When a dispute arises under a contract for the purchase or sale of goods with a foreign party, you may be surprised to learn that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) applies and, as a result, the Agreement will not be interpreted or enforced as anticipated, even if a domestic choice of law clause has been agreed to by the parties.
CISG was adopted by the United States in 1988, and as of 2006, has been adopted by 70 countries. It applies to all contracts for the international sale of goods between parties with their relevant places of business in different countries, or “Contracting States”. Unless the contract expressly provides that CISG will not apply, it will apply automatically.
Accordingly, a Contracting State will have two sales laws: a domestic and CISG. In the United States, under the Supremacy Clause of the Constitution, CISG is U.S. law and preempts state common law and the Uniform Commercial Code (“UCC”) on any issues to which is applies.
The purpose of CISG is to provide rules governing the making and interpretation of international contracts for the sale of goods and to provide obligations and remedies for the parties. Basically, CISG governs the same issues as Article 2 of the UCC and it fills in where the parties have failed to provide an express provision governing a situation to which CISG is applicable or a provision in the contract is unclear. CISG does not apply to contracts to provide services alone, contracts for the sale of securities or negotiable instruments, auctions, consumer sales or sales of aircraft or vessels.
When determining whether CISG applies, the nationality of the buyer and the seller, place where the buyer takes delivery and whether the goods are to move from one country to the other is irrelevant. The determining factor is whether the relevant business of the parties is in different contracting states. While CISG does not define place of relevant business, U. S. case law has used a facts and circumstances test and looked at which place of business is the closest to the contract. The issues become difficult when Non-Contracting State parties enter the equation, and a private rule of law analysis is required to determine which jurisdiction governs.
Here are but a few examples of when CISG may produce unintended results:
- Under the UCC, an offer to purchase goods is accepted by the mailing of the acceptance. Under CISG, an acceptance must be received to be effective, and it must be received within the time stated in the offer. This rule can create problems where an offer states that a party has a certain time in which to accept, e. g., 10 days. Under the UCC, the ten days would not begin to run until the offer is received. Under CISG, however, the ten days begins to run as of the date on the offer. By the time the offer is received, a certain number of the ten days would have elapsed and the acceptance must be received by the offeror within the remainder of the ten days.
- The UCC requires any contract for the sale of goods priced at $500 or more to be evidenced by a “writing” or electronic record. There is no such requirement under CISG.
- Under the UCC, merely placing a time limit on the duration of an offer does not prevent the offeror from revoking it. If, for example, a seller or buyer makes an offer stating that it must be accepted within 10 days, the offer may be revoked (withdrawn) at any time before the ten days elapse unless the offer provides written assurance that it will not be revoked. Under CISG, however, an offer that merely states that it will only last for ten days prevents the party making the offer from withdrawing it during the ten-day period.
- Under the UCC, if a buyer sends a purchase order and the seller responds with an acknowledgment stating the same price and quantity terms but adding other terms not found in the offer, the acknowledgment may still be an acceptance of the offer forming a contract. Typically, the buyer who makes an offer will prevail in this “battle of the forms.” Under CISG, virtually any additional term in the acknowledgment will convert the seller’s acceptance into a counter offer. The seller will then ship the goods and buyer will accept the goods (ignoring boilerplate additional terms) and seller’s terms will prevail.
- Under the UCC, where terms of the contract are reduced to a writing that manifests the parties’ intention to be bound only by written terms, evidence of terms discussed in negotiation before the writing was executed will not be admitted into evidence. Under CISG, such evidence is admissible.
- Interpretation of contract language under the UCC is based on the reasonable person standard. Under CISG, however, evidence of the subjective intention of the individual parties may even trump a document signed by both parties.
Article 6 of CISG allows the parties to agree that CISG will not apply, i. e., they may “opt out” of CISG. The parties may also decide that they wish to opt out of only one or more provisions of CISG. Whether they decide to opt out of CISG entirely or only certain parts, their contract should clearly indicate this intention.
In order to opt out of CISG entirely, the parties should expressly include in their contracts clear exclusive language, such as “This contract shall not be governed by the United Nations Convention on the International Sales of Goods.” Simply stating that the law of a certain state applies is not sufficient.