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April 13, 2016

Legal News

April 13, 2016

The Convention on the International Sale of Goods – Essential Information for Global Businesses

Since 1980, the Convention on the International Sale of Goods (CISG) has served as the default body of international law that governs most sales of commercial goods between businesses located in Contracting States to the CISG. A Contracting State is a country that has incorporated the CISG’s terms into its law. The United States is one of 84 Contracting Parties to the CISG.

What many international businesses fail to realize is that absent proper, written agreement to the contrary, the CISG may automatically govern any contract they enter into regarding the sale of commercial goods. While there are certain requirements for the CISG to apply and many exclusions from its coverage, businesses are best served to make sure their contracts meet the necessary legal requirements for ensuring that the CISG does not unexpectedly apply to their transactions.

As a threshold matter, the CISG will only apply if the parties involved have reason to know that at the time of the formation of the contract between them that they have “places of business” in different contracting states. The CISG considers a place of business to be the location that has the closest relationship to the contract and its performance. Even between two parties who have places of business in different Contracting States, the CISG specifically does not apply to the sale of consumer goods, stock or other securities, negotiable instruments, airplanes, ships, vessels, and electricity; mixed contracts where the seller is mostly contributing labor or services; the liability of the seller for the death or injury caused by goods sold; and goods that are sold at auction.

What that leaves are contracts and transactions involving the sale of commercial goods between businesses in different Contracting States. For example, the CISG would apply to a contract between a French cheese producer selling to a buyer in the United States. While the parties involved are free to allow the CISG to apply or to expressly designate it as their choice of law in the contracts between them, if the parties desire that some other jurisdiction govern, it is not as straightforward an election as they might assume. Merely stating that a contract is to be governed and interpreted by a particular jurisdiction, such as the laws of New York State, does not suffice to waive the application of the CISG where it applies by default. In the contract between the parties, it must also expressly state that the CISG is waived, that the parties do not wish for it to apply, and that they elect some other law instead.

One example of how the CISG differs from other laws is that it contains no statute of frauds provision. Statute of frauds refers to the idea that certain contracts or contracts above a threshold amount need to be evidenced by something in writing in order for them to be enforceable. For example, under the Uniform Commercial Code, which governs many sales of goods that the CISG does not, any sale of more than $500 must be evidenced by a writing. If the same contract were governed by the CISG, a court could find an oral agreement was binding.

While there are additional examples of the consequences of having one jurisdiction apply instead of another, the most important idea business owners should retain is that once they know which laws they want to govern a particular contract, they must be extra careful with the language they use in their choice-of-law provisions. Additionally, it is not always clear whether or not the CISG does apply to a particular transaction or contract, so business owners are best advised to seek the advice of counsel and make sure their contracts are intelligently drafted to meet their particular needs.

This article is not intended to provide not should be construed as providing legal advice. Before entering into any business transaction, you should consult with an attorney to fully assess your unique situation and ensure that your rights and interests are protected.

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