CISG: Opt Out, Or Not? CISG In A Nutshell

Submitted by bmurray on Tue, 04/06/2010 - 22:39.

By Timothy Murray

Since 1988, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) has been the United States law that preempts the UCC when contracting parties are from different countries that have ratified CISG. CISG has been ratified by over 70 countries, including China, Japan, Canada, Mexico, Germany, France, Switzerland, and virtually every other major trading country (but not the United Kingdom, Brazil, India, or South Africa). Despite its importance and wide application, CISG is not well understood by most of the U.S. practicing bar.

RECOGNIZING CISG’S APPLICATION

The first hurdle is that CISG’s applicability to a contract is frequently overlooked by some or all of the parties, and in some cases, by the judge adjudicating a dispute between the parties. Any time a party is a non-U.S. entity is involved in contracting, CISG’s possible application ought to be considered. Moreover, even where a U.S. buyer of goods contracts with a U.S. distributor, if it appears that the goods are the product of a seller with a principal place of business in another CISG country, it is important to know that CISG applies.

OPTING OUT

Once the parties recognize that CISG applies to their transaction, they must decide in the drafting phase if they want the contract to be governed by CISG. In deciding whether to opt out, the prudent drafter will understand that although there are similarities between the law governing the sale of goods between U.S. buyers and sellers, the Uniform Commercial Code (UCC), and CISG, there are also many important differences. Some of the most important differences are discussed below.

If the parties agree not to be governed by CISG, care needs to be taken in drafting to avoid being unwittingly bound by CISG. Article 6 of CISG allows the parties to agree that CISG will not apply, i.e., they may "opt out" of CISG. Unless they agree to opt out, however, CISG automatically applies to any contract for the sale of goods between parties whose principal places of business is in different CISG countries.

Perhaps the most fundamental mistake parties make (aside from not considering whether CISG governs their contract in the first place) is in assuming that a standard choice of law clause that does not mention CISG is sufficient to opt out of CISG merely because it designates the law of a particular jurisdiction to govern the contract. It is not. In Easom Automation Systems, Inc. v. Thyssenkrupp Fabco, Corp., 2007 U.S. Dist. LEXIS 72461 (E.D. Mich. 2007), the court reiterated a rule that has become a trap for unwary drafters: where the contract is between parties within CISG contracting states, to opt out of CISG it is insufficient to merely include a choice of law provision stating that the law of that party’s state or nation governs. The choice of law provision must expressly exclude application of the CISG because without an express exclusion, CISG will govern.

If a buyer's purchase order stated that the deal should be governed by the law of California while the seller's acknowledgment stated that the deal should be governed by the law of British Columbia (Canada), CISG would apply because the law of California (or any other U.S. state) and the law of British Columbia (or any other Canadian province) is CISG where parties have principal places of business in different CISG countries. Both the U.S. and Canada had adopted CISG, and CISG supersedes the state law of California and the local law of British Columbia. If the parties do not want CISG to apply, they must expressly indicate that CISG does not apply to their contract before stating the law that will. To opt out of CISG effectively, the parties must include a clause such as the following: “The parties hereby agree that the United Nations Convention on Contracts for the International Sale of Goods will not apply to this contract.” The parties could then substitute the law of the jurisdiction of their choice, assuming that law had a reasonable relation to the contract. If the parties failed to provide a substitute, the court would decide which law applied based on private international law concepts such as the dominant contacts theory.

Aside from opting out of CISG altogether, the parties may also decide that they wish to opt out of only one or more provisions of CISG. Whether they decide to opt out of CISG entirely or only certain parts, their contract should clearly indicate this intention.

TIME FOR ACCEPTING OFFER

Mail is becoming less important in the contracting process, but where it is utilized, under the UCC, an offer to purchase goods is accepted by the mailing of the acceptance of the offer. In contrast, under CISG, an acceptance must be received to be effective, and it must be received within the time stated in the offer. Article 20(1) of CISG states:

A period of time for acceptance fixed by the offeror in a telegram or a letter begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter, or if no date is shown, from the date shown on the envelope. A period of time fixed by the offeror by telephone, telex of other means of instantaneous communication begins to run from the moment the offer reaches the offeree.

This rule can create problems where an offer states that a party has a certain time in which to accept, e.g., 10 days. Under the UCC, the ten days would not begin to run until the offer is received. Under CISG, however, the ten days begins to run as of the date on the offer. By the time the offer is received, a certain number of the ten days might have elapsed and the acceptance must be received by the offeror within the remainder of the ten days.

The parties could avoid these questions by clearly stating the moment in time the power of acceptance expires. For example, “This offer expires at 3 P. M., United States eastern standard time, January 10, 2010.”

STATUTUE OF FRAUDS

The UCC requires any contract for the sale of goods priced at $500 or more to be evidenced by a "writing" or electronic record. There is no such requirement under CISG.

FIRM OFFER

Under the UCC, merely placing a time limit on the duration of an offer does not prevent the offeror from revoking it. If, for example, a seller or buyer makes an offer stating that it must be accepted within 10 days, the offer may be revoked (withdrawn) at any time before the ten days elapse unless the offer provides written assurance that it will not be revoked (offers can be made irrevocable for up to three months).

