CONTRACT FOR THE INTERNATIONAL SALE OF GOODS -- A PRIMER
January 1, 2003
By: Frederic D. Van Arnam, Jr.
The United Nations Convention on Contracts for the International Sale of Goods (CISG) entered into force on January 1, 1988. When it applies, the CISG governs all aspects of contracts for the international sale of goods with the goal of facilitating international trade by removing legal barriers. This article will touch on several areas in which the CISG differs from the Uniform Commercial Code (U.C.C.) and the effect of these changes on American merchants.
Scope of the CISG
Unless the parties have specified to the contrary, the CISG applies to sales of goods contracts between parties with places of business in "Contracting States," which are countries that have ratified the CISG. The CISG will only apply if the parties to the contract have reason to recognize that they have places of business in different Contracting States. The CISG defines place of business as "that which has the closest relationship to the contract and its performance . . ." CISG Art. 10(a). While the CISG applies to the sale of goods, the Convention itself does not define goods. It does, however, preclude its application to consumer sales and contracts, the greater part of which regards labor. CISG Arts. 2,3.
The CISG, like the U.C.C., applies in default if parties do not opt out. CISG Art. 6. However, the CISG differs from the U.C.C. in several areas, three of which deserve mention. First, the CISG does not apply to sales of goods purchased for personal, family or household use, unless the seller did not or could not have known that the goods were bought for those purposes. CISG Art. 2(a). Second, the CISG does not apply to the liability of the seller for death or personal injury caused by the goods to any person. CISG Art. 5. Finally, Art. 4(b) states that the CISG does not address the effect of a sale on the property interests in the goods sold.
Statute of Frauds
The U.C.C. requires all contracts for the sale of goods valued at more than $500 be evidenced in a writing in order to be enforceable. In other words, oral contracts for the sale of goods will not support a cause of action in court in the event of a breach or default by either side.
The CISG, on the other hand, does not exclude application of its provisions to oral sales contracts of any kind. In fact, the CISG specifically states that a "contract of sale need not be concluded in or evidenced by writing. . ." CISG Art. 11. This provision reflects the continental approach to sales contracts. In response to the concern of several countries that believed the statute of frauds was important, the drafters created Article 96. Article 96 afforded the signatories the opportunity to "opt out" of Article 11, thereby reserving for its citizens the statute of frauds requirement for any contract entered into with parties having their principal place of business in that country. The United States did not opt out of Article 11, largely because modern commercial practices, such as rapid and informal contracts, are common in the business world. Consequently, any international sales contract with US parties is not subject to the U.C.C. statute of frauds requirements.
That the statute of frauds defense is not available under the CISG is significant in the context of US businesses involved in international transactions. Under the U.C.C., if there is no evidence in writing of a contract for the sale of goods, the contract is unenforceable. Any action brought in court based on a breach of contract theory would not survive a motion to dismiss. In contrast, a mere claim that a contract existed, whether or not there is a writing, is sufficient to maintain litigation under the CISG. American courts have not seen much litigation on this issue as of yet, one of the reasons being that parties are not aware of the CISG's application to their contracts.
The U.C.C. prohibits the introduction of most types of extrinsic evidence, known as parol evidence, to prove what the parties' intended when they negotiated a written contract. U.C.C. § 2-202. The only such proof permitted is course of dealings or usage of trade (U.C.C. § 1-205), course of performance of the parties (U.C.C. § 2-208) and evidence of additional consistent terms, except where the court has determined that the writing is the final statement of the terms of the agreement. U.C.C. § 2-202(b).
In contrast, the CISG permits various types of extrinsic evidence to explain the terms of an agreement. CISG Art. 8. It recognizes "all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties." CISG Art. 8(3). American parties to an international contract are able to avoid application of this provision by inserting a standard merger clause into the contract, thereby expressing an intent to consider the writing a final and complete expression of the agreement. Authorization for this is found in Article 6 which permits parties to "derogate from or vary the effect of any of its provisions."
The U.C.C. excuses a seller from delay in delivery or non-delivery where performance was made impracticable by an occurrence, the non-occurrence of which was assumed by the parties upon entering into the contract. U.C.C. § 2-615. This section requires the seller to notify the buyer of the delay or non-delivery.
The CISG delineates its commercial impracticability rules in Article 79. Article 79 is at once similar to and distinct from U.C.C. § 2-615. Article 79 excuses a party from performance where nonperformance was a result of "an impediment beyond his control," so long as the impediment was neither foreseeable at the time of contract formation nor avoidable thereafter. Like U.C.C. § 2-615, Article 79 requires the non-performer to notify the other party of its reason for excuse and the consequences on the non-performer's ability to perform. Article 79 takes a broader approach to commercial impracticability in that it permits both buyers and sellers to invoke an excuse for non-performance, while U.C.C. § 2-615 applies only to sellers. Likewise, the CISG excuses a non-performer from "any of his obligations" while the U.C.C. excuses only a seller's delay in delivery or non-delivery. A more narrow approach is taken by the CISG where the cause for non-performance is a seller's supplier. Article 79(3) excuses a seller only where the seller's source itself has a valid basis of excuse, while under the U.C.C. a seller whose source fails to perform is excused, so long as both parties to the contract assumed that the particular source to be seller's exclusive source.
While the CISG is a little known convention to many involved in international business transactions, it nevertheless operates by default and governs all international contracts between parties of different Contracting States, unless the parties have specifically agreed that the CISG does not apply to their contract. US merchants should be aware of the CISG and its applications to contracts because its provisions differ from the standard U.C.C. rules, resulting in different rights and obligations for the contracting parties.