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Reproduced with permission of the author

When the U.N. Sales Convention Applies and Some of the Reasons Why it Matters to You and Your Clients

(Prepared for Presentation to Mecklenburg County Bar, International Sales CLE, May 23, 1996)

John P. McMahon

Contents

  1. INTRODUCTION

  2. ANALYTICAL PROBLEMS
    1. Your client, a poultry producer and processor
    2. Your client, a communications project contractor
    3. Your client, an electronics importer/wholesaler
    4. Your client, a fertilizer and chemical wholesaler

  3. TRANSACTIONS TO WHICH THE C.I.S.G. APPLIES
    1. Determining Whether the Convention Applies
    2. Contracting Out of the Convention
    3. Issues to Which the Convention Does not Apply

  4. MAKING AND PROVING CONTRACTS UNDER THE C.I.S.G.
    1. Offer and Acceptance - Almost a Mirror Image Rule
    2. No Statute of Frauds and No Parol Evidence Rule

  5. SELECTED ASPECTS OF PERFORMANCE AND BREACH
    1. Perfect Tender v. Fundamental Breach
    2. Insecurity and Assurances of Due Performance
    3. Seller's Right to Cure
    4. Force Majeure

  6. DIFFERENCES IN APPROACH TO REMEDIES
    1. Reduction in Price
    2. Specific Performance
    3. No Statute of Limitations, but....

  7. APPENDICES
    1. List of Contracting Parties and Effective Dates
    2. Bibliography
      1. Official Documents
      2. Recent Articles by Leading Commentators
      3. Selected Texts on the C.I.S.G
      4. Bibliographies
    3. World Wide Web Data Bases
      1. The Pace Law School IICL C.I.S.G. Data Base
      2. The University of Freiburg Rabel Website Project
      3. The UNCITRAL Data Base

I. INTRODUCTION

The United Nations Convention on Contracts for the International Sale of Goods (the "Convention" or "C.I.S.G.") is a treaty intended to establish uniform rules governing certain aspects of the making and performance of everyday commercial contracts for the sale of goods. The Convention came into force in 1988 after ten nations, including the United States, had agreed to make it part of their law. Now, forty-five countries have done so.

Before the treaty became part of U.S. law, state law, including state choice of law rules, would have governed the making and performance of contracts which now fall under the Convention. Before the C.I.S.G. came into effect, state sales contract law consisted mainly of Article 2 of the Uniform Commercial Code, which all but one state had adopted. Many of the concepts to be found in the provisions of the C.I.S.G. are similar to those in the sales provisions of the U.C.C. But, the Convention and Article 2 of the U.C.C. differ in ways which can make a substantial difference in the rights and obligations of the parties to contracts for the sale of goods.

This paper reviews the provisions of the Convention which determine whether it applies to a transaction and some of the ways in which the C.I.S.G.'s provisions differ significantly from the sales provisions of the U.C.C. Selected research resources are mentioned in the text and in the Appendices.

II. ANALYTICAL PROBLEMS

A. Your client, a poultry producer and processor, always sells with title and risk passing at its plants in North Carolina. A few weeks ago, the client entered into separate negotiations with two branch offices of a major foreign trading company. By phone, the trading company's Rome branch offered to buy a substantial quantity of broiler parts with title and risk passing at a plant in North Carolina designated by the seller as the point of delivery. The client's sales manager had accepted the offer, but had told the trading company's purchaser, who had agreed, that North Carolina sales law would apply to the transaction and that disputes would have to be resolved in a court sitting in Charlotte. The sales manager had forgotten to send a purchase confirmation. Now, the purchaser was refusing to perform, saying that it knew from other deals that under North Carolina law such a contract had to be in a signed writing. The second contract was with the London branch of the trading company. The circumstances were identical.

B. Your client, a communications project contractor, had entered into two separate contracts to supply all the components of two cellular phone networks to the Rome and London offices of the same trading company. Under one contract, the client was to deliver the goods to the purchaser's designee. The second contract called for your client to deliver and install the network. The parties signed contracts on the client's standard form.

The contracts stated that the client would be procuring the components in Finland, China, and Indonesia. One contract called for delivery in Bombay, the other for installation in a remote but booming province in China. Title and risk were to pass at the point of delivery to the purchaser's designee in Bombay and upon completion of installation in China. The client entered into supply contracts with manufacturers in the three countries and arranged for international ocean transportation with foreign-flag shipowners and marine insurance with Lloyd's of London.

The contracts contained choice of law and choice of forum clauses calling for resolution of disputes in North Carolina under North Carolina law. One contract contained a force majeure clause which clearly excused the client from liability for delays arising out of fires disrupting the client's suppliers' production. The other did not because the client's assistant had left it out. The force majeure clause had not been discussed, so the client was not in a position to assert that there was agreement on the subject.

Your client had performed late under both contracts because of a fire which disrupted production by one of the client's suppliers. Now the Rome office of the purchaser was saying that despite the force majeure clause, it was entitled to reduce the price of the goods, for which it had paid in full through a letter of credit. The London office was saying that the client was liable for damages for delay. Neither asserted that the goods did not conform to the contract.

