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Reproduced with permission from 8 Journal of Law and Commerce 187-205 (1988)

DRAFTING CONSIDERATIONS UNDER THE 1980 UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS

B. Blair Crawford [*]

This Article is written primarily for the practitioner and reviews some of the areas in which the Convention (or "CISG") will require different contract drafting techniques.

Part I briefly discusses the difference between the U.S. and foreign legal systems. Part II is a description of some issues that will affect all contract drafting, while Part III reviews the Convention's impact on certain frequently seen contractual clauses. This paper is far from exhaustive and is most certainly not a substitute for detailed study of the Convention and its background.[1] CISG is a detailed, fully integrated body of law with a scope at least as ambitious as Article 2 of the Uniform Commercial Code ("UCC") and cannot be approached in a piecemeal fashion.

I. Diverse Legal Systems

The practice of law, Holmes taught us, is the art of predicting what a court will do in a given set of circumstances. Notwithstanding computerized research, psychological profiles for jurors and other technological hoopla of the 20th century, it remains an art, and an imprecise one at that. If the outcome in a modern U.S. commercial case is so difficult to predict where the rules of the game, the language, the approach to analytic thinking and the cultural influences are familiar, consider the dilemma now facing the Bar with the Convention [page 187] where the task remains the same, but everything else is completely different.

The problem arises not from the relatively simple language used in the Convention, but from the vastly different approaches that other legal systems will use to interpret it. Some of the key differences are worth noting.

U.S. businessmen and lawyers are often surprised to find that our legal system is something of a global outcast and that our approach to legal problems is not always appreciated. Ours is the "Common Law" system which we inherited from the U.K. It had its origins in the Middle Ages from judges "riding the circuit," making law as they went. It tends to be highly fact-oriented; to use inductive reasoning; and to be largely judge made. Great reliance is placed on past decisions involving similar facts. Academic writings are distinctly secondary. The Civil Law system, which is dominant in one form or another virtually everywhere in the world except in the English speaking countries,[2] developed out of the medieval universities of Italy and the Continent. It is much more abstract in approach; emphasizes sweeping generally worded "codes;" and employs deductive reasoning. Stare decisis plays a minor role -- courts are not strictly bound in theory to follow precedent. The writings of learned Professors are extremely influential. It is much less oriented toward fact development and is accordingly much less prophylactic in approach. Civilian lawyers are less concerned about anticipating and solving all possible problems in their contracts. They think in general principles, believing that from those principles reasonable men will arrive at civilized and predictable results.

Perhaps the most significant difference lies in the absence of civil juries. The notion that a lay jury presided over by a politically appointed or elected judge should sit in judgment in a sophisticated commercial dispute astounds and dismays the Civilian. He finds our discovery system unbelievable. He is irritated by our insistence on highly detailed contracts (which we write because we do not really trust our judges and juries). He is used to dealing with experienced commercial judges who are well aware that in contract drafting "he includes she" and "the singular includes the plural."[page 188]

And now we are to join our Civilian brethren and together interpret, and practice under, this new statute, written in six languages. We are to predict what their courts will do, and they, ours. It is a unique challenge.

II. General Drafting Issues

The initial, practical question practitioners must consider is whether the Convention is something they will have to deal with or not -- is it a piece of esoterica or something that cannot be ignored except at the risk of malpractice? The answer will be increasingly the latter, although the process is likely to be slow.

A typical international sales negotiation illustrates the point. Choice of law, like dispute resolution and other "legal" issues, is generally left to the end when, if a bargain has actually been struck, the businessmen are anxious to finish up and celebrate. Each side demands its own law and rejects the other's for a variety of real and not-so-real reasons. American lawyers tend to be unfamiliar with foreign legal systems and to doubt that their clients can receive a fair hearing; in particular, they are incredulous at the lack of discovery overseas.[3] Foreign lawyers are very much afraid of the cost of U.S. litigation and of what they perceive to be its unpredictability. The usual compromise is the law of (and often a forum in) some "neutral" third country such as Sweden or Switzerland[4] since choice of law and choice of forum tend to go hand-in-hand. As CISG becomes better known, it is likely to become an acceptable compromise choice of law, even where it might not otherwise be applicable.[5]

The Convention's flexibility is an additional attraction that will increase its popularity. Unlike the UCC which restricts parties' ability to make their own rules through the unpredictable use of concepts such as "unconscionability" and "failure of essential purpose," and foreign laws which lean heavily on concepts of "public policy" to invalidate unacceptable agreements, the CISG, by its own terms, states that "[t]he parties may . . . derogate from or vary the effect of any of [page 189] its provisions."[6] In the final analysis, the fact that it is a ratified U.S. treaty is enough. As an integral part of the U.S. law, we can thus not disclaim particularlized knowledge as we can with Swiss or Swedish law. We are professionally responsible for knowing what it says and what its effect could be on an international transaction.

