United Nations headquarters in New York/Photo: IDN/Shutterstock.com

Notwithstanding the fact that the UN Convention on Contracts for the International Sale of Goods (CISG) has been in existence and United States has been a signatory since the 1980s, as shown by the recent cases across the country, parties to the international trade contracts (as well as many practitioners) are still not aware about CISG's existence and its application to a potential contract dispute. This leads to unpleasant surprises during litigation or arbitration when the parties realize for the first time that their dispute is governed by the unfamiliar contract regime under CISG and not the domestic law.

CISG automatically applies to contracts for the international sale of goods between parties whose principal places of business are in different CISG countries. While nowadays most commercial transactions contain an international element, it is prudent for many in house and outside practitioners to familiarize themselves with CISG that has been ratified by 93 countries. As further discussed in this Article, CISG and its potential application should be considered at the contract drafting stage and not in the midst of a contract dispute.

Applicability of CISG to a Contract

The CISG applies to contracts for the international sales of goods between private businesses located in CISG countries, excluding sales to consumers and sales of services, as well as sales of certain specified types of goods (stocks, ships, aircrafts, among others). See CISG, Article 2. As a result, most contracts involving sale of goods between an American business and a foreign business located in one of the Contracting States, including Canada, China, France, Germany, Israel, or Mexico, will be governed by the CISG.

Since CISG was ratified by the United States and became a part of its domestic law, the CISG "creates a private right of action in federal court." See Zodiac Seats US v. Synergy Aerospace, No. 417CV00410ALMKPJ, 2019 WL 1776960, at *2 (E.D. Tex. Apr. 23, 2019) (the United States' "assent to the CISG necessarily incorporates the treaty as part of [the U.S.] domestic law."). "As incorporated federal law, the CISG governs any dispute arising out of contracts for sales of goods between member states so long as the parties have not elected to exclude its application." See id.

As a result, if the parties do not wish for CISG to apply to their agreement, they must clearly state so in the agreement and if they do not, the court is likely to apply CISG to the parties' agreement. For example, in several recent decision, the courts found that since the contract "does not opt out of the CISG, and it was for the sale of a good … purchased for commercial use … the CISG applies." Sunrise Foods Int'l v. Ryan Hinton, No. 1:17-CV-00457-CWD, 2019 WL 3755499, at *4 (D. Idaho Aug. 8, 2019); Zodiac, 2019 WL 1776960, at *2 (when the contracts were silent as to the applicability of the CISG, as an American business, plaintiff is "bound by the terms of the CISG if it contracts with a party whose 'place of business' is in a country that is a signatory to the CISG at the time the contract was signed.").

Further, the CISG preempts contrary provisions of Article 2 of the UCC and other state contract law to the extent that those causes of action fall within the scope of the CISG. U.S. Nonwovens v. Pack Line, 48 Misc. 3d 211, 214, 4 N.Y.S.3d 868 (Sup. Ct. Suffolk Co. 2015). There are a number of substantive differences between CISG and the UCC (or potentially state law) that need to be considered. Some of the notable differences include an absence of the statute of frauds and parol evidence rule in the CISG. The CISG and UCC rules concerning the offer and acceptance also differ. As a result, it is imperative for any counsel who, in any way, works with international sale of goods contracts to become familiar with CISG and its provisions.

Considering CISG and Its Application at the Contract Negotiating and Drafting Stage

Based on the discussion above, in order to avoid unpleasant and costly surprises during litigation or arbitration, it is important for a contract drafter to consider applicability of CISG to the parties' contract. If there is a possibility that CISG may govern the parties' contract, a decision should be made during the negotiations and drafting stage of the contract (and not during the dispute) whether the parties intend for CISG to govern the contract or whether the rules set forth by CISG should be modified in any way.

If the parties do not intend for CISG to govern their contract, they should clearly indicate it in their agreement. The courts require the parties to show clear intent to opt out of the CISG's application. If the parties' position is not clear, however, the courts often require additional briefing on application of CISG, which, at a minimum, adds to litigation costs and creates further uncertainty. See, e.g., Hellenic Petroleum v. Elbow River Mktg. Ltd., No. 119CV00483LJOSKO, 2019 WL 3035530, at *1 (E.D. Cal. July 11, 2019).

Conclusion

Whenever a commercial transaction involves parties from different countries, the CISG's provisions and its potential application should be considered. In order to mitigate the risks of additional costs, uncertainty and delay during the litigation or arbitration, in house and outside counsel should consider CISG's application during the contract negotiating and drafting. Among other things, the differences between CISG and domestic laws should be analyzed and evaluated. Further, the contracting parties' agreement to opt out of the CISG should be clearly expressed in the contract.

Oksana Wright is a partner in the international litigation practice at Fox Rothschild. Barri Boylan is the senior associate general counsel at Dentsply Sirona.