The overly used phrase “global economy” is a stark reality for an increasing part of the United States economy though many business owners may be only slowly realizing it. All one needs to do is examine the typical item on the shelf of a typical store to realize that more than half of the products derive from Asia, Latin America or Europe. What may be less obvious to the American business person is that the United States exports a massive portion of its own products and in many fields is a net exporter of goods and services.
But whether buying or selling goods, the methods of business and the laws applicable to them are rapidly altering in conformity with the new technology and the increasing volume of trade. Most business is negotiated by e mail now while most companies have web sites available for viewing throughout the world. A sale or purchase from a website is more often than not an international transaction. Contracts entered via e mail and the internet have rapidly increased in number and complexity and Federal law now enables binding signatures to be achieved by e mail exchanges.
In the world of transactions involving goods between companies, most United States businesses are used to the terms of the UNIFORM COMMERCIAL CODE (“UCC”), a set of common sense but often complex statutes that every state in the United States has adopted, often with minor variations. These statutes, often in force for over forty years now, have created predictability and fairness in business commercial transactions involving goods that have helped facilitate commerce between states. The reader should review our articles on Contracts, Terms and Conditions in Invoices, and Mediation and Arbitration for the common terms required and recommended for typical business contracts.
For many years In international transactions the usual terms of the UCC were applied, defacto, in most transactions with the Courts in the respective nations usually paying great deference to the often intricate and well reasoned rules hammered out in the state legislatures and state business courts of the United States over the years.
This is changing. As trade has increased and as other economies have begun to rival the United States in dynamic cross border trading, they have developed their own similar but far from identical statutes applying to international transactions and over the past few decades most large trading nations, including the United States, have signed onto UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (“CISG” or ‘Convention”). While the United States originally signed the Convention in 1988, today more than sixty countries have ratified the CISG and the sale of good covered by CISG now exceeds two thirds of the world trade in the international arena. For the purposes of international trade, CISG has now assumed the prior role of the UCC Article 2 in its coverage.
The business engaged in the buying or selling of goods internationally must now understand and determine how to work with the CISG. The purpose of this article is to give an outline of its relevant provisions to assist the business owner in understanding its scope and adapting business practices to its requirements. Terms and conditions on sale documents should be altered with assistance of legal counsel to reflect the criteria imposed by the CISG to avoid both surprise and confusion should difficulties arise in any international transaction. Alternatively, some businesses may wish to reject use of the CISG terms in which case careful drafting of the relevant contractual documents to achieve this will have to be achieved. Good experienced legal advice is critical to both understand and alter the effect of CISG but this article will give the business owner a brief overview of the issues to be confronted.
1. WHEN DOES CISG APPLY TO A TRANSACTION?
Any transaction involving sale of goods between businesses from different nations that have ratified the CISG will be governed by the rules of the CISG absent agreement of the parties to the contrary.
It is important to note that the Convention does not apply to certain types of transactions:
a. Sales to consumers
b. Sales which are primarily for services.
c. Distributor/manufacturer Agreements unless they pertain to the delivery of specified goods.
d. “Maquiladora Agreements” which are defined as transactions in which the buyer provides a substantial part of the materials necessary for the assembly of the goods in question and the other party assembles them and delivers the assembled product back to the country of the buyer.
e. Transactions which are primarily for labor.
f. Marketing agreements
g. Franchise agreements
h. It is unclear at this time if CISG will apply to sale of computer software. It is note worthy that it has been applied to sale of music and videos on CDs and DVDs which are similar in nature to software on the same medium.
i. Sale of goods by auction.
It should be assumed that if the international transaction between businesses from treaty signing nations does not fall into one of the excluded areas above, that it will be subject to CISG absent proactive steps of the parties.
2. WHAT ISSUES DOES CISG ADDRESS?
CISG is not concerned with many aspects of a transaction and in those areas beyond the scope of CISG, the law of the sites of the transaction will normally apply. These aspects, discussed in some detail below, are significant and the wise business owner will take steps to determine the law of the relevant locale that might apply to a particular transaction in those areas.
CISG covers the formation of the contracts and the rights and obligations of the parties arising form the contract.
