April 2004

Your Sale of Goods — The Law Applied May Not Be What You Expect

Understanding The United Nations Convention on the International Sale of Goods

by Brett W. Smith

Consider this hypothetical exam question:

C, a manufacturer of consumer products, orders from S, a widget manufacturer, a total of 1.2 million widgets to be incorporated into C's products. The order is placed by telephone, and in their conversation the parties agree upon quantity, price, payment and shipping terms. No other terms are discussed. The parties had not dealt with each other before this order.

S ships the widgets in 11 separate shipments, each with an accompanying invoice. The invoices all contain a number of terms, including a clause selecting a particular forum for resolution of disputes. C takes delivery of and pays for each shipment, incorporates the widgets into its products, and sells the products (including the widgets) to the public. Later, C discovers that the widgets are defective. C wants to sue S in a different forum than the one specified in the invoices.

What are the rights and responsibilities of the parties?

The typical answer to this hypothetical exam question would likely discuss issues such as whether there is an enforceable contract under the statute of frauds under the Uniform Commercial Code (UCC),1 and whether, as between merchants, the seller's additional terms become part of the contract under the UCC.2

However, if one of the parties is located outside the United States, the typical answer to the exam question could be wrong. (More importantly to a practicing attorney, the typical advice given in a parallel situation in real life could be wrong.) Since Washington ranks fifth in the nation for exports,3 contracting with foreign parties is not uncommon. If the foreign party is located in a country which (like the United States) has ratified the United Nations Convention on the International Sale of Goods (CISG), then the CISG and its associated caselaw may provide the rules for the resolution of the dispute, rather than the UCC.

Background of the CISG
The CISG was promulgated by the United Nations Commission on International Trade Law (UNCITRAL), and adopted by diplomatic conference in 1980. It came into force on January 1, 1988, among the 11 original signatory nations, one of which was the United States.4 There are currently 62 countries which have adopted the CISG,5 including four out of the top five of the United States' major trading partners.6 The CISG has been described as "the most successful international trade treaty so far."7

Earlier international conventions on the sale of goods had appealed primarily to countries following western European legal systems. In contrast, the CISG was designed to be acceptable to countries having a variety of legal and economic traditions.8 Consequently, the applicability of the CISG was specifically limited to "the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract."9 Topics not covered by the CISG include "the validity of the contract, the effect which the contract may have on the property in the goods sold or the liability of the seller for death or personal injury caused by the goods to any person."10

The CISG contains 101 articles, grouped into seven chapters. Topics addressed include: formation of the contract, delivery of the goods, conformity of the goods, payment of the price, remedies, anticipatory breach, and damages.

Generally speaking, as a self-executing treaty,11 when ratified by a particular country, the CISG becomes part of the laws of that country, and applies automatically to contracts falling within its coverage. The CISG provides that it applies "to contracts of sale of goods between parties whose places of business are in different States"12 — that is, in different countries that have ratified the CISG. However, it also provides that contracting parties may "exclude the application of this Convention"13 — that is, opt out.

Chateau des Charmes case
As mentioned in the discussion of the hypothetical above, cases adjudicated under the CISG may have different outcomes than they would have if the UCC were applicable. The hypothetical was adapted from the recent case of Chateau des Charmes Wines Ltd. v. Sabaté USA Inc., 328 F.3d. 528 (9th Cir. 2003). Chateau des Charmes was a Canadian winery that purchased special corks for its wine bottles by telephone order from Sabaté USA, a California subsidiary of Sabaté, S.A., a French company. Sabaté claimed that the corks would not taint wines with cork flavors. The shipments were made by the French company, and the accompanying invoices stated that disputes were to be resolved under the sole jurisdiction of a specific court in France.

When Chateau des Charmes found that its bottled wines were spoiled by cork flavors, it sued both the California subsidiary and the French parent company in federal court in California. The defendants moved to dismiss the case based on the forum selection clause in the invoices. The district court found that the forum selection clause was enforceable, and granted the motion to dismiss.

On appeal, the 9th Circuit reversed. The court noted that the places of business of the parties were in different countries (France, Canada, and the United States), each of which had ratified the CISG. Consequently, the court held that the CISG "governs the substantive question of contract formation as to the forum selection clauses."14

The court then noted that the UCC would have required "a contract for the sale of corks for the value involved here to be evidenced by a writing."15 The CISG, on the other hand, provides that a sales contract "need not be concluded in or evidenced by writing."16 Therefore, the court held that the oral agreements between Sabaté's California subsidiary and Chateau des Charmes "as to the kind of cork, the quantity, and the price were sufficient to create complete and binding contracts."17

The 9th Circuit then pointed out that the oral agreements had no forum selection clause. Sabaté argued that the forum selection clause in the invoices became part of the agreement between the parties. The court disagreed. It stated that while the CISG allows the modification of a contract by "the mere agreement of the parties,"18 it also provides that "[a]dditional or different terms" relating to topics such as dispute resolution "are considered to alter the terms of the offer materially."19 The court concluded: "There is no indication that Chateau des Charmes conducted itself in a manner that evidenced any affirmative assent to the forum selection clauses in the invoices. Rather, Chateau des Charmes merely performed its obligations under the oral contract. Nothing in the Convention suggests that the failure to object to a party's unilateral attempt to alter materially the terms of an otherwise valid agreement is an 'agreement' within the term of Article 29."20

Since Sabaté's forum selection clause was not a part of the contract between the parties, the court reversed the district court's dismissal of the action.

