Category: News

Tony Nguyen – Sr Partner of EPLegal

(PART 2: CISG’S application in Vietnam in the past 4 years)

This Article focuses on the application of CISG in Vietnam in relation to Article 1, Article 6, Article 7 and Article 8 of the convention. It will also look into the matters not regulated by CISG, or the matters that are mentioned but yet to be resolved. 

Applying CISG correctly 

Except for a few existing doubts on the concept of “places of business”, Article 1.1(a) is generally noncontroversial. Article 1.1(b), on the other hand, demands discussions between experts all over the world. For example, if the contract stipulates that the applicable law is the law of a contracting state of CISG and that state did not excersice Article 95 to exclude Article 1.1(b), it is unclear whether the law of such state or CISG would apply. 

Previously, it is believed that choosing national law as the applicable law simultaneously means the exclusion of CISG.^[1] This view faced severe criticism and has became outdated. On the contrary, Majority of case law of the contracting states such as France, the US, China upheld the practice that if parties intend to exclude the application of CISG, they must do so expressly. Otherwise, applying national law of a contracting state of CISG would automatically lead to the application of CISG. The latter is also the official opinion of UNCITRAL.^[2] According to the CISG Advisory Council, even when one or more parties initiate a lawsuit or arbitration with reference to national law, the court or arbitration centers would not consider such action as a valid reason to rule out the application of CISG.^[3] 

In term of Article 7.1 of CISG, it is important to apply CISG uniformly and to promote and maintain the principle of “good faith” in international trade. In fact, the principle of “good faith” has been a topic of discussion for a long time. Experts and scholars of Common law countries disapprove the application of “good faith”, which exists in the national law of Civil law countries. They argue that the requirement for “good faith” in Article 7.1 of CISG is simply the spirit one should carry when interpreting CISG.^[4] However, this understanding of the common law countries should not be endorsed. The principle of “good faith” must be understood in its meaning in accordance with the international standard and not following or influenced by any national law.^[5] 

Next, the Gap-filling principle provided by Article 7.2 of CISG. There is a two-level mechanism to resolve the matters not stipulated in CISG or the matters merely mentioned but not accompanied by a solution. 

For the first level, the general principles of the convention are used to address the legal issues. Such principles are:

– Freedom to make an agreement (laid down in Article 6 of CISG) 

– The principle of using “good faith” in interpreting CISG (Article 7.1 of CISG) 

– The rule on the place of payment, which is the place of business of the seller (Article 57 of CISG) 

– The burden of proof is on the party who relies on CISG’s provisions to claim a benefit or an exemption from liability. 

– To compensate fully against a breach of contract 

– The rule to disregard the formality of the contract (Article 11 of CISG) 

– The dispatch rule (Article 27 of CISG) 

– To take reasonable measure to mitigate loss (Article 77 of CISG) 

– To apply parties’ customs or international customs to contract (Article 9.2 of CISG) 

– Buyer has the right to suspend payment against the Seller’s breach of contract 

– The right to claim interest on sum that is in arrears (Article 78 of CISG) 

– The principle of “Favor contractus” provided by Article 19.2, 25, 26, 34, 48, 49, 51.1 and Aricle 64 of CISG 

– The principle of “Reliance” expressed in Article 8 of CISG. The principle means that a party shall be liable for the statements or conducts that it made with the intention to be bound to such making. 

– The principle for “reasonable foreseeability” in accordance with Article 74 and Article 79 of CISG 

For the second level, the applicable law is the national law. The issue is how to differentiate between applying the CISG’s general principles of the first level and applying the national law. In fact, there are two common gaps of CISG. First, the external gap, meaning the matters not regulated by CISG (for example, the list in Article 4 of CISG). Correspondingly, national law would be applied to fill this gap. Second, the internal gap, which are the matters mentioned in CISG but lack proper solutions. The best way to fill the internal gap is to exhaust all the CISG’s general principles and avoid national law as much as possible.^[6] 

CISG’s application in Vietnam from 01/01/2017 to 30/11/2020 

There have been no records on the number of disputes of international sale of goods resolved in courts. Moreover, according to unofficial information collected from the people’s courts in Hanoi, Ho Chi Minh city and Da Nang city, CISG has never been applied by them. 

In term of Arbitration, there were 7 cases where CISG was applied to resolve disputes in international sale of goods (6 in VIAC^[7] and 1 in ICC^[8]). This is minimal compared to the total 86 disputes resolved in these arbitration centers. 

The three reasons for such limited application of CISG in Vietnam are examined as follow: 

1) The contracts of international sale of goods in dispute were formed before CISG took effect in Vietnam 

Many of the 86 cases mentioned above were brought to arbitration in 2017 but the contracts were signed before the 01/01/2017. At that time, CISG has not came into effect and cannot be applied, regardless of whether the contract states the applicable law to be Vietnam law or the contract has no applicable law clause. The fact that CISG was not referred to in these circumstances is totally reasonable in international standard. 

