For many business lawyers and their clients who trade in tangible goods, the legal framework provided by Article 2 of the Uniform Commercial Code (UCC) is familiar. This is not to say that they are experts in the more obscure provisions of the UCC, only that its major terms have become part of the business environment.
For example, if a retailer asks a manufacturer to sell it a truckload of goods in a simple purchase order, and the manufacturer accepts the order via a detailed order acceptance document that introduces numerous contradictory terms, then the parties generally know that the UCC “battle of the forms” principles apply.
These principles state that: (1) immaterial additional terms added by the seller will become part of the contract, assuming there is no objection by the buyer, (2) material alterations are rejected and (3) contradictory terms are ignored entirely.
However, many business lawyers may be unaware of a separate, second body of law that trumps UCC Article 2 in many regards: the U.N. Convention on Contracts for the International Sale of Goods (CISG).
Before dismissing the CISG as legal trivia, consider the following scenarios and whether the CISG applies in place of UCC Article 2:
1. Your American client sells gears to a Canadian buyer. The contract states that New York law applies.
2. Your Canadian client sells wheat to a Mexican buyer. The contract states that Delaware law applies.
3. Your Florida-based client sells solar panels to an exporter based in California, whom your client knows will be immediately exporting the panels to Mexico. The contract is silent on governing law.
4. For extra credit: Your American client buys tires from an English seller. The contract states that English law applies.
If you answered that the CISG applies in scenarios one and two and does not in scenario three, you’re correct. If you answered that it does not apply in scenario four, you’ve probably read up on the CISG.
The CISG is a treaty developed by the U.N. Commission on International Trade (UNCITRAL) and signed by the U.S. and most major trading nations (notable exceptions include Brazil, India, South Africa and the U.K.).
As a treaty obligation of the United States, when it applies, the CISG trumps state law, including UCC Article 2, via the Constitution’s supremacy clause. This is true even if a contract provides that the law of a particular state applies because federal law, including the CISG, is deemed incorporated into state law.
So, when does the CISG apply? Like UCC Article 2, the CISG applies to transactions in commercial goods, but it trumps Article 2 when the contracting parties are located in two different countries that have both adopted the CISG. When the parties have places of business in multiple countries, the locations that are most closely related to the contract and its performance are the relevant locations for these purposes.
This article cannot provide a complete discussion of why you should or should not want the CISG to apply to a particular situation. But here are a few key principles to remember about the CISG:
Principle 1: You can opt out of the CISG. Although the CISG is the default rule for international sales of commercial goods between the U.S. and most major trading partners, it is possible to opt out of it. To do so, the contract must explicitly use wording along these lines: “This contract shall be governed by the laws of [chosen jurisdiction]; provided, however, that the parties expressly opt out of the application of the U.N. Convention on the International Sale of Goods.”
An explicit opt-out is required when each party is located in a country that has adopted the CISG. It may also be wise to include it in a contract with a party in a non-CISG jurisdiction, such as Brazil, in case it later adopts the CISG.
Principle 2: The CISG is home court for the seller in the “battle of the forms.” The UCC generally seeks to “find a contract” in the substance of the documents exchanged by, and the conduct of, the parties. When necessary, the UCC provides gap-filling provisions to flesh out the contract, even filling in a missing price.
The CISG generally favors the seller in these cases by providing that an acceptance that includes materially “different” or “additional” terms (broadly defined to include any differences in price, quantity, delivery, liability or dispute resolution provisions) is actually a rejection of the original offer and a counteroffer — closer to the pre-UCC common law mirror image rule.
Principle 3: The CISG is tolerant of evidence found outside the body of the contract and recognizes oral contracts. In a major deviation from the UCC and U.S. contract law in general, the CISG requires that a reviewing court evaluate a party’s intent in entering into a contract, if the other party knew or must have known of such intent.
The UCC tends to confine the court’s review to the “four corners” of the contract, absent ambiguities. The UCC also requires that a contract for the sale of goods priced at $500 or more be “written,” which includes electronic records, whereas the CISG has no corresponding requirement.
Principle 4: Beware of irrevocable offers. Offers for a stated period are harder to revoke under the CISG. Whereas the UCC permits a seller to withdraw an offer previously made for a stated period (e.g., “good for the next 10 days”) for so long as it remains unaccepted, the CISG generally requires that the offer be kept open for the specified period. So if the CISG applies, consider inserting a hard cutoff date and explicitly making the offer revocable.
When working with cross-border sales of commercial goods, keep in mind the potential applicability of the CISG and the various foreign concepts that it incorporates into U.S. law. To the extent that they are unwelcome, the parties should consider contractual modifications or a complete opt-out.
Reprinted with permission from Law Bulletin Publishing Company.