The Convention on the International Sale of Goods
It is important for parties to commercial transactions to know what law applies to the transaction. This is even more important when the parties are from different countries, and so may expect their local law to apply. By knowing what law applies, the parties can know what to do, and who bears the risk, if something goes wrong.
Lawyers from around the world worked together in the 1980s to resolve the ambiguity of what law applies when parties are from different countries by forming the Convention on the International Sale of Goods (the “CISG”). But this law may actually make a party’s legal obligations more ambiguous instead.
Why should you continue to read this post about the CISG?
You sell products abroad and are interested in knowing about the law that may apply to your sales.
Someone just mentioned the CISG and you need to read something quickly to make sure it’s nothing important.
Everyone else is reading this post and you want to know what the big deal is.
When the CISG Applies
The CISG generally governs commercial transactions when one party, who resides in a country that signed the CISG, sells goods to another party, who resides in another country that also signed.
For example, if a French manufacturer sells bread to an American buyer, then the CISG applies, since France and the United States have both signed the CISG. But, if an American sells cars to another American, the CISG does not apply since the buyer and seller come from the same country. Similarly, if a British company sells toys to an American, then the CISG does not apply since the UK did not sign the CISG. And if the French company provided services to an American company, then the CISG does not apply since there was no sale of goods.
Contracting parties often stipulate in their contracts the law that applies. For example, the parties may say “This contract shall be governed by Delaware law.” But the CISG may still apply because, technically, the CISG is American law since America entered into the treaty. To get around this, many parties put language in their contracts that specifically states that the CISG should not apply.
What the CISG Says
The CISG provides rules for courts to evaluate contract claims that differ from the laws of many U.S. states. Below are three major differences.
First, many U.S. states have a “statute of frauds,” that says that several types of contracts need to be in writing for a court to enforce them. These include contracts involving the sale of land or that cannot be performed within a year. But the CISG has no such rule, which means that an American court may enforce an oral agreement governed by the CISG that it may not have enforced if it were governed by local law.
Second, many U.S. states have a “parol evidence rule” that prohibits evidence of conversations about a contract whose purpose is to vary its terms when the contract itself is clear. The CISG has no such rule, so a U.S. court applying the CISG may allow “parol evidence” about the parties’ true intent, even if the court would focus only on the contract’s terms if it were applying local law.
And third, the CISG follows the “mirror image” rule, which states that a party only accepts a contract when it agreed to the same terms (a “mirror image”) the other party offered. But many U.S. states allow parties to agree to a contract, even though they added additional terms.
How the CISG Can Help and How it can Hurt
Parties can determine whether the CISG is helpful for them or not based on whether they prefer its terms over the ones found in another applicable law. But putting those substantive differences aside, I believe that there is a significant benefit to the CISG, and a significant drawback.
The benefit is that parties in different countries can both be familiar with the governing law. An American company, for example, may not need to hire a French lawyer to analyze a contract if he knows that French law is unlikely to govern it. And, similarly, the French company can rely on its local counsel instead of hiring an American one.
But the downside is that there are far fewer court decisions that interpret the CISG than there are ones applying U.S. states’ laws. This means that it is very difficult for the parties (or, more accurately, their lawyers) to understand how the law may govern specific disputes over the contract. This makes litigation even more unpredictable than it usually is. And on top of that, because litigation is unpredictable, a court may decide that the CISG does not apply, which takes away the certainty that the parties had hoped for when they relied on the CISG.