COMMERCIAL LAW PERSPECTIVES – Newsworthy Notes Regarding International Commerce

10 Mar

Advice When Entering Into International Contracts For Sale Of Goods

Business owners who are party to a contract for sale of goods across international boundaries may be surprised to find out that the contract may be governed by a U.N. convention governing sales of goods known as The United Nations Convention on the International Sale of Goods (CISG), instead of U.S. state law (Uniform Commercial Code, or UCC), unless the contract specifically states that the provisions of CISG are excluded. Generally, I advise clients to specifically exclude CISG since there are some significant differences between U.S. state law (UCC) and CISG.

For example, under UCC, generally, if an offer includes a date by which it may be accepted, the offer is deemed revocable until it is accepted (except in the case of “firm offer”), but under CISG the offer is deemed irrevocable. Another example is that CISG provides that a revocable offer becomes irrevocable as soon as the offeree relies on it, or mails an acceptance, which may give the offeree grounds for claim for full contractual damages instead of quasi-contractual damages such as reliance damages or equitable remedy (i.e. greater exposure to damages).  Furthermore, under CISG, a contract may be proved by any means, including by witness testimony, and unlike the UCC, CISG does not require that the parties put their agreement in writing nor does it impose any other obligation as to form.  Businesses are therefore advised to pay particular attention to the keeping of records during negotiations in order to adequately protect themselves against a claim that a contract was formed under CISG in the absence of a writing or that the terms of a contract are other than those that appear in a written contract. Additionally, there is far more case-law interpreting UCC than CISG which may provide a greater degree of legal certainty to businesses who are parties to these types of contracts. There are other important differences but these are beyond the scope of this brief article, and really, the reasons above are significant enough for me to advise my clients to defer to UCC law in most instances.

The U.S. has signed and ratified CISG and is a party state to CISG, and as a result the provisions of CISG may qualify as U.S. Federal Law thereby pre-empting U.S. state law (UCC).  If parties, to a contract for sale of goods do not want CISG to apply, a simple clause, such as “this contract shall be governed by the law of the State of California” will not suffice. Instead, the contract must provide for express exclusion such as “The parties specifically agree not to be bound by the terms of the United Nations Convention on Contracts for the International Sale of Goods”.

CISG applies to contracts only for the sale of goods (not services or financial instruments) between parties whose places of business are in different countries that are parties to CISG.  However, it is important to note that the ‘place of business’ isn’t always clear- cut. For example, CISG may also apply even if the sale of goods is entirely domestic but the parties’ principal places of business are not in the same country i.e. a contract is entered into between a US buyer and a distributor incorporated and having offices in the US for goods they manufacture outside the US.

A list of countries that are parties to CISG can be found at www.uncitral.org

Itai Klein is a corporate attorney representing start-up enterprises, venture-backed companies, family-owned businesses and publicly-traded companies.  He acts as their outside general counsel and advises them in significant transactions such as corporate finance, mergers and acquisitions, securities compliance, joint ventures, licensing, and corporate governance. Itai has particular experience in the manufacturing & distribution, food & beverage, health and beauty, new media and technology industries. Call 310.295.2261 or email itai@ikleinlegal.com

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