International Sales Contracts

Originally published: Aug-24-2006

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Business in today's global marketplace is transacted at lightening speed. Sales are generated and finalized in the time it takes to make a phone call, send a fax or receive an email. And practically every company – large or small, sophisticated or neophyte – is involved in international transactions. With the speed of sales activity, the ease of access to multinational markets, and the comparative inexperience of many of the players, often little account is taken of the issue of applicable international contract law.

In our July 2006 article on Choices of Law and Venue in Sales Contracts, we briefly discussed the importance of these provisions. However, international law is complex. It is essential, therefore, for every company to have knowledge and understanding of the rules that govern, as well as a sales contract specifically designed for their international transactions. (See Model International Sales Contracts below.)

Leveling the Playing Field – The CISG

Until 1988, as far legalities were concerned, domestic and international sales were generally handled the same. The party with the most clout/bargaining power (often the buyer) imposed its standard terms and national law. If the parties were from different legal cultures, for instance civil law versus common law countries, then understanding and negotiating contract terms was fraught with difficulties.

A United Nations treaty, the UN Convention on Contracts for the International Sale of Goods (CISG), was the first instrument to establish a comprehensive code governing international sale of goods. CISG, also known as the Vienna Sale Convention, was adopted by diplomatic conference in April, 1980. It went into force on January 1, 1988.

When the CISG Applies

With certain exceptions, the CISG applies automatically to all contracts for the sale of goods between traders from two different countries where both countries have ratified the CISG. (Currently, 67 countries are signatories.) Automatic application takes place unless the parties to the contract expressly exclude all or part of the CISG. Circumstances such as the nationality of the parties, the place where title and risk pass, and whether the goods are to move between nations that are not parties to the convention do not matter.

Sales of goods not covered include:

1. Goods bought for personal, family or household use, unless the seller was unaware of that fact;
2. Sales by auction;
3. Sales on execution or otherwise by authority of law;
4. Sales of stocks, shares, investment securities, negotiable instruments or money;
5. Ships, vessels, hovercraft or aircraft (however, it has not been interpreted to exclude components of such goods); and
6. Sale of electricity.

The CISG does not cover the sale of services. In contracts that include both goods and service elements, the CISG applies when the sale of goods constitutes the “preponderant part of the [seller’s] obligations…” However, contracting parties are free to apply the CISG to services so long as this choice of law is made explicit in the contract.

The CISG may sometimes also apply to contracts between a signatory and non-signatory. This usually occurs when the contract is entered into with a branch office (located in a non-signatory) of a foreign company with its headquarters in a country that has signed the Convention.

Role of National Governing Law

One of the primary purposes of the development of the CISG was to help harmonize international trade terms by reducing to a minimum the role to be played by a national system of law. However, it does not entirely do away with “governing law”.

The CISG does provide that express contractual provisions take precedence over the Convention’s default provisions. Therefore, contracting parties remain free to specify whatever law or terms they wish to apply to their transaction, and may completely exclude the application of the CISG to their contractual relationship. (See Contracting Out of the CISG below.)

There are also matters that are a question of public policy and cannot be varied by the parties. For example, the scope of a provision regulating the fixed damages payable in the event of delayed performance is not entirely at the discretion of the parties.

Also, the CISG does not address the important issue of retention of title to the goods if the buyer does not pay. While it does allow for "a retention of title" clause in an international sales document, in most situations, this does not improve the collectability of the debt. This is because, generally, the laws where the goods are located govern the enforceability of a retention of title, which by its nature gives preference to a seller over other creditors.

Some Significant CISG Provisions

Acceptable Legal Evidence

According to David Greenberg, V.P. International Collections of ABC-Amega Inc., this feature is a powerful tool for mitigating the differences between various types of law (for instances, English common law vs. Spanish civil law).

In most common law countries, like the United States, electronic messages (faxes, photocopies and emails) are held to be qualified pieces of evidence to support the transaction between buyer and seller. In many civil law countries, on the other hand, this type of documentation is ignored with only original documents supplying legal evidence regarding the transaction.

The CISG clearly provides that electronic media can be used as evidence of contracts between sellers and buyers, thus superseding the national law of signatories, at least for international contracts. All that is generally required is an affidavit from the seller certifying that the electronic documents are true and exact replicas of the original. This certification must, however, be done in the presence of a Notary Public and then legalized by Apostille.

Contract Formation

Contract formation rules under the CISG make a distinction between “invitations to make offers” and “actual offers” based on the factor of “definiteness”. Under the CISG, an offer is deemed to be definite when (1) it is made to one or more specific persons; (2) it is sufficiently definite, and; (3) it indicates the intention to be bound in case of acceptance. For an offer to be sufficiently definite, therefore, it must indicate the goods and fix the price or make provisions for determining the price.

Oral Contracts of Sale

Under the CISG, oral contracts of sale are enforceable. A binding oral contract can be proved by any means, including persons who were witness to the agreement. This provision is of special concern to sellers represented by sales agents in foreign countries. If the sales agent provides a verbal offer to sell at a certain price, even if this offer is unacceptable to the actual seller, it could be held enforceable under the CISG.

