According to Article 1 of the CISG it applies to contracts for the sale of goods between parties whose places of business are in different states when the states are contracting states or when the rules of private international law lead to the application of the law of a contracting state. Thus the CISG will automatically apply to all contracts for the sale of goods between these parties to a contract, thereby taking precedence over other national laws on the sale of goods.

Nevertheless, the CISG is still often disregarded by lawyers around the world simply by excluding the CISG, a possibility that is provided for in Article 6 of the CISG. The CISG itself is far away from being a complete law on the sale of goods: its gaps, for example, on the transfer of title have to be filled by applying the relevant other national laws, a fact which has contributed to the unpopularity of the CISG.

However, in China, the parties to an international sales transaction often use standard sales contracts provided by the PRC import and export company. Such contracts, sometimes fairly simple and often outdated, usually do not exclude the CISG and the parties learn about the application of CISG only once an arbitration case has commenced. In this case it becomes important to understand the relationship between the PRC Contract Law (中华人民共和国合同法)(Contract Law) and the CISG.

THE ROOTS OF THE CONTRACT LAW

As different as the Contract Law and the CISG may seem at first sight, after a closer look a number of similarities become evident. The Contract Law itself has also been developed by comparing several contract laws and unifications of private law, such as the German BGB or the UNIDROIT Principles of International Commercial Contracts. Especially these UNIDROIT Principles may, to some extent, be a very helpful guide on the interpretation of still unclear provisions of the Contract Law.1

ALL IN THE INTERPRETATION

One of the more general aspects is that the methods of interpreting the Contract Law and the CISG may differ to some extent.

Though there are several specific provisions in the Contract Law on the interpretation of contract clauses, Articles 5 and 6 of the Contract Law are of particular importance. Chinese courts or arbitration tribunals such as the China International Economic and Trade Arbitration Commission (CIETAC) often apply the principles of fairness and good faith, repeated in Article 60 of the Contract Law. These principles, laid down in the first chapter of the Contract Law, have to always be considered when drafting contracts that the Contract Law applies to.

As to the CISG, Article 7 II states that matters that are not expressly stipulated within the CISG are to be settled in conformity with the general principles the CISG is based upon. It is often difficult to determine the exact scope and content of a number of other clauses of the CISG; it may sometimes be nearly impossible to identify these general principles. However, if one is used to working with the CISG and especially with the case law on the topic2, one will definitively find sufficient material covering various principles of the CISG. However, in proceedings before Chinese courts and arbitration tribunals it will be important to the respective counsel to adequately prepare and provide materials that may otherwise not be accessible by the tribunal.

MAJOR DIFFERENCES

a) Liabilities arising from negotiations

According to Article 42 of the Contract Law an omission in the course of negotiating a contract, for example by deliberately concealing the important facts relating to the conclusion of the contract or providing deliberately false information, may give rise to legal liability to pay damages to the other party. This means a clear distinction from the Common law principle of caveat emptor. Thus, whilst concluding a contract one has to find a certain balance between the information given to the other party to the contract and other information not presented to the other party.

On the contrary, it might be the case that by applying Article 7 of the CISG such liability might not arise. As this "liability arising from negotiations" is not specifically addressed in the CISG it might not be considered a general principle of the CISG. In such case if Chinese law applies to the contract resorting to the Contract Law may be helpful.

b) Formation of Sales Contracts

No major differences exist between the CISG and the Contract Law with regard to the formation of a sales contract. However, CISG does not contain any provisions on the invalidity or revocation of offers or withdrawal of acceptance. These gaps have to be filled by applying the relevant provisions of the Contract Law.

c) Form of Contracts

With reference to Article 11 of the CISG a sales contract does not have to be concluded or evidenced by writing and is not subject to any other requirement as to form. The PRC, however, has made a declaration under the Articles 12 and 96 of the CISG that Sales contracts can only be concluded in a written form. After the promulgation of the Contract Law it is now not clear whether or not this declaration has been revoked tacitly. Under the Contract Law it is generally possible to conclude a contract in an oral form. Though Article 10 II of the Contract Law now states that where a law requires a contract to be concluded in a written form a contract cannot be concluded in an oral form, it is questionable whether or not this Article also will be applied to contracts where the CISG is the decisive law.

d) Agency

Under the Contract Law a contract made by an agent without, beyond or after revocation of his authority is binding on the principal, if the other party to the contract had reasons to believe that the agent was authorized to act on behalf of the principal. A party negotiating with an agent from another party should ensure that the agent it is negotiating with is a statutory representative or a responsible person of a legal person or other organization. In these cases the party is protected by Article 50 of the Contract Law, even in those cases where the representative acts beyond his authority. The Contract Law introduces here the concept of apparent authority for contracts concluded by agents. If a party acting in good faith had reason to believe the agent had legal authority, the agent's actions are generally considered valid.

The CISG itself does not contain any provisions as to agency of any kind, thus this issue will be entirely covered by the Contract Law in cases where Chinese law is the governing law to the contract.

e) Standard Terms

The CISG does not contain provisions that govern the validity of any standard terms used by the parties. On the other hand, the Contract Law contains a few provisions on the use of standard terms in the Articles 39 to 41.

