International Legal Framework for Commercial Transactions

In the nineteenth century, international commercial transactions were largely governed by commercial usage and bilateral commercial treaties — commonly known as ‘Friendship, Commerce and Navigation’ (FCN) Treaties. These treaties addressed trade and shipping rights and, as corporations became more significant, introduced the concept of ‘national treatment’, whereby legal persons of one state were treated no less favorably in the other state than their domestic equivalents.

More recently, FCN treaties have been largely replaced by bilateral and multilateral agreements that focus on market access and trade liberalization. This shift followed the establishment of the United Nations and the corresponding increase in international economic cooperation.

The key multilateral treaty for international commercial transactions is the United Nations Convention on Contracts for the International Sale of Goods 1980 (also known as the ‘Vienna Sales Convention’ or ‘CISG’). Other important multilateral treaties govern the carriage of goods, including the United Nations Convention on the Carriage of Goods by Sea 1978 (the Hamburg Rules).

Note

The parties to a contract are free to choose their preferred governing law, whether that of one of the parties, a third country, or the CISG itself.

Commercial custom and trade usage remain important sources of international commercial law and have been codified by the International Chamber of Commerce (ICC). The ICC’s rules are codified commercial usage: they have no binding force on their own but can be incorporated into any contract, at which point they become binding as terms of that contract. These rules, known as ‘Incoterms®’, are explained later.

The law governing international commercial transactions is therefore a combination of conventions, treaties, domestic legislation, and commercial practice. The two principal international bodies that shape international trade law are:

  • The United Nations Commission on International Trade Law (UNCITRAL)
  • The World Trade Organization (WTO)
The United Nations Convention on Contracts for the International Sale of Goods (CISG)

Because we are talking about an international sales transaction there can be three different legal regimes that come into play: 

  1. The domestic law of either the buyer or the seller, with the contract governed by the law of the jurisdiction where it was concluded.
  2. An international convention applicable to one or both parties.
  3. The rules that apply where one party is not a signatory to the relevant international convention.

Article 1.1 of the CISG states that it applies between parties whose places of business are in different States. This means the CISG may apply even where goods are collected by a foreign buyer in the seller’s country, or where the goods move only within the seller’s country — provided the parties’ places of business are in different States.

The CISG is not mandatory. It is intended to assist where parties have not addressed a matter in their contract, serving a ‘gap-filling’ function. Its purpose is to provide an internationally acceptable set of rules that reduces difficulties arising from differences in national sales law. Because it functions as a model law, it has no legal effect of itself; it takes effect only where a country enacts it into law or adopts it in some other way. The CISG has been adopted as the law of 76 countries, including Australia, Canada, China, France, Germany, Italy, Japan, New Zealand, Singapore, the Russian Federation, and the United States.

One issue the CISG does not address is when ownership of the goods passes from the seller to the buyer. This was not possible to agree at the time of negotiation and must instead be determined by reference to the contract itself or applicable national law.