Knowing when, why, and how to “opt out” of the United Nations Convention on Contracts for the International Sale of Goods

The international contract: knowing when, why, and how to “opt out” of the United Nations Convention on Contracts for the International Sale of Goods

Allison E. Butler

According to the U.S. International Trade Administration, Florida ranks ninth in the nation for exports. (1) Notably, two of the top countries of export destination from Florida–Mexico and Canada–as well as the United States, are among the 60 countries that have adopted the 1980 United Nations Convention on Contracts for the International Sale of Goods (the “convention” or “CISG”). (2) The convention as adopted by the U.S. is a self-executing treaty. Consequently, all international sale contracts entered into with U.S. companies and companies located in countries that have adopted the CISG are governed by the CISG unless the parties effectively “opt out” of the CISG’s application. (3)

This article provides a general overview of the convention as well as a short comparative analysis to the Uniform Commercial Code (UCC). (45) More importantly, however, this article seeks to assist the practitioner when drafting the international contract that is subject to the convention.

Background of the CISG

In 1988, the convention was officially adopted by 10 nations, including the U.S. The objective of the convention is to establish uniform rules governing certain aspects of the formation and performance of international commercial contracts for the sale of goods. As of December 2001, 60 countries had adopted the CISG. (6) These countries are more commonly referred to as “contracting states.” However, it should be noted that countries also have the option to declare certain portions of the convention inapplicable upon ratification. (7) This is achieved by declaration. For example, at the time of ratification of the CISG, the U.S. declared that it was not bound by article 1(1)(b), which provides that the convention applies to the sale of goods when the rules of private international law lead to the application of the law of the contracting state. The application of this reservation mandates that courts in the U.S. must apply the CISG when the places of business of both parties to the sale contract are each in different states, and both of those states are contracting states to the CISG. (8)

When Does the CISG Apply?

Part I of the convention sets forth its sphere of application as well as general provisions. In sum, the convention governs contracts for the sale of goods when the transaction is international. Although the term “international” is defined in the convention, the two remaining terms are defined through negation. (9)

* Contracts for Sale

The convention specifically governs the formation of the contract of sale and the rights and obligations of the seller and buyer arising from such a contract. Hence, the convention is not concerned with the validity of the contract or any of its provisions of any usage as well as the effect, which the contract may have on the property in the sale of goods. (10) Moreover, the convention does not apply to the liability of the seller for the death or personal injury caused by the goods to any person. (11) A cautious practitioner should also note that other treaties pre-empt the application of the convention. (12)

* Goods

Article 2 of the convention expressly states that the convention does not apply to the sale of goods for personal family or household uses unless the seller, at anytime before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for such use. (13) Also excluded from the convention is the sale of watercraft, aircraft, natural gas or electricity, letters of credit, auctions, and securities. (14) In the event of a mixed contract, the convention would apply unless the “preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.” (15) The CISG can apply to the sale of goods of a distributorship; however, it does not apply to exclusivity or other nonsale aspect of distributorship agreements. (16)

* International

As the CISG is a self-executing treaty, it is the supreme law of the U.S. preempting state law. (17) However, the CISG does not necessarily displace state law, as the convention only applies to international sales contracts.

An international contract is defined as one in which the relevant places of business of the seller and buyer are located in different contracting states. (18) Hence, when determining whether the CISG applies, the practitioner should not be concerned with the nationality of the buyer or the seller, the place of delivery, or the route the goods will be taking for purchase. However, if either entity has more than one place of business, the convention looks to the place most closely related to the transaction. (19)

Freedom to Contract

Even if the practitioner finds that the CISG applies, the CISG does not deprive both contracting states and sellers and buyers the freedom to contract the terms of their contract. Article 6 of the convention provides that the parties can select the parts of the convention they will be bound to, if at all. Hence, even if a practitioner realizes that the convention applies, a practitioner can “opt out” of the convention’s application. In this respect, the CISG is more flexible than the UCC because it does not restrict the parties’ ability to make their own rules and avoids such concepts of “unconscionability” and “failure of essential purpose” and foreign laws which often invalidate agreements based on violation of”public policy.” (20)

With this point in mind, a practitioner confronted with the drafting of an international contract may rightly conclude the CISG is not even an issue as he or she can select a choice of law provision. However, before deciding to opt out, there are professional, substantive, and drafting matters that the practitioner should consider.