The easy, and obvious, solution for many lawyers will simply be to opt out of it -- fully permissible under Article 6. Indeed, this flexibility is part of the Convention's attractiveness and, no doubt, the reason why it was unanimously approved by sixty-two nations in the first place. But our clients may not always have that choice for the competitive reasons mentioned earlier, and even where they do, it may not always be the best course for them. Woe to the U.S. lawyer who advised his client to avoid CISG and then finds out that he is worse off with the UCC!

III. The Convention's Impact on Contractual Clauses

The key ingredients to successful drafting under CISG are likely to be simplicity, and the avoidance, as much as possible, of U.S. terms of art. It will be important not to lose sight of the fact that the English version of the Convention is only one of six equally authentic versions (the others being Arabic, Chinese, French, Russian and Spanish). The Convention is notable for the relative simplicity of its terminology and for its lack of definitions (contrast UCC §§ 2-103, 2-104, 2-105 and 2-106 which define, or incorporate other definitions of, some fifty separate terms). For example, numerous contract remedies such as termination, cancellation, rescission, etc., are distilled in the Convention into the single remedy of "avoidance."[7] And while this concept, as well as others such as "fundamental breach,"[8] and the definition of "material"[9] need to be reviewed in order to avoid misunderstanding, the Convention on the whole avoids special terms of art.

The lesson here, as with the drafting of all international contracts, is to avoid terms which have a particular local or regional meaning, and to watch very carefully for false cognates. A classic example of this might be the use of the term "consequential damages" without further definition. That term means something far different [page 190] than does the Spanish term "danos consecuentes" which looks and sounds very similar. If a particular term is pivotal in a CISG contract, it should be clearly defined either in factual terms, or in terms of its intended legal effect. The following example illustrates the above principle:

. . . as used herein drawings and models transferred in accordance with clause __ shall not be deemed to be goods.

In some cases, a comparison of the same term as used in different language versions of the Convention may prove useful. Keep in mind that while the English language version is likely, given the predominance of English as the language of international commerce, to become a "first among equals," the everyday experience of multilingual lawyers teaches that differences in meaning do crop up in translations and can be problematic.

Regardless of the industry or circumstances involved, some issues and drafting considerations will apply across the board. Of these, perhaps the most important and troublesome is the problem of "validity." Article 4(a) specifically provides that the Convention is not concerned with "the validity of the contract or of any of its provisions or of any usage."[10] The obvious intent behind this clause was to be sure that the Convention neither disturbed deeply ingrained notions of public policy, such as the invalidity of contracts for the sale of heroin, or contracts entered into by minors or incompetents, nor tried to legislate what public policy should be for all nations. Neither approach would have succeeded; the Convention would simply not have been adopted. Some matters simply had to be left to local law.[11]

The concern is that U.S. Courts might try to read U.S. doctrines such as "unconscionability" into the Convention, or that foreign [page 191] courts might do the same with important principles of their law.[12] Whether this will happen, or to what extent, is pure speculation, but it does lead to one very important point -- there is an absolute need to draft with one eye on the Convention, and the other on whatever body of law will apply if for any reason the Convention is inapplicable.[13] It is simply too early to tell what reception awaits the Convention in our courts or anyone else's. Thus, it would be wise to cover all bases when drafting, regardless of what you think may or may not be the effect of your choice of law clause. The drafter should keep in mind that, notwithstanding CISG's status as a ratified treaty, the UCC has not been repealed.[14] Caution suggests, for example, that exclusions of implied warranties continue to be in bold-face.[15] Further, lawyers should not be too eager to take advantage of the Convention's apparent flexibility. Under the UCC, the shortest time allowed for limitation of actions periods is one year;[16] no such minimum exists under CISG. It would no doubt be tempting to select CISG and to put in an extremely short limitations period. However, overreaching in initial drafting, coupled with the "wrong" forum, could result in disaster. CISG may be a drafting opportunity, but some prudence is clearly called for.

With the foregoing in mind, which frequently seen contract clauses will be most affected by the Convention? Obviously the choice of law clause itself (if there is to be one)[17] must be well crafted, or the whole premise upon which the contract rests is faulty.

With CISG, however, this presents a special problem since, unlike Swedish law, CISG is not an unrelated "foreign" body of law.[page 192] CISG is now part of U.S. law; as a ratified treaty, it "outranks" ordinary state or federal statutes. Thus, the following clause is not an effective way to "opt out" of the Convention:

This Contract shall be governed by and construed under the laws of the Commonwealth of Pennsylvania

The above clause is ineffective because CISG is just as much a part of Pennsylvania law as is the UCC. In order to effectively "opt out" of the Convention, the following clause should be used:

This Contract shall be governed by and construed under the laws of the Commonwealth of Pennsylvania not including the 1980 United Nations Convention on Contracts for the International Sale of [page 193] Goods.

