Paper Details Paper Code: RA-CLA-V2-10 Category: Research Article Date of Submission for First Review: March 28, 2022 Date of Acceptance: July 6, 2022 Citation: Jeeri S. Reddy. “Increasing MSME Participation in Global Trade with the Help of the Convention on Contracts for the International Sale of Goods”, 2, AIJACLA, 127, 127-133 (2022). Author Details: Jeeri S. Reddy, Student, Damodaram Sanjivayya National Law University
Abstract Globalisation has increased the volume of products travelling between countries, necessitating the development of widely accepted trade practises and customs in order to promote effective discourse between countries. The United Nations Convention on Contracts for the International Sale of Goods has proven to be an effective international legal instrument by promoting consistency in international trade due to its role as a uniform sales law. While there might be several benefits to its ratification by India, a key advantage is connected to the Micro, Small and Medium Enterprises (“MSME”) sector. The Indian economy can truly flourish with rising MSME participation in cross-border transactions. However, such small enterprises face several legal hurdles which deter their participation in global markets. This article seeks to address the legal problems faced by these enterprises and outlines solutions by highlighting the benefits that can be reaped by MSMEs in India by utilizing the CISG. Keywords: India and CISG – MSME Sector – International Trade – Indian Economy
INTRODUCTION
When the United Nations Commission on International Trade Law (UNCITRAL) was established, it has been recognized that differing legal requirements of different countries are the greatest impediment to international trade. The liberal harmonisation of multiple trade rules has been heralded as the only means of facilitating extensive trade law development. The United Nations Convention on Contracts for the International Sale of Goods[1] (“CISG” or “the Convention”) is an example of international law that aims to take into account different economic, legal and social systems whilst simultaneously eliminating legal barriers to promote international trade development. While many countries have ratified it, India has been one of the most prominent and talked-about absentees. India has repeatedly refused to ratify the treaty. The pros and cons of the adoption of CISG by India has been a hot topic for debate in the academia for years. However, other than the usual reasons discussed before, this article seeks to analyse whether the Indian economy could actually benefit from the ratification of the CISG? More specifically, it is a curious and exciting question – as to whether the CISG can be wielded as a powerful and viable tool by Micro, Small and Medium Enterprises (“MSMEs”) in India? In this regard, this article seeks to identify one of the major advantages of India ratifying the CISG – vis-à-vis its effect on the MSME sector. It shall evaluate the effects of such ratification, and the manner in which CISG can be made applicable.
THE PIVOTAL ROLE PLAYED BY THE MSME SECTOR IN THE INDIAN ECONOMY
The CISG can assist the Indian government in expanding its economy. Micro, small, and medium-sized enterprises (MSMEs) are the most common business forms, and the MSME sector contributes significantly to the country’s socioeconomic development.[2] The sector has made a significant contribution to entrepreneurial growth in India, particularly in semi-urban and rural areas. MSMEs contribute for 80 percent of the country’s industries, 31 percent of GDP, and 45 percent of exports, with about 63 million MSMEs. This sector is also India’s second-largest employer, engaging over 120 million people.[3] As a result, the government is always attempting to improve growth and boost productivity in this field. In order to become a globally competitive economy, India must place a high priority on exporting to demanding countries. Increased engagement of Indian MSMEs in the international market may aid in the acceleration of this expansion.
MSMEs in the country are now starting to focus on international trade to sustain their operations in the post-pandemic market, according to a PayPal survey on “MSME Digital Readiness”.[4] According to the survey, 86% of MSMEs reported increased cross-border transactions during the corona virus pandemic. As a result of tremendous growth due to international trade, MSMEs are now making a concerted effort in their business to expand global operations. Therefore, it isn’t the case that MSMEs aren’t interested to participate in the global market. So, what is stopping MSMEs from participating in the global market?
It has been observed that MSMEs frequently lack the knowledge, desire, resources, or bargaining strength to include a favourable choice of law clause in their contracts. For many MSMEs, the unsatisfactory response appears to be to “self-hedge,” limiting cross-border trade and so limiting the potential growth and benefits that such trade could create. Alternatively, MSMEs may be exposed to the substantial risks of cross-border litigation, which can result in unfair and disastrous outcomes for small businesses. Contractual reality research for SMEs is uncommon, if not non-existent. It is therefore critical to support these small enterprises in cross-border trading. This can be done by understanding the most suitable manner in which MSMEs can enter into international transactions, and determining the most appropriate law for such cross-border contracts. In order to do so, it is imperative to first understand how small businesses contract, and what other options might there be.