Under CISG, however, an offer that merely states that it will only last for ten days prevents the party making the offer from withdrawing it during the ten-day period. Article 16(2)(a) of CISG states that an offer “cannot be revoked if it indicates, whether by stating a fixed time for acceptance or otherwise that it is irrevocable.” Thus, simply by inserting a time when the offer will expire, the offer becomes irrevocable under CISG. Moreover, there is no three-month limitation. To avoid this result under CISG, where an offer for the purchase and sale of goods governed by CISG is made with a definite duration, the power to revoke the offer must be expressly reserved and the parties’ contract should expressly state that this provision of CISG does not apply. The parties are free to agree to opt out of CISG entirely. They may also “derogate” from one or more CISG Articles. Such derogation will not, however, be implied. It must be expressed.

BATTLE OF THE FORMS

Under the UCC, if a buyer sends a purchase order and the seller responds with an acknowledgment stating the same price and quantity terms but adding other terms not found in the offer, the acknowledgment may still be an acceptance of the offer forming a contract. Typically, the buyer who makes an offer will prevail in this "battle of the forms."

Under CISG, virtually any additional term in the acknowledgment will convert the seller's acceptance into a counter offer. The seller will then ship the goods and buyer will accept the goods (ignoring boilerplate additional terms) and seller's terms will prevail. Article 19(1) of CISG establishes the basic rule:

A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter offer.

The language is more than reminiscent of the pre-UCC common law view of the “matching acceptance” rule. Where the buyer is the offeror, the mere inclusion in the seller’s “purported acceptance” of any additional term, limitation (e.g., a disclaimer of warranty or remedy limitation), or other modification (e.g., an arbitration term) would constitute a counter offer rejecting the original offer. Presumably, subsequent shipment of the goods and the buyer’s acceptance would constitute acceptance of the seller’s terms. Thus, the “last shot” principle “lives” under CISG.

Section 19(2), however, may be seen as an attempt to address the “battle of the forms” issue:

However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offer, without undue delay, objects orally to such a discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are t he terms of the offer with the modifications contained in the acceptance.

On its face, 19(2) may appear as a major exception to the “matching acceptance” rule and the corresponding “last shot” principle. The final subsection of Article 19, however, reduces the exception to what may be a de minimis level.

Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

CISG, Article 19(3). It is not merely the extensive list of subjects to which any additional or different term would be deemed to be a material alteration that constitutes a severe limitation to the exception in 19(2). The list is also prefaced by “among other things” that provides a carte blanche invitation to any court to add to the expressly non-exhaustive list of subject matter terms that are not within the scope of 19(2).

The inescapable conclusion is that the typical buyer-offeror who receives a CISG seller’s form with the kind of boilerplate commonly seen domestically in such forms will be subject to the “last shot” principle. Simply on this basis alone, buyers may not wish their contracts to be governed by CISG but sellers (as offerees) will have the same advantages that sellers had prior to the Code.

PAROL EVIDENCE

One of the most important differences between the UCC and CISG involves the parol evidence rule. There is no parol evidence rule under CISG, and evidence may be admitted that contradicts the written contract. Teevee Toons, Inc. v. Gerhard Schubert GMBH, 2006 U.S. Dist. LEXIS 59455 (S.D. N.Y. 2006).

Under the UCC, where terms of the contract are reduced to a writing that manifests the parties' intention to be bound only by written terms, evidence of terms discussed in negotiation before the writing was executed will not be admitted into evidence. Under CISG, such evidence is admissible.

Interpretation of contract language under the UCC is based on the standard of what a reasonable person would have understood the words to mean under all of the surrounding circumstances. Under CISG, however, evidence of the subjective intention of the individual parties may even trump a document signed by both parties.

Article 8(2) of CISG establishes a standard of interpretation familiar to U.S attorneys: “[S]tatements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.” However, this standard only applies “[i]f the preceding paragraph is not applicable.” The preceding paragraph suggests a quite different standard:

[S]tatements made by and other conduct of a party are to be interpreted according to his intent when the other party knew or could not have been unaware what that intent was.

CISG Article 8(1). In Guang Dong Light Headgear Factory Co., Ltd. v. ACI International, Inc., 2007 U.S.Dist. LEXIS 76844 (D.C. Kan. 2007) the court held that “[t]he plain language of the CISG requires the Court to evaluate a party's subjective intent, so long as the other party was aware of that intent. Otherwise, paragraph two of article 8 applies.” (Article 8 paragraph two provides the reasonable person standard of interpretation).

Thus, the plain language of CISG requires an inquiry into a party’s subjective intent as long as the other party to the contract was aware of that intent. This standard, while seemingly radical, is reminiscent of the familiar principle of domestic contract law involving latent ambiguities illustrated in the famous old case of two ships named “Peerless” where neither party was aware of the ambiguity and the court held that no contract existed since each innocent party subjectively intended a different Peerless. If, however, one party knows or reasonably should know of the ambiguity and is also aware that the other party is knows of only one ship named Peerless, there is a contract according to the intention of the innocent party. Raffles v. Wishelhaus, 2 H. & C 906 (1864).
The third paragraph of CISG Article 8 is more important. In addressing how a court should determine the subjective intent of a party under 8(1) or the understanding of a reasonable person under 8(2),

due consideration is to be given to all relevant circumstances of the case including the negotiations, an practices which the parties have established between themselves, usages and any subsequent conduct of the parties.

CISG Article 8(3). “Negotiations” would include any prior agreements or understandings which are admissible into evidence. Thus, there is no parol evidence rule under CISG. See, e.g., TeeVee Toons, Inc. v. Gerhard Schubert GmbH, 2006 U. S. Dist. LEXIS 59455 (S. D. N. Y. 2006), an American buyer claimed a subjective understanding that it was not bound by the German seller’s printed terms. The court noted the absence of any CISG parol evidence rule in denying a motion for summary judgment and requiring a determination of the subjective understanding of the parties at the time the contract was formed.