By Matthew C. Brown, Joseph W. Martini, and Judd Lindenfeld
Over twenty years ago, the Second Circuit remarked that “virtually no caselaw” exists interpreting the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), a newly enacted treaty governing the international sale of goods with uniform rules of contract formation and interpretation. http://iicl.law.pace.edu/cisg/cisg. Today, with over eighty signatory countries, including the United States, more than 3,000 reported CISG decisions are compiled into a searchable database maintained by Pace University’s Institute of International Commercial Law.
Reported decisions now include over 500 international disputes litigated in German courts, over 400 in Chinese courts, and nearly 200 cases from the United States – to name a few. While the CISG has come a long way, the modern business reality remains that commercial parties, sophisticated and otherwise, domestic and abroad, routinely sell millions of dollars of goods through purchase orders, invoices, and boilerplate commercial forms. Indeed, under the CISG, commercial parties in international markets are freed of a formal writing requirement altogether.
What does this mean for attorneys called upon to resolve international contract disputes between commercial parties, manufacturers, distributors, and suppliers? If the CISG applies, counsel may end up litigating generously admitted evidence concerning the meaning of an agreement, among other things. In this article, we explain how the CISG’s approach to core contract principles, including writing requirements, parol evidence, and agreement terms, differs from the Uniform Commercial Code (“UCC”). Additionally, we offer practical suggestions for companies with cross-border disputes governed by the CISG.
The Writing Requirement
A critical distinction under the CISG is that “a contract need not be evidenced by a writing.” The CISG has no statute of frauds unlike the UCC rule requiring “some writing sufficient to indicate that a contract for sale has been made.” Under the CISG, an agreement is formed whenever an offer “is sufficiently definite and indicates the intention of the offeror to be bound.” Acceptance is effective through any “statement … or other conduct … indicating assent to an offer.” Consequently, oral agreements under the CISG benefit from the same protections written contracts receive, regardless of the type of goods transacted or their value.
Is this an attractive feature for businesses involved in cross-border transactions? On the one hand, the lack of a writing requirement allows parties to avoid the tedium and cost of formalizing terms of their agreements. On the other, it leaves the door open for creative arguments that contract negotiations are, in fact, verbal agreements.
Company executives and managers are therefore wise to summarize negotiation sessions in email or memoranda with an eye toward providing the other side with an understanding of what was said and agreed to in a given business meeting. Doing so may limit company exposure, up front, and cabin the possibility of alleged verbal contracts otherwise allowed by the CISG.
The Parol Evidence Rule
Another consequence of the CISG’s lack of a writing requirement is that all relevant information is admissible to prove contract terms even if that evidence contradicts the written agreement. This departure from the UCC’s parol evidence rule prohibiting the introduction of extrinsic evidence to vary written contract terms expands the scope of permissible evidence in international trade. Accordingly, “all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties” are considered when determining the parties’ obligations.
For many businesses, this rule is problematic. It requires investigation into emails, communications, written agreements, and course of dealing for extrinsic evidence that actually contradicts an agreement reduced to writing. Put differently, exhibit and witness lists might grow exponentially in CISG litigation. Fortunately, a potential solution exists in the form of a merger clause limiting CISG tribunals to the “four corners” of an agreement when determining party intent under the CISG.
What happens when the terms of an offer differ from the terms supplied by a counterparty when accepting or confirming the offer? This scenario is common in cross-border transactions. The UCC’s approach to this battle of the forms inquiry, found in its oft-cited § 2-207, construes additional terms as part of a contract unless the offer expressly limits acceptance to the terms of the offer, the additional terms materially alter the offer, or a party objects to the additional terms within a reasonable time after notice of them is received.
The CISG goes one step further. Not only are conflicting material terms read out of the contract, they prevent a contract from forming in the first place: “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.” The CISG’s approach, therefore, “is an embodiment of the mirror image rule” requiring affirmative assent to all material terms before a contract is formed. Commercial parties may, of course, disclaim the CISG’s application to their agreement by affirmatively stating it does not apply.
Many businesses engaged in cross-border transactions are accustomed to having their standard conditions incorporated by reference into their contracts with suppliers, manufacturers, distributors, or other business partners. Does the CISG treat these terms any differently than the UCC?
According to the CISG, “standard conditions are only incorporated if one party attempts to incorporate the standard conditions and the other party had reasonable notice of this attempted incorporation.” In determining reasonable notice, the CISG considers “all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties.” In Allied Dynamics Corp., the court concluded that “a reasonable person” would have been aware of standard conditions attached to an order confirmation even when written in a foreign language. Another court concluded that standard conditions merely directing “the other party to a website which needs to be navigated in order for the standard conditions to be located” is not reasonable notice. Accordingly, companies might benefit from clearly articulated, language specific, notice to their contracting partner that standard terms and conditions will apply to their agreement.
The CISG has covered much territory since its inception. In a complex fast paced global economy, knowing its contours before walking into the negotiation room, or sending a boilerplate purchase order, is vital to limiting company exposure and increasing the chances of successful contracting within international markets.
Joseph W. Martini and Matthew C. Brown are the Co-Chairs of Wiggin and Dana’s Manufacturing Industry Practice Group, where they represent manufacturing clients in the aerospace, industrial, maritime, heavy chemicals, pharmaceutical, and agricultural industries on bet the company and straightforward contract matters. Their manufacturing practice includes resolution of supplier disputes through mediation, arbitration and, where necessary, trial. Among other cases, they have secured injunctive relief before an arbitration panel of retired Court of Appeals Judges from the Second and Third Circuit, and a Delaware Supreme Court Justice. They have also tried to conclusion multi-million-dollar jury and courtside manufacturing claims. Mr. Martini is also the chair of the firm's White Collar Defense, Investigations and Corporate Compliance Group. In this capacity, Mr. Martini has represented manufacturers in government and internal investigations. Judd Lindenfeld is an associate in the firm's Litigation Department. Prior to joining Wiggin and Dana, Judd worked as a litigation associate for Gibson, Dunn & Crutcher, LLP in New York. Judd has represented a diverse group of clients engaged in high-stakes commercial litigation, from companies engaged in complex contract disputes to community groups challenging state and local laws and government actions. He has also represented corporate executives, political figures, professional athletes, and other individuals in federal, state, and local criminal matters.