What Saudi Arabia’s Adoption of the United Nations CISG Means for Companies Doing Business There

September 26, 2023
KN Legal

The United Nations Convention on the Contracts for the International Sale of Goods (“CISG”) is an international treaty governing contract formation and party performance of cross-border agreements for the sales of goods.

In August 2023, the Kingdom of Saudi Arabia (“Kingdom”) became the latest of almost 100 nations deciding to take part in the Convention. Article 92 of the CISG grants participating states the ability to modify or exclude certain provisions of the Convention, thereby allowing the Kingdom to adopt the CISG, or a modified version of it, by incorporating some of its terms into the Kingdom’s legal system. For instance, in compliance with Islamic Law, the Kingdom has excluded sections imposing interest payments as penalty for non-payment.

The Impact on the Kingdom’s Dealings with International Trade

Along with the momentous change currently taking place in the Kingdom, this decision to adopt the CISG will significantly alter the landscape of the Kingdom’s international and domestic dealings. As part of its 2030 vision, the Kingdom has seen an influx of investments into the country. Some observers claim that further uniformity in default contractual terms, especially as applied to international sale of goods agreements, will streamline the execution of international contracts and increase global parties’ interest in contracting with entities in the Kingdom.

For the reasons detailed below, however, this prediction may not come to pass. The impact of the Kingdom’s adoption of the CISG is greatly limited by the Kingdom’s exclusion of Part III of the Convention.

As a result of this exclusion, the Kingdom’s decision will affect only the governing terms relating to contract formation. None of the CISG terms pertaining to the parties’ obligations and performance will be applicable in the Kingdom. These excluded terms, which represent the essence of the Convention and make up most of its terms, are the subject of most contract disputes.

The number of disputes arising from contract formation, governed by Part II, is negligible when compared to disputes arising from the parties’ performance, governed by Part III. The Kingdom’s adoption of the CISG may alter contracting parties’ conduct prior to the execution of international agreements, such as their conduct in relation to offer, offer revocation, acceptance, and acceptance withdrawal.

However, to many contracting parties and states, Part III constitutes the most important part of the CISG. The Kingdom’s exclusion of Part III means that, upon the execution of an international agreement for the sale of goods in the Kingdom, not much will change, since most contractual disputes will concern terms governed by Part III. As such, the Kingdom’s adoption of the CISG may not result in the dramatic positive change some are predicting.

The Kingdom’s Options

It may be the case that the Kingdom wishes to “test” certain aspects of the Convention prior to adopting it in its entirety. Several other United Nations members, including Denmark, Finland, Norway, Sweden, and Iceland, have excluded portions of the Convention. Thus, the Kingdom’s decision to exclude a part of the CISG is not unprecedented.

The adoption of the CISG without the exclusion of Part III would mitigate some of the otherwise “unknown risks” of Saudi contract law as it pertains to the sale of goods to foreign investors. Thanks to its similarity to U.S. contract law principles, the CISG provides terms already familiar to international parties, and the fact that 95 other nations are participating provides welcome comfort and security. With the adoption of the CISG, international businesses and investors will have further clarity as to the risks associated with purchasing or selling goods to or from the Kingdom.

Should the Kingdom at a later date adopt Part III of the Convention, default applicable terms in each international agreement for the sale of goods will govern the parties’ obligations, the instances of breach, the standards of offer, acceptance, and revocation, the permitted instances of termination, and the standard for the preservation and delivery of goods. Unless the parties to an agreement negotiate alternative terms (rendering invalid the applicability of certain provisions of the Convention as per Article 6 of the Convention), these default provisions will apply.

Given the recent changes in the Kingdom, however, it is safe to assume that the Kingdom shares the following sentiment from the text of the Convention:

“The States Parties to this Convention . . . Being of the opinion that the adoption of uniform rules which govern contracts for the international sale of goods and take into account the different social, economic and legal systems would contribute to the removal of legal barriers in international trade and promote the development of international trade.”

Hence, it is not outside the realm of possibility that, after assessing the impact of the CISG on the Kingdom’s affairs and dealings, the Kingdom will choose to adopt Part III of the Convention at some point in the future. Indeed, such a course of action would be astute, allowing the Kingdom to avoid assuming a rushed, unjustified risk.

The Impact on the Kingdom’s Domestic Dealings

While the adoption of the CISG relates primarily to the Kingdom’s dealings with international trade, its decision may likewise affect domestic transactions.

As part of the efforts to increase uniformity in international agreements for the sale of goods, domestic parties may opt to do the same and adopt terms similar to the CISG in their local contracts. Of course, doing so will be voluntary for domestic parties, who will have no obligation to conform to CISG provisions. It remains to be seen whether the adoption of the Convention will spur the Kingdom to modify its domestic contract principles to further mirror the provisions of the Convention and provide greater uniformity in the adjudication of contract disputes in the Kingdom.

Response to the Decision

Saudi entities dealing internationally will surely be receptive to the Kingdom’s decision to adopt the CISG. The decision will serve to facilitate the negotiation of terms with international entities, and parties are free to exclude from their contracts any CISG terms they oppose. Thus, the decision is a clear win-win for Saudi entities, who will have the autonomy and freedom to define their contractual terms while being perceived internationally as more appealing—and possibly more lucrative—business counterparts.

There is little doubt that legal scholars, litigants, and other legal professionals will be closely tracking the impact of the Kingdom’s decision in the foreseeable future. In particular, the legal world will be curious as to whether Saudi courts will present unique interpretations of CISG provisions. Importantly, even if Saudi courts do take a novel legal approach, Article 7 provides some limitation on the interpretation of the CISG, calling for uniform application of the CISG and observance of good faith in international trade.

Summary of the Convention

  • Part I: Sphere of Application and General Provisions

Part I of the Convention defines the scope and applicability of the CISG. In general, the CISG applies to contracts for the sale of goods when the parties are contracting states. However, subject to a few exceptions, the Convention does not apply to sales: (i) of personal or household goods; (ii) by auction; (iii) by authority of law; (iv) of stocks, shares, investment securities, or negotiable instruments; (v) of ships or aircrafts; or (vi) of electricity.

This Part likewise addresses the construction and interpretation of the CISG and the validity of oral agreements. Importantly, in instances of ambiguity or lack of applicable terms, the spirit of international law and standards will govern the construction and interpretation of the Convention.

  • Part II: Formation of the Contract

Like the Uniform Commercial Code and common-law principles, Part II of the CISG outlines definite terms for contract formation, including offer terms, offer revocation, acceptance, and acceptance withdrawal.

  • Part III: Sale of Goods 

** Note that the Kingdom has opted out of the Convention’s Part III as permitted by Article 92, which provides, “A Contracting State may declare at the time of signature, ratification, acceptance, approval or accession that it will not be bound by Part II of this Convention or that it will not be bound by Part III of this Convention.”

In the performance of agreements executed under the CISG, Part III defines the confines of breach, the standard buyer, seller, and joint obligations, and acceptable standards of goods and their preservation.

  • Part IV: Final Provisions

Part IV concerns the contracting states’ rights under the Convention and other related matters that do not significantly affect parties to CISG agreements.

Tony Khoury is a partner in KN Legal. His robust practice concentrates on projects and corporate transactions across the Middle East. He can be reached at t.khoury@knlaw.com. Ahmad AlZamel and Abdulrahman Alrikhaimi are associates at KN Legal and can be reached at a.alzamel@knlaw.com and a.alrikhaimi@knlaw.com.