Authors: Cesar Pereira C.Arb FCiarb*, Leonardo F. Souza-McMurtrie**, Lorenzo Galan***
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Introduction
The 2024-2025 Vis Moot Problem highlighted an issue that is not always obvious. When governments buy goods internationally, they conclude international sales potentially subject to the United Nations Convention on Contracts for the International Sale of Goods (CISG). But public procurement is a highly regulated activity. How do the CISG and public procurement regulations interplay? Or do they?
Selling goods to foreign governments is a risky business. International sales and public procurement rules do not always align, and there are peculiar risks when contracting with a sovereign nation. Even though the CISG aims to simplify the life of international contracts, handling government deals is still not straightforward.
Although it is mainly used for private-sector deals, the CISG applies to government contracts, as explained below. It makes international sales more consistent, reducing the confusion caused by different local laws. Using it in government contracts can be complicated due to conflicts with national laws, questions about whether contracts are valid, and specific form requirements. These challenges can be addressed through careful interpretation of the CISG.
The CISG Advisory Council has taken up the issue and appointed Cesar Pereira, one of the authors, as the rapporteur for its upcoming Opinion. The draft will be discussed further in 2025. He has been working on the application of the CISG to government contracts since 2014.[1] His most recent paper on the topic was published in 2023 during the CISG Advisory Council’s first meeting on the issue in Serbia.
Application of the CISG
According to Article 1(3) of the CISG, the nature of the parties (commercial or civil) does not affect its applicability. This same reasoning implies that whether a party or contract is administrative, governmental, or public is also irrelevant: the CISG covers contracts with state-owned entities. However, domestic procurement laws may sometimes override the CISG, leading to conflicts. The key issue is to define when such laws exclude or modify the application of the Convention.
Challenges in Applying the CISG to Government Contracts
Applying the CISG in government contracts necessitates understanding potential conflicts with national public procurement laws. Here are some:
- Contract Validity Issues: A primary challenge is contract validity, to which the CISG to some extent does not apply under Article 4 (see CISG Advisory Council no. 23). Many domestic procurement laws have strict requirements for official authority, procedures, and legal criteria for entering into public contracts. For instance, some countries specify formalities for government contract authorisation beyond the requirements outlined in the CISG. Thus, domestic rules may fall outside the CISG or amount to a derogation from the CISG in matters of contract validity matters, limiting its application.
- Conflicts with Form Requirements: Article 11 of the CISG permits oral contracts, yet public procurement laws often require written ones. Some argue that domestic requirements override the CISG due to Article 4’s validity exclusion, while others view Article 11 as providing flexibility. The correct approach typically depends on whether the domestic regulations that the parties adopted in their contract can be interpreted as an agreed-upon derogation from the CISG under Article 6.
- Domestic Rules on Contract Formation: Local laws often include contract formation procedures, such as tenders and bidding, which may conflict with, or may not be addressed in, the CISG’s provisions regarding the formation of contracts (Articles 14–24). Such national rules generally govern the pre-contractual phase and they might override the CISG due to their regulatory nature. The critical point is whether “auctions” or “reverse auctions” as a method of contracting or selecting government suppliers or buyers are encompassed in the CISG Article 2(b) exclusion.
- Incorporation of Domestic Procurement Law: Government contracts often reference local procurement laws, potentially excluding or altering the application of the CISG under Article 6. They exclude the CISG when local laws cover contractual obligations comprehensively—i.e. when they are similar in scope to the CISG and can be understood as having replaced it. If not, the CISG will apply where it does not conflict with the domestic laws chosen in the contract. Party autonomy prevails under the CISG.
Case Law and Practical Examples
Government contract cases under the CISG are less common than private ones, but those reported in case law show the challenges that arise when the CISG intersects with local regulations.
In Hilaturas Miel, S.L. v. Republic of Iraq, the U.S. court applied the CISG to a goods supply contract under the Oil for Food program. The CISG can apply to government contracts if they meet international and applicability standards, offering a consistent legal framework in complex scenarios.
