United States: The Law That Dare Not Speak Its Name In The USA: The CISG

Last Updated: September 8 2015
Article by Leonard N. Budow

Fashion is global; an often used truism which means the law applicable to a transaction involving a fashion house and a supplier, or even affiliated companies, may involve overlap with multiple countries.  The United Nations Convention on Contracts for the International Sale of Goods ("CISG") is a project of the United Nations Commission on International Trade Law designed to address this issue.  It is an attempt to create a uniform set of procedural and substantive rules for the international sale of goods.  One may say it is a revised Article 2 of Uniform Commercial Code for the international community.

The applicability1 of the CISG should obviate the concerns regarding local, jurisdictional law. So a purchaser located in California in negotiating his purchase order with a seller in China does not have to be concerned about the vagaries of Chinese law nor does the Chinese seller need be concerned about the anomalies in California law. Defaulting to the CISG permits the parties to move apace without recourse to the impediments created by different law and experiences.

However United States practitioners have been slow to adopt the CISG or to advise their clients to adapt their contracts to incorporate the CISG as applicable law.  This is at best nettlesome and to a degree a significant impediment to the expansion of trade.  A buyer in the United States of finished apparel from China should be able to arrange a negotiated contract, without an extensive negotiation or concern as to which law will apply.  But the dismal adaptation of the CISG by lawyers in the United States has been a barrier to the smooth adaption of a process facilitator effective in other jurisdictions.2

So why is it that the American bar has not jumped on the CISG bandwagon? There are five principal factors: ignorance, parol evidence, intent concerns, statute of frauds and perfect tender.

(1) Ignorance. When we speak of ignorance that relates to the actual status of the CISG in United States jurisdictions.  Many practitioners may still not realize that the CISG is United States law, not alien or foreign law. It was ratified as treaty by the Senate in 1986 and became law on January 1, 1988. This means that the CISG is American law as a self-executing treaty. For the avoidance of dout such a treaty is also the substantive law of the separate states.

Unless one affirmatively opts out of the CISG or  if one merely designates the choice of law as being any particular state, such as New York or California, in fact the CISG most likely will apply.3  For a party to opt out the language in the Contract should first state that "The parties agree that United Nations Convention on Contracts for the International Sale of Goods shall not apply to this contract and the transactions described herein; the laws of the State of ____ (or country of ________) shall apply." Unless the ritualistic formulation precedes the desired applicable law, the CISG may apply.

Most importantly, there are also cases in which two US domiciled corporations may enter into an agreement which can subject to the CISG. An example is when the principal business situs of contracting entities are in differing countries which are signatories to the CISG.  Therefore and inadvertently one may be subject to the CISG based upon an illusion created by the domicile of the parties to the contract.

(2) Parol Evidence.  Aside from just plain ignorance there are some substantive objections. US Courts applying the UCC will bar evidence that contradicts the specific terms of contract. The parol evidence rule4 presumes that a written contract encapsulates the parties' complete agreement. Therefore, under the UCC, oral evidence cannot be used to contradict the terms of a written contract.

However, such customary parol evidence rules do not apply when interpreting contracts governed by CISG5 and this causes some practitioners concern. Under the standard American parol evidence rule, in general, a writing intended by the parties to be the apotheosis of their concurrence as to the terms of their transactions cannot be varied by evidence of earlier agreements or negotiations.  So a contracting party cannot introduce evidence of negotiations that preceded the signing of the agreement. By contrast, under the CISG, when determining a party's intent, the CISG requires a courts and arbitrators to consider all relevant facts and circumstances which would include the negotiations preceding the contract execution, the course of conduct or on going practices of the parties, and any post contract actions of the parties.  This ability to traverse the four corners of a contract likely gives many American practitioners agita, that the unambiguous words of the contract might be varied by the parties' pre- or post-signing conduct.  However, such a rule could be useful if the course of negotiations were illuminative of the parties' intent, perhaps more so than a form contact, and when a client wishes to modify the terms of the agreement based on pre-signing negotiations. This is a judgment call dependent on the nature of one's client and the types of goods in question.

(3) The Parties' Intent. Related to the parol evidence rule is the treatment of parties' subjective intent6 by the CISG7 which also gives leeway to modify the apparent terms of a contract.   If evidence exists which may be admissible due to the obviation of the parol evidence rule discussed above, if the parties intent is inconsistent with the written terms of the contract, such evidence of intent would be admissible to in effect re-write the contract8. If one is concerned about a transaction accurately reflecting the intents of the parties, this rule makes sense and is desirable; if one views a contract as a battle of forms9 with the last draft prevailing, evidence of intent is anathema.

(4) Statute of Frauds  Following these gaping holes in the finality of a contract is the lack of a statute of frauds.  Recall under the UCC, a contract for the sale for goods over $500 must be in writing to be enforceable in the US court.  The CISG does not.10  This fits in with the CISG approach which fundamentally is a search for the truth, not the formalities of a lawyerly drafted document which might be too smart by half.11

(5) Perfect Tender Rule.  The next issue of distress to some practitioners is the upending of the perfect tender rule.12 Simply put a buyer has the right to insist upon perfect and fully compliant performance under the UCC. However the CISG13 states (1) The buyer may declare the contract avoided if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract14 (Emphasis Added).

Notwithstanding all of the foregoing an adept practitioner would nonetheless still accommodate and implement the CISG for the purpose of facilitating a client's business processes.  Using Article 6 of the CISG the practitioner may selectively opt out of the applicability of any article of the CISG15; in other words it is the acme of freedom of contract.  Using the CISG as a malleable product subject to subtle or crude adaptation can give a client the upper hand in a negotiation process. It behooves any US practitioner engaged in multi-national contracts to speak the name of the CISG to clients when drafting or amending a contract for the sale of goods.

Fotnotes

1. To be clear the applicability itself of the CISG is dependent not on multiple nationality of parties to a contract but of the residency of those multiple parties in a contracting state to the CISG. The convention on international sale of goods disregards nationality in favor of place of business.  So we have a US company or French company with a foreign subsidiary conducting business in a non-convention contracting nation the convention will not apply. So that's an important consideration to take into account if you've got an American company and its subsidiary is located within a non-contracting party  nation state then in that event the CISG will not apply.

2. To determine if a counterparty is resident, which is the key term not nationality, in a signatory to the CISG please see http://www.cisg.law.pace.edu/cisg/countries/cntries.html

3. See  Easom Automation Systems, Inc. v. Thyssenkrupp Fabco, Corp., 2007 U.S. Dist. LEXIS 72461 (E.D. Mich. 2007)

4. See UCC 2-202

5. See CSIG Article 8(3)– In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. (Emphasis Added)

6. See MCC Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostina, S.p.A., 144 F. 3rd 1384 (United States, 11th Cir. 1998) which is the seminal case dealing with both intent and the parol evidence rule under the CISG.

7. See 8(1): For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.

8. See TeeVee Tunes, Inc. et al v. Gerhard Schubert GmbH  http://cisgw3.law.pace.edu/cases/060823u1.html which held "the CISG, unlike American contract law, includes no Parol Evidence rule "

9. See UCC 2-207.

10. See CISG 11– 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.

11. See also Articles  9  "any usage to which they have agreed and by any practices which they have established between themselves" and  11: "contract of sale need not be concluded in or evidenced by writing.

12. See UCC 2-601

13. See CISG Art.49 (1)

14. Clearly for a seller the CISG provides greater protection.

15. Art. 6 states: The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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