C. Your client, an electronics importer/wholesaler, entered into a contract to purchase computer components. The C.I.S.G. applies. The contract delivery period expired on Tuesday. Late yesterday, the client received a fax from Seller saying that the goods will arrive tomorrow, Friday. The client had resold to a computer products assembler under a contract which is governed by the North Carolina U.C.C. The delivery period expired yesterday. This morning the client received a letter from its North Carolina purchaser canceling the contract because the goods had not been delivered.

D. Your client, a fertilizer and chemical wholesaler, has entered into a contract to buy chemicals. The C.I.S.G. applies. The contract deadline for the client to post its letter of credit is approaching. The client has learned that Seller had tendered goods which did not meet contract specifications to others and had recently been reported to be having quality control problems.

The client has resold under a contract which is governed by the North Carolina U.C.C. It needs conforming goods to satisfy its obligations under that contract. Its credit facilities are limited. It will not be able to open a second letter of credit to secure payment for substitute goods if it opens a letter of credit in favor of Seller. Before calling you, thinking that its North Carolina buyer would give it some leeway, the client had told it everything it has just told you and received a letter demanding unspecified assurances of performance.

III. TRANSACTIONS TO WHICH THE C.I.S.G. APPLIES - HEREIN OF ARTICLES 1 - 4, 6, 10, 99 and 100

A. Determining Whether the Convention Applies.

With certain exceptions, unless a contract provides otherwise, the Convention applies to contracts of sale between parties whose places of business are in different countries that made the C.I.S.G. part of their law over twelve months before the contract is made. Circumstances such as the nationality of the parties, the place where title and risk pass, and whether the goods are to move between nations, or between nations which are parties to the Convention, are not taken into consideration in determining whether the C.I.S.G. governs the transaction. Additionally, under Article 1(b), the C.I.S.G. applies when international choice of law rules lead to the application of the law of a nation which is a party to the Convention. The Convention permits a nation to exclude this provision when it becomes a party to the treaty. The United States has done so. Consequently, it will not come into play here, but could affect an American contract party in an action in a foreign court or arbitration.

The Convention may apply to contracts between a North Carolina company and a company whose headquarters is in a non-treaty country, if the contract is entered into with a branch office of the company which is located in a nation which is a party to the Convention. "If a party has more than one place of business, [for purposes of determining whether the C.I.S.G. applies] the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract." (C.I.S.G. Article 10(a)). So, generally, in determining whether the Convention applies, the first step is to determine whether the parties are located in different "Contracting States," as nations which have ratified or acceded to the Convention are called.

The forty-five Contracting States are listed in Appendix A. The Convention is not in effect for one of them, Poland. It has been said that the Contracting States account for two-thirds of world trade. Among them are four of the top ten destinations for North Carolina's 1995 exports.

The C.I.S.G. enters into force for a Contracting Party on the first day of the month following the expiration of twelve months after the date it becomes a party by notifying the United Nations that it will be bound by the Convention. (Article 99(2)). For example, Poland adhered to the C.I.S.G. on May 22, 1995, so the Convention will come into force for Poland on June 1, 1996. Because the Convention applies to issues regarding formation of a contract only if the offer which led to the contract was made on or after the date when the Convention entered into force for the Contracting States in which the parties' places of business are located and to contracts made after that date (Article 100), it is necessary to determine when the offer was made or contract concluded and when the C.I.S.G. entered into force for the relevant countries. The text of the Convention, a list of parties, the dates when they filed their instruments of ratification, accession or approval and information on the reservations and declarations they have made can be found in an appendix in the annual pocket part to the Regulations and Index volume of 15 U.S.C.A. More current information can be obtained from the United Nations Treaty Section, tel. no. (212) 963-5484, fax (212) 963-3693, and from the State Department's Treaty Affairs Section, tel. no. (202) 647-1345. The United Nations publishes a list of parties, accession dates and reservations in its treaty data base at:

"http://WWW.UN.ORG:80/Depts/Treaty/".

This information is available, too, in the Pace Law School IICL data base devoted to the C.I.S.G. which is described in Appendix C to this paper.

Article 2 of the Convention contains a list of sales transactions to which the C.I.S.G. does not apply. It does not apply to sales by auction and would not usually, but may in some circumstances, apply to consumer sales. Mixed contracts present the same difficulties under the C.I.S.G. as they do under the U.C.C. Under Article 3, the Convention applies to contracts which include service obligations, such as a contract to supply and install equipment, unless the preponderant part of the obligations of the party furnishing the goods is to supply labor and services. The Convention does not apply to transactions in which the party ordering manufactured or produced goods supplies a substantial part of the material necessary for such manufacture or production. The U.C.C. does not contain provisions dealing with these issues, but the courts have developed approaches to determining whether the U.C.C.'s sales article applies which are similar to the Convention's provisions.

B. Contracting Out of the Convention.

Both Contracting States and sellers and buyers have the right to pick and choose the parts of the C.I.S.G. by which they will be bound. When agreeing to be bound by the Convention, a Contracting State has the right to declare that it will not be bound by the part of the Convention that deals with the formation of contracts, Part II, or that it will not be bound by any of the provisions of the Convention which establish the substantive rules applicable to contracts of sale, Part III. (Article 92). As mentioned below, a Contracting State may refuse to accept the Convention's rule regarding the form in which contracts must be concluded.

