- December 1, 2015
Businesses large and small now routinely buy and sell goods across oceans and international boundaries. Often, the business people involved may not speak the same primary language and the contracts they enter can be as simple as an e-mail exchange. They may also fail to take into account many of the intricacies of international law.
The United Nations recognized the importance of these issues in the 1980s, when it prepared the Convention on Contracts for the International Sale of Goods (“the CISG”). The CISG has now been ratified by 83 countries including the world’s largest economies. Because it governs a significant proportion of world trade, the CISG is proving to be one of the most successful economic treaties to date. It is therefore important for companies conducting business internationally to understand how the CISG affects international goods transactions.
Generally, the CISG governs contracts for the sale of goods between businesses located in separate signatory countries. Article 6 of the treaty provides flexibility where parties may exclude the CISG entirely or “derogate from or vary the effect of any of its provisions.” As such, parties are free to write their own contracts to govern their own international transactions.
The CISG does not uproot the laws of signatory countries, but instead serves two key purposes: to fill in gaps in goods contracts to help resolve disputes and to facilitate dialogue between potential parties to such contracts, before they engage in a covered transaction. For example, if a German company contracts to sell a significant piece of equipment to an English business, but the contract is silent on what happens if the equipment is a “lemon” and simply does not work as represented, the CISG provides a mechanism to “avoid” the sale.
If, however, parties to an international goods transaction do not have a contract, the CISG provides a default set of terms and remedies for these commercial transactions, much like the Uniform Commercial Code in the United States. By way of example, the CISG covers:
- The key elements of offers and the manner of their acceptance;
- What happens when parties seek to add or change terms or other modifications to international sales contracts;
- The role of local and international practice, customs and usage;
- Obligations as to the quality of the goods, issues as to examination of goods, delivery, payment and notice of any claimed lack of conformity;
- Remedies for breach of contract — for both the seller and buyer — ranging from delivery and price issues, repair, replacement or price adjustment for non-conforming goods to contract avoidance, warranty issues, or damages incurred by performing sellers; and
- The passing of risk of loss in the goods sold to defenses due to acts of God (i.e., force majeure).
To the extent necessary, courts in signatory countries will, by default, apply the law of the CISG to contracts for goods transactions, instead of the sales law of their own country, when a dispute relative to an international goods transaction applies.
What general impact does the CISG have on businesses? If a transaction is covered, businesses must not only know how the CISG works, but also understand that unless they alter the terms of their international goods contract, the rules may not have any effect to which they are accustomed. As such, businesses should ensure that they address all of the issues above in their sales contracts and avoid disputes before they occur. No international goods sales contract should go without review by counsel, particularly with respect to choice of law and dispute resolution provisions. One aspect of international goods disputes that is not addressed by the CISG (but can be by the parties themselves) is what court or forum (e.g., arbitration) will hear any dispute governing a covered transaction.
Language barriers and cultural differences have the potential to exacerbate disputes involving the international sale of goods. As such, it is important for businesses to ensure that their contractual protections as buyer or seller are not lost in translation. The CISG is not necessarily a substitute for a well drafted sales contract, but it does establish a baseline, uniform international law that creates level negotiating positions both in pre-contract negotiations and post-contract disputes, which courts in signatory countries seek to evenly apply to avoid misunderstandings of the scope and applicability of the CISG among parties in different legal and economic cultures.
Burke Warren attorneys are available to answer any questions or advise solutions to any concerns regarding international purchase or sales agreements. Please contact Fred Mendelsohn, email@example.com or 312/840-7004, or Josh Cauhorn, firstname.lastname@example.org or 312/840-7055 with any questions regarding the subject matter.