THE LAWYER and the CONTRACT BASED ON AUSTRALIAN STATE LAW.

Thursday , 1, February 2018 Leave a comment


Introduction

This paper examines ‘Phil’ the hypothetical lawyer who didn’t study international commercial law, which is not necessary to complete a law degree.  Phil didn’t know the United Nations Convention on Contracts for the International Sale of Goods ‘CISG[1] applied to a contract of sale based on Victorian law.

The CISG[2] has been adopted worldwide by 84 States[3] becoming the governing law globally, covering international sales of goods since the 1st of January 1988 and adopted in Australia, in all states and territories, since April 1st 1989[4].

Autonomous Application.

The CISG is autonomously applicable to all Australian transactions involving the sale of goods internationally by virtue of Article 1 (1) as a result of Australia being a contracting State.  The Convention, which is now part of the municipal law of Australia, is not to be treated as foreign law which requires proof as a fact[5], the Provisions of the Convention have the force of law in Victoria[6] and prevail over any other law in Victoria to the extent of any inconsistency[7].

Despite three decades of operation few cases have considered CISG in Australia.  According to the Pace Law School, Institute of International Commercial Law, that maintain a CISG database of cases, their Country Case Schedule (last updated on the 25th of January 2016) contains links to some 3,152 cases where Courts in Member states have considered CISG, of those only 26 cases from Australia get a mention[8], similarly searches on Australian Legal Databases produce few results.

Australian application of the CISG has been criticized as still in the Australian legal outback[9], with criticism extending to suggest Australian lawyers have paid the CISG inadequate attention to their clients detriment[10].

The criticism has been savage, “the CISG has not been fully understood”[11] and “it is fair to say that the CISG is scarcely known in Australia.”[12] One has to wonder what chance would an Australian client have with an Australian lawyer who is not well versed in CISG?

The Lawyer Who Doesn’t know Part I – Does CISG apply?

If Phil relied on his knowledge of Australian Contract Law when drafting, choosing Victorian Law as the agreed law that governs the contract and thus invoking the Goods Act 1958 (Vic) ‘GAV’,     he may unwittingly have put his client into a position where the contract is subject to the CISG first and foremost, with Australian law only filling any gaps.

This is because the GAV provides that the CISG has force of law in Victoria, and prevails over any inconsistencies[13]. Even if a lawyer tries to avoid the CISG in the pleadings the Court may still apply the CISG due to the lawyer pleading incorrectly inapplicable domestic laws.

This was evident in Downs Investments Pty Ltd v Perwaja Steel SDN BHD [2001] QCA 433[14] where the contract stated any dispute to “be settled by the laws prevailing in Brisbane”[15] yet it was held that the CISG applied, stating

“As the respondent was in Australia and the appellant in Malaysia it was held that The United Nations Convention on Contracts for the International Sale of Goods, made relevant by the Sale of Goods (Vienna Convention) Act l986, applied to the transaction. The learned trial judge held on the evidence that the appellant had fundamentally breached the contract and assessed damages pursuant to Articles 74 and 75 of the Convention.”[16]

Then in Perry Eng P/L (Rec And Man Appt’d) V Bernold AG No. SCGRG-99-1063 [2001] SASC 15 (1 February 2001) ‘Perry[17] where Perry already entered default judgement and the hearing turned to damages, the contract provided:

“The Contract shall be deemed to have been made in the State of South Australia and all matters relating directly or indirectly thereto or arising directly or indirectly there from shall be governed in all respect by the Laws of the State of South Australia and the parties submit to the exclusive jurisdiction of the State of South Australia Courts.”[18]

The Court however took a different view, stating “However, there is a further complication that the Sale of Goods (Vienna Convention) Act 1986 (SA) applies to the dealings between the parties but the relevant provisions have not been pleaded in the plaintiff’s statement of claim. The statement of claim has been drawn up on the assumption that the South Australian Sale of Goods Act applies. This seems to me to be fatal to the plaintiff’s ability to proceed to judgment based on damages for breach of contract.”[19]

In response Perry contended “that it was not necessary to plead the specific provisions of the Sale of Goods (Vienna Convention) Act”[20].  Reliance was placed on Roder Zelt v Rosedown Park[21] but, Burley J did not accept this and distinguished the cases stating “in my view that case is not authority for the proposition contended for by the plaintiff. The trial Judge, von Doussa J, did not complete the hearing of the matter and did not then indicate that it was unnecessary to plead the statute.”[22]

Therefore it is clear that Roder Zelt can be easily distinguished, as held by Brumby J above.[23]  Ultimately it was held “That being the case, the Court cannot proceed to an assessment of damages based on the provisions of an Act of Parliament which the plaintiff acknowledges do not apply to the claim pursued by the plaintiff.[24]  Phil just lost his client damages.