Like Article 2 of the U.C.C., the Convention does not deprive the parties of freedom of contract. Insofar as its terms governing the parties' rights and obligations are concerned, it is a gap filler. If the contract does not deal with certain matters, the Convention supplies rules governing the relationship of the parties. Some treaties which deal with commercial contract matters invalidate contract terms which conflict with their provisions. Examples are the treaties which govern certain aspects of the international carriage of goods and passengers by sea and air. The C.I.S.G. is not the type of law which prevents the parties to a contract from agreeing upon terms inconsistent with its provisions. In this it is like the U.C.C. which, with a very few exceptions, permits the parties to a contract of sale to establish rules governing their relationship which conflict with the provisions of the U.C.C.'s sales article. Article 6 of the C.I.S.G. permits the parties to a contract of sale which would otherwise be governed by the Convention to exclude its application and, when they do not contract out of it altogether, with one exception, to depart from its provisions.

Writers have tended to favor widespread acceptance and application of the Convention, but the common wisdom among traders and their advisors has been that the C.I.S.G. is so new and so different from the U.C.C. and the ramifications of its provisions are so uncertain that it is sound practice to exercise the option to exclude it. With so many nations having become parties to the Convention, that attitude will have to be reassessed. Further, with so many alternative sources available to the purchasers of manufactured goods and so many alternative markets available to the producers of raw materials, American exporters and importers are no longer in a position to have their way with respect to choice of law and forum selection. The climate, attitudes and lack of a widely accepted alternative that made the "laws of England" and the "law of New York" common contractual choices of law in international commercial transactions are gone or changing. A seller or buyer who refuses to deal on Convention terms may find itself losing business opportunities to competitors who will. But, for North Carolina traders who resell on the domestic market, widespread acceptance of the C.I.S.G. creates a dilemma, i.e., back to back transactions governed by conflicting rules of law.

Commentators on the C.I.S.G. usually point out that clauses intended to exclude the application of the Convention must be drafted with care. They usually say that it is doubtful that a contract choice of law provision which states that the contract shall be governed by, for example, the law of North Carolina, would be sufficient to effectively contract out of the Convention. The rationale is that the C.I.S.G. is the law of North Carolina, because, as a treaty, it is the supreme law of the land. There are a few foreign decisions which support the view that a choice of law clause referring to the law of a Contracting State incorporates the C.I.S.G. The writers suggest clauses which specifically rule out the application of the Convention, e.g., "the law of North Carolina, excluding the C.I.S.G." or "Article 2 of the U.C.C. as enacted in North Carolina." The issue is discussed, and a variety of suggested clauses may be found, in Peter Winship, Changing Contract Practices in Light of the United Nations Sales Convention: A Guide for Practitioners, 29 Int'l Lawyer 525, 538 (1995), and B. Blair Crawford, Drafting Considerations under the 1980 Convention on Contracts for the International Sale of Goods, 8 J. Law & Com. 187, 192-194 (1988).

C. Issues to Which the Convention Does not Apply.

Article 4 specifies issues to which the C.I.S.G. does not apply. In the words of Article 4, "it is not concerned with" issues of validity of the contract or any of its provisions and the effect which the contract may have on the property in the goods sold. This means that the Convention does not deal with issues, such as agent's authority, fraud in the inducement, duress, penalty and liquidated damages clauses, and unconscionability, which may make a contract or a contract term void or voidable. For an in depth analysis of the validity issue, see Helen E. Hartnell, Rousing the Sleeping Dog: The Validity Exception to the Convention on Contracts for the International Sale of Goods, 18 Yale J. Int'l L. 1 (1993).

While the Convention deals with passage of risk of loss or damage, it does not contain provisions governing what we call passage of "title." Some commentators indicate that the Convention's lack of concern with the effect which the contract may have on the property in the goods sold refers to the interest of third parties, not passage of title between seller and buyer. The UNCITRAL commentary on the 1978 draft of the Convention (see Appendix B1.) very clearly establishes, however, that the drafters of the Convention did not regard it as possible to unify the rules on when "title" passes to the buyer from the seller. The U.C.C. contains a detailed provision specifying when title passes. (G.S. 25-2-401).

IV. MAKING AND PROVING CONTRACTS UNDER THE C.I.S.G.

A. Offer and Acceptance - Almost a Mirror Image Rule - Herein of G.S. 25-2-207 and C.I.S.G. Art 19.

Sellers and purchasers tend to use forms containing detailed clauses geared to their side of the trade in which they are involved. The exchange of such forms as offers and acceptances or "confirmations" gives rise to what is called the "battle of the forms." Under the common law, an acceptance of an offer which contained different or additional terms operated as a rejection of the offer. So an "acceptance" which was not the mirror image of an offer did not give rise to a contract. The drafters of the U.C.C. attempted to avoid the rigors of the common law rule and end the battle of the forms. Under the U.C.C., unless acceptance is stated to be conditional on the offeror's consent to additional or different terms, the expression of acceptance operates as such, with additional incidental terms becoming part of the contract unless the offeror has limited acceptance to the terms of the offer or objects to them. (G.S. 25-2-207). Absent objection, whether an additional term, e.g., an arbitration clause, is part of the contract depends upon whether it is considered to be "material." See Frances Hosiery Mills, Inc. v. Burlington Industries, Inc., 285 N.C. 344, 204 S.E.2d 834 (1974), and Green Light Posted on Inclusion of Arbitration Terms in Letter of Confirmation, 30 U.C.C. Newsletter, No. 2, April, 1996 at 1. If the additional term is found to be "material," it is not part of the contract, but there is a contract. How different, as opposed to additional, terms, for example a counter arbitration clause, are to be handled is a matter of conflicting views and decisions. See Daitom Inc. v. Pennwalt Corp., 741 F.2d 1569 (10th Cir. 1984), and North Carolina Comment on G.S. 25-2-207(2).