Opting Out of the CISG
If the parties to a contract for the sale of goods do not want the CISG to apply, they may include a provision to "opt out" of the CISG. The CISG does not explain how to do so; it merely states that parties "may exclude the application of this Convention."21 In an "Explanatory Note" on the CISG prepared by the Secretariat of UNCITRAL (for "informational purposes" and not as official commentary22), the Secretariat expressed the opinion that: "The exclusion of the Convention would most often result from the choice by the parties of the law of a non-contracting State or of the domestic law of a contracting State to be the law applicable to the contract."23

Nevertheless, caselaw reveals that a simple statement as to which law applies to an international contract for the sale of goods will not necessarily result in the CISG being found to be inapplicable. For example, in Ajax Tool Works, Inc. v. Can-Eng Manufacturing Ltd., 2003 WL 223187 (N.D. Ill. 2003), the plaintiff was an Illinois corporation, while the defendant was an Ontario corporation. The contract between the parties stated: "This agreement shall be governed by the laws of the Province of Ontario, Canada."24 The court held that this statement did not exclude the CISG. Rather, the court held, "because the CISG is the law of Ontario, the CISG governs the parties' agreement."25

Similarly, in Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F. Supp. 1142 (N.D. Cal. 2001), the plaintiff's purchase orders provided that California law governed, while the defendant's terms of sale provided that British Columbia law governed.26 The court held that both parties' choices of law provisions were "inadequate to effectuate an opt out of the CISG."27 Nevertheless, the court went on to state that "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."28

One commentator collected a variety of clauses recommended to be used to opt out of the CISG, as follows (selecting the law of Florida instead):

• This Contract shall be governed by and construed under the laws of [the] State of Florida not including the 1980 United Nations Convention on Contracts for the International Sale of Goods.

• Disclaimer of UN Convention on Sale of Goods. PURSUANT TO ARTICLE 6 OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, THE PARTIES AGREE THAT THE UN CONVENTION SHALL NOT APPLY TO THIS AGREEMENT.

• The validity and performance of this Agreement shall be governed by the internal law of the State of Florida without regard to its rules of conflicts of law. The parties exclude the application of the 1980 United Nations Convention on Contracts for the International Sale of Goods if otherwise applicable.

• In contrast, if the parties elect to have the convention apply in total, the parties should use a provision similar to the following: "The terms of this Contract shall be governed by and construed under the 1980 United Nations Convention on Contracts for the International Sale of Goods."29

Conclusion
Practitioners and their clients would be well advised to carefully consider whether particular transactions might be governed by the CISG instead of the state law to which they are accustomed. Otherwise, they may find the law applicable to the sale to be quite different from what they expected.

___________________________

Brett W. Smith is Corporate Legal Counsel for RAHCO International, Inc., of Spokane, a custom manufacturer of heavy equipment for domestic and international sales.

NOTES
1 See RCW 62A.2-201.

2 See RCW 62A.2-207.

3 U.S. Department of Commerce, International Trade Administration, Office of Trade and Economic Analysis, "State Merchandise Export Totals to the World, 1993-2000, Ranked by 2000 Export Value," located at www.ita.
doc.gov/td/industry/otea/state/merchandise/Worldtot2.txt.

4 Secretariat of the United Nations Commission on International Trade Law, "Explanatory Note by the UNCITRAL Secretariat on the United Nations Convention on Contracts for the International Sale of Goods," paragraph 4 (June 1989), reprinted at the Pace Law School Institute of International Commercial Law website at www.cisg.law.pace.edu/cisg/text/p23.html.

5 See the United Nations Commission on International Trade Law website at www.
uncitral.org/english/status/status-e.htm.

6 These four countries are Canada, Mexico, China, and Germany. The one "top five" trading partner of the United States which has not adopted the CISG is Japan. See the U.S. Census Bureau website at www.census.gov/foreign-trade/top/dst/current/balance.html.

7 Kilian, Monica, "CISG and the Problem with Common Law Jurisdictions," 10 Journal of Transnational Law & Policy 217 (Spring 2001).

8 "Explanatory Note," supra, paragraph 3.

9 United Nations Convention on Contracts for the International Sale of Goods, Apr. 10, 1980, S. Treaty Doc. No. 98-9 (1983), art. 4, reprinted at www.uncitral.org/en-index.htm.

10 "Explanatory Note," supra, paragraph 11.

11 Butler, Allison E., "Knowing When, Why, and How to 'Opt Out' of the United Nations Convention on Contracts for the International Sale of Goods," 76 Florida Bar Journal 24, 26 (May 2002).

12 CISG, supra, art. 1.

13 CISG, supra, art. 6.

14 328 F.3d at 530.

15 Id. at 531 n.3.

16 CISG, supra, art. 11.

17 328 F.3d at 531.

18 CISG, supra, art. 29(1).

19 Id. art. 19(3).

20 328 F.3d at 531.

21 CISG, supra, art. 6.

22 See heading of "Explanatory Note," supra.

23 "Explanatory Note," supra, paragraph 12.

24 2003 WL 223187 at 1.

25 Id. at 3.

26 In this case, both the plaintiff and the defendant were Delaware corporations. The CISG was still found to be applicable, because the plaintiff's place of business was in California, while the defendant's place of business was in British Columbia.

27 164 F. Supp. at 1150.

28 Id. (emphasis in original).

29 Butler, supra, at 30.

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