As of 1st December 2022 an important legal change is set to take place for international businesses doing business in or with Hong Kong: the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) will apply from now on. How this will affect international trade will be outlined and explained in this article.
What is the CISG?
The CISG, is an international treaty that came effective on 1st January 1988. Countries can agree to it, with the result that it applies to that country. The purpose of the CISG is to create an international uniform handling of commercial contracts for the sale and purchase of goods, which is fair, simple and modern. In the meantime there are already over 90 contracting states including Germany and Mainland China. With the passing of the Hong Kong Legislative Council on 29th September 2021 and the announcement on 24th June 2022, the CISG will now also come into force in Hong Kong on 1st December 2022.
Scope of Application of the CISG
The basic scope of application of the CISG can be derived from Art. 1 CISG and is applicable if the following conditions are fulfilled:
- Material scope of application: First of all, it must be a contract for the purchase or sale of goods, i.e. a contract of sale.
- Local scope of application: In addition, the contracting parties must come from different countries; the nationality of the parties is irrelevant, Art. 1 III CISG. Furthermore, the jurisdictions from which the parties come must either both be contracting states of CSIG or the contract between the countries must be governed by the law of a jurisdiction state which is a contracting state of the CISG.
- No exclusion: Finally, the contract between the parties must not be excluded from the scope of CISG. This can be according to Art. 2 CISG especially the case with contracts between consumers, or otherwise by authority of law and of stocks, shares, investment securities, negotiable instruments or money.
If these above conditions are fulfilled, CISG automatically applies to a contract of sale between the parties.
However, the parties are still free to make a different choice of law according to Art. 6 CISG and opt out of CISG in whole or in part.
What does this mean for practitioners in Hong Kong?
Until recently, CISG was not an important topic for local Hong Kong solicitors and barristers, because CISG was not applicable for contracts concluded by Hong Kong parties, unless the contract expressly opted in CISG. This will change completely from now on, since CISG will by default be applicable for all contracts for the sale and purchase of goods between Hong Kong parties and parties in other jurisdictions that are members of CISG as well. Hong Kong practitioners must therefore be aware of the applicability of CISG and its differences to local Hong Kong laws, which can be substantial, especially when it comes to the conclusion of contracts and remedies available to the parties in case of breach of contract.
Practitioners that miss details of CISG might provide misleading legal advise to their clients, which can result in professional liability towards their clients.
Nevertheless, a vast number of contracts for the sale and purchase of goods in Hong Kong take place between Hong Kong parties and parties in Mainland China. For such contracts, it should be noted that Hong Kong and China are one country. This means that even there are two different legal systems between both, CISG will not automatically apply in the case of trade between contracting parties from one of the two systems. However, it should also be noted that Mainland China and Hong Kong are working to establish a corresponding application between the two systems, and it can be assumed that in the rather near future, CISG will also be applicable by default for contracts between Hong Kong and Mainland China.
Advantages and Disadvantages
The CISG introduces many different new regulations such as more choice of remedies, the notice of defects or how to handle non-conforming goods... For example, according to Art. 21 I CISG, a late acceptance of an offer shall nevertheless be deemed to be an acceptance if the offeror immediately informs the offeree orally or sends a corresponding notification. There is no corresponding provision in Hong Kong.
Also the element of consideration, i.e. an exchange between the parties, which is a fundamental element for the conclusion of a contract in Common Law Systems, cannot be found in CISG.
Another difference is regulated by Art. 37, 48 CISG, according to which the seller has the right 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.
These and also all other innovations, which occur by the validity of the CISG, are such, with which practitioners should make themselves familiar before they enter or advise about any kind of commercial discussion or relationship, in order to avoid uncertainties or misunderstandings if necessary.
The decisive advantage, however, is obvious: The introduction of the CISG has also made it easier for local companies to do business with foreign trading partners, because after a period of familiarization, everyone is familiar with the law of sales.
Thus, internationally, a uniform system known to all can be used, so that there are no uncertainties regarding possible legal consequences. This also supports international trade.
In conclusion, it can be said that Hong Kong's accession is another important step in the area of international trade agreements, which will initially require all parties concerned to familiarize themselves with the CISG but will in the long term bring about significant simplifications at the international level.
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