The C.I.S.G. contains rules of offer and acceptance which are close to the common law rule. Article 19 provides as follows:

"(1) 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.

(2) 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 offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.

(3) 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."

Under Article 19 the additional or different terms prevent a contract from arising unless they are not material and the offeror does not object to them. Under the U.C.C., a stipulation for arbitration in an acceptance would not keep a contract from arising. There would be a contract and an issue, i.e., whether the contract contained an arbitration clause, which would turn on whether such a clause is "material." Under the C.I.S.G., there would be no contract. For a general discussion of the differences between the U.C.C., the law in common law jurisdictions, and the Convention in this regard, see Henry D. Gabriel, The Battle of the Forms: A Comparison of the United Nations Convention for the Sale of Goods and the Uniform Commercial Code, 49 Bus. Lawyer 1053 (1994).

The U.C.C. contains little on the "mechanics" of offer and acceptance. The Convention contains detailed provisions on offer and acceptance in its Part II, which contains eleven Articles. As the commentators usually point out, it should be noted that the C.I.S.G. treats offers as irrevocable more readily than does the U.C.C. Under the U.C.C., unless there is an option contract, the offeror's right and power to withdraw an offer are restricted only if the offer is in a signed writing which by its terms gives assurances that it will be held open and, even then, the period of irrevocability does not exceed three months. Under the C.I.S.G., there is no writing requirement, no time limit, and an offer which states a fixed time for acceptance can be regarded as irrevocable even though it does not state that it will be held open for that period. (Article 16(2)(a)). A seller who makes an offer on the basis that it expires at the close of business on Friday may think that he is protecting himself against having to withdraw the offer to keep it from being accepted on Monday. Under the C.I.S.G., he is doing that, but he may be depriving himself of the right to withdraw the offer before the close of business on Friday. Further, under the C.I.S.G. an offer cannot be revoked "if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer." (Article 16(2)(b)).

B. No Statute of Frauds and No Parol Evidence Rule - Herein of G.S. 25-2-201 and C.I.S.G. Arts. 11, 12 and 96.

Article 2 of the U.C.C. contains a statute of frauds and a parol evidence rule. The C.I.S.G. does not. See Harry M. Flechtner, Another CISG Case in the U.S. Courts: Pitfalls for the Practitioner and the Potential for Regionalized Interpretations, 15 J. L. & Com. 127 (1995).

Although U.C.C. Section 2-204 says that a contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties, under section 2-201, with certain exceptions listed in section 2-201(3), a contract for the sale of goods for $500 or more is not enforceable unless there is some writing signed by or for the party against whom enforcement is sought and the writing is sufficient to indicate that a contract of sale has been made between the parties. As between "merchants," if one party sends a writing confirming the contract to the other, if the writing is sufficient to bind the sender and if the recipient does not object in writing within ten days after receipt, the U.C.C.'s statute of frauds requirement is satisfied. (G.S. 25-2- 201(2)). But, generally, unless the existence of a contract is admitted, or there has been payment or delivery and acceptance, oral contracts for the sale of goods are not enforceable. Section 2-202 prohibits, subject to exceptions, contradiction of terms on which the parties' confirmations of the contract provisions agree or which are set forth in a writing intended by the parties as a final expression of their agreement by evidence of prior agreement or contemporaneous oral agreement.

Article 11 of the C.I.S.G. shuns such formalities. It provides that a contract of sale need not be concluded in or evidenced by a writing and may be proved by any means, including witnesses. Under Article 12, however, Article 11 does not apply where a party to the contract of sale has its place of business in a Contracting State whose law requires contracts of sale to be concluded in or evidenced by a writing and which has made an Article 96 declaration that Article 11 does not apply. Some Contracting States have made this declaration. The parties may not derogate from or vary the effect of Article 12. Consequently, if an oral contract falls under the C.I.S.G., it is necessary to determine whether Article 12 is in play. As mentioned above, reservations and declarations made by Contracting Parties are available in an Appendix to 15 U.S.C.A. and from the United Nations, the Department of State, the U.N. World Wide Web site, and the Pace IICL C.I.S.G. data base described in Appendix C.

V. SELECTED ASPECTS OF PERFORMANCE AND BREACH

A. Perfect Tender v. Fundamental Breach - Herein of G.S. 25-2-601 and C.I.S.G. Arts. 25, 46, 49 and 51.

This is an area where the differences between the C.I.S.G. and the U.C.C. can create substantial problems for a buyer which has a C.I.S.G. contract to purchase goods and a U.C.C. contract to sell them. Such a buyer has back to back transactions governed by very different rules regarding rejection and cancellation for breach.