Professional Considerations

As an ethical consideration, Florida attorneys have the duty to act in their clients’ interest. (21) Hence, even if a client insists that Florida law should control a contract, a practitioner should have enough knowledge of the convention to fully inform the client as to the pros and cons of its application. (22)

This advice would include the fact that the convention is relatively new and as such is subject to the uncertainties inherent in a new law. However, this point is steadily decreasing as more courts throughout the world, including the U.S., apply the convention. Moreover, there are two companion documents that may assist in the application of the CISG: the UNIDROIT Principles of International Commercial Contracts (promulgated in 1994) and the Principles of European Contract Laws (complete and revised version 1998). Similar to the U.S. Restatement of Contracts, both take cognizance of insights derived from the text of the CISG. (23)

It should also be pointed out to the client that the convention is often viewed by foreign entities as a neutral body of law. Therefore, inclusion of the convention might be the factor that brings closure to negotiations.

All these relevant points should be brought to the attention of the client and discussed during the negotiations. By doing so, not only will the client be making an informed decision, but also you will have eliminated any choice of law dispute that could arise in the future.

Substantive Considerations

Whether the UCC or the CISG offers an advantage or disadvantage to a client depends on the client’s perspective as well as the factual circumstances surrounding the negotiations. The following is a brief comparative analysis of the UCC and the CISG. However, it should be noted that this analysis is limited in scope and the author highly recommends that a practitioner fully examine both laws in their entirety prior to making any final decision. (24)

As previously discussed, the terms of the convention provide for the freedom to contract. So why be concerned? Although many of the concepts of article 2 of the Uniform Commercial Code are similar to those found in the provisions of the convention, several distinctive differences can make a substantial difference in the rights and obligations of the parties to contracts for the sale of goods. These can be found in parts I, II, and III of the convention. Following are some notable distinctions:

1) The Battle of the Forms (“Mirror Image”). Under common law, if an acceptance of an offer contained different or additional terms, it was considered a rejection and a counter-offer. This doctrine was eliminated by the drafters of the UCC, which provides that unless an acceptance is stated to be conditional on the offeror’s consent to additional or different terms, an expression of acceptance operates as such, with additional terms becoming part of the contract unless the offeror has limited acceptance of the terms of the offer or objects to them. (25) Moreover, absent objection, an additional term will only be rejected if it is found to be “material.” (26)

In contrast, article 19 of the convention provides that additional or different terms in an acceptance prevent a contract from arising unless they are not material and the offeror does not object to them. Therefore, if a party fails to object to a term, they are subject to it under the convention even if the contract is subject to the terms of a master contract between one of the contracting parties and a third party. (27)

2) Statute of Frauds. Another notable distinction between the UCC and the convention is that the statute of frauds does not apply under the convention. (28) Article 11 of the convention provides that a contract of the sale need not be concluded in or evidenced by writing and may be proved by any means, including witnesses. However, under article 12 of the convention, article 11 may not apply where a party to the contract of sale has its place of business in a contracting state whose law requires contracts of sale to be concluded in or evidenced by a writing and which has made an article 96 declaration that article 11 is inapplicable.

On this note, the parol evidence rule is also eliminated under the convention. (29) Hence, there is a wider spectrum of admissible evidence to consider in construing terms of a contract subject to the convention. (30)

3) Perfect Tender Rule. Unlike the UCC, the convention rejects the “perfect tender rule,” which entitles a buyer to reject a one-delivery contract of sale if the delivery fails to conform with the contract. This is true even if a defect in tendered goods or document is not serious and the buyer would receive substantially the performance and the goods for which it had bargained. (31)

In contrast, the convention imposes a stricter standard of rejection and cancellation, which is referred to as “avoidance.” (32) Under article 49(1) of the convention, a buyer is permitted to avoid a contract only if the seller’s failure to perform amounts to a fundamental breach. Article 25 of the convention provides that a breach is fundamental “if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. Moreover, article 46(2) precludes a buyer from demanding substitute goods unless the nonconformity constitutes a fundamental breach. Also under the convention, a buyer must notify the seller of any nonconformity promptly and not later than two years from the date the goods are delivered to the buyer? A buyer that fails to act within this time period may be barred from recovering damages. (34)

Drafting Considerations: Opting Out

Whether one is opting in or opting out, a cautious practitioner should be alerted to the fact that absent an express provision of choice of law, the CISG is controlling and preempts all state actions.

