In Saudi Arabia’s continuous efforts to maintain its position as a global powerhouse in the international field, Saudi Arabia becomes the 96th country to accede to the Convention on Contracts for the International Sale of Goods (the “Convention”), as evidenced in Royal Decree No. M/196 dated 4/12/1444H (corresponding to 22/06/2023 G) (“Royal Decree M/196”). The Convention shall come into force in Saudi Arabia on 1 September 2024, and is a welcomed opportunity to continue shaping contracts related to the provision of international goods, as local legislation only speaks to the provision of goods in respect to agreements between foreign principals with local agents and/or distributors under the Commercial Agencies Law issued by Royal Decree No.11 dated 1/1/1382H (corresponding to 30/6/1962 G) and, most recently, the E-Commerce Law issued by Royal Decree No. M/126 dated 7/11/1440H (corresponding to 10/7/2019 G). By Saudi Arabia acceding to the Convention, this invites further clarity as to the defined terms between the parties to an agreement for the provision of goods in cross-border transactions but carries certain implications should a dispute arise. This article will walk merchants through the subtle yet significant changes and how this may impact their business with Saudi Arabian buyers and sellers.
Demystifying the Scope of the Convention
- Who is subject to the Convention?
The Convention applies to any contract for the sale of goods between parties whose places of business are in different states. The Convention considers states as different states when the parties are Contracting States (meaning, states that have ratified or acceded to the Convention) or when the rules of private international law (meaning, a conflict of law analysis) lead to the application of the law of a Contracting State (even if the other party’s country is not a Contracting State). Further, determining the place of business is not extrapolated from the nationality of the parties, rather, it considers whether the place of business is a permanent establishment (which means warehouses or seller’s agent’s offices disqualify as a place of business), and whether the substance of the contract between the parties or from prior dealings speaks to the place of business.
- What types of goods are covered under the Convention?
The Convention inversely defines goods by determining what’s out rather than what’s in. The Convention’s reach does not extend to the sale of goods intended for personal use (such as household items), by auction, execution or by authority of law, stocks, shares, investment securities, negotiable instruments, or money, ships, vessels, hovercraft or aircraft, electricity, and contracts for the provision of services (such as manufacturing or producing the goods supplied, supply of labor or other services) in which the provision of goods is incidental to the services contract.
- What does the Convention Cover?
The Convention only governs the formation of the contract for the sale of goods (i.e. what constitutes an offer, acceptance, rejection) and the rights and obligations between seller and buyer. The Convention does not speak to the validity of the contract, the effect on title of goods, and third-party rights. Neither does it address liability of seller for death or personal injury caused by the goods to any person.
Filling in the Gaps: Interpretation of the Convention, the Contract, and the Parties’ Conduct
While in principle, the Convention promotes uniformity, it does have gaps in application. The Convention permits Contracting States’ courts to interpret Convention on a good-faith basis (an international principle set in stone and promotes finding solutions rather than findings ways to terminating agreements). In respect to interpreting the parties conduct, the Convention allows courts to consider the intent of the parties (from a subjective standpoint), the parties’ statements made to each other (from an objective standpoint), and/or to consider any usage of trade or prior dealings between the parties.
Main Pillars of Contract Formation Under the Convention
Part II of the Convention governs the process of formation of an international sale of goods contract. In general, proposals with definite terms (including quantity and price) and an intention to be bound is deemed as an offer, however, a proposal addressed to multiple people is an indication to make offers.
Other principles are worth noting, such as receipt, which is a definitive factor in determining whether an offer or acceptance has been satisfied. For instance, an offer becomes effective upon receipt by the offeree. An irrevocable offer can be withdrawn or rejected upon the offeror’s receipt of the offeree’s intention to withdraw or reject arrives prior to the offeree’s acceptance.
Moreover, methods of accepting an offer is not limited to written statements; an offeree’s conduct (unless such conduct is in the form of silence or inactivity by the offeree), or verbal statements can be deemed as an acceptance. However, silence may be sufficient if followed by affirmative conduct.
Further, modifications to offers is not necessarily an outright rejection of the offer (and thereby creating a counteroffer). As a general rule, the Convention considers different terms that do not materially alter the offer to form an integral part of the offeree’s acceptance. However, should the offeree materially alter the offer in respect to: price, payment, quality, quantity of goods, place and time of delivery, extent of party’s liability to another, and settlement of disputes, such deviation will be deemed as a rejection of the offer and the creation of a counteroffer.