Under the U.C.C., a buyer is entitled to reject a tender of delivery under a one delivery contract of sale which fails in any respect to conform to the contract. (G.S. 25-2-601, and comment 2 to G.S. 25-2-106). This is the "perfect tender" rule. Under it, a buyer may reject the goods and cancel the contract even if a defect in tendered goods or documents is not material and the buyer would receive substantially the performance and the goods for which it had bargained. Some of the leading commentators object to the perfect tender rule, e.g., 1 White & Summers Uniform Commercial Code 439-440 (4th ed. 1995), and courts tend to misconstrue it as requiring a substantial non-conformity or look for a way around it. See Printing Center of Texas, Inc. v. Supermind Publishing Co., Inc., 669 S.W.2d 779 (Tex. App. 14 Dist. 1984); T.W. Oil, Inc. v. Consolidated Edison of New York, Inc., 457 N.Y.S.2d 458 (1982). It would be retained, however, in preference to the C.I.S.G.'s rules, under the proposed revision of Article 2 of the U.C.C. After acceptance and in the case of installment contracts, a different standard applies. (G.S. 25-2-608 and 612). In such cases, a buyer may reject only if a non-conformity substantially impairs the value of the goods to the buyer. This standard is closer to that adopted by the C.I.S.G., but it contains a subjective element which is not part of the C.I.S.G. standard. Under the U.C.C., a minor non-conformity may, in the circumstances, result in a substantial impairment of value to the buyer. That does not seem to be the case under the C.I.S.G.

The C.I.S.G. imposes a much stricter standard for rejection and cancellation, which it refers to as "avoidance." Under the Convention's provisions, effectively, a buyer cannot reject defective goods and cancel unless a non-conformity substantially deprives the buyer of what it was entitled to expect under the contract and, even then, only if the seller foresaw, or a party in its position would have foreseen, such a result. This follows from Article 49(1) which permits a buyer to avoid the contract only if the seller's failure to perform amounts to a "fundamental breach," as that term is defined in Article 25. The buyer cannot even demand substitute goods unless the non-conformity constitutes a fundamental breach. (Article 46(2)).

Where a seller fails to deliver within the contract period, the buyer may obtain the right to avoid the contract by fixing a reasonable additional time for performance. (Articles 49(1)(b) and 47).

B. Insecurity and Assurances of Due Performance - Herein of G.S. 25-2-609 and C.I.S.G. Art. 71.

Under the common law doctrine of anticipatory repudiation, the non- repudiating party was entitled to declare the contract at an end only if there was an unequivocal expression of an intent not to perform or the circumstances were such that non-performance was almost certain. A party which declared a contract at an end in other circumstances had itself repudiated the contract and was liable for breach. Consequently, under the common law, a party who had reasonable grounds to think that the other party would not perform was in a difficult position. It could not safely make substitute arrangements and had to continue its own performance.

In many common commercial situations, the common law created a difficult problem for contract parties and their lawyers. Often a purchaser has to be confident that the seller will perform, because the goods are needed to avoid a disruption of production or a breach of the purchaser's commitments to others. What could a buyer do if it learned that its seller's usual source of supply had been cut off or that its seller had delivered defective goods to others? Could a buyer safely decide that its seller was not able or willing to perform where it received notice from the seller that the seller would have difficulty in supplying conforming goods or delivering on time or at the contract price and requested a modification of the contract specifications, delivery date or price? On the seller's side, the problem arose when it learned of reports that its buyer had failed to take delivery under contracts with others or was having financial difficulties, that its buyer's usual bank had terminated the buyer's loan and letter of credit facility, or that a buyer had lost its contract with a major customer.

U.C.C. section 2-609 created new law to deal with this common problem. It acknowledges the existence of a right to expect due performance and an obligation on each party such that the other party's right to expect due performance will not be impaired. It establishes rights to demand adequate assurance of due performance and to suspend performance until it is received. These rights are available when reasonable grounds for insecurity arise with respect to the performance of the other party. Reasonable grounds for insecurity are to be measured by commercial standards. This loose structure creates some uncertainties, but, generally, any circumstance which would justify rejection or cancellation if it came to pass should be sufficient to bring section 2-609 into play. Section 2-609 does not require that the insecurity arise out of circumstances which indicate an inability to perform which will substantially impair the value of the contract or that the other side will not perform a substantial part of its obligations.

The problem which existed under the common law of anticipatory repudiation is remedied by subsection (4) of section 2-609. It declares a failure to provide adequate assurance of due performance to be a repudiation of the contract. Again, there are uncertainties arising out of the time within which such assurances must be forthcoming and the determination of the adequacy of the assurance, but they do not gut the remedy. A party to a contract of sale faced with circumstances which do not amount to an anticipatory repudiation, but create reasonable concern regarding due performance, has a course to follow.

The C.I.S.G. deals with the concept of insecurity with respect to performance differently. Although Article 71 provides for suspension of performance on the grounds of insecurity regarding the other side's performance, the standard is different and more restrictive. The standard is whether it has become apparent that the other party will not perform a substantial part of its obligations. Professor Honnold asserts that this means that there must be "objective grounds showing a high degree of probability of non-performance." J. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 389 (2d ed. 1991). Consequently, suspension of performance and the right to demand adequate assurance of performance are not as readily available under the C.I.S.G. as they are under the U.C.C.

Further, Article 71 says that suspension of performance is permitted only if the ground for insecurity arises after the contract is made. If, before the contract was made, it was apparent that there was a serious deficiency in a seller's ability to perform or a serious deficiency in a buyer's creditworthiness, performance may not be suspended on the ground that such seller or buyer will not perform a substantial part of its obligations as a result of those circumstances. The U.C.C. does not address this point.