The Lawyer who doesn’t know Part II – Domestic Pleadings.

In the case of Ginza Pty Ltd v Vista Corp Pty Ltd[25]Ginza[26] ordered contact lens solution from Vista subject to compliance with the Australian Therapeutic Goods Administration (‘TGA’) regulatory requirements including that the goods were sterile.

The TGA discovered bacterial contamination in its random testing and ordered the goods recalled.

A dispute between the Seller and Buyer ensued with Vista suing for full contract price and Ginza countered that no payment should be due with claims for breach due to non-conformity, negligence[27] and claimed damages for lost profits and lost goodwill as well as costs of recall[28].

Merchantable Quality.

Ginza argued express terms of compliance with TGA regulatory requirements and sterility were a condition of the contract and in the alternative implied terms of “merchantable quality and fitness for purpose” applied pursuant to the Sale of Goods Act 1895 (WA) or the CISG[29].

The problem with such an argument is that “merchantable quality” is not a CISG term[30], it comes from Common Law and Domestic Legislation, which the CISG is above autonomously and any interpretation of the Contract, as it is covered by CISG, ought to be read in light of CISG Article 35(2)(a) and global case law.

In this case the appropriate standard is “fitness for purpose” which requires the goods to be of specific standards[31] and non-conformity under Article 35(1) which requires compliance with “quality, quantity and description”.

If it was not so clear cut and the distinction was drawn between merchantable quality in reliance upon domestic law as opposed to fitness for specific purpose which is a narrower standard under the CISG, Phil’s client could face a controversial matter.

Phil might erroneously find in Ginza a reason to cite a non-CISG case in support of an argument of contamination[32] however, as Barker J considered, any pleadings ought to be made in light of the CISG on cases of non-conformity[33] and with CISG case law available which specifically deals with the issue of contamination, non-conformity and whether there was an obligation to take the goods,[34] Phil would be in trouble if he doesn’t know this.

Reasonable Time

Another issue Phil needs to consider, is notification under the CISG, even if the item does not conform with the specifications in the contract, the CISG requires that the Seller be notified within reasonable time or the right to claim is forfeited[35].

The CISG has been adopted into domestic legislation and because domestic law forms part of the agreement and applies CISG to a transaction even if the opposing party is not a CISG country so long as the choice of law is Australia, CISG applies, as held in  Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108 ‘Playcorp’[36].

It has been held that CISG applies unless expressly excluded as noted by Bridge, “[t]here seems to be hardening in favour of the view that choice of law clauses in favor of the law of a Contracting State do not exclude the CISG”[37].

The trend in Australia in Commercial contracts for international sale of goods has been to opt-out of the CISG which in many cases may not be in the best interests of the client, who would be better served had CISG been the operative law[38].

Services can be captured by the CISG

The CISG can apply to services, not just goods, a client represented by Phil may be surprised to find that they may be liable for breach of a service contract pursuant to the CISG in certain circumstances[39], this is provided for in Article 3.
If an Australian Client supplied substantial materials to the Seller to transform and sell back to the Buyer, this might attract the CISG as it may be held the buyer is liable for the transformative process to the degree the quality of the materials supplied affects the quality of the product.  Where the value of the goods exceeds a 50% maximum threshold for transformation services[40], under CISG the seller may avoid responsibility.

When the service component is completed in Australia, Phil didn’t know that Arbitration clauses can be avoided in service contracts in certain circumstances, pursuant to S.106 of the Industrial Relations Act 1996 (NSW) on the grounds of being an unfair contract in terms of the effect the contract has on the Industry norms[41].

Australian Consumer Law may not apply

Goods bought for personal use are excluded under the CISG, as are stocks, shares, negotiable instruments and money, also ships, aircraft and the supply of electricity are excluded, as are auctioned goods and goods sold on execution of authority of law under Article 2.2.3.

Phil faces another problem with Article 2.2.4, he may not think the Convention applies and find himself captured by it regardless, because it was not explicitly excluded.[42] His arguments on common law contract validity and the effect which the contract may have on property if the goods sold, are excluded by the CISG[43].