An interesting question arises as to whether under some circumstances the first clause, above, is in fact sufficient to invoke CISG. As a strict matter of constitutional interpretation, the answer seems clearly to be "yes," but this may not reflect reality. Countless numbers of such clauses are today in effect in standard terms and conditions, selling policies, and the like. Given the general lack of awareness of the Convention, it is doubtful that very many people really expect that the Convention will govern their international sales (to other CISG countries). It is thus not difficult to imagine a judge finding that the parties did not in fact intend to invoke the Convention, and ruling that it is not applicable. That would be a troublesome interpretation over the long run. If the parties intend for the Convention to govern, the parties should use the following explicit language:

This Contract shall be governed by and construed under the 1980 United Nations Convention on Contracts for the International Sale of Goods.

Even this is not wholly satisfactory. The contract may not be wholly a sale of goods, further, a "backup" choice of law is always a must[18] -- if you do not select it, the court will. A more satisfactory solution might be:

This Contract shall be governed by and construed under the 1980 United Nations Convention on Contracts for the International Sale of Goods, or, to the extent that the Convention does not settle the rights and obligations of the parties, the law of the State of Delaware.

Another alternative is to rely on the supremacy clause to reconcile conflicts between the UCC and CISG:

This Contract shall be governed by and construed under the law of the State of Delaware including, when it is, by its own terms, applicable, the 1980 United Nations Convention on Contracts for the International Sale of Goods.

Even though choice of law and choice of forum frequently go hand-in-hand, that is not always the case. For example, ICC Arbitration in Switzerland,[19] which uses the substantive law of another country, is frequently a model in international commercial transactions. One should therefore always look at the likely fori in the event of a dispute and, consider at least briefly the attitudes of their courts in the event of a dispute. Will local notions of conflicts or public policy interfere with the parties' choice of law? Is CISG available in local translation? Is that country a signatory? etc., etc.

The process of contract formation is considerably different under the Convention than under U.S. Common Law or the UCC. Under the UCC, it is clear that a contract may be formed even though the exact mechanism of offer and acceptance cannot be traced.[20] In contrast, the Convention hews somewhat more rigidly to the older "offer-counteroffer/rejection-acceptance" model. Thus, contract formation is more difficult under the CISG than under the UCC.[21]

In light of the above, the process of acceptance is very important -- both from the offeror and offeree's viewpoint. Of particular concern for larger companies, will be the provisions of Article 11 which abolishes the Statute of Frauds[22] -- meaning that an oral acceptance, if proven, ("by any means, including witnesses") will be valid.[23][page 194]

Clearly, all quotations or proposals should contain a requirement that acceptances be in writing:

This proposal may be accepted only in writing delivered to (the Offeror's address).

To do otherwise is to risk an argument -- particularly in the commodity trading business -- that "Mr. X accepted our proposal in a telephone call the day before the price skyrocketed/plummeted."

Depending on the industry, it may also be important to specify very clearly how and when the acceptance is to be effective; thus

This quotation may be accepted only in writing received at our offices on or before 5:00 PM local time on its expiration day. Facsimile transmission is/is not acceptable.

Offerors should note the mechanism of Article 19(2) in which" acceptances" which contain terms different from or additional to the terms of the offer are discussed. If the new terms are "material," i.e., price, payment, quality or quantity, place and time of delivery, liability or dispute settlement, the acceptance is a rejection and counteroffer. Consideration should be given to defining additional terms as "material" -- choice of law, perhaps (which could have a significant effect on the whole proposal).

One of the most frustrating aspects of a typical U.S. "battle of the forms" can be, once again, the issue of applicable law. Assuming that each competing form specifies its own "home" law, a circular debate can arise -- which decision must be made first, the forum or the law. Fortunately, this debate is usually rendered moot by § 2-207 of the UCC, but in a CISG vs. UCC battle, it would not be; indeed the spectre of a logically endless argument is very real. Given the differing approaches of the Convention and the UCC toward contract formation, it is not hard to imagine a situation in which the activities of the parties have given rise to a UCC, but not a CISG, contract. If one party's form invokes CISG, while the other's selects the UCC, what is the result? The CISG party might find himself in an impossible dilemma: in order to have a cause of action, he must claim that a contract exists (and has been breached) but to do so he has to impeach his own, CISG based, form and thus, perhaps, the contractual term [page 195] which he claims has been breached! To avoid this, one commentator[24] has suggested that a Seller's quotation form say that a

Distributor shall submit orders for Products on its standard purchase form; provided, however, that any terms or conditions of purchase appearing on such form shall be valid only to the extent said terms and conditions are not inconsistent with any of the terms contained herein, or any terms appearing in Supplier's order acknowledgment form, including the requirement that the rights and obligations of the parties shall be governed by the provisions of the U.N. Convention on Contracts for the International Sale of Goods, 1980, prior to and following the effective date of said Convention.

