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The following article appeared in The Metropolitan Corporate Counsel (May 2002) 9. Reproduced with permission of the authors.

Be Explicit: Drafting Choice of Law Clauses
in International Sale of Goods Contracts

Thomas J. Drago, Esq. and Alan F. Zoccolillo, Esq. [*]

Introduction

Contracts covering the sale of goods will generally include "governing law" or "choice of law" provisions. These provisions are intended to determine the laws which will apply to any dispute respecting the interpretation of the contract. In domestic sale of goods transactions, parties will often select the law of a particular U.S. state, with such selection intending to apply the Uniform Commercial Code ("U.C.C.") as adopted by that state. In the case of contracts respecting an international sale of goods, however, the parties to the contract are often unaware that their choice of law clauses which select the laws of a U.S. state may in fact be selecting the 1980 United Nations Convention on Contracts for the International Sale of Goods (the "CISG" or "Convention").

Why is this important? While the Convention and the U.C.C. are similar in many respects, there are some key substantive differences between them. Some differences include (i) the non-existence of the "statute of frauds" under the CISG, (ii) differing mechanics respecting offer and acceptance, and (iii) the non-existence of the "perfect tender rule" under the CISG. To the unwary practitioner, these differences could have devastating consequences.

This article does not focus on the number of differences between the Convention and UCC, but rather discusses how the CISG could be selected inadvertently by parties to an international sale of goods contract and provides some guidance as to how parties can effectively exclude (or apply) the CISG to their transaction.[1]

What is the CISG?

The CISG was signed and opened for signature in 1980 in Vienna, Austria.[2] It is an international treaty sponsored by the United Nations containing substantive rules regulating contracts for the international sale of goods, including provisions on the formation of contracts, the obligations of the contracting parties and rights and remedies for breach of contract. Currently, there are 61 States which have adopted the CISG as their international sales law.[3] From an American viewpoint, the CISG might be seen as the "UCC of international sales,[4] "with many substantive differences.

When is the CISG applicable?

Generally, the CISG applies to sales of goods [5] between parties whose relevant places of business are in countries which have adopted the Convention.[6] For example, the CISG would be applicable to a contract for the sale of ceramic tiles between an Italian seller and a U.S. buyer since (i) the contract is for the sale of goods, and (ii) the parties to the transaction have their relevant places of business in countries which have adopted the Convention. The applicability of the CISG, however, is limited by a number of factors. One scenario in which the CISG is not applicable is when it is not readily apparent that the parties to the contract are from different States.[7] For instance, such a situation might arise where the parties appeared to have their places of business in the same State but one of the parties was acting as the agent for an undisclosed foreign principle.[8] In this situation, although the parties reside in different States, the CISG would be inapplicable.[9]

Additionally, the language of the CISG has placed further restrictions on its applicability by excluding certain types of goods and certain types of sales from its scope. Under Article 2 of the CISG, the sale of stocks, shares, investment securities, negotiable instruments, money, ships, vessels, hovercraft, aircraft, and electricity are all items which are explicitly excluded from the Convention.[10] The CISG also precludes its application to situations where the goods are bought for personal, family or household use,[11] when the goods are sold by auction [12] and when the goods are sold on execution or otherwise by authority of law.[13]

Further exclusion of the Convention's applicability arises in situations where the parties share in a substantial part of the supply of materials or labor. Article 3 of the CISG states that contracts for the supply of goods are to be considered sales unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.[14] The theory behind this exclusion is such a contract is more akin to a contract for the supply of services or labor rather than a contract for the sale of goods.[15] Additionally, Article 3 further restricts the Convention's application in situations where the preponderant part of the obligations of the party who furnishes the goods consists of the supply of labor or other services.[16] This restriction is intended to exclude situations where, for instance, the purchase of a small machine would require significant installation work and extended supervision. In this scenario, the CISG would exclude transactions focused on service, rather than sales, aspects.

Can parties exclude the application of the CISG?

The most dominant theme of the Convention is its non-mandatory nature. Parties who desire not to submit their commercial relationships to the reaches of its provisions are empowered by one of its Articles to "opt out" of the Convention in its entirety or derogate from or vary the effect of any of its principles. The source of this autonomy is contained in Article 6 of the Convention which states that "[t]he parties may exclude the application of [the] Convention or, subject to Article 12, derogate from or vary the effects of any of its provisions."[17]

The simplest way to exclude the application of the CISG or "opt out" is by inserting a choice of law provision in the international sale contract. However, choice of law clauses must explicitly provide that the Convention is inapplicable to the international sale of goods transaction in order to ensure that it will not be applied. Practitioners should be aware that clauses specifying the laws of a country or a specific U.S. State will not, in most instances, effectively exclude the application of the Convention.