If Phil relies upon such Australian cases when ultimately the CISG is the prevailing law, he may be applying precedents that globally have been criticized and have valid International precedents[44] from CISG cases and other external sources[45] used against him.  Much of Phil’s argument could be struck out[46] of court.

Phil didn’t know that the Interpretation of Legislation Act (1984) s.35 is in conflict with the CISG and to the extent of the conflict the CISG prevails, for start, the CISG has it’s own interpretive provisions in Article 7 that require it to be interpreted in light of its international character and the need to promote uniformity and good faith in international trade.

Article 7(1) CISG “excludes recourse to methodological theories of interpretation of domestic texts”[47] meaning use of domestic law in resolving interpretation of text covered by the CISG is explicitly excluded.  You can’t use domestic law to interpret CISG.

Phil is thrust into the CISG world where autonomous[48] interpretation[49] as seen in Playcorp where even if the other contracting party is from a Country that is not a member state of the CISG it still applies as Part of Australian Law which governs the Contract.  In doing so CISG is lifted autonomously above the domestic law and prevails in the event of inconsistencies.  It is to be interpreted under three CISG directives.  Having regard to the CISG’s International Character, promoting uniformity in application, and promoting good faith in International Trade[50].

Good Faith

Australian contract law has struggled to come to terms with “good faith” as a contract term[51], yet the CISG requires it in International Trade.

As Australia’s contract law values freedom of contract and economic independence, the High Court recently cast doubt upon whether good faith is an automatic term in contract law.[52]

However, in Australia, such an implied term appears to conflict with fundamental notions of caveat emptor that are inherent (statute and equitable intervention apart) in common law conceptions of economic freedom. It also appears to be inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts which the parties have omitted to include.”[53]

“Good Faith” is not implied into a contract in Australia as it is with CISG, Phil might argue that good faith is not part of the contract as it is too vague and uncertain[54] as is the Australian position and that his client’s legitimate interests were being protected, which is not in breach of an express contractual term. Which in Australian contract law, he may be right, but here with CISG being the dominant law, that argument would fail.

Phil may find acting in good faith, in CISG terms, involves both parties acting in good faith, to each other, to the point of minimizing damages of the other party as much as favoring the party acting in its own “legitimate interests”,[55] to be seen as good faith.  To do an act that knowingly a party ought to realise is foreseeable to cause harm would be considered a breach of that good faith.

It would be easy to fall into the trap of relying on the Queensland decision of Downs Investments Pty Ltd (in liq) v Perwaja Steel SDN BHD [2002] 2 Qd R 462 ‘Downs’, which itself misinterpreted the application of the CISG in common law terms citing erroneously non-CISG cases of Robinson v Harman (1848) 1 Ex 850 and Hadley v Baxendale (1854) 9 Ex 341 ‘Hadley’ instead of focusing on Article 74 and International cases.  It’s a published decision that forms part of our Common Law after all.

However, CISG can be distinguished from our Common law in that Article 74 focuses on damages, and limits to it, to actual damages and lost profits for breach, and then limits it further to foreseeable damages which ought to have been known, the CISG views things from the perspective of the breaching party unlike our Common law and the cases cited in Downs which examines the ‘contemplation’ of both parties[56] this would not assist in a CISG argument.

To make things worse now for Phil, CISG Article 73 defines foreseeability as a ‘possibility’ whereas he relies on Common law in Hadley requiring ‘probability’. A significantly different standard of foreseeability, with ‘probability’ requiring the additional level of an objective reasonable person test of whether or not on the balance of probabilities it was more likely to happen, than not, that it is ‘probable’ that the event would occur.

Phil is in difficulty if his client is the one doing the breaching, the plaintiff just needs to prove that is was foreseeable, that it was possible, while Phil may argue to the wrong standard and cost his client avoidable damages.  Had Phil known the Court was obligated to determine the matter on CISG Jurisdiction, he may have submitted additional evidence to counter the foreseeability to a possibility standard.

Phil sees a case based on Victorian Law and relies upon the Goods Act (Vic) 1958 which requires that the goods be of a merchantable quality, where as now he finds himself in CISG Jurisdiction which requires fitness for intended purpose.