This does not necessarily solve the dilemma for it is still not clear what happens when a buyer submits his own (UCC) form and then both sides begin to perform and act as if a contract was in existence -- the classic UCC § 2-207(3) situation. Only Article 18 of the Convention is analogous[25] but that Article does not indicate what the terms of the contract are, as does 2-207(3).[26] The terms may come from the provisions of Article 19(2) which provides that ". . . [t]he terms of the contract are the terms of the offer with the modifications contained in the acceptance," but this hardly answers the initial conundrum. It may be that there is no answer!

The phrases "place of business" and "place of performance" should be used in order to take advantage of Article 1 which contains the basic jurisdictional statement of the Convention. "This Convention applies to contracts of sale of goods between parties whose places of business are in different States[27] . . . ." Note that other, perhaps more familiar nexuses such as place of incorporation, domicile, siege social, etc. are not relevant; it is "place of business" that counts. The usual description of the parties:

. . . by and between Ashley Manufacturing Co., a corporation organized [page 196] and existing under the laws of Delaware with an office and place of business in Pittsburgh

is familiar, but under the Convention, the import is considerably different.

With larger companies, defining the particular office or division involved may be crucial, since Article 10, which defines "place of business," states that ". . . if a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance. . . ." Thus, in a contract for the sale of goods between two U.S. companies, applicability of the Convention could be, at least preliminarily,[28] effectively chosen or avoided by the difference between:

by and between Ashley Manufacturing ("Seller") and Bartles Productions ("Buyer") both U.S. corporations. . . . (CISG inapplicable)

and
by and between LeBien Co., a division of Ashley Manufacturing Co., located in Paris, France and Bartles Productions " (CISG applicable)

In a close situation, the drafter might even insert a phrase such as

. . . delivery of the goods shall take place and performance shall be deemed to have occurred upon delivery, FAS Baltimore . . . .

Clearly, if Convention applicability is an issue, as many factual recitals as possible should be made in order to avoid doubt. There is, of course, no substitute for a specific selection or rejection of the Convention in the choice of law clause, but in circumstances where that is not desirable (to avoid educating an uninformed adversary about its existence for example) the factual recitals will be crucial, especially where there is arguably more than one "place of business."[29]

A similar problem arises in connection with Article 2, which excludes certain sales, including "goods bought for personal, family or household use unless the Seller . . . neither knew nor ought to have known that the goods were bought for any such use ...." Recitation [page 197] concerning a Seller's state of mind at the time the Contract is signed, or relevant representations by the Buyer, could be important.

Article 3, which excludes sales of manufactured goods for which the Buyer has supplied a substantial part of the "materials," i.e., raw material, components, etc., used in their manufacture, and contracts in which "the preponderant part" of the Seller's obligations is in the "supply of labor or other services," presents additional drafting concerns. The former is somewhat of a special case (i.e., Mexican border or "maquiladora" industries; or parent/subsidiary contracts where governing law is usually unimportant) but the latter is crucial. In this respect, the Convention echoes a similar, frequently ignored problem in domestic law -- the "mixed" contract for the supply of both goods and services where the applicability of the UCC becomes an issue. As with other terms in the Convention, "preponderant" is not defined and could become the object of some interesting linguistic comparisons between the different language versions. For the practicing lawyer, however, the issue is most decidedly unacademic since a finding that services in a major industrial contract were a "preponderant part of the obligations of the Seller" could be a major disaster -- for his lawyer.

Consider the following perfectly reasonable example: Seller, a large supplier of industrial raw materials processing equipment agrees to supply a new multimillion dollar processing line for a factory; CISG is selected and as a result the usual UCC disclaimers are not printed in bold face (or not printed at all). For ease of administration, Seller agrees to add installation services to its scope, although the work will be done by others, with the cost to be passed through to the Buyer. A dispute arises over the equipment; Buyer's counsel convinces the court that "preponderant" means simply "more" and since the total price of the installation portion of the job (all of which is now in Seller's scope) exceeded the equipment price, CISG does not apply. Seller is now left to argue, perhaps, that the UCC is also inapplicable in order to avoid full Code remedies. Maybe he succeeds, maybe he does not, but in any event, he is denied the benefit of his choice of law and he is left to the mercy of whatever comes next.[30] This scenario is further complicated by the potential effect of Article 50, "Reduction of Price," a somewhat unfamiliar concept to American [page 198] lawyers. Similar in effect to, but not the same as, UCC § 2-717 (which permits a set-off of damages resulting from breach of contract),[31] Article 50 permits the price of non-conforming goods to be reduced in certain circumstances.[32] Is it conceivable that a later price reduction in the goods portion of a mixed contract could tip the balance? Clearly, in a mixed contract, definition is needed.