A majority of arbitral tribunals and national courts around the world have held that a choice of law clause in an international sale of goods contract which selects the laws of a Contracting State means that the Convention (and not the domestic commercial laws of such Contracting State) shall apply to the contract. This position is taken, for the most part, because the Contracting States have incorporated the Convention into the laws of their country, and the law of such Contracting State which governs international commercial contracts for the sale of goods is the CISG.

Until recently, U.S. courts had not addressed the applicability of the CISG in such situations. However, in 2001 the U.S. District Court for the Northern District of California in Assante Technologies, Inc. v. PMC-Sierra, Inc., made clear that a choice of law clause which merely specifies the law of a U.S. State or the general law of a Contracting State is insufficient to exclude the application of the Convention.[18]

In Assante, the plaintiff [buyer] Assante Technologies, Inc., a Delaware corporation with its principal place of business in Santa Clara County, California, purchased application-specific integrated circuits in a number of transactions from defendant [seller] PMC-Sierra, Inc., a Delaware corporation with its principal place of business in British Columbia, Canada.[19] Assante brought an action against PMC-Sierra after a number of the electronic components that it ordered failed to meet certain designated technical specifications.[20] While there was not a single contract embodying the agreement pertaining to the sales, Assante asserted that acceptance of each of its purchase orders was expressly conditioned upon PMC-Sierra's acceptance of Assante's "Terms and Conditions" which were included with each purchase order.[21] Assante's Terms and Conditions, as they related to the law governing the

"APPLICABLE LAW: The validity [and] performance of this [purchase] order shall be governed by the laws of the state shown on the Buyer's address on this order."[22]

The Buyer's address as shown on each of the purchase orders was San Jose, California.[23] On the other hand, PMC-Sierra argued that the terms of shipment were governed by a document entitled "[Seller's] Terms and Conditions of Sale."[24] Seller's Terms and Conditions, as they related to the law governing the transactions, provided:

"APPLICABLE LAW: The contract between the parties is made, governed by, and shall be construed in accordance with the laws of the Province of British Columbia and the laws of Canada applicable therein, which shall be deemed to be the proper law hereof."[25]

Assante further asserted that, even though the parties are from two nations which have adopted the CISG, the choice of law provisions in the "Terms and Conditions" set forth by both parties reflects the parties' intent to "opt out" of the application of the Convention.[27] PMC-Sierra, on the other hand, asserted that merely choosing the law of a jurisdiction is insufficient to opt out of the Convention, absent an express exclusion of the CISG.[28] The court, in rendering its decision, held that the choice of law clauses contained in the "Terms and Conditions" of both parties were insufficient to exclude the application of the Convention.[29] The court, in rendering its opinion, stated:

"Although selection of a particular choice of law, such as 'the California Commercial Code' or the 'Uniform Commercial Code' could amount to an implied exclusion of the CISG, the choice of law clauses at issue here do not evince a clear intent to opt out of the CISG. For example, [seller's] choice of applicable law adopts the law of British Columbia, and it is undisputed that the CISG is the law of British Columbia [citation omitted]. Furthermore, even [buyer's] choice of applicable law generally adopts the 'laws of' the State of California, and California is bound by the Supremacy Clause to the treaties of the United States.[30] Thus, under general California law, the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. In the absence of clear language indicating that both contracting parties intended to opt out of the CISG … the choice of law provisions [do not] preclude the applicability of the CISG."[31]

Therefore, the holding in Assante makes clear that U.S. parties wishing to exclude the application of the Convention to their transactions must provide clear language evidencing such intent.

While a clear majority of courts and tribunals around the world have taken the same approach as the court in Assante, practitioners must be mindful of several decisions which have reached opposite conclusions. In a small number of controversies where the Convention would otherwise have been applicable, courts and tribunals have held that a choice of law clause which specifies the national law of a country amounts to an implicit and effective exclusion of the Convention.[32] On the other hand, in situations where the parties desire the application of the Convention,[33] it is helpful to provide clear language evidencing such intent.

How can parties effectively exclude or ensure the application of the CISG to their transaction?

As stated above, a well-drafted choice of law clause can effectively exclude or ensure the application of theConvention to an international sale of goods contract. While common practice is not to include an express exclusion or application of the Convention, we recommend that choice of law clauses in future international commercial contracts for the sale of goods include specific language either expressly excluding or adopting the application of the Convention. This will ensure that the law intended to be applied by the parties is solidly established and not second guessed by a court or arbitral tribunal.

Please note that when expressly electing to apply the Convention to a contract for the international sale of goods, two important points must be addressed. First, it is prudent to include the language version of the Convention which is to apply. Official versions of the CISG are available in Arabic, Chinese, English, French, Russian and Spanish. Several other unofficial translations are also available in a variety of languages. Potential inconsistencies between different language versions of the Convention could lead to varying results in application. Therefore, it is important to specify a language version of the Convention. Second, it is also recommended that parties include a "gap filling" law to supplement issues not resolved by the Convention.[34] The selection of a national system to supplement the limited CISG scope may serve to provide the parties a sense of increased certainty.