In the recent case of Asante Technologies v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142 (N.D. Cal. 2001), a federal court in California, in a case of first impression, held that absent a sufficient “opt-out provision” all state law causes of action were pre-empted by the CISG. As stated herein, this ruling was specifically based on the fact that the convention is a self-executing treaty and outranks ordinary state or federal statutes. This case is of great significance as until recently, there has been no U.S. case law specifically dealing with the choice of law clause and it has been a matter of commentators speculating on this issue.

The facts of Asante deal with the sale of electronic components between Asante Technologies, Inc. (buyer), a California corporation, and PMC-Sierra (seller), a Canadian corporation. Notably, the majority of the transaction took place through a distributor located in California. The buyer had originally filed the action in state court; however, the seller removed the action to federal court, asserting federal question jurisdiction.

As there was no single contract embodying the parties’ agreement, the court focused on five purchase orders. Notably, four of the five purchase orders were submitted to PMC-Sierra through a distributor as directed by PMC-Sierra. On appeal, Asante asserted that its acceptance was conditioned on seller accepting the terms on its purchase order making the law of California applicable. Their purchase order stated: “APPLICABLE LAW. The validity [and] performance of this [purchase] order shall be governed by the laws of the state shown on Buyer’s address on this order.”

In contrast, PMC-Sierra argued that the contract claims at issue implicate the CISG because the contract is between parties having their places of business in two nations that have adopted the CISG treaty. (35) PMC-Sierra also argued that the CISG applied because the parties did not effectuate an “opt out” of application of the CISG. In response, Asante argued that the distributor was the agent for PMC-Sierra, who was located in California. Therefore the CISG did not apply, but rather California law.

Upon review, the court concluded that although selection of a particular choice of law could amount to implied exclusion of the CISG, the choice of law clause at issue did not evidence a clear intent to opt out of the CISG. Furthermore, Asante’s choice of applicable law generally adopted the laws of the State of California and California is bound by the supremacy clause to the treaties of the U.S. Thus, under general California law, the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. In the absence of clear language indicating that both contracting parties intended to opt out of the CISG, the court rejected Asante’s contention that the choice of law provision precluded the application of the CISG. The court also rejected the Asante’s contention that the distributor was acting as an agent for the seller.

The ruling of Asante illustrates the importance of effectively “opting out” of the convention’s application particularly if a client does not want the CISG to apply. In order to preclude the application of the CISG, the following clauses are recommended:

This Contract shall be governed by and construed under the laws of State of Florida not including the 1980 United Nations Convention on Contracts for the international Sale of Goods. (36)

Disclaimer of UN Convention on Sale of Goods. PURSUANT TO ARTICLE 6 OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, THE PARTIES AGREE THAT THE UN CONVENTION SHALL NOT APPLY TO THIS AGREEMENT. (37)

The validity and performance of this Agreement shall be governed by the internal law of the State of Florida without regard to its rules of conflicts of law. The parties exclude the application of the 1980 United Nations Convention on Contracts for the International Sale of Goods if otherwise applicable. (38)

In contrast, if the parties elect to have the convention apply in total, the parties should use a provision similar to the following: “The terms of this Contract shall be governed by and construed under the 1980 United Nations Convention on Contracts for the International Sale of Goods.”

In the event that the contract may not be a wholly a sale of goods, a practitioner may elect to put in a “backup” choice of law such as: (39) “This Contract shall be governed by and construed under the 1980 Untied Nations Convention on Contracts for the International Sale of Goods, or, in the event the Convention does not settle the rights and obligation of the parties, the law the State of Florida shall apply.”

In addition to the foregoing, practitioners can place other limitations on various other aspects of the international contract that is subject to the convention. (40)

Conclusion

As the business world becomes increasingly global, practitioners should familiarize themselves with the convention. A general understanding of the convention and careful drafting can prevent future litigation. And although some commentators speculate that the general lack of awareness of the convention may preclude a judge from finding that the parties did not in fact intend to invoke the convention by failing to expressly exclude the convention, this author highly disagrees. (41) The majority of the case law on this subject demonstrates that U.S. courts have strictly construed contracts in which the fact pattern required the application of the convention. Therefore, a prudent practitioner should be cautious whenever drafting the international contract where the parties are subject to the convention.

