Written By: Taotao Zhu
Edited By: Nadia Ho
The Canadian Chamber of Commerce in Hong Kong
Introduction
The application of the United Nations Convention on Contracts for the International Sale of Goods (‘CISG’) to contracts involving a party from the Hong Kong SAR (‘HK’) has long been under dispute. Despite the fact that CISG was approved by the People’s Republic of China (‘China’) in 1986 and entered into force in 1988, it did not extend to HK until 4 May 2022, when China deposited the declaration (‘Declaration II’) with the UN Secretary-General (‘UNSG’) that the CISG shall apply to HK thereafter. While eliminating some of the controversies, others remain: for example, whether the CISG can be applied to a contract between parties from Mainland China and HK.
This article will analyse the historic development of the status of HK under the CISG, the effect of the Declaration II and relevant legislation in HK, and the remaining issues. Nevertheless, the application of the CISG combined with further cooperation between Mainland China and HK, may address the issues and greatly benefit HK.
Past: The Status of HK under the CISG
Before the retrocession in 1997, it was the UK that was de facto responsible for the international relationship of HK. As the UK is not a contracting state of the CISG, the CISG did not apply to HK at the time. Nevertheless, the CISG could apply to HK ‘when the rules of private international law lead to the application of the law of a Contracting State [which is the opposite party in the contract from HK’s perspective].’
In a declaration (‘Declaration I’) submitted to UNSG on 20 June 1997, China set out a list of conventions to which it was party, that should apply to HK, and the CISG was not included in the list. Thus, confusion arose regarding the status of HK, and there was a division among court decisions based on the interpretation of the Declaration I in light of Art. 93 CISG.
Art. 93 CISG provides that:
(1) If a Contracting State has two or more territorial units in which, according to its constitution, different systems of law are applicable in relation to the matters dealt with in this Convention, it may, at the time of signature, ratification, acceptance, approval or accession, declare that this Convention is to extend to all its territorial units or only to one or more of them, and may amend its declaration by submitting another declaration at any time.
(2) These declarations are to be notified to the depositary and are to state expressly the territorial units to which the Convention extends.
…
(4) If a Contracting State makes no declaration under paragraph (1) of this article, the Convention is to extend to all territorial units of that State.
One of the predominant views given by the French Supreme Court believes that the CISG should not be applied to HK, because the CISG did not feature in the Declaration I. On the other hand, the U.S. District Court for the Northern District of Illinois explicitly contended that the Declaration I failed to satisfy the requirement under Art. 93(1) and (2) CISG; therefore, the CISG should apply to HK according to Art. 93(4) CISG.
The issue was left open until China deposited a new declaration regarding the status of HK on 4 May 2022.
Present: New Declaration and New Ordinance
On 4 May 2022, China deposited the Declaration II with the UNSG which clearly stated that the CISG shall apply to HK, and the Declaration I that China is not bound by Art. 1(1)(b) CISG shall not apply to HK. Declaration II takes effect on 1 December 2022 per Art. 97(3) CISG.
Despite the United Nations Commission On International Trade Law confirming the effect of the Declaration II, the interpretation of Art. 93 CISG may raise further doubt.
It is argued that the declaration under Art. 93 CISG can only be made ‘at the time of signature, ratification, acceptance, approval or accession’. Therefore, it is unclear whether China can make a declaration under Art. 93 CISG after having acceded to the CISG and such circumstance was never considered during the drafting process of the CISG.
However, it is also believed that Art. 7(2) CISG should render the Declaration II admissible. Art. 7(2) CISG provides that, ‘[q]uestions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law.’ It is contended that this Article shall allow the State to enable the progressive application of the CISG to particular units of the State concerned. The legal effect of the Declaration II was flawless in practice and in theory. HK has officially been a contracting state territorial unit since 1 December 2022.
In implementing the CISG, from 2020, the HK government started consulting the community, including the legal profession, business organisations and other interested parties, on whether the application of the CISG should extent to HK, and the results demonstrate that the business and legal sectors in HK and Mainland China generally supported the application of CISG to HK. Thereafter, the Sale of Goods (United Nations Convention) Ordinance was passed by the Legislative Council and came into operation on 1 December 2022.
Future: The Remained Issues and the Prospectives
Because of non-compliance with the stipulations of Art. 1 CISG, the issue of whether the CISG is applicable between Mainland China and HK remains unsolved. If the CISG can be applied as the unified trade law between HK and Mainland China, the cost of negotiating the applicable laws will be significantly reduced.
In practice, the most frequently employed method to apply the CISG is via the parties’ agreement to ‘opt-in.’. Although the CISG only expressly empowered the parties to exclude its application in Art. 6, it should not be used to prevent the parties from designating the CISG as the law governing their contract. First, because it is addressed by Art. 4 of the Convention as relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods–the antecedent of the CISG– the parties have the power to ‘opt-in’. Second, in the diplomatic conference of drafting the CISG, it is noted that the ‘principle of party autonomy was sufficient to allow the parties to “opt-in” to the Convention’.
There are two ways to opt-into the CISG. While some parties simply incorporate the CISG provisions at the substantive law level as contract terms, most parties chose to opt-into the CISG as the applicable law. In the latter situation, two main issues emerge in the courts of Mainland China, which are, whether the parties can choose to apply the CISG and whether the CISG can be invoked if the parties choose to apply Mainland Law, Chinese Law or HK Law.
First, the Chinese conflict rules are used to restrict the scope of the applicable law as substantive national law, which would exclude the application of the CISG. The Law of the People's Republic of China on Choice of Law for Foreign-related Civil Relationships (‘the Conflict Law’) came into force on 11 April 2011, and Articles 3 and 41 of the Conflict Law generally extend the scope to ‘law’, indicating that the CISG can be chosen by the parties as the applicable law in theory.
Second, the parties often choose the law of the forum. As HK has implemented the CISG into its Ordinance, it will have practically the same effect whether the parties choose HK Law or the CISG. In Mainland China cases, before the Civil Code of China entered into force in 2021, Art. 142 of the General Principles of the Civil Law provided that international treaties shall prevail over non-harmonized domestic law. However, such provision is absent in the Civil Code, and the courts tend to directly choose domestic contract law via Art. 41 of the Conflict Law. Nonetheless, according to one of the recent cases, the Chinese court explicitly held that the CISG should prevail as an international treaty when parties only choose ‘Chinese Law’ as the applicable law.
From the administrative level, the HK government planned on negotiating with Mainland China to create ‘an arrangement for the mutual application of the CISG provisions to Mainland–HK sales transactions and propose implementing such arrangement in Mainland China and HK’.
Therefore, as analysed above, these issues can be overcome both from the interpretation of the laws and from administrative and legislative actions. The perspective of future CISG applications to HK should not be ignored.
It is argued that, despite the challenge HK faces on the difference between common law tradition and the CISG system, extending the CISG to HK is positive in many ways. First, it will reduce legal costs in trade, as the majority of the top trading partners of HK are contracting states. Second, it can free HK enterprises from being restrained by unfamiliar foreign laws–since the parties will be more likely governed by a completely neutral set of rules. Thirdly, it will consolidate HK's position as a centre for commercial dispute resolution.
Conclusion
Whilst there may be some remaining issues waiting to be confirmed by future court and tribunal decisions, it is evident that the CISG’s application to HK has confirmed HK’s status and addressed some of the relevant issues. However, the arrangement between Mainland China and HK on the issue of mutual application of the CISG is desirable and the extension of the CISG shall by no doubt benefit HK in multiple aspects.
REFERENCES
[1] Art. 1(1)(b) CISG
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