2) The contract does not contain an applicable law clause 

According to the data gathered from VIAC, up until the end of 2020, there were 31 disputes in international trade where the contracts had no applicable law clause. For these cases, the tribunal decided to apply Vietnam laws. However, this solution does not correspond to Article 1.1(b) of CISG, international practice and UNCITRAL’s instruction. When deciding to apply Vietnam laws, the tribunal should have referred to Article 1.1(b) to also apply CISG to settle the said disputes. 

3) The contract stipulates that Vietnam law is the applicable law 

54 out of the 86 cases resolved in VIAC and ICC fall into this category where the contracts expressly chose Vietnam law. Nearly all the tribunals of these cases ignored the existence of CISG in the Vietnamese legal system. This behavior can be described as “hometrend”, meaning the tribunals, intentionally or otherwise, excluded CISG in the situations where CISG should have been applied in accordance with Article 1.1(b). 

To reveal and explain the reasons for “hometrend”, 14 Vietnamese arbitrators were interviewed on the topic of CISG’s application. The results are as follow: 

– 3 artbitrators had experience in a case related to CISG. 

– 7 arbitrators had conservative approach and believed that choosing Vietnam law as the applicable law simultaneously means the exclusion CISG or CISG should only be used as a secondary source of law. 

– Majority of the arbitrators liken the provisions of CISG and Vietnam laws. As such, they concluded that the application of either law would lead to the same result. 

– Majority of the arbitrators considered the actions of “submitting Statement of claim or Statement of defence on the basis of Vietnam law” to have the effect of preventing CISG from being applied. This understanding contravenes the international practice and CISG Advisory Council’s opinion stated in the third paragraph of this Article. 

– 1 arbitrator explained on why Vietnam law takes precedence over CISG. Accordingly, CISG has been mentioned in Viet Nam but has never been applied. Vietnamese enterprises prefer Vietnam Law because it is familiar to the enterprises and they understand it better. 

It can be concluded that the parties in dispute tend to ignore CISG and rely only on Vietnam law. Arbitral tribunals also carry the same mindset where they accept that parties prioritize Vietnam law to setlle disputes. Because of such “reluctant to change”, parties end up “going home” to apply Vietnam law instead of CISG. 

Adding to the interview of 14 Arbitrators, 10 judges, who handled commercial dispute cases, were invited to give their opinion on this topic. 8 out of the 10 judges believed Vietnam law must be applied when the disputing parties so agreed in their contract. Such practice contributes to the fact that CISG has not been applied in any court case. 

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[1] Italy 14 January 1993 District Court Monza (Nuova Fucinati v. Fondmetall International) http://cisgw3.law.pace.edu/cases/930114i3.html and France 26 September 1995 Appellate Court Colmar (Ceramique Culinaire v. Musgrave). http://cisgw3.law.pace.edu/cases/950926f1.html
[2] UNCITRAL Digest of Case Law on the CISG (2016 Edition), page 34, para 11
[3] CISG Advisory Council (2014), Opinion no. 16: Exclusion of the CISG under Article 6, para 5.
[4] Bruno Zeller, ‘Good Faith – The Scarlet Pimpernel of the CISG (May 2000).
[5] Magnus, ‘Remarks on Good faith’ Int. Trade and Bus L Ann III (1997) 46
[6] UNCITRAL Digest (2016), page 43, para 10.
[7] Vietnam International Arbitration Center
[8] ICC International Court of Arbitration

Tony Nguyen – Sr Partner of EPLegal

(PART 1: The journey of Vietnam joining CISG)

The birth of CISG and its success

United Nations Convention on Contracts for the International Sale of Goods (“CISG”) was ratified in 1980. Since then, CISG has been contributing greatly to the certainty and cost effective in commerce.^[1] Together with the New York Convention 1958, CISG is considered by many as one of the most successful conventions of UNCITRAL.

CISG was drafted by a group of lawyers from different regions of the world under the sponsorship of United Nation Commission on International Trade (“UNCITRAL”). Up until 01/11/2020, 96 states have ratified CISG.^[2] The import-export turnover between these contracting states amounts up to ¾ of the world’s turnover, proving the popularity of the convention and its strong influence toward international trade.

The success of CISG can be explained by the following factors:

Firstly, CISG is the effort of decades of negotiations by representatives from various states. This results in a modern convention which is suitable to different legal systems of the world and capable of balancing out the benefit between sellers and buyers.

Secondly, the convention applies to commercial contracts between a buyers and sellers whose place of business is located in Contracting States of CISG or when the rules of private international law lead to the application of the law of a Contracting State. Despite such broad coverage, the convention is flexible and it respects the freedom of contract by allowing parties of a contract to exclude, change or replace one or almost all of CISG’s provisions.^[3]

Thirdly, the language of CISG is practical and easy for anyone to read, understand and apply.

