Lex Mercatoria: International Contracts for the Sale of Goods, Drafting Effective Choice of Law Provisions, and Avoiding the Unwitting Submission to the CISG

Lex Mercatoria: International Contracts for the Sale of Goods, Drafting Effective Choice of Law Provisions, and Avoiding the Unwitting Submission to the CISG

By:  Anthony Vanicek

Many contracts for the sale of goods come with boilerplate language specifying the parties’ choice of state law that will govern in the event of a contracts dispute. They often state something to the effect of:

“This contract shall be governed by and interpreted in accordance with the laws of [a designated State] . . .”

While this language may be sufficient for contracts between two parties who are both in the United States, many litigants involved in a dispute over an international contract for the sale of goods find that they have unwittingly chosen to have their contract governed by the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). Although the terms of the CISG are similar to the Uniform Commercial Code (“UCC”), there are some key differences that can significantly alter the rights of a contracting party. Nevertheless, through careful drafting parties to international contracts can opt out of the CISG, include an enforceable choice of law provision, and avoid this common pitfall.

THE UCC

In the United States, contracts for the sale of goods are generally governed by Article 2 of the Uniform Commercial Code (“UCC”). The UCC has been widely adopted by almost all U.S. states, and been remarkably successful in harmonizing the law governing the sale of goods within the U.S. The UCC provides rules governing contract formation, a party’s rights in the event of non-conforming goods, rules regarding express and implied warranties, the enforceability of clauses limiting a plaintiff’s legal remedies and much more.

UCC § 1-301 permits parties to include choice of law provisions. For example, if a supplier of goods in Florida enters into a sale with a buyer in Alaska, and the contract specifies that the law of the state of Alaska will govern the contract, the UCC will generally honor that choice. In Colorado, choice of law provisions are liberally honored as they are considered a clear manifestation of the parties’ intentions. Pirkey v. Hosp. Corp. of Am., 483 F.Supp. 770, 773 (D.Colo.1980). Where a contract specifies that the laws of another jurisdiction will govern the court will apply the chosen law for all substantive matters, but apply Colorado law to all matters of judicial administration. Target Corp. v. Prestige Maitenance USA, Ltd., 351 P.3d 493, 497 (Colo. App. 2013).  But within the U.S., regardless of what state the parties choose to govern the sale of goods, they can be fairly certain that the UCC will apply.

THE CISG AND THE UCC

But what law governs when a sale of goods involves one party in the United States and another party in a foreign country? For contracts made between parties in CISG member states (including the United States), the rules laid out in the CISG will apply. To date, 89 countries are parties to the CISG (a list of member countries can be found here: http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG_status.html  ).

For attorneys, a reading of the text of the CISG will look very familiar to the text of the UCC. Like the UCC, the CISG applies only to the sale of goods. But the CISG differs in some significant ways. Some of the most key differences are:

  • Writing requirement – While the UCC requires contracts for the sale of goods for the price of $500 or more to be evidenced in writing, the CISG has no such requirement. Under the CISG “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” CISG art. 11.
  • Warranty Disclaimers – The UCC requires a disclaimer of the warranty of merchantability to include the word “merchantability” and in the case of writing to be “conspicuous.” UCC 2-316(2). Disclaimers of any implied warranty of fitness must be both in writing and conspicuous. Id. But under the CISG, there is no specific language that must be used. The goods sold are presumed to be “fit for the purposes for which goods of the same description would ordinarily be used” or “are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract” unless “the parties have agreed otherwise.” CISG Art. 35(2)(a)-(b).

Notably absent from the CISG are rules governing contractual limitations on liability, or limitations on consequential damages. The CISG aims to honor the intent of the agreement between the parties, so long as an aggrieved party retains “at least a minimum adequate remedy.” CISG Advisory Council Opinion No. 17. The result is that, unlike the UCC, contracts governed by the CISG are less likely to have clauses (such as disclaimers, or limitations on remedies) declared void in the interest of “fairness.” Many commentators note that the CISG tends to be more “seller friendly” than the UCC. Indeed, depending on a party’s position, they may well want the CISG to apply to their contract.

CHOICE OF LAW AND OPTING OUT

So how does one get into or out of the application of the CISG? The CISG will apply by default to international contracts made between parties in different member states unless expressly excluded or varied. The United States Code makes it clear that the CISG is a law enacted under the treaty power of the U.S. Constitution (and therefore, federal courts have “federal question” jurisdiction rather than “diversity” jurisdiction over the contract dispute). In Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F.Supp. 2d 1142, 1149-50 (N.D. Cal. 2001) the court noted that “[a]lthough selection of a particular choice of law, such as ‘the California Commercial Code’ or the ‘Uniform Commercial Code’ could amount to implied exclusion of the CISG, the choice of law clauses at issue here do not evince a clear intent to opt out of the CISG.” The Court noted that even if

Plaintiff’s choice of applicable law generally adopts the ‘laws of” the State of California . . . California is bound by the Supremacy Clause to the treaties of the United States. U.S. Const. art. VI, cl. 2 (‘This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land.’) Thus, under general California law, the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. Id. at 1150.

In essence, a clause that merely selects a forum that is a party to the CISG does not evidence an intent to exclude the application of the CISG. As in Asante Technologies, Inc., that is because the CISG is the law of the land in California.

Under Article 6 of the CISG “[t]he parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.” Courts in the U.S. have interpreted this to mean that explicit mention of the CISG is necessary. For example, a sale of goods contract between a Colorado company and a Canadian company stating “this agreement shall be governed by laws of the state of Colorado” will likely result in the application of the CISG. By contrast, language stating “this agreement shall be governed by the laws of the State of Colorado and Article 2 of the U.C.C. as enacted in the state of Colorado. Under Article 6 of the CISG, the parties expressly exclude the application of the CISG in its entirety to this Contract” will safely lead to the application of Colorado law.

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