International Trade

Invisible Ink: The Hidden Clause in Many International Sales Contracts

 There’s good news—and cause for concern—in recent numbers about the U.S. economy. On a positive note, the Export-Import Bank of the United States reported in early June 2014 that the country’s exporting performance was continuing to show signs of recovery. According to data released by the Bureau of Economic Analysis through the U.S. Commerce Department, the country exported $193.3 billion worth of goods and services in April.

Moreover, the bank noted, exports over the past 12 months totaled $2.3 trillion—a 45.1 percent increase over the level in 2009—and have been growing at an annualized rate of 9.1 percent over the past five years. Those numbers further prompted a buoyant outlook from the federal credit agency.

But on the flip side of that seemingly rosy picture is a detail that worries some in the legal profession. What the numbers also mean is that more U.S. businesses are potentially exposed to a risk that is barely known, and much less understood, by those that engage in international trade.

Specifically, since the 1980s the United States has been a signatory to a multilateral treaty that governs a broad range of global transactions. And according to one authority, that treaty—the United Nations Convention on Contracts for the International Sale of Goods (usually referred to by its abbreviation CISG and pronounced “sis-gee”)—remains “an under-studied… and somewhat esoteric body of law” among many in the U.S. legal profession.

“It is a sad fact that American commercial lawyers don’t know much about the CISG or tend to ignore it—and do so at their peril,” says Clayton P. Gillette, the Max E. Greenberg Professor of Contract Law at NYU School of Law.

Waking Up to a New Reality

One reason for Gillette’s wake-up call is simple: if the provisions of the CISG are not explicitly excluded, they are by default deemed to be incorporated into contracts pertaining to the sale of most goods between businesses in different nations participating in the treaty. Indeed, those provisions supplant any other governing statutes—state law versions of the Uniform Commercial Code, for example—declared in a contract.

“That is something of which many commercial attorneys are unaware,” says Gillette. “And even if they are aware of it, they’re often not aware of the substantive provisions of the CISG.”

The origins of the CISG go back decades to international efforts to create a widely acceptable legal framework for global trade. In its current form, the purpose of the CISG is to provide a “modern, uniform and fair regime for contracts for the international sale of goods,” according to the United Nations Commission on International Trade Law, which led the development of the treaty that was signed in Vienna in 1980 and came into effect in 1988 after ratification by almost a dozen countries, including the United States.

The CISG governs contracts for the sale of goods between private businesses and excludes sales to consumers, as well as sales of certain specified types of goods, including vessels, aircraft, investment securities and electricity. Still, that covers a lot of what is exported and imported, which partly explains why there are currently 81 parties to the agreement. Countries that have ratified the CISG, which are referred to as “Contracting States,” account for a substantial proportion of world trade—with some significant exceptions.

Major trading countries that continue to balk at joining include India, South Africa and Taiwan. “The UK has still not signed on,” adds Gillette, “and it never will. Lawyers there make a lot of money by virtue of the fact that commercial parties often prefer to choose English law. They want to see those parties continue to do so, rather than abide by an international agreement.”

Malpractice Risk

Lack of familiarity with the CISG may explain why some U.S. attorneys choose simply to ignore it, without sufficient consideration as to how a client’s interests would be served by including it in commercial agreements. But that too is a potentially risky practice, according to Gillette.

In fact, it may be performing a disservice to a client—“to the point of malpractice,” Gillette suggests—given that in some circumstances, provisions of the convention could be more beneficial to one’s client than other applicable law.

“A seller’s attorney may prefer the CISG because it allows the buyer to reject goods only when there has been a serious nonconformity—a ‘fundamental breach,’ in the words of the treaty,” Gillette explains. He compares that with the Uniform Commercial Code, which is more familiar to U.S. attorneys. “The UCC permits rejection for any nonconformity, regardless of how minor it is.”

He adds: “At the same time, a buyer may prefer the CISG because it can be argued that it provides the ability to obtain a decree of specific performance against a recalcitrant seller more readily than the UCC does, for example.”

Time to Get Acquainted

Businesses and legal counsel in other parts of the world have a much deeper appreciation of the CISG, according to Gillette. “Most of the commentary and case law comes from Western Europe,” he points out. “Lawyers working with large to medium-sized companies there are very familiar with it.”

But that disparity could be changing, which Gillette says would be a welcome development. One factor behind such a shift might be the outcome of cases now in arbitration or litigation stemming from the 2008 financial crisis. Many of those cases are just now drawing toward a conclusion, which could result in greater awareness of and attention to the CISG.

“Parties have attempted to get out of long-term contracts on the basis that the crash of commodity prices in 2008 caused such a disruption as to be deemed excused performance,” Gillette says. “There’s debate about the extent to which the CISG provision on excused performance would apply in such circumstances. To some extent, the debate reflects the various domestic laws on whether dramatic changes in market prices can affect the enforceability of a contract.”

For commercial lawyers and counsel with U.S. companies participating in or contemplating expansion into global markets, Gillette’s message is simple and direct: there’s a treaty for that, and as part of an attorney’s duty to give informed advice to clients, it’s time to get acquainted with it.

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