Attention should also be paid to the fact that "goods" is not a defined term in the Convention, as it is in the UCC.[33] While this will not present a problem in the vast majority of contracts, it is easy to imagine borderline cases, e.g., the transfer of technology where "know-how" is the goal, but "things" such as drawings, models, manuals, etc., are what is actually transferred. Since technology transfer frequently occurs these days as part of larger transactions which may or may not be deemed sales of goods, it would be wise, in a close situation, to be specific.

A perennial problem in the drafting and implementation of contracts arises when either side attempts to go beyond the four corners of the contract to introduce evidence of prior negotiations that the parties intended some different result, or that they modified their agreement by their subsequent conduct. The parol evidence rule[34] is supposed to exclude evidence of prior negotiations, when, as is usually the case, an "Entirety of Agreement" clause[35] is inserted in the "boiler-plate" contract. Subsequent "waiver by conduct" is also a perennial problem which is usually attacked, but less often solved, by including a clause which provides a rigid, formal system for contract modification. The Convention complicates all of this considerably.

Article 8(3), reflecting the Civil Law view of a contractual relationship as being somewhat more of a subjective state of mind than an [page 199] objective expression of assent,[36] instructs the court to give "due consideration to 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." The parol evidence rule, in other words, is abolished.

Article 9(2) seems innocuous but could cause significant problems for companies just beginning to break into established international markets:

The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

The rule is that parties are contractually bound by international trade usages which are widely known and regularly observed by the particular trade whether or not the parties themselves have any experience in the area. The UCC speaks only of a usage of trade which "justif[ies] an expectation that it will be observed with respect to the transaction in question."[37] Naturally, nothing is said respecting international trade usages and the UCC's emphasis is more towards what the parties themselves might reasonably have anticipated (a subjective standard) than what is generally the custom (more objective).

An example might be use of the phrase "FOB." While this is defined for domestic trade in the UCC, international trade usually looks to the International Chamber of Commerce's "Incoterms" publication,[38] where "FOB" has a very different meaning. How should an international trade contract which calls for "FOB delivery" be construed? Some significant liabilities (the responsibility for obtaining an export license, for example) could hang in the balance. Because Incoterms is so widely accepted everywhere in the world, its definitions would almost certainly be adopted in an Article 9(2) construction if nothing to the contrary were said.

If under Article 6 we can derogate from almost any of the Convention's provisions, it would seem that a simple "entirety of agreement clause" might be sufficient. I suggest, however, that it would not because the usual clause excludes only prior meetings, correspondence,[page 200] negotiations, etc., between the parties. It says nothing about external factors such as trade usages, much less about the more specialized, and in this country frequently less known, international trade usages. Further, our clauses are written with the parol evidence rule in mind. If we wish to exclude "all relevant circumstances . . . including negotiations . . .," from consideration in construing the contract it should be clear that the language was drafted with the Convention in mind. Remember that the Convention specifically incorporates these usages, whereas the UCC almost as specifically excludes them (assuming that an entirety of agreement clause is present). We cannot fairly assume that the same language will work in both cases.

As a general rule of thumb, it will be risky to attempt to derogate from the Convention without making it clear that that is the intention. Counsel wishing to preserve the parol evidence rule and to avoid the imposition of constructive knowledge of international trade practices might therefore consider something along the lines of:

The provisions of Articles 8 and 9 of the Convention to the contrary notwithstanding, this Contract contains the entire agreement of the parties concerning the Project, and supersedes and replaces all prior communications or representations between them, including, without limitation, the Proposal and other circumstances including the course of negotiations. The parties shall not be bound by any international trade usages, except to the extent that they are regularly observed in the domestic, U.S. _____ industry.

One of the most important, albeit subtle, distinctions between the CISG and the UCC occurs in the area of warranties. The UCC as we know "implies" warranties of "merchantability"[39]; "fitness for a particular purpose"[40]; and others that may arise from "usages of trade."[41] A body of well known, somewhat ritualistically applied, law has arisen concerning their exclusion or modification -- the use of "conspicuous" language.[42] The assumption is that a few lines of boldface prose takes care of the problem.

