Is Your Sales Contract Governed by International or National Law?

Although the United States is party to the 1988 United Nations Convention on Contracts for the International Sale of Goods (CISG), many U.S. companies exclude it from their international sales contracts. The Convention provides the default standards for sales contracts between member countries. However, U.S. companies are often more confident with state Uniform Commercial Codes (UCC). Likewise, their foreign trading partners are more comfortable with the rules of their home countries, posing a potential conflict over which law will govern a contract dispute. Opting for the CISG in dispute resolution may help to avoid potential conflicts.

The CISG is a set of neutral rules independent of local traditions. The United Nations Commission on International Trade Law provides resources to help national courts harmonize their interpretations, thus avoiding the emergence of regional variations destructive of CISG’s neutrality. The CISG provides only default. For example, the delivery of goods not in line with the contract, would be in breach under the United States Uniform Commercial Code. However, the CISG incorporates a looser standard of conformity requiring the merchandise to merely be "fit for the purposes" described. In contracts governed by the CISG, buyers may specify in the contract which deviations will be considered a "fundamental breach," or may simply exclude the objectionable principle (Article 25, in this example).

Some important differences between the UCC and the CISG pertaining to US businesses include:

• Defective goods: Cancelling the contract or rejecting nonconforming goods is more difficult under the CISG standard. Buyers may complain about noncompliance with the contract only when the seller should have known the defect "substantially deprives" the buyer of what it expected. The "close enough" standard is especially problematic for a buyer who expects to resell the goods under UCC contracts where nonconformity may not be tolerated. In some circumstances a buyer may unilaterally reduce payment for nonconforming goods proportional to the seriousness of the nonconformity.
• Force Majeure: The CISG adopts a broad standard for excusing parties for unforeseen circumstances.
• Good faith: Conspicuously absent from the CISG is the UCC requirement that all obligations be carried out in good faith. This omission compounds other concerns such as avoidance.
• Offer and Acceptance: The CISG negotiating process differs from the UCC. If a party attempts to accept a contract, but responds with some different provision, the CISG treats the fact that there are differences as a rejection of the offer. Even the revocation of offers can be more difficult under the CISG.
• Integration: Specifying that the whole intent of the parties is embodied in a contract is even more important in the CISG because U.S. parties do not expect the contents of negotiation to be used in dispute settlement. The CISG generally allows a contract to be interpreted in light of underlying negotiation discussions--U.S. laws would not.

In circumstances where these issues are not serious concerns for the contracting parties, selecting the CISG as the choice of law is easier. The CISG is automatically added into transnational contracts based on U.S. law when the contract is with a resident of another member country. Because United States Federal law takes precedent over state laws, designating only the "law of New York," will include the CISG by default and displace the UCC. For this reason, many U.S. companies use contracts that either specify the UCC or exclude the CISG (to the same effect).

Choice of law can become a costly negotiation point. Surprises await the unprepared, but if a company overrides the CISG’s unique provisions or learns enough to conform with them, it may never be disadvantaged by the CISG's incorporation. After nearly two decades of case law and arbitral decisions, the CISG creates a predictable commercial system so that companies know how to behave and know what to expect from each other.

If you have questions regarding the applicability of the CISG or any other international rules, please contact Scott Isaacson at sisaacson@kmclaw.com or 801.328.3600.