It does not pertain to what it terms “validity issues.” Validity issues are not defined in the Convention but at a minimum encompass fraud, capacity to contract, and certain types of duress. The reader should review our article on Torts and on Fraud for a discussion of the elements of these legal theories. Other issues which have been specifically held as not within the scope of the CISG provisions are those related to questions of agency; estoppel; and unjust enrichment issues. Questions involving title to goods has also been held outside the scope of CISG. The reader should review our article on Contracts for a fuller discussion of these concepts.
Thus, certain legal concerns within the transaction shall be subject to CISG law while for those areas outside the scope of CISG local law will apply and the Court or arbitrator will be required to apply both. (This is not that remarkable. Most Federal Courts in the United States apply both Federal and State law in a single case depending on the issue presented.)
3. WHAT LAW APPLIES IF A BUSINESS HAS MULTIPLE LOCATIONS?
In the United States CISG only applies to transactions between parties who are from different countries that are signatories to the Convention. A party’s contractual rights are subject to CISG only if its place of business is located in a signatory country.
The common question arises as to what is the place of business if a business has several locations in several nations. The court is required to determine the place of business that possesses the closest nexus to the transaction. Note that the seller and buyer being from the same nation will defeat the applicability of the CISG to the transaction.
The question can become quite complex. Assume that a manufacturer has a location in one nation but a sales office in the same nation as the buyer. Does CISG apply? The Court is required then to determine which office has the true “nexus” to the business. In one case from the Northern District of California, the court evaluated the transactional nexus based on such criteria as the location of the sales and marketing departments, the research and development departments, and where the product was actually manufactured.
4. PARTIES CAN OPT OUT OF CISG.
With one exception, the parties can, by mutual agreement opt out of the application of CISG to their international transaction even if they derive from different nations. The sole exception to this power to opt out relates to Article 12 which provides that member states cannot require a writing for the contract to be enforceable.
Electing not to apply CISG requires care in drafting. Merely indicating that alternative law will apply will NOT necessarily eliminate the applicability of CISG. The parties must also indicate a clear intent that the provisions of CISG will not apply and state so in the relevant documents. (The reason is that, as stated above, local law can often apply to areas not covered by CISG and CISG remains applicable to the other areas with the local law being considered “gap filling laws.”) Thus merely indicating what local law would apply might be interpreted as indicating what gap filling law would apply.
Instead, such wording as “THIS CONTRACT SHALL NOT BE GOVERNED BY THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE SALE OF INTERNATIONAL GOODS (1980) BUT SHALL BE INSTEAD GOVERNED BY THE CALIFORNIA UNIFORM COMMERCIAL CODE AND OTHER CALIFORNIA LAWS THAT ARE APPLICABLE TO THE DOMESTIC SALE OF GOODS” should be inserted.
5. PREEMPTION OF STATE LAW
The law remains unclear as to how far CISG supplants and preempts relevant contrary state law. Few courts have addressed the issue and those that have seem to indicate that CISG will probably prevail over contrary state law on areas covered by CISG. More cases are anticipated to occur. One published Northern District court case in California held that CISG did preempt the pleaded state law claims for breach of contact and breach of warranty. Asante Technologies Inc v PMC-Sierra Inc, 164 F.Supp.2d 1142 (2001).
6. CISG AND OFFER AND ACCEPTANCE OF TERMS OF SALE
Any business person engaged in business for any length of time is well aware of the typical “battle of the forms” conflict between the buyer and seller in which each submits forms to the other claiming that their paperwork constitutes the entire deal, supersedes the other, and cannot be altered by any subsequent document received…often with each document having conflicting terms.
The UCC has long agonized about how to treat such conflicting paperwork and has developed an imperfect but workable method which provides that parties can conclude a contract in any manner sufficient to show agreement so long as they have intended to make a contract and a reasonably certain basis exists for granting a remedy. Contract formation generally requires only that the offeree (the party receiving the offer) make an adequate expression of acceptance on the essential terms, such as goods and quantities, within a reasonable time, even though the acceptance might state terms additional to or different form those offered. (The exception to this rule is if the offeree expressly makes its acceptance conditional on the offeror’s assent to the different or additional terms in which case, absent that consent, no deal is made.) If there is a material difference in other terms the UCC will normally NOT enforce either version…instead, both conflicting terms are voided and the default terms provided in the UCC or local law shall apply.