Article 35 approaches the problem from a slightly different perspective. It uses very similar terminology ("fit for any particular purpose"; ". . . are contained or packaged in the manner usual for such [page 201] goods . . .") but treats the subject as one of conformity to the contract, viz:

Except where the parties have agreed otherwise, the goods do not conform with the contract unless they:
(a) are fit for the purpose . . .
(b) possess the qualities of goods which the Seller has held out to the Buyer . . ., etc.

The drafting question, then, is how to "agree otherwise." For a contract which all parties agree is governed by CISG, the following should work:

Buyer acknowledges that Seller has made no other representations, promises or warranties concerning the quality or functioning of the Goods and agrees that, except to the extent that they are in violation of the express warranties set forth above, their failure to comply with the provisions of Article 35(2) shall not be deemed to be a lack of conformity to the contract.

The point is that attempting to disclaim "implied warranties," which are not implied under CISG in the first place, is a doubtful proposition. One can argue, of course, that since the UCC "implied warranties" include all of the substance of Article 35(2) and more, a § 2-316 waiver is certainly an effective waiver of 35(2) as well. This is probably true as a matter of pure contract interpretation, and it is likely that a U.S. Court would in fact treat typical UCC § 2-316 disclaimers as effective waivers of Article 35(2) conformity requirements on the theory that that was clearly the intention of the parties.[43] It is less certain that a foreign court would do so, however, since UCC practices would not be familiar and the terminology of "implied warranties" and "conformity" do not necessarily translate into similar concepts in other languages. Unless the drafter is absolutely certain that a foreign court or arbitral panel will not be involved, UCC style language may have some risk.

Standard forms drafted to cover both the UCC and CISG can probably use slightly modified UCC language, viz:

SELLER EXPRESSLY DISCLAIMS ALL WARRANTIES,[page 202] EITHER EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR PURSUANT TO ARTICLE 35(2) OF THE CISG.

It would be somewhat better to avoid mentioning Article 35(2) because that sort of specific reference usually attracts unwanted questions, particularly where "standard" forms are involved, but not mentioning it leads to awkward draftsmanship -- one is left with the necessity of disclaiming the obligation to supply goods that conform to the contract, hardly an acceptable position!

U.S. lawyers are used to relying on (or resisting attempts to deviate from) statutory rates of interest imposed by State law on overdue but liquidated debts. These typically are in the 6% range and do not require specific mention to be effective. Article 78 provides for the payment of interest on arrearages -- but is completely silent on the applicable rate or even on a method for calculating it. Even the notion that applicable domestic law be used was rejected.[44] Because Article78 makes it clear that payment of interest is not made in lieu of whatever damages might otherwise be applicable, it may be presumed that the actual cost of money could be calculated in light of the circumstances. It would be more prudent, however, to cover this point in the initial drafting. Some consideration should still be given to "local" law since prohibitions on usury would clearly be beyond the scope of the Convention. Subject to that caution, however, probably any standard formula would pass muster.

Mention was made earlier of the Article 50 Price Reduction remedies for failure of goods to comply with the contract.[45] As noted, the UCC reaches a similar result, but via a different route. Section 2-714(2) allows the Buyer to claim damages for "the difference . . . between the value of the goods accepted and the value they would have had if they had been as warranted . . . ." This difference in approach could lead to a real difference in result in some cases.

Counsel for smaller companies entering into mixed contracts such as the sale, installation and start-up of complex machinery to large buyers occasionally try to insert a clause in the contract preventing the larger Buyer from setting-off "back charges" (counterclaims arising during the course of delivery or installation) against the price. The Seller wishes to have a predictable cash-flow during the project and would prefer to argue about back charges later. The Buyer, of [page 203] course, objects because he wants to be able to threaten to or actually withhold payment, particularly near the end of the project.

Under CISG, could the Buyer not agree to the "no set-off" language (in return, of course, for some concession) and then later withhold funds anyway on the theory that this is not the setting-off of one debt (back charges) against another (price) but rather a simple reduction in price as permitted by Article 50? It seems like a reasonable interpretation of the Convention. To avoid this, the wary Seller will have to propose something along the lines of:

All payments due to Seller hereunder shall be made in accordance with this schedule, and shall not be subject to reduction or withholding for any cause including, but not limited to, claims by Buyer for damages or reduction in price as the result of alleged non-conformity of the Goods or other failure of Seller to perform in accordance herewith.

A slightly different concern arises out of a comparison between § 2-711 (Buyer's remedies) and the CISG. Section 2-711(3) provides in relevant part:

On rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in his possession or control for any payments made on their price . . . .