A 2019 Swiss Federal Supreme Court decision in the Electronic electricity meters case highlighted how the CISG interacts with public procurement laws. The court applied the CISG to a deal between a state-owned Swiss company and a subsidiary of a Slovenian supplier, deciding that the seller’s main business location—not the subsidiary—was relevant. This case demonstrates that the Convention can apply even if the supplier has a business in the buyer’s country, emphasizing the importance of correctly identifying the primary business location in government contracts correctly.
The CISG’s flexible rules on contract formation and lack of formal requirements can clash with local government procurement laws. For instance, Article 11 allows informal contracts, but countries like Brazil may require written agreements for government dealings. In such cases, local laws take precedence over the CISG. However, Article 11 and Article 29 may influence contract amendments, including constructive changes.
The COVID-19 pandemic highlighted the importance of using the CISG in government purchasing, especially for medical supplies. In 2022, the Supreme Court of New York applied the CISG in a case concerning mask supplies, noting that the contract did not exclude the application of the Convention. Similar reasoning was applied in the Protective masks case IV. The EU’s vaccine deal with AstraZeneca also raised CISG-related questions, although state courts did not address the issue directly.
Governments are aware of the CISG’s relevance. For instance, the Brazilian state-owned company Nuclep included the CISG in at least three contracts (CS-164/2020, CB-012/2020, and CB-103/2021). Conversely, the Brazilian military purchasing office in Washington excluded the CISG until 2021, but some of the more recent contracts have removed this exclusion (Compare Contracts 1040/2021 and 1129/2023 here). Both examples demonstrate that state-owned entities recognize the CISG’s application to their international contracts.
Benefits for Government Entities Adopting the CISG
The CISG’s inspection and non-conformity rules (Articles 38 and 39) and damage mitigation obligations (Article 77) are valuable in government procurement. They enable early problem detection, reduce disputes, and guarantee product standards. The duty to minimize losses helps manage costs by ensuring reasonable actions are taken to limit damages, which is vital for avoiding financial impacts in major government projects.
An advantage of the CISG is that it allows government bodies to adjust contract terms to suit their requirements within a unified legal framework. Article 6 permits exclusion or modification of the CISG rules, enabling agencies to customize contracts to meet procurement needs. This flexibility aids in supplier negotiations and helps achieve quality, delivery, and liability objectives.
Balancing Article 6 in government contracts is delicate. The tribunal in Inter Rao UES et al. v. CELEC EP viewed the referencing domestic public procurement law and domestic special rules of public procurement as an implied exclusion of the CISG. Exclusion under Article 6 requires that such statutes to be independent and comparable to the CISG. The CISG Advisory Council detailed these standards in Opinion No. 16.
Using the CISG in tenders can attract international suppliers by offering a well-known legal framework, leading to more competitive bids and better prices. International suppliers appreciate the CISG because it is widely accepted and has supportive case law, making it less risky than dealing with unfamiliar legal systems.
The CISG benefits subcontracting in government projects by simplifying legal processes and reducing costs, which is crucial for complex international sales. The Diversitel Communications Inc. v. Glacier Bay Inc. case demonstrated the advantages of consistent contract terms across primary contracts and subcontracts.
Recommendations for Harmonizing the CISG with Domestic Laws
Governments must determine how to align the CISG provisions with their domestic procurement rules. But this is not solely the government’s responsibility, since suppliers and citizens also have a role to play. Here are some recommendations:
- Clarify Contractual Terms Regarding the CISG’s Applicability: Government agencies drafting procurement contracts should embrace the application of the CISG. Any exclusion, derogation or modification of the CISG under Article 6 should be unequivocal. This reduces ambiguity and potential disputes, providing suppliers a clear understanding of the applicable rules.
- Align Local Procurement Rules with CISG Principles: Governments should review their government contract laws to find any clashes with the CISG, particularly regarding how contracts are formed and validated. By aligning domestic rules with CISG standards—such as allowing flexible contract formats—it becomes easier to integrate the CISG into government contract practices. This may include adopting CISG-like rules for contract obligations and potential remedies.
