Background
The CISG was adopted in Vienna in 1980 and has so far been ratified by over 90 contracting states (Contracting States), including 12 of Hong Kong’s top 20 trading partners (accounting for more than 75 per cent of the total trading value in Hong Kong), such as Mainland China, the United States, Singapore and South Korea.
The Hong Kong Legislative Council passed the Sale of Goods (United Nations Convention) Ordinance (Cap. 641) (Ordinance) on 29 September 2021, and according to the Sale of Goods (United Nations Convention) Ordinance (Commencement) Notice dated 24 June 2022, the CISG will come into effect on 1 December 2022.
Application of CISG
The CISG will automatically apply to contracts concluded on or after 1 December 2022, if the following three requirements are satisfied:
1. There must be a contract for the sale of goods;
2. The contract must be “international”, i.e., concluded between parties whose places of business are in different States; and
3. The contract must relate to the CISG. In other words, the contract must be:
- Concluded between parties whose places of business are in different Contracting States (Article 1(1)(a)). It is noted that the CISG does not currently automatically apply to Mainland China–Hong Kong sales transactions, but a mutual arrangement is under discussion to achieve this effect in due course;1 or
- Governed by the law of a Contracting State according to the rules of private international law (Article 1(1)(b)). For example, after the Ordinance has come into effect, if an Indian seller and an English buyer have chosen for their contract to be governed by Hong Kong law and any disputes arising out of the contract are to be heard by the Hong Kong courts, since the CISG is applicable to Hong Kong by declaration and notification of the Central People’s Government of the People’s Republic of China as a Contracting State, the CISG will apply (even though neither India nor the UK is a Contracting State).
The parties may also choose the CISG as the governing law in choice of law agreements. After the CISG comes into effect in Hong Kong, choice of law clauses adopting Hong Kong law as the governing law will entail the applicability of the CISG.
Exclusion
The CISG does not apply to the following types of contracts:
1. Contracts for the sale:
- of ships, vessels, hovercraft or aircraft.
- by auction.
- of consumer goods.
- on execution or otherwise by authority of law.
- of stocks, shares, investment securities, negotiable instruments or money.
- of electricity.2
2. Contracts where the preponderant part of the obligations of the party who furnishes the goods consists of the supply of labour or other services;3 and/or
3. Contracts where the parties have expressly excluded its application. Notably, Article 6 entitles parties to completely or partially opt out of the CISG provisions.
Relationship between CISG and local Hong Kong law
The relevant local Hong Kong law applicable to sale of goods contracts is the Sale of Goods Ordinance (Cap. 26), supplemented by common law rules. It is important to understand the relationship between the CISG and local Hong Kong law.
Firstly, after the CISG comes into effect in Hong Kong, the parties’ choice of Hong Kong law as the governing law will mean that the CISG applies by virtue of Article 1(1)(b). Unless the parties evince clear intent to exclude the CISG, the CISG will apply to international trade agreements.4
Secondly, local Hong Kong law continues to apply to matters not covered by the CISG, such as the substantive validity of the contract, retention of title, liability for death or personal injury, and assignment of contractual rights.
Lastly, for matters covered by the CISG, the CISG will prevail in the event of any conflict with other Hong Kong laws (Section 5 of the Ordinance).
Differences between local Hong Kong law and CISG
Generally, the CISG adopts a more pro-contract approach than local Hong Kong law. Among others, the CISG differs from local Hong Kong law in the following respects:
- Fundamental breach. Compared to Hong Kong law, the CISG establishes a more stringent standard to avoid (i.e., terminate) the contract; namely, the defaulting party must have committed a fundamental breach (Articles 47 and 49(1)), which is rarely established in practice.
- Choice of remedies. The CISG provides the buyer with more choices of remedy, but these additional remedies have no direct equivalent in Hong Kong law. This includes the buyer’s right to request a reduction in the price of non-conforming goods (Article 50), request substitute goods (Article 46(2)), or require repair by the seller (Article 46(3)). The CISG also provides the buyer with the right to suspend performance in the event that the seller’s inability to perform becomes known to the buyer (Article 71).
- Non-conforming goods. The local Hong Kong law generally allows the buyer to reject non-conforming goods, whilst the CISG entitles the seller to remedy the defects, both before and after delivery, as long as this can be done without undue delay, expense, or inconvenience to the buyer (Articles 37 and 48).
- Notice of defects. The CISG requires the buyer to provide notice to the seller of any defects within a reasonable period of time, or in any event within two years after the goods have been handed over. Otherwise, the buyer loses its remedies in relation to any lack of conformity of the goods (Article 39). This is more stringent than local Hong Kong law provisions, which only bar the buyer from the remedy of rejecting the goods if the goods are not rejected within a reasonable period of time, but otherwise other remedies (such as the seeking of damages) are generally not affected.
To exclude CISG or not?
A key benefit of choosing the CISG is that Hong Kong businesses will not be subject to unfamiliar foreign laws. If Hong Kong businesses are unable to agree with major trading partners from Mainland China, Japan or the United States on the choice of Hong Kong law as the governing law, the CISG sets out a more unified set of rules and is arguably more neutral than national laws such as PRC, Japanese and U.S. laws.5 With an increasing number of Belt and Road Initiative (BRI) countries adopting the CISG, the CISG can also bridge the differences between the legal systems of Hong Kong and BRI countries.
In this connection, Article 6 allows parties to vary the CISG provisions to the extent that they conflict with local Hong Kong law. For example, the CISG admits pre-contractual negotiations and post-contract conduct in the interpretation of contracts. To supersede this and reinstate the position of Hong Kong law, parties may want to include a typical “entire agreement clause” in the contract.
Practical tips on adoption or exclusion of CISG
For parties looking to adopt the CISG, it is advisable to:
- Stipulate the place of business in the applicable trade agreement to ensure it is an international transaction;
- Review the existing standard terms and consider whether to vary certain CISG provisions; and
- Choose the domestic law to govern those issues outside the scope of the CISG.
If parties would prefer to exclude the application of the CISG, it is advisable to stipulate that “the applicability of the United Nations Convention on Contracts for the International Sale of Goods 1980 is expressly and entirely excluded” in all relevant purchase orders, sale confirmations, invoices, and agreements.
Implications
With the CISG coming into effect in Hong Kong, parties should review existing standard terms in any relevant sale of goods contract to consider whether to adopt the CISG, and, if so, how to revise the current standard terms. Further, parties and practitioners should take into account the implications of and legal authorities relating to the CISG to ensure that the contractual terms would accurately reflect the parties’ intention in relation to the particular transactions.
Through our offices in the United States, Germany, Hong Kong and Mainland China, Reed Smith has a wealth of experience in the application of the CISG. Please let us know if you need any assistance.
- Paragraph 16 of Proposed Application of the United Nations Convention on Contracts for the International Sale of Goods to the Hong Kong Special Administrative Region published by Legislative Council on 22 March 2021.
- CISG Article 2.
- CISG Article 3.
- Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F.Supp.2d 1142 (N.D. Cal. 2001).
- Paragraphs 3.54-3.58 of Proposed Application of The United Nations Convention on Contracts for the International Sale of Goods to the Hong Kong Special Administrative Region published by Legislative Council on 22 March 2021.
In-depth 2022-386