More importantly, the C.I.S.G. does not treat a failure to provide assurances as a repudiation of the contract. Article 71 merely says that the suspending party must continue with performance if the other party provides adequate assurance. Unlike section 2-609, it does not create a separate ground upon which the party suspending performance may cancel or "avoid" the contract if the other party fails to provide adequate assurance of performance. Avoidance is permitted only if it is clear that the other party will commit a "fundamental breach." (Article 72(1)). Thus, the C.I.S.G. takes a buyer or seller having reasonable grounds for insecurity back to where it was under the common law.

C. Seller's Right to Cure - Herein of G.S. 25-2-508 and C.I.S.G. Arts. 34, 37 and 48.

As we have seen, U.C.C. section 2-601 permits a buyer to reject and cancel if the goods or the tender of delivery fail in any respect to conform to the contract, but under the C.I.S.G. a buyer's rights to reject and cancel are restricted to circumstances in which it would be substantially deprived of what it is entitled to expect under the contract.

Both the U.C.C. and C.I.S.G. afford the seller a right to cure. Consistent with their fundamentally different approaches to the consequences of deficiencies in performance, the C.I.S.G.'s right to cure is broader than that to be found in the U.C.C.

Under U.C.C. section 2-508(1) when a buyer has rejected a tender or a delivery, but the time for performance has not expired, upon notice of its intention to cure, the seller may make a conforming delivery within the time fixed by the contract. In other words, the non-conforming delivery and rejection do not fix the positions of the parties, but the seller must make a conforming tender or delivery before the expiration of the delivery period fixed by the contract. Section 2-508(2) gives the seller the right to cure within a reasonable time beyond the delivery time fixed by the contract, if the seller had reasonable grounds to believe that a non-conforming tender would be acceptable to the buyer. See 1 White & Summers Uniform Commercial Code 469-473 (4th ed. 1995) for an analysis of the issues arising under section 2-508(2). Section 508 protects the seller from a surprise rejection by allowing extra time to make a conforming tender, but late delivery is not a curable breach. Neither part of Section 2-508 is restricted to circumstances in which the buyer will not be subjected to inconvenience or expense. The section does not mention the buyer's right to incidental or consequential damages, but it is likely that they are recoverable.

Under section 2-508 it is not clear whether a seller is entitled to replace a defective part instead of delivering a substitute item. In some cases, the courts have permitted the seller to repair rather than provide a substitute. In others, they have not.

Article 34 of the C.I.S.G. permits a seller to remedy a tender of defective documents up to the time fixed for handing them over, so long as the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. Article 37 deals with deliveries of non-conforming goods before the delivery date fixed by the contract. In such a case, a seller has the right to replace non-conforming goods or remedy any lack of conformity in the goods delivered, so long as it does so by the delivery date and the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. Article 48 gives a seller the right to remedy "any failure to perform" its obligations after the date for delivery, if it can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer. This right to remedy applies to a breach by failure to deliver on time. Article 48 establishes a procedure for the seller to follow, if it wishes to exercise such right. The seller must request the buyer to make known whether it will accept performance within a time specified by the seller. If the buyer does not answer within a reasonable time, the seller has the right to perform and the buyer has the obligation to accept performance within the time indicated in the seller's request. Article 48(3) provides that a notice by the seller that it will perform within a specified period of time is assumed to include a request that the buyer consent or refuse its consent. This means that a buyer who does not respond to a notice that the seller will deliver late will be in breach if it refuses to accept delivery.

D. Force Majeure - Herein of G.S. 25-2-613-615 and C.I.S.G. Art. 79.

Under the common law and under the U.C.C., absent a force majeure clause which covers the situation, unless a particular source of supply is exclusive, disruption of the seller's supply by a casualty, such as a fire, or a strike delaying the carrying vessel or plane, does not excuse a seller's non-performance or late performance. Even where the source of supply is exclusive, the seller must have exercised due diligence to see that the source will not fail. The U.C.C. contains provisions which protect the parties from the consequences of certain disruptions of performance which occur without their fault. (G.S. 25-2-613 to G.S. 25-2-616). None of them would protect a seller from liability for breach caused by a supplier's failure to perform with respect to goods not identified when the contract was made. The Convention, on the other hand, contains a provision similar to a force majeure clause, Article 79. In the circumstances specified in it, Article 79 protects a seller whose failure to perform is due to the failure of a third person, such as a component manufacturer or carrier, whom it has engaged to perform the whole or part of the contract.

Unlike some commonly used force majeure clauses, Article 79 does not extend the time for performance. In other words, Article 79 is a shield against liability for damages for breach, but does not protect the seller from other consequences by adding the time lost by reason of an impediment beyond its control to the time for performance. Further, it does not deprive the buyer of its Article 50 right to reduce the price, which is discussed below. Consequently, even though the seller is immune from a claim for damages, it may be subject to avoidance or a price reduction. Most force majeure clauses require, as a condition to receiving the protection of the clause, that the party affected by force majeure invoke the clause by notifying the other party. Article 79 requires the party whose performance is affected by an impediment beyond its control to give notice to the other party. Under Article 79(4), if the other party does not receive the notice, the party affected by the impediment is liable for damages resulting from non-receipt.

