How does contract law apply to businesses in Australia, and internationally?

Date: Jan 03, 2012
Document Type: Newsletter

In an increasingly interdependent world, it’s no longer a surprise that many Australian businesses conduct transactions with other businesses located internationally. Despite the fact that the sale of goods is conducted between businesses in different countries, the law of contracts still apply, but which laws? Furthermore, questions surrounding how a contract is formed, and what dispute resolution mechanisms is available, are other pertinent questions an Australian business may ask in regards to international sales contracts.

What are the laws that govern international sales between businesses in Australia and overseas?
A contractual relationship between businesses located in Australia and overseas may be governed by the provisions of the United Nations Convention on Contracts for the International Sale of Goods (the Convention), in which Australia is a signatory, and has also been implemented in all jurisdictions. The provisions of the Convention are as such, that if any inconsistencies arise in relation to the Convention and any other law, then it is the Convention which prevails over the local law.
The overriding purpose of the Convention is the promotion of friendly relations between actor States through business, as well as the promotion of international trade.

How is the Convention applied?
Under Part 1, Chapter 1, Article 1(1), the Convention applies to contracts of sales of goods between parties who are of different States, on the proviso:

  • the States are signatories to the Convention;
  • the rules of private international law leads to the application of the law of the contracting State.

The fact that the contracting parties are located in different countries is to be disregarded when this fact does not appear on the terms of the contract in the dealings between the parties, or any information which was disclosed at any time during the contractual negotiations, or its conclusion.
Additionally, there may be instances where a business conducts dealings in more than one jurisdiction and there is a need to apply the relevant rules, which can be found in Article 10 of the Convention which states:

  • a party that has more than one place of business, the place of business that has the closest relationship to the contract and its performance – taking into account the circumstances which is known or contemplated by the parties at any time before, or at the conclusion of the contract;
  • in the event that a party does not have a business, then reference shall be made to the place of residence of the party.

When is the Convention not applicable?
Perhaps the most important thing to be aware of in regards to the Convention is that it applies only to substantive laws in relation to international sales, rather than the awarding of costs or jurisdictional matters. So, under Article 4, the Convention only governs the formation, rights, and obligations of both the buyer and seller, except for:

  • whether the contract is valid, such as whether it is void, voidable or unenforceable;
  • the effect of the contract on the property in the goods sold.

Furthermore, ‘goods’ are not defined within the Convention, so there may be some uncertainty to whether or not an item will fall under the auspices of the Convention.
However, the types of sales in which the Convention does not expressly apply to, can be found in Article 2, and are as follows:

  • goods purchased for personal, family or domestic use, unless the merchant had no actual or constructive knowledge of such use;
  • sales executed via auction;
  • sales by authority of law;
  • sales of stocks, shares, investment securities, negotiable instruments or money;
  • sales involving ships, vessels, hovercraft or aircraft; and
  • sales of electricity.

Article 3 of the Convention further states that contracts for the supply of goods manufactured or produced will be considered as sales, unless, the business undertaking the purchase, supplies a substantial part of the materials required for manufacture or production. Furthermore, Article 3(2) of the Convention is not applicable in instances where the obligation of the vendor is the supply of labour.

Must the parties be bound by the Articles of the Convention?
The parties under Article 6 are able to exclude, derogate or vary any terms however, it may be necessary to expressly include within the contract a desire of the contracting parties to undertake such actions.

What are the required elements when forming a contract under the Convention?
There are many interesting aspects of the formation of a contract under the Convention, such as the element of consideration is not necessary. However, the other standard elements of the law of contract such as offer, acceptance and intention to be bound by the contract, are still required elements.

Furthermore, Article 11 does not require a contract of sales to be in writing, nor subject to a standard form. Instead, the contractual relationship may be proved via other means, such as any witnesses to the agreement.

How can a contract be modified or terminated?
If the parties wish to either modify or terminate the contractual relationship, under the Article 29(1) provisions, the only requirement necessary is that the parties agree to either the modification, or termination of the agreement.
However, in circumstances where a written agreement requires modification or termination to be done in writing, then it must be done so according to the provisions of Article 29(2). However, a party may be precluded from asserting such a provision, to the extent in which there was a reliance on the conduct of the other party (Article 29(2)).
The overarching aspect in the conduct of the parties is that they are bound by any usage in which they have agreed upon, or the established practices under Article 9(1) of the Convention.

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