(1) State Merchandise Export for 2000, available at www.ita.doc.gov/td/industry/otea/state/merchandise/ Worldtot2.txt.

(2) Enterprise Florida, Inc., Florida Exports to Mexico Jump 58 Percent in 2000: Enterprise Florida Reports Seven Percent Overall Increase, available at www.eflorida.all_facts.html. See also supra note 6 for a complete list of countries.

(3) The official text of the convention is published in the Official Records of the United Nations Conference on Contracts for the International Sale of Goods, U.N. Doc. No. A/CONF.97/19 (1981) [hereinafter cited as CISG]. A complete copy of the U.N.-certified English text is published in 52 Federal Register 626, 6264-6280 (March 2, 1987); U.S.C. Ann. tit. 15, Appendix (Supp. 1987).

(4) Companies located in these countries may not be subject to the CISG if they have more than one place of business which is located in a country not subject to the CISG. See CISG art. 10.

(5) See generally, FLA. STAT. [section] 672.101 et seq.

(6) The following is a list of contracting states: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Canada, Chile, China (PRC), Columbia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Guinea, Hungary, Iraq, Israel (full membership October 2002), Italy, Kyrgystan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldavia, Mongolia, Netherlands, New Zealand, Norway, Peru, Poland, Romania, Russian Federation, Saint Vincent & Grenadines, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, United States, Uruguay, Uzbekistan, Yugoslavia, and Zambia, available at www. cisg.law.pace.edu.edu/cisg/countries/ entries.html.

(7) CISG art. 92.

(8) Another example of a declaration: “Article 96 Declarations. Pursuant to Article 96, Argentina, Belarus, Chile, Estonia, Hungary, Lithuania, Russian Federation and Ukraine have declared that any provision of Article 11, Article 29 or Part II of the Convention that allows a contract of sale or its modification or termination by agreement or any offer, acceptance, or other indication of intention be made in any form other that in writing does not apply where any party has his place in the country that has filed this declaration.” China (PRC) has filed a similar declaration, but it is not couched in the precise phraseology called for by Article 96, http:// www.un.org/Depts/Treaty/final/ts2/ newfiles/part_boo/x_boo/x_boo/x-10.html.

(9) See generally CISG arts. 1-8.

(10) CISG art. 4.

(11) CISG art. 5.

(12) For example, the Warsaw Act governs the international rules for the liability of international carriage of goods and passengers by sea and air, including their liability for injury to passengers or cargo.

(13) CISG art. 2(a).

(14) CISG art. 2(b)-(f).

(15) CISG art. 3(2).

(16) CISG art. 3. See also Helen Kaminski Pry. Ltd. v. Marketing Australian Prods., Inc., Nos. M-47 (DLC), 96B46519, 97-8072A, 1997 WL 414137 (S.D.N.Y. July 23, 1997) (holding that the convention’s scope did not extend to a distributorship agreement); see also Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F. Supp. 2d 1142, 1143 (N.D. Cal. 2001), available at http:// cisgw3.law.pace.edu/cases/ 010727ul.html (holding that a distributor is not an agent for a seller in order to determine the choice of law clause).

(17) A treaty is self-executing when it expressly or impliedly creates a private right of action.; see also Delchi Carrier v. Rotorex Corp., 71 F. 3d 1024, 1027-28 (2d Cir. 1995); Filanto, S.p.A. v. Chilewich Int’l Corp., 789 F. Supp. 1229, 1237 (S.D. N.Y. 1992) available at http://cisgw3.law.pace.edu/cases/ 920414ul.html; Asante, 164 F. Supp. 2d at 1144.

(18) CISG art. 1(1)(a).

(19) CISG arts. 1(3) and 10; see also Asante, 164 F. Supp. 2d 1142 (rejecting a buyer’s claim that distributorship was an agent and therefore established that the U.S. had closest contact).

(20) Blair Crawford, Drafting Considerations Under the 1980 United Nations Convention on Contracts for the International Sale of Goods, 8 J. LAW AND COMMERCE 187-205 (1988).