INCREASING MSME PARTICIPATION IN GLOBAL TRADE BY USING THE CISG
Studies conducted in New Zealand in 2015 and 2018 confirmed the lack of sophistication in cross-border contracting by MSMEs; they also highlighted that the seriousness of this problem is always underestimated. Despite the government’s efforts under the International Cooperation Scheme for MSMEs, the situation appears to be similar in India.[5]
A major problem is that most small businesses lack even a single contract document. Contracting is often done haphazardly, in a combination of emails, phone calls, and messenger apps. For example, India has seen a rise in small business operating on social media – especially Instagram. Order forms, export papers, and bills are frequently the most comprehensive single contract document. However, the more complicated the product is, the more likely it is to have a single contract form with all elements, such as if it incorporates intellectual property rights or requires distribution agreements.[6] On top of trying to sustain and grow their firm, MSMEs lack the resources to seek legal guidance or cope with the associated processes.[7] They lack of awareness of legal concerns and also lack involvement with legal services. Furthermore, MSMEs are typically unaware of the complexities of potential legal concerns, and as a result; they frequently assume legal realities based on their ‘gut sense’.[8] They are often unaware that cross-border contracting can result in extra complications. Lawyers are frequently assumed to be involved in the contract drafting step in traditional academic literature on international commercial contracts.[9] However, spending time or money on such preventive measures is not an economically viable alternative for MSMEs.
In this backdrop, it is proposed that the application of the CISG allows MSMEs to conduct international trade on concrete grounds, with established trade customs, and without the risks of confusion due to different legal systems, additional expenses, or a lack of information.[10] MSMEs, particularly in developing countries, have very restricted access to professional legal advice when drafting contracts and have little idea about the law applicable to the contract. So, the application of the CISG would be beneficial to them. The CISG’s main benefit is that it provides a neutral set of standards for international sales of goods transactions that are independent of any domestic legal system.[11] More crucially, unlike some national contract laws that favour either the buyer or the seller, the CISG equally balances both the buyer and the seller’s rights and obligations. The CISG’s scope of remedies (the Damages Regime)[12] and attitude to consideration under Article 29(1)[13] demonstrate the CISG’s use for MSMEs looking to enter international trade (unquestionably, the majority of MSMEs do not factor in consideration when altering a contract). Moreover, by relying on the concept of a “reasonable business person,” the CISG may have discovered a means to meet both the common law’s need for clarity and the civil law’s founding premise of the contracting parties’ entire obligation. Furthermore, Article 6 of the CISG[14] of the CISG allows parties to contract out of any of the Convention’s provisions. This promotes party autonomy and gives more power and control to MSMEs contracting with unfamiliar cross- border entities.
States that have ratified the CISG have seen their MSMEs participate in global commerce, aided by a modern and neutral contract legal framework. Article 1(1) CISG[15] of the CISG will apply to MSMEs’ contractual arrangements as long as they deal with a business in another CISG member state. However, MSMEs that do not have their headquarters in a CISG member state (such as those in India), on the other hand, are unlikely to benefit from the convention. This serves as a roadblock for Indian MSMEs in their efforts to join global value chains (GVCs) and discover new ways to incorporate themselves into the GVC as exporters and suppliers to large exporting companies.
APPLICABILITY OF THE CISG
I. How far has India come as regards to the ratification of CISG?
The Government of India amended the Specific Relief Act, 1963[16] on August 1, 2018, to boost the ease of doing business in India. Specific performance was an extraordinary remedy for contract breaches prior to the Amendment. In circumstances where damages would not be an acceptable remedy, the Court may require ‘Specific Performance’ of a contractual duty. The Amendment, on the other hand, aimed to change this position by making particular performance an obligatory relief, subject to the aggrieved party’s discretion. The Amendment, by requiring good faith fulfilment of the contract, is said to match India’s position with that of the Convention on International Sales of Goods, paving the way for India’s acceptance of the same. However, this article cannot simply state the advantages to the economy and MSME sector by basing its premise on the fact that India will be ratifying the CISG.
II. Enabling the applicability of CISG despite non- ratification by India
Although this research proposes harmonisation of legislation in order for India to accept the CISG, it is equally necessary to acknowledge that India might never adopt the convention. In such a situation, the possible benefits that MSMEs could reap should not be left untapped. There are few circumstances in which the convention can be applied in sales contracts between Indian dealers and international businessmen. The terms “express incorporation” and “implied inclusion” are used to describe these circumstances.