What is the result under CISG? Since "security interest" is peculiarly an American concept[46] it is naturally not treated directly in the Convention. And, of course, to the extent that the concept of a security interest involves the property rights of third parties, it is outside the Convention's scope.[47] Does the rejecting or revoking Buyer have any right to retain the goods? Since the Code remains in effect,[48] it is at least arguable that § 2-711(3) remains available, but only if the UCC is otherwise controlling and, as a practical matter, probably only if the goods are physically located in a UCC-State in this country. Buyer would do well to include § 2-711(3) language in the terms of sale:

Should the Goods not conform to the specifications, or be otherwise rightfully rejected by Buyer, or should Buyer rightfully revoke its acceptance [page 204] of the Goods or any of them, Buyer shall have the right to retain the Goods and, in a commercially reasonable manner, to resell them and to apply the proceeds to an appropriate price reduction or to damages suffered by Buyer, including expenses incurred in effecting such a sale, but less any expenses saved by Buyer in consequence of the breach.

Note that this language tracks § 2-706 to a degree but avoids terms of art such as "security interest" or "incidental damages." Whether it will pass muster in a foreign court, using foreign "back-up" law is a different question but one that should be determined, at least for larger contracts.

* * *

The foregoing obviously just scratches the surface. Subtle distinctions will begin to appear as lawyers begin to draft for particular contracts or as disputes reach the court. Some may turn out to be distinctions without a difference. For the first time, U.S. lawyers can no longer safely ignore a body of international law in every day transactions, for it is now part of our jurisprudence. The U.S. no longer holds the preeminent position it once did in international commerce; we can no longer always do business on "our" terms. CISG represents a relatively simple bridge between our system and the rest of the world. It is now part of our practice.[page 205]


FOOTNOTES

* B.A. 1963, Tufts University; LL.B. 1966, Rutgers University. Partner in Pittsburgh office of Buchanan Ingersoll, P.C., specializing in international law

1. The leading reference is by John O. Honnold. See Honnold, Uniform Law for International Sales Under The 1980 United Nations Convention (1982) [hereinafter Honnold]. Professor Honnold, Schnader Professor of Commercial Law Emeritus at the University of Pennsylvania, was a U.S. delegate to the Convention. His book is a highly detailed, annotated, section-by-section review of the Convention.

For reference to the actual code sections, see U.N. Conference on Contracts for the International Sale of Goods, Final Act (April 10, 1980), U.N. Doc. A/Conf. 97/18, reprinted in S. Treaty Doc. No. 98-9, 98th Cong., 1st Sess. and 19 Int'l Legal Mat. 668 (1980) [hereinafter referred to as the "Sales Convention"].

2. Some countries are an amalgam of their own indigenous systems plus a grafting of common or civil law traditions from colonial times. South Africa follows Roman-Dutch traditions with an overlay of English Commercial law. Other countries have their own peculiarities but within this general framework.

3. American lawyers tend to equate the availability of discovery with the availability of justice, forgetting that discovery is a relatively modern development now very much under attack for its cost and for its use as a delaying or diversionary tactic.

4. This is a practice which ought to give counsel for both sides fits since the client will rarely, except in the most significant matters, agree to have Swiss or Swedish counsel review the draft.

5. Unlike U.C.C. § 1-105(1) (1978), a "reasonable relation(ship)" between CISG and the transaction is not required. The Convention can be adopted by the parties regardless of where they maintain their place of business. Whether all courts will enforce that choice is a different question.

6. See Sales Convention, supra note 1, art. 6. Note however the concern, discussed at infra note 10, about how the concept of "validity" may allow courts to impose such "public policy" views.

7. See Sales Convention, supra note 1, art. 49.

8. Id., art. 25.

9. Id., art. 19(3).

10. "This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold." Id., art. 4.

11. A wonderful example of a very real clash in public policies (although it relates only indirectly to contracts for the sale of goods) concerns the differing attitude towards bribery of foreign governmental officials. In the U.S. this is strictly forbidden by federal criminal law, the Foreign Corrupt Practices Act of 1977, (P.L. 95-213, 91 Stat. 1494 (December 19, 1977)) and a contract to deliver goods or money in settlement of such a bribe would clearly be invalid. This is most emphatically not the case overseas. Indeed, at least one country is reputed to allow bribes to be deducted as business expenses!

12. For a discussion of difficult areas in German and U.K. law where this could happen, see Honnold, supra note 1, at 261-62.

13. Some examples of when this could happen even if the convention were otherwise clearly applicable are given later in this paper. See infra notes 39-48 and accompanying text.