Article 79(4) highlights the need to consider the Convention's provisions relating to the effectiveness of communications. In some circumstances the sender bears the risk that the communication will not arrive, but the Convention's general rule is that the communication becomes effective when it is sent. (Article 27).

VI. DIFFERENCES IN APPROACH TO REMEDIES

A. Reduction in Price - Herein of G.S. 25-2-717 and C.I.S.G. Art. 50.

One of the areas in which the U.C.C. and the C.I.S.G. differ is with respect to price reduction. Under section 2-717, upon giving notice, a buyer has the right to deduct its damages from any part of the price still due under the same contract. Unless a sale is made on open credit or with a reserve to cover damages, this right of setoff is not a meaningful remedy. If a buyer pays before it discovers a non-conformity or posts a letter of credit, this right is of no significance. Under the C.I.S.G., the right to reduce the price is a substantial right. Under Article 50, if the seller delivers goods which do not conform to the contract, whether or not the price has already been paid, in addition to recovering damages, the buyer may reduce the price in the same proportion as the value that the goods actually delivered bears to the value that conforming goods would have had at that time. If the goods are delivered late, but they did conform to the contract, Article 50 does not apply. For a recent analysis of the impact of the price reduction provision, see Harry M. Flechtner, More U.S. Decisions on the U.N. Sales Convention: Scope, Parol Evidence, "Validity," and Reduction of Price under Article 50, 14 J. L. Com. 153, 169-176 (1995).

B. Specific Performance - Herein of G.S. 25-2-709 and 716 and C.I.S.G. Arts. 28, 46 and 62.

While the C.I.S.G.'s rules on specific performance are very different from those under North Carolina law, there is an escape clause which, probably, eliminates the difference. Under the U.C.C., the courts rarely decree specific performance of sales contracts. Articles 46 and 62 of the C.I.S.G. permit both the buyer and seller to require performance of the other party's obligations under the contract. The U.C.C. entitles the seller to recover the purchase price rather than damages from a non-performing buyer in certain very limited circumstances. Under the U.C.C., the seller cannot force the buyer to take delivery. Under the C.I.S.G., the seller may require the buyer to take delivery. Article 28, however, undoes Articles 46 and 62. It says that a court need not enter a judgment for specific performance unless it would do so under its own law in non-C.I.S.G. cases involving similar contracts of sale.

C. No Statute of Limitations, But....

Under the C.I.S.G., a buyer loses the right to rely on a lack of conformity of the goods if it does not notify the seller of the non-conformity within a reasonable time and, in any event, at the latest two years after the goods were handed over to the buyer. (Article 39(2)). It has been held that Article 39(2) is not a statute of limitations.

The C.I.S.G. does not contain a statute of limitations, but there is another treaty, the 1974 Convention on the Limitation Period in the International Sale of Goods, which, like the U.C.C. (G.S. 25-2-725), establishes a four year limitation period. It came into effect in 1988. It entered into force for the United States on December 1, 1994, and applies to contracts concluded on or after that date. (Article 33). The provisions of the Convention which determine its applicability to contracts and issues were brought into line with the C.I.S.G. by a 1980 protocol to the Limitation Period Convention. There are some differences between U.C.C. section 2-725 and the treaty, but, in general, they are consistent. See generally, Peter Winship, The Convention on the Limitation Period in the International Sale of Goods: The United States Adopts UNCITRAL's First Born, 28 Int'l Lawyer 1071 (1994).

Information concerning nations which are parties to the Limitation Period Convention and the date it came into force for them may be obtained from the State Department and United Nations offices mentioned in section IIIA, above, and the United Nations treaty data base.

VII. APPENDICES

A. List of Contracting Parties and Effective Dates.

Nations adhering to the United Nations Convention on Contracts for the International Sale of Goods and the dates when the Convention came or will come into force in respect of them as of April 30, 1996.

Ratification
State Accession Approval Entry into Force
Argentina 19 July 1983 1 January 1988
Australia 17 March 1988 1 April 1989
Austria 29 December 1987 1 January 1989
Belarus 9 October 1989 1 November 1990
Bosnia/Herzegovina 12 January 1994 1 February 1995
Bulgaria 7 July 1990 1 August 1991
Canada 23 April 1991* 1 May 1992
Chile 7 February 1990 1 March 1991
China 11 December 1986 1 January 1988
Cuba 2 November 1994 1 December 1995
Czech Republic 30 September 1993 1 October 1994
Denmark 14 February 1989 1 March 1990
Ecuador 27 January 1992 1 February 1993
Egypt 6 December 1982 1 January 1988
Estonia 20 September 1993 1 October 1993
Finland 15 December 1987 1 January 1989
France 6 August 1982 1 January 1988
Georgia 16 August 1994 1 Sept. 1995
Germany 21 December 1989 1 January 1991
Guinea 23 January 1991 1 February 1992
Hungary 16 June 1983 1 January 1988
Iraq 5 March 1990 1 April 1991
Italy 11 December 1986 1 January 1988
Lesotho 18 June 1981 1 January 1988
Lithuania 18 January 1995 1 February 1996
Mexico 29 December 1987 1 January 1989
Moldova 13 October 1994 1 November 1995
Netherlands 13 December 1990 1 January 1992
New Zealand 22 September 1994 1 October 1995
Norway 20 July 1988 1 August 1989
Poland 22 May 1995 1 June 1996
Romania 22 May 1991 1 June 1992
Russian Fed. 16 August 1990 1 Sept. 1991
Singapore 16 February 1995 1 March 1996
Slovakia 28 May 1993 1 June 1994
Slovenia 7 January 1994 1 February 1995
Spain 24 July 1990 1 August 1991
Sweden 15 December 1987 1 January 1989
Switzerland 21 February 1990 1 March 1991
Syrian Arab Rep. 19 October 1982 1 January 1988
Uganda 12 February 1992 1 March 1993
Ukraine 3 January 1990 1 February 1991
United States of America 11 December 1986 1 January 1988
Yugoslavia 27 March 1985 1 January 1988
Zambia 6 June 1986 1 January 1988