CISG has a different method, more formalized. A reply to an offer that purports to be an acceptance but contains any changes in material terms is treated as a rejection of the offer and a counter offer, subject to acceptance or rejection by the party making the original offer. (Examples of material terms include price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or methods of dispute resolution.)
CISG does provide that inconsistent terms added by the offeree may become part of the contract if they are “immaterial” and the offeror does not timely object to their inclusion in the contract.
Further, even material terms may be deemed adopted by statements of the offeror or “other conduct” of the offeror indicating assent to the counter offer…but mere silence or inactivity of the offeror will not alone suffice to show consent.
This is commonly known as the “last shot” rule by which the final counter offer (last shot fired) in the battle of the forms can become the contract through the subsequent performance of the contract since the other party performing the contract creates the “conduct” accepting the counter offer…(often without that party even reading the “last shot” it can be expected in many cases.)
United States courts have not yet ruled on how they will react to the CISG approach and it may be that the “last shot” method will be somehow rejected or evaded by those courts. It may be summarized that the difference comes down to this: In the battle of the forms, where there are material difference between an offer and response, CISG seeks to enforce one version of the terms at the expense of the other while the UCC will simply strike the additional or contradictory term and replace with the applicable governing law. This is a major difference to be kept in mind.
An example can illustrate the danger. Assume a buyer’s unconditional reply to the seller’s unconditional offer includes an additional term that calls for resolution of disputes by arbitration. The UCC would find the buyer accepted the offer but would knock out the arbitration clause because it is an additional material terms. If either buyer or seller had expressly made acceptance conditional on no changes, both forms would be knocked out and the UCC basic terms would comprise the agreement if performance occurred..
In contrast, CISG would instead construe the buyer’s reply as a rejection and counter offer and no contract would result unless seller’s performance followed. Seller’s subsequent performance would be deemed an assent to the buyer’s terms, according to the “last shot” rule. Thus, arbitration would be part of the agreement.
7. NO WRITING REQUIRED IN THE CISG: SUBJECTIVE INTENT RELEVANT
Under the UCC, certain provisions require a writing to be exchanged between the parties to create a binding agreement (sometimes called the Statute of Frauds) and many United States states require a writing to have a binding agreement in certain types of transactions.
Under the CISG the parties to a contract for the international sale of goods need not put the agreement in writing to enforce it and the parties are allowed to prove the contract by any means, including oral testimony as to its terms.
It follows that when the CISG applies, parole (oral) evidence may be utilized to determine the terms of the contract. This is contrary to the traditional UCC approach by which it has been held that the courts trying to establish the state of mind and intent of the parties, rather than looking at the terms of the writing, is confusing and leads to controversy.
Put differently, it is the CISG approach to attempt to determine the subjective intent of the parties in a transaction. In the UCC, the subjective intent of the parties matters little, only what the objective words of the written document state. According to Article 8 of the Convention, a court is supposed to determine intent of the terms by performing an analysis of what a “reasonable person would have intended, given the relevant circumstances, the course of dealing, trade usage and the subsequent conduct of the party.” A review of the entire negotiating history of the contract and the parties can follow since the subjective reasonable intent and expectations of the parties is relevant to determine the terms.
8. SELLER’S OBLIGATIONS: DELIVERY, QUALITY AND TITLE
Under CISG the seller is obligated to deliver goods of the quality, description and packing called for under the contract. The goods must be fit for “ordinary use” as well as for any use made known to the seller and they must conform to any goods that the seller has held out as a sample.
The concepts of warranty, express or implied, and concepts of strict product liability, fault or negligence are not contained within the CISG approach but it has been argued that the results of the above doctrine is functionally comparable to the warranty articulated under the UCC, absent express and implied warranty criteria.
The parties are free in their documents to expand or limit the CISG obligations of the seller. As to the question as to what jurisdiction determines what “ordinary use” is, the courts are still undecided. One United States court has held that the seller is not obligated to sell goods in conformity to ordinary use of the buyer if the goods do conform to ordinary use of the seller. Medical Marketing International, Inc. vs. Internazionale Medico Scientifica, SRL 1999 WL 311945.
This would mean that a product prohibited in one locale maybe sold if legal in the other locale and the intended use would still be ordinary. Local law would still prohibit the transaction, most likely, but the CISG would still consider that performance. (Force Majeure clauses would then apply. See below.)
