contains provisions exempting a contracting party from performing a contract in certain circumstances.

Article 79(1) provides that:

… a party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, or its consequences.

This article can, if the CISG applies, provide a contracting party with rights which are additional to the rights afforded by a traditional force majeure clause.  The exemption provided by Article 79(1) has effect for the period during which the impediment exists.

Some buyers and sellers who were prevented from completing their contracts during the Covid pandemic in 2020 to 2021 and faced claims for breach of contract and damages had this exemption available to them where their contracts were otherwise silent or the force majeure provisions were not applicable.

However, the exemption does not automatically suspend the obligation to perform. The party who is unable to perform the contract must give notice to the other party of the impediment and on his ability to perform and:

If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.⁶

If you are currently concerned about your company's ability to perform a contract for the international sale of goods or an exposure to a potential claim for damages (or your foreign counterparty's performance of a contract of sale has been impacted by the recent developments), please contact Partners Bronwyn Lincoln or Andrew Chalet.

¹ CISG, Preamble
‍² CISG, Article 1(1)
‍³ CISG, Article 2
‍⁴ CISG, Article 3(1)
‍⁵ CISG, Article 5
‍⁶ CISG, Article 79(4)
‍

‍