Though the Contract Law contains rudimentary provisions, essential questions as to standard terms remain unanswered by both laws. Neither CISG nor the Contract Law make any distinction as to different standards of care between a normal customer or a businessman.

Both laws do not cover the important problem of the battle of forms, that is, use of contradicting standard terms by the parties to a contract. Article 19 II of the CISG as well as Article 31 of the Contract Law stipulates that a reply to an offer, that purports to be an acceptance but contains additional or different terms that do not materially alter the terms of the offer, constitutes an acceptance unless the offeror rejects that change. Both laws do so without a provision that in the case of colliding standard terms the relevant provision in the law shall fill that lack of clarity. Thus it is strongly recommended to find a solution to the relevant application of standard terms during the negotiations. Thus misunderstandings can be avoided which might later lead to substantial disputes.

TRANSFER OF PROPERTY

As Article 4 (b) of CISG stipulates, CISG does not govern the effects that the contract may have on the property of the goods sold. Thus the transfer of property is subject to the provisions by national law or the provisions in the contract to the extent it may be altered by agreement between the parties.

One of the major issues to be considered here is the possibility of reservation of property, as stated in Article 134 of the Contract Law. The parties to a contract may agree that the ownership shall belong to the seller if the buyer fails to pay the price or perform other obligations. However, how about the ownership if the buyer manufactures the goods (raw materials) into other goods? Does the property of the new goods belong to the seller, or will it automatically be transferred to the buyer? Even more problems arise if the buyer himself sells these new goods. Since the Contract Law does not contain any clear provisions except the Articles 132 and 151 and the CISG does not address the issue entirely, it is, for the time, up to the foreign seller to address this issue in detail in the contract.

REASONABLE CHOICE

The Contract Law mentions the various forms of liability for breach of contract. These may take forms such as carrying out repairs, replacement, redoing, return of goods or reduction of price or remuneration, depending on the nature of the subject matter and the extent of the loss. The injured party may reasonably choose to request the other party to bear the liabilities for breach of contract (Article 111 Contract Law). As one can imagine, this clause will be subject to further disputes, focusing on the question of whether the injured party has chosen the reasonable remedy.

On the other hand, in this respect the CISG contains more precise provisions. Article 45 I a) and 46 II of the CISG state that the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract. Article 25 contains a definition of fundamental breach of contract and also shows another important aspect. By excusing the party in breach from a fundamental breach in case this party did not foresee the result of its behavior, the CISG generally favors the seller above the buyer. Consequence: If you are the selling party to a contract, the CISG might generally be the better choice.

Whether CISG applies or not, in the case where the Chinese law applies to the international transaction, it is important that the contract stipulates the way in which liability shall be assumed for a breach. In an appeal case decided by the Jiangsu Provincial Higher People's court, part of the court's reasoning for not awarding any damages was that the contract in question did not contain any provisions as to the liability for breach.

TIME LIMITS

The CISG itself does not contain any provisions regarding the time limit for action before a court. Thus national law has to be applied. The time limit for an action under the Contract Law is four years counting from the date when the party knew or ought to have known that these rights were infringed (Article 129 Contract Law).

DAMAGES

foreseeability

Care has to be taken of Article 28 of the CISG. If one party is entitled to require performance of any obligation by the other party, a court is not bound to enter a judgment for specific performance unless the court would do so under its own law. Article 28 is a compromise between the Common law and the Civil law countries. However, under the Contract Law (Articles 107, 110 Contract Law) the Chinese court may render a judgement for specific performance, thus PRC courts and arbitration tribunals may be bound to render such judgement, if one party is entitled to.

CAREFUL CONSIDERATION

The Contract Law now governs a number of relevant aspects relating to the conclusion and the performance of a contract of national as well as international sales contracts. On the other hand, the CISG which also covers major issues of international sales transactions, does not however address a number of crucial issues which have to be decided according to the applicable law in the respective case. This recourse to the uniform interpretation of the CISG and the national regulation causes difficulties with the interpretation of the CISG and also exposes the CISG to strong national influence. In addition, especially in China, a number of judges and arbitrators are not familiar with the CISG.

In certain cases the seller may be more favored to apply CISG, but this cannot be taken as a general rule and therefore the application or exclusion of the CISG, in case Chinese law will apply to the contract, cannot be generally determined.

However, the question of the applicable laws should not be decided isolated from the choice of forum. Thus, for example, an arbitration tribunal in Stockholm may apply CISG and the Chinese Contract Law in a much more internationally consistent way then this can be assured at a local Chinese court. Therefore, if a choice of forum is available and is determined outside the PRC, an application of CISG may be considered. However, if the case was to be eventually determined by a local Chinese court or a Chinese arbitration tribunal, the application of CISG shall be carefully considered.

ENDNOTES

1 One may refer to www.unidroit.org for further information on the UNIDROIT Principles.
2 This might be of interest to Common law lawyers. Please refer to www.uncitral.org