CISG also requires the seller to deliver products free of any claim on title or infringement of intellectual property rights though the courts have not defined as of yet the scope of this obligations.
9. BUYER’S OBLIGATIONS: INSPECTION AND NOTICE OF DEFECTS
Aside from the obligations of paying for and taking delivery of goods which is substantially identical under both the UCC and CISG, the buyer has both a right to inspect and duty to undertake inspection as soon as is practical and to notify the seller of any nonconformity.
The buyer must then give notice to seller within a reasonable period of time of discovery of lack of conformity and the notice period can not exceed two years after delivery unless a period of guarantee specified in the contract is longer.
Failure to abide by the time limits above places the burden on the buyer who failed to timely inspect the goods. The question of what is a reasonable period of time is subject the Trier of fact.
CISG also differs from the UCC in that is does not include an explicit perfect tender rule permitting the buyer to reject the goods for lack of conformity. A CISG buyer may reject the goods only if their nonconformity amounts to a fundamental breach of contract. (Under the UCC, a buyer can reject product that fails in any respect to conform to the contract, even if not critically material.)
10. RIGHT TO CURE
Sellers have the right to cure nonconformity before the date for delivery and the buyer is obligated to accept the cure if achieved and to cooperate in efforts of the seller to cure.
The right to cure after the due date is dependent on not causing the buyer unreasonable inconvenience or expense or delay. Some CISG cases have held that the right to cure after delivery date is predicated on buyer’s consent and the Convention lays out the procedure to be used by the buyer in rejecting the right to cure in such instances.
11. RISK OF LOSS
The UCC and CISG treat risk of loss similarly, to wit, the buyer bears the risk of loss during transport of the goods by a carrier unless the contract provides otherwise. Risk of loss passes when the goods are handed over by the seller to the first independent carrier or to the buyer, whichever first occurs. Contract terms can supersede this rule.
12. EXCUSED PERFORMANCE
While case law is scarce, the Convention provides that a party’s performance of an obligation will be excused only if the failure was due to an “impediment” that was beyond the party’s control and which the party could not have reasonably been expected to take into account at the time of formation of the contract. The nonperforming party has the burden of proving that it could neither avoid nor overcome the impediment; the exemption lasts only so long as the impediment continues and the party seeking excuse must notify the other party to the contract of both the impediment and the effect on performance. Under CSIG, Force Majeure clauses in which the parties create less strenuous obligations to perform are fully enforceable.
The remedies under both the UCC and CISG are quite similar. Both seek to put the non breaching party in as good a position had there been no breach.
Buyers have four remedies:
avoiding of the contract;
adjustment of the price;
or an action for damages.
Sellers may elect among:
suspension of performance;
avoidance of the contract;
reclamation of the goods;
an action for the price of the goods;
or an action for damages.
Under CISG damages for breach of contract by one party are equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. The damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters known or ought to have been known as a possible consequence of the breach.
Unlike the UCC, the Convention utilizes a subjective test of this knowledge, e.g. what did the party in breach actually knew or should have known.
14. STATUTE OF LIMITATIONS
CSIG does not contain a specific statute of limitations for when an action may be commenced though the claim for nonconforming goods, as described above, must be within a reasonable period of time or two years, whichever first occurs. Instead, reference is made to the 1974 Convention on the Limitations Period in the International Sale of Goods Treaty, ratified by the United States, that provides for a four year statute of limitations which is essentially the same as the UCC.
Any United States business, accustomed to using the terms of the UCC, must keep in mind the benefits and detriments of the different regime imposed by CISG in international transactions. It is true that the correct contract terms can avoid its application. Increasingly, parties abroad are going to be disinclined to agree to apply UCC terms just because one of the parties is from the United States.
Such aspects as increased barriers to unilateral modification of the contract terms; broader rights to cure defects in performance; limitations on remedies and preemption over state laws should be carefully considered in determining if the CISG should be resisted…or suggested…by a party engaging in international business. Preplanning can avoid some very unpleasant surprises. Ignorance will be no excuse and many United States businesses may be astounded to discover that long cherished procedures and rules do not apply to certain transactions. Many will so discover only after the fact when it is too late to adjust. Forewarned is forearmed.