The higher standard of specific purpose requires that the seller disclosed to the buyer the specific purpose that the goods would be used for and required that the Seller confirm that the goods could meet that specific purpose as opposed to a merchantability standard, which just requires that the goods are fit for the general purpose they are intended for.

So while Phil argues that the goods the seller supplied were of merchantable quality, the buyer doesn’t care.  If the buyer asked can I use your microwave oven to melt glass safely? If the seller said yes, then it matters not that the microwave works perfectly for its general purpose it was intended for, if it can’t melt glass, it is not fit for the purpose.

In Conclusion;

Phil has a lot to learn.  A Corporate client with Phil as a lawyer would certainly be disadvantaged, a lawyer who has not studied CISG and International Commercial Law would be ill-equipped to advise a client on even drafting a contract, let alone litigating a dispute based on one.   Any commercial transactions in Australia involving the sale of goods internationally would need an experienced International Commercial Lawyer who is well versed in CISG.   As Australian Courts play catch up, they may entertain Phil and his arguments for a while, but if the dispute turned on application of the letter of the law, the Australian Courts will be obligated to follow the CISG and its application as a higher law when it comes to international contracts for the sale of goods.

Postscript

You can begin to appreciate the value in having a lawyer trained in CISG, similarly so, you ought to ensure, if you have a problem, that your Mediator is also experienced and trained in CISG and International Commercial Law.

What does your mediation clause state in your contract?  Does it provide for mediation by a Nationally Accredited  CISG Mediator?  How can you mediate what you don’t understand?

Footnotes:
[1] United Nations Convention on Contracts for the International Sale of Goods of 11 April 1980 ‘CISG’.

[2] Ibid.

[3] CISG: Table of Contracting States, accessed at http://cisg.law.pace.edu/cisg/countries/cntries.html on 02/01/2018 at 1.27pm.

[4] Sale of Goods (Vienna Convention) Act 1987 (Vic) (repealed) now found in the Goods Act (Vic) ‘GAV’ S.85, Sale of Goods (Vienna Convention) Act has also been incorporated into all other States and Territories and the Trade Practices Act 1974(Cth) S.66a, now found in Competition and Consumer Act (Cth) 2010 – Schedule 2 The Australian Consumer Law, s.68.

[5] Roder Zelt and Hallenkonstruktionen GMBH v Rosedown Park Pty Ltd. (1995) ACSR 153, op cit.

[6] GAV S.86.

[7] Ibid S.87.

[8] CISG Database Country Case Schedule accessed at http://cisg.pace.edu/cisg/text/casecit.html on 02/01/2018 at 1.35pm.

[9] Spagnolo, L., “The Last Outpost: Automatic CISG Opt Outs, Misapplications and the Costs of Ignoring the  Vienna  Sales  Convention  for  Australian  Lawyers” (2009)  10 Melbourne  Journal  of  International Law 141, at p.142.

[10] Ibid, David Fairlie, ‘A Commentary on Issues Arising under Articles 1 to 6 of the CISG’ (Paper presented at the United Nations Commission on International Trade Law (‘UNCITRAL’) and Singapore International Abitration Centre Joint Conference, ‘Celebrating Success: 25 Years United Nations Convention on Contracts for the International Sale of Goods’, Singapore, 22–3 September 2005).

[11] Benjamin Hayward, “The CISG in Australia–The Jigsaw Puzzle Missing a Piece” ‘Benjamin’, citing Zeller,

B., “Traversing International Waters” (2004) 78(9) Law Institute Journal 52, at p352.

[12] Ibid citing Finn, Justice P., “National Contract Law”, supra fn 7, at p.9.

[13] GAV S.85-87.

[14] Downs Investments Pty Ltd v Perwaja Steel SDN BHD [2001] QCA 433.

[15] Ibid at 21.

[16] Ibid at 2.

[17] Perry Eng P/L (Rec And Man Appt’d) V Bernold AG No. SCGRG-99-1063 [2001] SASC 15 (1 February 2001) ‘Perry’.

[18] Ibid at 15.

[19] Perry at 16.

[20] Ibid at 17.

[21] Roder Zelt-und Hallenkonstruktionen gmbh v Rosedown Park Pty Ltd & Anor [1995] FCA 275; 13 ACLC 776.

[22] Perry at 17.

[23] Ibid.

[24] Perry at 18.

[25] Ginza Pty Ltd v Vista Corp Pty Ltd  [2003] WASC 11 (Unreported, Barker J, 11 January 2003) ‘Ginza’.

