Contracting Outside The Four Corners Of The United States - A Closer Look At The United Nations Convention On Contracts For The International Sales Of Goods
January, 2004
by Michael R. Grimm and Dean S. Rauchwerger
Consider a situation where you represent a buyer who is seeking to purchase goods from a seller in Germany. At first glance, it would seem to be a situation where the typical provisions of the Uniform Commercial Code (“UCC”) would apply. However, as the negotiation and draft of the contract moves forward, your research leads to a relatively new and unfamiliar area, that of the 1980 United Nations Convention on Contracts for the International Sale of Goods (“CISG”), which was adopted by the United States in 1988. The CISG will change the way that you approach this hypothetical contract and any others that deal with international commerce.
As the trend is moving towards application of the CISG, this article serves to give traders, importers, exporters, manufacturers, sales and purchasing managers, agents and their legal representatives notice about a set of laws that may apply to your international business.
The Convention’s Impact On Your Global Business
Practically speaking, the CISG is a binding convention between nations providing rules that govern contracts for the sale of goods in international commerce and does so in an economical and straightforward manner. It seeks to alleviate the choice of law problems that arise in situations where the principal places of business of the contracting parties are in different countries. Essentially, it is a uniform set of laws that is ratified by approximately sixty-two countries to date.
Does Your Global Business Transaction Fall Within The CISG’s Net?
The CISG does not apply to all contracts, but rather only to the sale of goods between parties whose places of business are in different countries, provided each country has ratified the CISG or if the private rules of the state whose law is to apply has ratified the CISG. As important as it is to recognize what it does apply to, there is a laundry list of situations where it will not apply, including goods purchased for personal use, ships, vessels, aircrafts, securities, etc. It will also only apply to a “mixed” contract for services and goods if the goods portion of the contract predominates or is the substantial part of the transaction.
The sole consideration for application of the CISG to the particular parties is the principal places of business of each party, which, under this analysis, is the place that has the closest connection to the contract and its performance. This designation must be clearly indicated in the contract. The CISG only applies to the formation of the contract, the obligations of the parties, and the passing of risk. It does not govern the contract’s validity. Thus, there are a number of gaps that need to be filled in by the parties.
In cases where the CISG will automatically apply, the parties may opt out of its coverage, but must expressly do so, either entirely or provision by provision. However, you must consider, as a business decision, whether or not you want the CISG to apply to your global contracts on a case-by-case basis.
The Good, The Bad, And The Ugly
The CISG is thought to be more flexible than the UCC. It mandates its application in certain instances, but always allows for modification and/or exclusion, if done properly.
There are many distinctions between the CISG and its parallel UCC provisions. Under the CISG, there is no statute of frauds, no parol evidence rules, acceptance and offer practices vary, tender and compliance differ, and breach is handled slightly differently than in the UCC context.
In general, you can have the best of both worlds in drafting a contract for the international sale of goods. You can submit to the application of the CISG and merely exclude the provisions that you do not wish to be bound by and fill in the gaps with the law of the state that you wish to govern the rest of the contract.
Practice Tips
• Use express choice of law provisions in your contract. A failure to do so can invoke the coverage of the CISG or remove your contract from its application.
• Always consider if the parties to the contract are members of the convention as it could automatically apply to your contract. For a list of participating countries, go to http://www.cisg.law.pace.edu/cisg/countries/cntries. html.
• Consider if there are other international agreements in place that were ratified prior to the CISG that could apply to the contract instead.
• Review provisions for each particular sale of goods as the advantages or disadvantages vary with the type of contract, goods, and parties involved.
• If you do not wish for the CISG to apply, it must be specifically stated in the contract terms and another express choice of law provision should be included.
• Make sure your contracts are always in writing and include a merger or integration clause to ensure the intent of the parties is accurately captured in the contract if the CISG applies.
Should you have any inquiries on your global business sales transactions, please contact Michael R. Grimm, Sr., Dean S. Rauchwerger, Cheri L. Baden, or any member of CM’s Business Practice Group. ¨
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