FOOTNOTES

* Thomas J. Drago is a partner and Alan F. Zoccolillo is an associate in the New York office of Coudert Brothers LLP. Please email the authors at tdrago@coudert.com or azoccolillo@coudert.com with questions about this article.

1. For a discussion of the differences between the U.C.C. and the CISG, see Louis F. Del Duca and Patrick Del Duca, Practice Under the Convention on the International Sale of Goods: A Primer for Attorneys and International Traders, 27 U.C.C. L.J. 113 (1995).

2. JOSEPH LOOKOFSKY, UNDERSTANDING THE CISG IN THE USA, 1 (Kluwer Law International 1995).

3. The States include: Argentina, Australia, Austria, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Burundi, Canada, Chile, China (PRC), Croatia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guinea, Hungary, Iraq, Italy, Krygystan, Latvia, Lesotho, Lithuania, Luxembourg, Mauritania, Mexico, Moldova, Mongolia, Netherlands, New Zealand, Norway, Peru, Poland, Romania, Russian Federation, Saint Vincent & Grenadines, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Uganda, Ukraine, United States, Uruguay, Uzbekistan, Venezuela, Yugoslavia, and Zambia. Three other States have adopted the CISG, but such adoption has not yet become effective. They include Columbia (8/1/02), Iceland (6/1/02) and Israel (2/1/03).

4. See LOOKOFSKY, supra note 16, at 1.

5. Although the CISG does not expressly define goods, it has been said to mean, excluding the goods removed from the scope of the Convention in article 2, "tangible moveables." See Peter Winship, Energy Contracts and the U.N. Sales Convention, 25 TEXAS INT'L L.J. 371, N. 33 (1990),

6. See CISG article 1. The Convention is also applicable in situations where (i) the rules of private international law lead to the application of the laws of a state that has adopted the Convention, (ii) the parties agree to apply the Convention to their commercial relationship, and (iii) when it is applied as a part of the "lex mercatoria."

7. See CISG Article 1(2) which states: "[t]he fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract."

8. ALBERT H. KRITZER, GUIDE TO PRACTICAL APPLICATIONS OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, 9 vol. I (Kluwer Law International) (1994).

9. See CISG article 1(2).

10. See CISG article 2(d)(e)(f).

11. See CISG article 2(a).

12. See CISG article 2(b).

13. See CISG article 2(c).

14. See CISG article 3(1).

15. See KRITZER, supra note 8, at 14.

16. See CISG article 3(2).

17. CISG art. 6.

18. 164 F.Supp. 2d 1142.

19. Id. at 1145.

20. Id.

21. Id. at 1150.

22. Id.

23. 164 F.Supp. 2d, at 1150.

24. Id.

25. Id.

26. Id.

27. Id.

28. 164 F.Supp. 2d, at 1150.

29. U.S. Const. art. IV, cl.2 ("This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land.")

30. 164 F.Supp. 2d, at 1150.

31. See Arbitration 19 April 1994 Ad Hoc Arbitral Tribunal - Florence (Società X v. Società Y) (Arbitral panel decided that clause contained in the contract for the sale of leather goods between an Italian Seller and Japanese buyer which stated that contract was "to be governed exclusively by Italian law" amounted to an implicit exclusion of the Convention); See also ICC Arbitration Case No. 8482 of December 1996 [Digest of Presentation at ICAB, Vol. 11/No. 2 (Fall 2000)] (Arbitral tribunal considered CISG inapplicable to contract for the sale of two engines between a Polish seller and a Greek buyer which contained a clause stating that the "contract shall be subject to Swiss Law" since the parties, in selecting Swiss Law, must have intended to apply a neutral law to their contract.)

32. Parties to international commercial contracts where the Convention is not applicable (i.e. the parties are not from Contracting States or the rules of private international law do not lead to the application of the laws of a Contracting State) are free to "opt in" to the Convention as well. Such adoption is not premised on the freedom granted by CISG Article 6, but rather on the notion of contractual freedom afforded by the rules of various national laws. Parties should be aware that opting into the Convention does not, however, remove the transaction from the reach of domestic laws if such application violates applicable national precepts. See M.J. BONELL, Article 6, contained in COMMENTARY ON THE INTERNATIONAL SALES LAW: THE 1980 VIENNA SALES CONVENTION, 51 (C.M. BIANCA & M.J. BONELL EDS. 1987).

33. See LOOKOFSKY, supra note 16, at 16. See also KRITZER, supra note 8, at 53.

34. Id.


Pace Law School Institute of International Commercial Law - Last updated July 26, 2002
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