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Buying and Selling Across Borders
Regina Mundi recommends that clients consider using the United Nations Convention on Contracts for the International Sale of Goods (CISG) when buying and selling across international borders. The purpose of the CISG is to make it easier and more economical to buy and sell raw materials, commodities and manufactured goods in international commerce. Without the Convention, there is greater room for uncertainty and disputes. The sales law of one country often differs from that of another. In international transactions, there is often doubt about which nation's law controls.
Where there is doubt about the rules that apply, the parties cannot be sure of their rights and obligations. The CISG does not apply to contracts to provide services alone. Generally, it does not apply to sales of goods bought for personal, family or household use. The nationality of the buyer and seller, the place where the buyer takes delivery, and whether the goods are to move from one country to another country do not matter.
Unless your contract says that the CISG will not apply or the parties otherwise so indicate, the CISG can apply automatically to your transactions with foreign buyers or suppliers of raw materials, commodities and manufactured goods. The CISG governs contracts for the sale of goods that are between sellers and buyers whose relevant places of business are in different countries that have made the CISG part of their law, called "Contracting States."
The United Nations Treaty Section publishes a list of Contracting States, which is available to subscribers on the Internet. The nations on the list include most of the major U.S. trading partners. They account for over three-quarters of all goods moving in international trade. In addition to the United States, among them are Mexico, Canada, China, Japan, Germany, France, and Russia.
International contracts need to consider the CISG though the parties may contract around terms that are not useful or helpful. For buyers and sellers who have designed their contracting procedures around the law applicable to U.S. domestic contracts, the CISG makes important changes. The CISG makes it easier to become bound by an enforceable contract but it upturns the American historical approach to contracting for goods and materials as incorporated in the Uniform Commercial Code adopted by 49 states (“UCC”).
The CISG differences include:
- An offer is considered “rejected” if the acceptance changes any material terms or uses a different form with materially different terms of any kind (such as arbitration, venue or choice of law terms). The acceptance document also does not form a “counter offer” as would be the case under the UCC.
- A differing acceptance which changes immaterial terms is binding upon the offeror unless the offeror expressly objects orally or in writing to the changes.
- An offer is irrevocable unless a time limit is placed upon the acceptance. An offer may not be withdrawn until that time limit has passed. By comparison under the UCC an offer cannot survive more than 90 days without expiring, and can be withdrawn if not accepted at anytime before the 90 days expire.
- A contract for sale of goods may consist of oral representations and is not required to be in writing for a binding contract to apply to the parties. By comparison the UCC requires a writing of some kind.
- The delivery of non-conforming goods may not be rejected (“avoided” in the language of the CISG) unless the delivery is so substantially wrong that the delivery is a “fundamental breach” of the contract as defined by the CISG. The non-conformity must also be such that the buyer’s use of the product is sufficiently deprived that the deprivation is abundantly clear to the seller and predictable to the seller.
Any terms of the CISG may be expressly contracted around by the parties if using the freedom of contract provisions of the CISG. However, the replacement terms must be specific, express, and unequivocal if the parties intend to supplant or replace the CISG language. If your company relies upon conformity with product assembly, marking, tagging protocols (such as those imposed by large retailers) or if you have a just in time delivery system, then having express terms which address these potential non- conformities as a basis for rejection of delivery is critical to limiting buyer losses and to educating sellers who wish for repeat business.
Buyers who need essential markings on products need to include that requirement in contracts under the CISG. For example, if the buyer sells products to a distributor or a retailer, those products may need a UPC bar code that represents a "Global Trade Item Number (GTIN). All retailers doing scanning of merchandise at the checkout counter will require the buyer to bar code label any merchandise to be sold. Before buyers must receive marked product (using a unique UCC Company Prefix issued by the GS1 US). Sellers who are being asked to delivered marked products should require the proof of a “certificate” which identifies the GTIN as belonging to the buyer before marking the products if entering into a CISG contract.
A trap for unsuspecting sellers exists in the buyer “price reduction” remedies where the delivered product is “non-conforming”. The CISG allows the buyer to unilaterally reduce its purchase price, and if that result is not desired the seller needs to expressly remove that remedy in its contract. A trap for the unsuspecting buyer is the strict timeliness and specificity requirements of the CISG for any complaint about non-conformity. A failure results in a loss of the CISG remedies.
Should a contract under the CISG be breached then there is a companion treaty which governs the amount of time within which the aggrieved party must take legal action. Efforts to cure a breach do not extend the period. Each CISG nation has its own time period either through the laws of the nation or the Convention of the Limitation Period in the International Sale of Goods and the 1980 Protocol thereto. Usually, the period is four years from the date the breach is discovered or notice of breach is given. The facts of the specific breach will govern how the period is measured. In the specific instance of the buyer there is actually a two year period in which to give the seller notice of non-conforming goods or the claim is lost.
As with all laws there are exceptions to the time period and a skilled legal advisor can help a company considering making a claim. Skilled advice is a recoverable cost in some Convention nations but not all. The comparison is readily made between the Commonwealth Nations which follow the British Rule which allows recovery of the costs of a legal dispute from the party which fails to prevail, and the American Rule which provides no cost recovery unless a specific term in the contract calls for such recovery. Other than skilled advisors there are the resources of the International Chamber of Commerce (www.iccwbo.org) which has some forms and rules available for review and use. Please note that the CISG does not provide for alternative dispute resolution or venue so the first party to file an action can determine the location of the lawsuit. If you do not wish to be brought into a foreign court then the contract must expressly provide for the location and type of tribunal which will hear any claims.
In conclusion, the CISG provides an international set of rules for the buyers and sellers of manufactured goods and materials. A company that uses the CISG contract as modified by skilled advisors can better protect itself from foreseen and avoidable problems in international market access. No company can afford a loss, however small, which occurs from a failure to plan or protect. Regina Mundi can provide your business with the skilled advice which will lead you past such avoidable problems.