[26] Ibid.

[27] Ginza at [12]–[13], [16]–[18]. A related action between Ginza and a corporation related to Vista, Kontack Pty Ltd was consolidated with this action. Counterclaimed commission fees were admitted and are not relevant to the current discussion: see ibid [20].

[28] Ibid at [21], [214]. On damages for loss of goodwill under art 74.

[29] Ibid at [13], [16].

[30] Ibid at [190].

[31] Ibid at [124], [153].

[32] Ginza at [131], [152].

[33] ICC Award No 6653 of 1993 (1993) (22 per cent of steel bars outside specified weight tolerances); Engines for Hydraulic Presses and Welding Machines Case (Landgericht Düsseldorf, Germany, 23 June 1994) and ICC Award No 8740 of 1996 (coal contained 20 per cent rather than specified 32 per cent dry matter).

[34] International Flavors & International Flavors & Fragrances Inc.  IFF & Fragrances (Netherland) B.V. v Ramon Sabater SA heard in the Spanish Court of Appeal Audiencias Provinciales May 24, 2012.

[35] Spagnolo, Lisa — “The Last Outpost: Automatic CISG Opt Outs, Misapplications and the Costs of Ignoring the Vienna Sales Convention For Australian Lawyers” [2009] MelbJlIntLaw 10; (2009) 10(1) Melbourne Journal of International Law 141, A maximum time of two years for notice is imposed by art 39(2) of the CISG. However, normally a much shorter period is imposed by the requirement that notice be given within a ‘reasonable’ time: see  Model Locomotives Case (Kantonsgericht Schaffhausen, Switzerland, 27 January 2004) §3c (reasonable time in art 39 depends on the type of goods); Person of Greece v Ed Fruit and Vegetables BV (Rechtbank Breda, Netherlands, 16 January 2009) [3.12] (watermelons subject to decay, inadequate notification if not within days).

[36] Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108 ‘Playcorp’.

[37] Benjamin at 201, Footnote [63]-[65].

[38] Lisa Spagnolo, The last Outpost: Automatic CISG Opt outs, misapplications and the costs of ignoring the Vienna Sales Convention for Australian Lawyers, Melbourne Journal of International Law, Vol.10, ‘Spagnolo’.

[39] Ibid, Footnote [82].

[40] Ibid, Footnote [83]-[90].

[41] Metrocall Inc v Electronic Tracking Systems P/L (2000) 52 NSWLR 1.

[42] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4),  [2009] FCA 522; (2009) 255 ALR 632,  “CISG was excluded by the words ‘Australian law applicable under exclusion of UNCITRAL law’ at [28].

[43] CISG Article 2.2.4(b).

[44] Benjamin Hayward, The CISG’s place in Australian Law – An incomplete jigsaw puzzle, The jigsaw puzzle missing a piece (2010) 14 VJ 193 – 222 at 211, ‘Benjamin’ at 222.

[45] Ibid.

[46] Spagnolo Pg.55, 57.

[47] Spagnolo at 211., Schlechtriem, P.,  “Article  7” in  Schlechtriem,  P.and  Schwenzer,  I.(eds),Commentary  on  the  UN Convention on the International Sale of Goods (CISG), 2ndEnglish ed, 2005, Oxford University Press, New York, p.93, at p.96, para.12.

[48] Benjamin at 211.

[49] Playcorp Pty Ltd v Taiyo Kogyo Ltd [2003] VSC 108 (Unreported, Hansen J, 24 April 2003) at 235.

[50] Ibid.

[51] Marcus S. Jacobs QC, Professor Katrin Cutbush-Sabine, Philip Bambagiotti The CISG in Australia-to-date: An illusive quest for global harmonisation?” at 9.2, accessed at https://www.cisg.law.pace.edu/cisg/biblio/jacobs2.html#35 on 01/09/2018 at 8.58pm, ‘Marcus’.

[52] Ibid at 9.4.2 citing Royal Botanic Gardens & Domain Trust, v South Sydney City Council,[41] Kirby J.

[53] Ibid.

[54] Aiton v Transfield [1999] NSWSC 996 (1 October 1999).

[55] South Sydney District Rugby League Football Club Ltd v News Ltd & Ors [2000] FCA 1541 (3 November 2000) at [393, 394].

[56] Benhamin citing Spagnolo, L., “The Last Outpost”, supra note 6, at p.178.



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