(21) Rules Regulating The Florida Bar 4-1.1, 4-1.2, and 4-1.4(b).

(22) Peter Winship, Changing Contract Practices in the Light of the United Nations Sales Convention: A Guide for Practitioners, 29 INTERNATIONAL LAWYER 525-554 (1995).

(23) Written communication with John Felemegas, CISG-PECL-UNIDROIT Project (January 18, 2002).

(24) The author highly recommends the electronic library located at Institute of International Commercial Law Pace University Law School for future reference (www.cisg..law.pace.edu/cisg).

(25) FLA STAT. [section] 627.207.

(26) John P. McHahon, Applying the CISG Guides for Business Managers and Counsel, http:/cisgw3.law.pace.edu/ guides.html; see also Advance Mobile Home Systems of Tampa, Inc. v. Alumax Fabricated Products, Inc., 666 So. 2d 166 (Fla. 2d D.C.A. 1995) (finding additional term materially altered contract making it unenforceable under UCC).

(27) See Filanto, S.p.A. v. Chilewich Int’l Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992) (holding an Italian shoe manufacturer was bound to an arbitration provision of a master agreement between a New York enterprise and a Russian enterprise because it failed to object at the time of acceptance); see also Les Verrieries de Saint Gobain, SA v. Martinswerk GmbH. Cour de Cassation, 16 July 1998, the Supreme Court of France, available at http:// cisgw3.law.pace.edu/cases/ 980716fl.html (holding that the terms of an acceptance form used by a French buyer was not controlling since “the last confirmations of the order” referenced the documentation sent by the seller).

(28) FLA STAT. [section] 672.201; see also CISG art. 11, but see supra note 7.

(29) FLA. STAT. [section] 672.202.

(30) See MCC-Marble Ceramic Ctr., Inc. v. Ceramica Nuova d’Agostino, S.p.A., 144 F.3d 1384 (11th Cir. 1998) (holding the parol evidence rule inapplicable under the convention; see also Calzaturificio Claudia s.n.c. v. Olivieri Footwear Ltd., No. 96 Civ. 8052(HB) (THK), 1998 WL 164824 (S.D.N.Y. Apr. 7, 1998), available at http:// cisgw3.law.pace.edu/cases/ 980406ul.html (applying the convention rules eliminating statute of frauds and the parol evidence rule).

(31) FLA. STAT. [section] 627.601 et seq.

(32) CISG art. 49: see also art. 50 providing the buyer with the option to reduce the price as a remedy.

(33) CISG art. 39; however, see art. 40 which provides “[t]he seller is not entitled to rely on the provision of articles 38 and 39 if the lack of conformity relate to facts which he knew or could not have been unaware and which he did not disclose to the buyer.”

(34) See Bundesgerichtshof, VII ZR 287/ 98, 3 November 1999, available at http:/ /cisgw3.law.pace.edu/cases (holding that Article 39(1) reasonable period included time in which to decide what to do next, time to consult an expert and obtain the expert’s view and a “regular” one-month period).

(35) PMC-Sierra’s form also contained a choice of law provision stating Canadian law applied.

(36) Crawford, supra note 20, at 193.

(37) Ronald E. Myrick and Penelope Smith Wilson, Licensing Rights to Software, in PLI, Technology Licensing and Litigation 1993, at 585 (1993).

(38) G. Gervaise Davis III, Contract Issues in Software Development, Acquisition, Marketing, and Use, in PLI, 2 COMPUTER SOFTWARE 1989; PRODUCTION AND MARKETING 359 (1989).

(39) Crawford, supra note 20, at 193.

(40) Winship, supra note 22. Albert H. Kritzer, GUIDE TO PRACTICAL APPLICATIONS OF THE U.N. CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (Deventer, Boston; Kluwer, 1989 [2d ed. forthcoming]).

(41) Crawford, supra note 20.

Allison E. Butler received her J.D. from Loyola University School of Law and her B.A., with honors, from the University of South Florida. She has written for several national publications and has had various articles published as a freelance writer. She is currently a contributing commentator for the CISG-PECL comparative study and a consultant at the law firm of Grazi and Gianino, P.A. in Martin County.

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