Contract (Offer) Revocability

There is no time limit on contracts under the rules of the CISG. Even if an offer states a fixed time for acceptance, it can basically be regarded as irrevocable, unless the seller withdraws it prior to the buyer dispatching his acceptance. In other words, a seller who makes an offer to sell, stating that the offer expires at the close of business on Friday, is not protected against having to formally withdraw the offer to keep it from being accepted on Monday.

Cover and Resale Damages

The CISG section on “cover damages” provides an “out” for buyers as it allows them to enter into a new contract with a third party when the original seller has failed to deliver the goods. The buyer is then entitled to recover from the initial seller the difference between the original, unfulfilled contract and the one entered in substitution.

“Resale damages” protects the seller by allowing him to sell his goods to a different buyer when the original buyer has failed to accept the goods. The seller also has the right to recover the difference between the original breached contract and the new sale.

Specific Performance

This provision allows an aggrieved party the right to force the contract breaching party into meeting his duties under the contract. Specific performance is only granted, however, if the court where enforcement is sought would do so under its own law.

Quanti minoris

Quanti minoris is Latin for “lesser amount”. This provision allows a buyer who has received non-conforming goods to opt for a price reduction and keep the goods, rather than sending them back to the seller.

Declaration of Avoidance and Fundamental Breach

The CISG defines a fundamental breach as one that causes “such a detriment to the other party as to substantially deprive him of what he is entitled to expect under the contract”. In order for this provision to apply, however, the breaching party must have foreseen the result of his breach.

The non-breaching party may send a declaration of avoidance to the breaching party releasing both from obligations (subject to any damages due) under the contract.

Benefits of CISG to International Business

According to the American Bar Association, there are three significant benefits to international businesses that utilize the CISG:

1. Sellers can avoid difficulties of reaching agreement with foreign buyers on choice of law issues as the CISG text will be readily available for compromise.
2. Use of the CISG will decrease the time and legal costs otherwise involved in the research of unfamiliar foreign laws.
3. The CISG will reduce the problems of proof of foreign law in domestic and foreign courts.

Contracting Out of the CISG

The CISG provides that express contractual provisions take precedence over the default provisions of the CISG. Therefore, contracting states, sellers and buyers have the right to pick and choose the parts of the CISG by which they will be bound, or to specifically exclude the application of the CISG. If not specifically excluded, the CISG applies to any matters not specifically dealt with in the contract.

Although not commonly known, doing business in countries that have adopted the treaty can establish a completely new legal requirement. Most exporters and importers assume that the governing law will be that of the state specified in the purchase order or contract of sale. This is not always the case. Unless specifically opting out of the CISG, both parties may be operating under the CISG rules whether they realize it or not. To ensure opt out, the contract should explicitly state something to the effect that:

“The law of (your state) is the governing law and the Convention for the International Sale of Goods (CISG) shall not apply.”

Note that the United States, in ratifying the CISG specifically stipulated that, absent express agreement to the contrary, the CISG would not apply to contracts between a U.S. party and a party whose place of business is in a country that has not yet adopted the Convention.

Contracts that exclude the application of the CISG should be written with care as the Convention treaty becomes the “law of the land” when ratified by a country, and takes precedence over any state law.

The CISG and the U.S. Uniform Commercial Code

The United States was among the first ten signers of the UN Convention on Contracts for International Sale of Goods (CSIG). Before the treaty became US law, state law governed the making and performance of international sales contracts. For most states, it was Article 2 of the Uniform Commercial Code (UCC-2) that applied to international sales contracts.

Adoption of the CISG by the United States provides important benefits as it circumvents one of the most contentious issues in international sales, i.e. choice of law and venue.

The fact that the CISG is similar to many provisions of UCC-2 is not surprising as the United States played an active role in the negotiations on the Convention. Some significant areas of accord include:

• Both legal codes allow for supplementation of contracts with agreed upon trade usages and established courses of dealing.
• Both give great weight to the concept that the contract governs the transaction.
• Both treat revocation of acceptance, warranties, risk of loss, notice, excuse, remedies, cover, and assurances in performance in a similar manner.

Areas of difference between the CISG and UCC-2 are listed below:

Model International Sales Contracts

For many smaller and mid-size companies, hiring an attorney to vet international sales contracts may not be affordable. Both the International Chamber of Commerce (ICC) and the U.S. International Trade Commission (ITC) have developed ready-to-use model international sales contracts. Both provide terms ready for use. All the parties need to do is add the relevant details of their commercial transaction. Both promote harmonization of international contracting practices through use of vocabulary and common reliance on the CISG and ICC International Commercial Terms (Incoterms).

• ICC Model International Sales Contract for Manufactured Goods is available via a web-based application for a reasonable one-time user fee and minimal per contract fee. The application has been designed with the smaller trader, perhaps new to international trade in mind; however, experienced international traders can also benefit. The text produced by the application is concise, delivering only the clauses relevant to the transaction being contemplated, and thus creating a tailor-made contract.
• ITC International Commercial Sale of Perishable Goods Model Contract is available free, online in PDF format and includes a user guide.

Further Information on International Sales Contracts

1980 - United Nations Convention on Contracts for the International Sale of Goods (CISG): Includes full text of Convention plus related documentation.

The Future of Electronic Contracts in International Sales: Gaps and Natural Remedies under the United Nations Convention on Contracts for the International Sale of Goods, by Jennifer E. Hill

The Dilemma of Good Faith in International Commercial Trade, by Elena Christine Zaccaria

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This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.