For example, let’s say you are a seller whose head office is domiciled in Bahrain (a Contracting Party) and wish to enter into a sales agreement for office furniture with a buyer whose headquartered in Saudi Arabia (another Contracting Party). You draft up an offer which includes the quantity and the price of the office furniture but does not specify the manner in which your proposal may be accepted. You send the proposal across to your buyer in Saudi Arabia, and buyer goes silent; neither accepting nor rejecting your proposal. Two weeks later, you receive information from a third-party that the buyer is selling all his previous office furniture for a significant amount. Under the Convention, the buyer would be deemed to have accepted the offer; while the buyer was silent, his affirmative conduct (freeing up space and securing additional financing in order to facilitate a purchase order) can be deemed as acceptance.
Based on the liberal interpretation of offer, acceptance, and counteroffer under the Convention, it is best for any buyer and seller to draft up letters of intents, proposals, and acceptances with the Convention in mind, i.e. the seller may limit the method of acceptance to be in writing, draft proposals with specificity and certainty. The more terms not addressed, the more likely the agreement between the parties will be prone to interpretation or gap filling by Contracting States’ courts.
Reservations and its Implications
The Convention permits Contracting States to declare that they will not be bound by Part II (Formation of the Contract) or Part III (Sale of Goods) of the Convention upon its accession or ratification of the Convention. Saudi Arabia has submitted its reservation both to the United Nations Depository including its reservation to Part III of the Convention, and in the Royal Decree M/196, expressly stating that Saudi Arabia will not be bound by Part III of the Convention.
Part III forms a substantial part of the Convention, detailing the rights and obligations of the parties, passage of risk of loss, payment and delivery terms, damages, anticipatory breach, and instalment contracts. However, Saudi Arabia has indicated in Royal Decree M/196 that the main purpose of its reservation to Part III is the presence of the application of interest for failure to pay in a timely manner and payment of any interest rate on refunds. Islamic (Shariah) law strictly forbids the application of interest on payments or receipt of interest on payments (also known as riba under Islamic law), any provision within an agreement including interests would render the agreement void.
In light of the above, Royal Decree M/196 mandates that the Minister of Commerce continue investigating ways for Saudi Arabia to accede to the entire Convention permitted under international law – with the exception of provisions related to the application of interests – thereby allowing the remaining provisions of Part III to form part of Saudi’s accession to the Convention.
In the event that Saudi Arabia and another Contracting State have certain disputes arising as to the formation of the contract, and, one Contracting State has not made a reservation to either Part II or Part III of the Convention, the rules of private international law (such as a conflicts of law analysis) may lead to the law of either the Contracting State who has not made any reservation, or Saudi Arabia’s laws (who is not bound by Part III). Should the forum of the dispute be in Saudi Arabia, the Saudi Arabian courts will need to conduct a conflict of laws analysis to reach a determination as to which of the two Contracting States law would apply.
Let’s take the same example as above. Imagine the Bahraini seller and the Saudi buyer face a dispute, and resort to a Bahraini court to seek resolution. The agreement between the buyer and the seller fails to specify the governing law and the damages recognized under the agreement. Bahrain has not declared any reservations, while Saudi has declared not being bound by Part III of the Convention. The Bahraini court will need to conduct a conflict of law analysis, determining which Contracting States’ law will apply. The Bahraini court conducts the conflict of law analysis and concludes that Saudi’s law applies, because of majority of the transaction occurred in Saudi Arabia. Since Saudi Arabia is not bound by Part III (which addresses damages), the Bahraini court cannot apply damages based on the Convention and will consider other Saudi laws, such as shariah principles, or the recently promulgated Saudi Civil Transactions Law, issued by Royal Decree No. M/191 dated 29/11/1444H (corresponding to 18/6/2023G) (“Royal Decree M/191”)
Similarly, should Saudi Arabia and a non-Contracting State have a dispute arising in respect to a contract for the sale of goods, the non-Contracting State would possibly be subjected to the Convention pursuant to a conflicts of law determination, despite not acceding to it.
Saudi Arabia’s accession to the Convention may appear on its face to provide much needed clarity to how goods will be governed in cross-border transactions. However, it is unclear how certain rights and obligations between sellers and buyers will be determined given Saudi Arabia’s reservation to Part III of the Convention, perhaps Royal Decree No. M/191 will provide guidance as to defenses to contracts, damages, and rights and obligations. Further, non-Contracting States should be wary that agreements concluded with Saudi Arabia for the provision of goods may subject them to the Convention. When preparing a proposal or accepting an offer, parties to an international sale of good transactions should draft up agreements with the Convention in mind, expressly stating the terms of the agreement, the manner in which a contract is formed, and create a solid foundation for damages and governing law (without inviting the application of a conflicts of law analysis).