Saudi Arabia Joins the CISG: A New Era for International Trade
The United Nations Convention on Contracts for International Sale of Goods (CISG), also known as the Vienna Convention, is an international treaty that establishes a uniform set of rules governing contracts which provide a modern, uniform and fair regime for contracts for the international sale of goods between parties in different countries. The Convention, considered one of the core international trade law conventions, was adopted in 1980 and has since been ratified by 95 countries, including the Kingdom of Saudi Arabia (KSA). As of 3 August 2023, the KSA has lodged its instrument of accession to (CISG). This was accompanied by a statement on June 21, 2023, that the KSA has confirmed its entrance to the CISG pursuant to the Council of Ministers Resolution No. (839) dated 2/12/1444H (corresponding to 21/6/2023G). The CISG will enter into force in the KSA on September 1st, 2024. The KSA’s accession to the CISG is a significant step in the country’s efforts to modernize its commercial laws and align them with international standards. The Convention will provide businesses in the KSA with greater certainty and predictability when entering international contracts for the sale of goods.
Benefits of the adherence of Saudi Arabia to the CISG:
95 nations have already acceded the CISG which comprises world-wide acclaimed standards for international sale transactions, among them all major economic powers, and leading companies, when undertaking cross-border trade, search for stability and assurance therefore tend to avoid wasting considerable amounts of time and money arising from negotiations about the major obligations of each party in the contract, and other clauses especially those relating to the applicable law. One benefit of the CISG is that it directly applies to contracts of sale of goods between parties whose places of business are in different states when the states are contracting states (Article 1 of the CISG), instead of applying the Sharia Law which might be an issue for some foreign investors. Also, the CISG is clear and allows predictability and flexibility by its general terms and conditions which do not differ a lot from what Saudi Arabia has been used to, but rather enhance the certainty of Law in international transactions. In addition to that, the CISG does not compel the parties or limit their choice regarding the competent authority which leaves them free to decide which suits them better.
Implementation of the CISG on certain goods:
CISG does not enumerate or define what is considered to be goods for the international trade, but it expressly excludes the sale of some objects like goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use, sale of goods by auction, sale of goods on execution or otherwise by authority of law, sale of stocks, shares, investment securities, negotiable instruments or money, sale of ships, vessels, hovercraft or aircraft and sale of electricity (Article 2 of the CISG).
Exclusions by Saudi Arabia:
The Council of Ministers of Saudi Arabia, while ratifying the adherence of Saudi Arabia to the CISG, stated that Saudi Arabi shall not be bound by Articles 78 and 84.
The CISG entitles in its Article 78 “a party, when the other party fails to pay the price or any other sum that is in arrears, to benefit from interest on it, without prejudice to any claim for damages” and Article 84 “If the seller is bound to refund the price, he must also pay interest on it from the date on which the price was paid” a practice entirely prohibited under Sharia Law. Riba and Gharar are the primary prohibited transactional elements in the Saudi Arabi. Interest is a monetary charge for borrowing money, expressed as a percentage of the borrowed amount which can be earned by lenders or paid by borrowers. Therefore, interest is considered riba which leads someone to earn money he is not entitled to. In addition to that, the CISG does not limit the amount of these due sums, or any specific interest rate which leaves place to the arbitrary decisions of the courts and their subjective implementation of the convention.
Subjects regarding which CISG remains silent:
CISG as a whole is considered to cover major topics regarding the international sale of goods. However, it comprises certain gaps when it comes to penalty clauses, choice of currency and place to return payment in case of termination of the contract. Silent issues may lead to uncertainty especially when two different countries and two different jurisdictions are involved in a disputed matter, therefore the court ruling on such matters will apply its own methodology towards implementing the CISG and its dispositions, which leads back to subjective interpretation and implementation.
The adherence of the Kingdom of Saudi Arabia to the CISG constitutes a turning point in the commercial industry for the Kingdom and time will demonstrate that this accession has a significant positive impact on the country’s trade and economy. The Convention has provided a clear and predictable legal framework for international sales transactions, which will decrease the risk of disputes and simplify cross-border trade and it has enhanced Saudi Arabia’s reputation as a business-friendly destination and will contribute in the attraction of foreign business men and investors. The ratification should not be seen as the ultimate goal, but must be regarded as the beginning of a long effort to ensure the success of Vision 2030 of Saudi Arabia.
Authors: Fadi A. Daher (PhD), Partner, and Karen Akl, Associate.