14. See U.C.C. § 1-104 (1978).

15. See U.C.C. § 2-316 (1978).

16. See U.C.C. § 2-725 (1978).

17. Careful drafters almost always insist on a choice of law clause, but occasions may arise when one is omitted -- when there is no hope of obtaining a "favorable" choice of law and simply raising the issue may provoke endless argument, for example. Counsel in these situations may decide to rely on their interpretation of the relevant conflict-of-laws rules (and hope for the best). I have seen contracts where the parties were at such loggerheads over choice of law that they have agreed in lieu of the law of a particular country, to"...the plain meaning of this contract, or should it prove ambiguous or silent on the issue, then internationally accepted principles of equity and fairness (ex aequo et bono)." One memorable contract went so far as to expressly stipulate that recourse would not be had to any body of national law, but only to the language of the contract and generally accepted principles of fairness, etc.

18. Note that the Convention itself anticipates the need for a "backup" choice of law. Article 7(2) provides that "questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law." Sales Convention, supra note 1, art. 7(2).

19. Frequently seen, but not always a particularly good choice, ICC Arbitration can be frustrating and is always slow and expensive. Switzerland has much to offer, including a highly trained Bar and excellent facilities, but it is expensive and is a Civil Law country. Common Law businesses can do better elsewhere.

20. See U.C.C. §§ 2-204 through 2-207 (1978).

21. Article 92 allows ratifying nations to reject Part II of the Convention, the rules relating to contract formation. The Scandinavian nations may do so, thus preserving their own domestic law in this area. Sales Convention supra note 1, art. 92.

22. Article 11: "A contract of sale need not be concluded in or evidenced by, writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses." Id., art. 11.

23. Note that this section does not apply to countries which, by making a reservation under Article 12, have decided that oral acceptance is not valid. These countries are for the most part expected to be the Socialist bloc, including the USSR, which maintain tight centralized control over foreign purchases and sales and would never delegate final contracting authority to the negotiators in the field.

24. David C. James, Draft Model Clauses, International Sales Contracts (Paper presented to seminar "The New International Sales Convention and its Impact on the Uniform Commercial Code" (Chicago May 13, 1987; American Bar Association)).

25. Per Article 18(1); "A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance." Sales Convention, supra note 1, art. 18(1).

26. U.C.C. § 2-207(3) (1978) provides: " Conduct establishing contract. -- Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this title."

27. "State," as used in this international treaty, of course means "nation" or "country."

28. Article 10 defines the "place of business" to be that which has "the closest relationship to the contract and its performance," so the totality of the facts, such as, for example, where manufacture or delivery actually took place, rather than bare contractual recitals, will obviously control. In case of doubt, or in case of a situation like repudiation before performance, however, the recitals will undoubtedly carry great weight. Sales Convention, supra note 1, art. 10.

29. Note, too, that the recital can be important for other reasons, such as questions of enforceability under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

30. For a good discussion of the comparable "predominant aspect" test in the context of the U.C.C., see McDonnell & Coleman, Commercial and Consumer Warranties § 1.04(2) (M. Bender ed. 1987).

31. U.C.C. § 2-717 (1978) provides: "The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract."

32. "If the goods do not conform with the contract and whether or not the price had already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of delivery bears to the value that conforming goods would have had at that time. . . ." Sales Convention, supra note 1, art.50.

33. See U.C.C. § 2-105(1) (1978).

34. U.C.C. § 2-202 (1978) provides: "Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement. . . ."

35. For example: "This contract contains the entire agreement of the parties concerning the Rawlings Project, and supersedes and replaces. . . ."

36. See Honnold, supra note 1, at 138.

37. See U.C.C. § 1-205(2) (1978).

38. International Chamber of Commerce, Incoterms -- International Rules for the Interpretation of Trade Terms (ICC Publishing SA Paris, 1980).

39. See U.C.C. § 2-314 (1978).

40. See U.C.C. § 2-315 (1978).

41. See U.C.C. § 2-314 (1978).

42. See U.C.C. § 7-316 (1978).

43. It should be noted that the law in the U.S. relating to the enforceability of disclaimers of implied warranties is in a state of constant flux (in part because of the willingness of the courts to find "unconscionable" behavior in various circumstances (see McDonnell & Coleman, supra note 30, at § 4.08)). Thus, making predictions in this area is hazardous at best.

44. Honnold, supra note 1, at 423.

45. See supra notes 30, 31 and accompanying text.

46. The U.K. equivalent might be "charge" or "encumbrance" but the mechanism is quite different. The chattel mortgage is still very much in use. In Germany the reservation of title system is widely used, and is effective when certain steps have been complied with, even after delivery of the goods.

47. See Sales Convention, supra note 1, art. 4, which provides: "This Con vention. . . is not concerned with:. . .(b) The effect which the contract may have on the property in the goods sold."

48. See U.C.C. § 1-104 (1978).


Pace Law School Institute of International Commercial Law - Last updated March 2, 2001
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