More Thoughts on the Convention on Contracts for the International Sale of Goods

I took a class on the rules that apply to international sales when I studied law at the University of Copenhagen in 2006. I didn’t understand back then how interesting a subject this was. Fifteen years later, I wrote a blog post about it. And now, nearly twenty years after the class, I share some additional thoughts.

• The purpose of the United Nations Convention on Contracts for the International Sale of Goods (called the “CISG”) is to make international transactions easier by setting cross-border expectations. But in my experience, the convention doesn’t make anything simpler. Companies that are sophisticated enough to know they will trade under the CISG employ lawyers to apply this and other laws; parties who do not have their own legal department are generally unaware of it.

• The purpose of the law may be not in its direct application, but in setting an international standard. Just as law professors study all aspects criminal law and its repercussions and may publish a model penal code for states to adopt, the CISG may serve as a model for countries who are developing new commercial regulations. As the United States already had a well-developed Uniform Commercial Code, we have not seen much influence on domestic law from the CISG.

• A bigger challenge commercial parties face than substantive commercial law is procedural law. This is the practical side of things. In other words, you may think that the main barrier to enforcing a commercial party’s rights is legal arguments, or how a judge will apply business laws of another countries to their case. But a client (or their legal department) needs to figure out how to find a good lawyer in a foreign country, understand how expensive it is to launch a lawsuit there, and estimate how long it could take to get the outcome they seek—in short, is litigation worth it in Hong Kong, Paraguay, or Switzerland? Accordingly, applying the CISG to a transaction dispute may be easier in the context of arbitration than litigation across borders.

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Parties to commercial transactions should know what laws apply to their transactions. This is even more important when the parties are from different countries and each party expects their local law to apply. By knowing which set of laws applies, the parties can know how to structure a transaction, and who bears the risk if something goes wrong.

Starting in the 1970s, lawyers around the world worked together to resolve the ambiguity of which commercial laws should apply when parties are from different countries, and what became known as the CISG went into effect in 1988. But this law may not clarify a commercial party’s legal obligations, but make them more ambiguous.

Why should you read this post about the CISG?

• You sell products abroad and are interested in the law that affects your sales process.

• Someone mentioned the CISG, and you need to read something to make sure the convention is nothing important.

• Everyone else is talking about this post, so you want to know what the big deal is.

Image Credit: Patrick Gruban, cropped, downsampled by Pine, UN General Assembly hall, CC BY-SA 2.0

When the CISG Applies

The CISG generally governs commercial transactions when one party sells goods to another party in a different country, as long as both countries agreed to the CISG.

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 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. 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. 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.