*For nine Provinces. Extended to Quebec, Saskatchewan and Yukon on 9 April 1992.

B. Bibliography.

1. Official Documents.

Commentary on the Draft Convention on Contracts for the International Sale of Goods, prepared by the UNCITRAL Secretariat, U.N. document A/CONF.97/5, March 14, 1979, reprinted in John Honnold, Documentary History of the Uniform Law for International Sales 404 (1989).

Department of State, Legal Analysis of the United Nations Convention on Contracts for the International Sale of Goods, (1980), Treaty Doc. 98-9, 98th Congress, 1st Session (1983), reprinted in an appendix in the annual pocket part of the Regulations and Index volume of 15 U.S.C.A.

Each of the foregoing is reprinted in R. Kathrein and D. Magraw, The Convention for the International Sale of Goods: A Handbook of Basic Materials (A.B.A. Section of Int'l Law and Practice 2d ed. 1990) and in Hancock, Appendix B3.

2. Recent Articles by Leading Commentators.

Franco Ferrari, Specific Topics of the C.I.S.G. in Light of Judicial Application and Scholarly Writing, 15 J. L. & Com. 1 (1995)

Albert Kritzer, The Convention on Contracts for the International Sale of Goods: Scope, Interpretation and Resources, 1 Cornell Rev. on Contracts for the Int'l Sale of Goods 147 (1996).

Peter Winship, Changing Contract Practices in Light of the United Nations Sales Convention: A Guide for Practitioners, 29 Int'l Lawyer 525 (1995).

3. Selected Texts on the C.I.S.G.

Guide to the International Sale of Goods Conventions (W. Hancock ed. Looseleaf 1995). ("Hancock")

John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (2d ed. 1991).

Albert Kritzer, Guide to Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (2d ed. 1994).

Joseph Lookofsky, Understanding the C.I.S.G. in the USA - A Compact GUIDE to the 1980 United Nations Convention on Contracts for the International Sale of Goods (1995).

4. Bibliographies.

Hancock, Appendix B3, at 401.001.

Peter Winship, The U.N. Sales Convention: A Bibliography of English Language Publications, 28 Int'l Lawyer 401 (1994).

Michael R. Will, C.I.S.G. Bibliography (4th ed. September, 1995). Unpublished, available from Prof. Will by contacting Madame Claudine Zbinden, Faculty of Law, University of Geneva, 102 Boulevard Carl-Vogt, CH-1211 Geneva 4, Switzerland, fax. no. (41-22) 705-8467.
Mr. Kritzer suggests a donation of $25.00, see A. Kritzer, Appendix B2. above, at note 130.

C. World Wide Web Data Bases.

1. The Pace Law School IICL C.I.S.G. Data Base.

The Institute of International Commercial Law at Pace University School of Law has established a free data base on the C.I.S.G.. It can be found at:
"http://www.CISG.law.pace.edu"
and
"http://www.cisg.law.pace.edu"

In the two years or so since the IICL announced the project, academic institutions from numerous countries have volunteered to join with Pace to offer a comprehensive source of information concerning the C.I.S.G. Included in the data base are an article by article analysis of the Convention with references to its negotiating history and cases and commentaries concerning it. The UNCITRAL and U.N. documents constituting the Convention's negotiating history will not be in the data base, so it will be necessary to refer to other sources, such as Professor Honnold's compilation of the negotiating history. See Appendix B1. There is a bibliography of articles and books relating to the Convention said to contain over 2,000 entries. The full text of some of the commentaries will be available on the data base. The IICL plans to cover every case dealing with the C.I.S.G. and to furnish expert commentary on the decision and the way the case was decided. Over two hundred decisions have been analyzed and the analyses are now being entered in the data base. The IICL plans to have foreign decisions translated into English and the full text available on the data base. A sophisticated, but easy to use research, procedure will permit broad or very specific searches.

2. The Rabel Website Project of the Institute of Foreign and International Private Law, University of Freiburg, maintains a data base on the C.I.S.G. at:
"http://132.230.55.33/ipr1/CISG"

It contains information on German C.I.S.G. cases.

3. The UNCITRAL data base is at:
"http://www.un.or.at/uncitral"

At April 30th, it contains the first six CLOUT ("Case Law on UNCITRAL Texts") abstracts of C.I.S.G. cases. For more information on CLOUT, see Kritzer, Appendix B2 above, at note 35.


Pace Law School Institute of International Commercial Law - Last updated February 6, 1998
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