- Train and Guide Procurement Officials: Training procurement officials on the CISG and how they mesh with local laws for successful implementation is key. Giving clear guidance on applying the CISG in government contracts can help staff determine when it is beneficial and when local laws should take priority.
- Create Model Contracts with CISG Integration: Government agencies can create standard contract templates that incorporate the CISG, adjusting for local laws where needed. These contracts should spell out the relevant CISG rules and specify where domestic laws take precedence. This approach ensures that procurement practices remain consistent, balancing international and local standards.
- Get Bidders to Talk About the CISG in Their Offers: Suppliers should refer to the CISG in their bids. This helps identify potential problems or benefits early, allowing for easier contract adjustments with international vendors while adhering to local laws. Domestic laws often allow bidders and citizens to affect the final request for proposals (RFPs) and contracts, requiring government entities to clarify the CISG’s relevance to any agreement.
Conclusion
The CISG is quite useful for international government procurement because it brings consistency and predictability to contracts. It is essential to think about the interplay between the CISG’s rules and the domestic regulations incorporated into the government contract. Article 6 of the CISG allows for some flexibility and adjustments, which can help harmonize with national standards when done correctly.
Applying the CISG to government procurement can streamline contracting, especially for complex international deals. Its rules on inspections, damage control, and non-conformity standards and notices help reduce disputes and costs, ensuring that goods meet required standards. Plus, using the CISG can make the process more attractive to international bidders by providing a familiar legal framework and boosting competition in tenders. Governments can enhance procurement efficiency by clearly stating the CISG’s role in contract terms, training officials, and creating model contracts that include the CISG rules.
There is consistent case law and robust scholarship in favour of an expanded role of the CISG in government contracts, as one of the author’s 2023 paper highlights.
While the CISG cannot and does not intend to replace domestic public procurement laws, it works in conjunction with them. Far from being enemies, the CISG and government contracts work hand in hand toward more efficient public deals.
*Cesar Pereira C.Arb FCiarb is a Partner at Justen, Pereira, Oliveira & Talamini. He is a Chartered Arbitrator (C.Arb) and Fellow (FCiarb) of the Chartered Institute of Arbitrators – Ciarb. Cesar received his PhD and LLM in Administrative Law at Pontifícia Universidade Católica de São Paulo and was a Fellow of the Public Procurement Research Group of the University of Nottingham.
**Leonardo F. Souza-McMurtrie is a Gates Scholar and PhD candidate at Cambridge University. He was a Chevening Scholar and received an LLM in Dispute Resolution from Queen Mary University of London. Leonardo won the QMUL International Dispute Resolution Award 2020. He is a Lawyer in Brazil and a Solicitor in England and Wales.
***Lorenzo Galan is an Associate at Justen, Pereira, Oliveira & Talamini. He received his Bachelor of Laws at the Federal University of Rio Grande do Sul. Lorenzo also served as an Editor at Arbipedia.
[1] This article benefits from materials comprised in Cesar Pereira. ‘Application of the CISG to international government contracts for the procurement of goods’, Review of the Kopaonik School of Natural Law, No. 2/2023, p. 157-183, 2023. Available at: <https://kopaonikschool.org/wp-content/uploads/2023/11/06-Cesar-Pereira.pdf>. Accessed on 31 October 2024. The latter is an updated and broader version of Cesar Pereira. ‘Aplicação da CISG a licitações e contratos administrativos de compra internacional de mercadorias’, in Ingeborg Schwenzer, Paula Costa e Silva & Cesar Pereira (coord.) CISG, Brasil e Portugal. São Paulo, Almedina, 2022, p. 137-159; C. Pereira. Application of the CISG to international government procurement of goods, Public Procurement Law Review, No. 1, pp. 20-32, 2016; and Cesar Pereira. ‘Aplicação da CISG a licitações e contratos administrativos de compra internacional de mercadorias’, in Ingeborg Schwenzer, Cesar Pereira & Leandro Tripodi (coord.) A CISG e o Brasil, São Paulo, Marial Pons, Curitiba, Federação das Indústrias do Estado do Paraná, 2015.