Firstly, where one of the foreign parties specifically incorporates the convention into the contract, Indian courts may elect to apply it as the contracting choice of parties. This is also permitted under Indian choice of law provisions, which dictate the use of contract law from another nation that is a signatory to the convention (“express incorporation”). Furthermore, an agreement’s “choice of law clause” can determine the applicability of the CISG, when a foreign party is a contracting state and its law is chosen as the applicable law by the parties. The CISG can also be the applicable law as part of the domestic law of a third country which is chosen as per the “choice of law” rules of the foreign court.[17] Secondly, it must be emphasised that rather than explicitly adopting the convention requirements in the contract, the CISG can be applied implicitly as stated in the convention itself (“implied inclusion”). Article 1(1)(b)[18] read with Article 6,[19] stipulate that the Convention can apply unless both parties have specifically excluded it. This is useful when conflicts rules indicate to applying the law of a contracting state.
Illustration –If an Indian enterprise enters into a contract to purchase certain goods from an Australian business and the agreement’s proper law is Australian, the Convention will be referred to. As a consequence of their discussions and conventional contracts, Indian traders are already aware of the Convention and can apply it if they desire to do so.
CONCLUSION We are living in the era of globalization, and traders from developing countries now transacting with peers from a wide range of jurisdictions, many of whose norms and laws are unknown and inconsistent. As a result of being exposed to a completely new and alien legal system, many people face legal difficulties. Each conflict creates a bevy of challenges for all stakeholders — traders, policymakers, lawyers, enterprises and courts – under such circumstances. Moreover, to determine a proper and clear legal position for concerns raised due to any given international transaction, they must also become familiar with the subtleties and complexities of that alien legal system, while simultaneously working on developing solutions to problems of an international nature. This also increases the work load and adds needless complications to commercial relationships. As stated earlier, MSMEs cannot afford to spend on such expenses. By establishing a uniform and consistent sales regime, the CISG aims to decrease such risks in the realm of international trade. Although it is not quite accurate to state that a strong legal system guarantees a robust economy, it is impossible to find thriving economy which is not supported by suitable legal framework. It has been established in this article that the CISG helps to enhance the Indian economy by aiding the growth of the MSME sector. Therefore, ratifying the Convention can lead to increased and more effective trade in India. At the very least, its applicability as choice of law in cross-border contracts ought to be considered by MSMEs. Otherwise, they risk facing legal barriers such as complicated transnational commercial operations, which could have been avoided in international trade that is governed by a uniform and consistently applied sales legislation.
[1] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG). [2] ‘MSME Sector in India’ (IBEF, 7 December 2021) <https://www.ibef.org/industry/msme.aspx> accessed 22 March 2022. [3] ‘ETRise Top MSMEs 2021: Making India competitive globally through exports’ Economic Times (India, 16 September 2021) <https://economictimes.indiatimes.com/small-biz/trade/exports/insights/etrise-top-msmes-21-making-india-competitive-globally-through-exports/articleshow/86253693.cms?from=mdr> accessed 23 March 2022. [4] ‘Indian MSME sector shifting towards cross border trade: PayPal Survey’ KNN India (New Delhi, 20 January 2022) < https://knnindia.co.in/news/newsdetails/msme/indian-msme-sector-shifting-towards-cross-border-trade-paypal-survey> accessed 23 March 2022. [5] Ministry of Micro, Small and Medium Enterprises, ‘Annual Report 2020-2021’ (Government of India) <https://msme.gov.in/sites/default/files/MSME-ANNUAL-REPORT-ENGLISH%202020-21.pdf> accessed 23 March 2022. [6] Petra Butler, ‘The CISG as the Toll for Successful MSME Participation in Global Trade’ (2019) 38 Journal of Law & Commerce < http://jlc.law.pitt.edu/ojs/jlc/article/view/187/162> accessed 24 March 2022. [7] ibid. [8] ibid. [9] William Fox, International Commercial Agreements and Electronic Commerce (5th edn, Wolters Kluwer 2013). [10] Butler (n 6). [11] Ingeborg Schwenzer et al., Commentary on the UN Convention on the International Sale of Goods (4th edn., OUP 2016). [12] Christoph Brunner and Benjamin Gottlieb, Commentary on the UN Sales Law (CISG) (Kluwer Arbitration, March 2019). [13] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG) art 29(1). [14] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG) art 6. [15] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG) art 1(1). [16] The Specific Relief Act 1963. [17] Schwenzer (n 11). [18] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG) art 1(1)(b). [19] United Nations Convention on Contracts for the International Sale of Goods (opened for signature 11 April 1980, entered into force 1 January 1988) UNGA A/CONF 97/18 (CISG) art 6.