Next, CISG has been referred to by many states to develop their own national law of contract. In fact, CISG’s presence can be noticed in commercial law of France, Germany,^[4] Switzerland, China^[5] and Vietnam.^[6]

Lastly, medium and small size enterprises often have limited access to legal services when negotiating a contract. Therefore, they are more likely to be the side with lower bargaining power and are exposed to higher risk in a transaction. Such enterprises are placed in a better position when CISG, which consist of fair provisions for buyers, is apllied by default to their contract.

The journey of Vietnam joining CISG

Vietnam started accessing CISG in the 80s. However, it is until 2010 that the benefits and drawbacks of joining CISG is carefully considered by a group of experts in CISG. The experts were assembled to conduct an extensive research on CISG in response to the proposal by the International Trade Advisory Committee (“INTAC”) which is a unit of the Vietnam Chamber of Commerce and Industry (“VCCI”). The research focuses on analyzing the reasons that other countries joined or refused to join CISG, comparing CISG and Vietnam law in effect at the time, what benefit can the convention bring to Vietnamese enterprises, collecting opinions of scholars, entrepreneurs and law practitioners, the potential risk of ratifying CISG, the procedure for Vietnam to join CISG and how to effectively apply CISG.

In April 2011, a group of researcher from the International Trade Law Research Center of the Foreign Trade University commenced a study on CISG to analyse the behaviour and pratice of Vietnamese enterprises in signing contracts of sale of goods. The goal is to measure the risk an enterprise may encounter when Vietnam is not a contracting state of CISC and compare such risk to the same situation when Vietnam is a contracting state. The study is two parts: 1) A complete and detailed comparison between CISG and Vietnam Law; and 2) Surveying over 75 enterprises on their knowledge about CISG and their point of view on this convention; and examine 150 contracts of sale of goods of different import and export enterprises^.[7]

On the 14^th January 2013, based on the proposals of Vietnamese enterprises and the Ministry of Industry and Trade (“MOIT”), the Prime Minister approved the plan for Vietnam to join CISG. The MOIT was responsible for undertaking the necessary procedure of the joining. In 2013, MOIT operate its own research on the potential benefit and risk of ratifying CISG. In the research, the Ministry collected opinions and of enterprises and scholars to assess the enterprises’ knowledge on CISG, the governing law of their contracts (or their prefereable governing law), and whether the enterprises and scholars believe that Vietnam should join CISG.

On the 18^th December 2015, the Vietnamese President officially signed approval to join CISG. Accordingly, Vietnam became the 84^th Contracting State of this convention.

On the 1^st January 2017, CISG became effective in Vietnam.

Concerns for Vietnam when joining CISG

According to MOIT’s survey in 2013, 35% of the interviewees (who work in the import and export sector) admitted that they do not understand or have no knowledge about CISG, 40% supposed that they would be able to apply CISG if requested and only 25% claimed to fully understand the convention.^[8] This statistic at the time means that enterprises had limited expertise on CISG, for which they are reluctant to apply CISG and would prioritize Vietnam law instead.

The other concern being the principles of CISG is still considerable new for the Vietnamese legal system. The Legal education also does not offer a comprehensive program or subject on CISG and there is only a minimum amount of legal research on the application of CISG in Vietnam.

In addition, the criticism for CISG can be summarized as below:

• CISG cannot stand alone as an applicable law for a contract.
• The definition of “sale”, “goods”, “place of business” drafted in CISG can be complex causing the application of the convention to be problematic.
• CISG does not govern matters such as legal capacity to enter a contract, legal representative, fine (penalty) against breach of contract, transfer of rights and obligations, security transaction, time limits, …
• The principles, source of law used to interprete CISG are not conclusive, causing the applications of CISG to be inconsistent.
• The contracting states made a considerable amount of reservations to not apply certain provisions of CISG. Therefore, parties of a contract must take an extra step to examine whether there is any such reservations that could affect their contract. For example, Vietnam reserved that international contract of sale of goods is valid only in writing, which contradict Article 11 of CISG.

Next on this Article, part 2 about CISG’s APPLICATION IN VIETNAM IN THE PAST 4 YEARS will be published on the 7th June 2021.

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[1] https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg
[2] https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg/status
[3] Article 6 CISG
[4] Franco Ferarri (ed), The CISG and its Impact on National Legal Systems (Sellier. European Law Publishers GmbH, Munich 2008) 144.
[5] Fan YANG, ‘The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice’ (PACE, December 2006).
[6] The Vietnam Civi Code 2005 and Civil Code 2015 contains regulations that are similar to CISG’s provisions.
[7] Nguyen Minh Hang, Nguyen Trung Nam, ‘Why should Vietnam Accede to the CISG – A Comparative and Quantitative Study on the Costs and Benefits of Vietnam for joining the CISG’ in The Annual MAA Peter Schlechtriem CISG Conference 2014: Boundaries and Intersections (2014).
[8] Nguyen Minh Hang, Nguyen Trung Nam, ‘Why should Vietnam Accede to the CISG – A Comparative and Quantitative Study on the Costs and Benefits of Vietnam for joining the CISG’ in The Annual MAA Peter Schlechtriem CISG Conference 2014: Boundaries and Intersections (2014).