In the course of fine-tuning purchase contacts for several large Chinese manufacturers, it became apparent to me that most businesses that transact business with foreign manufacturers and exporters are unaware of the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or “The Convention”). By its name, CISG is the global equivalent to the Uniform Commercial Code (the “UCC”), to the extent that each governs the sale of goods as opposed to services; CISG also exempts distribution agreements from its purview.
The Convention took effect in 1988, and it was self-executing, meaning that it became federal law the moment that it took effect, eliminating the need for implementing legislation. Since The Convention is an international code established by treaty, it is superior to any law of its signatory nations; the United States, China, Canada, Mexico, Italy, Spain and Germany are signatories, also commonly known as ‘Contracting States’ [to The Convention]. By virtue of its nearly universal acceptance by most developed nations it is important that you know enough about The Convention to determine which provisions, if any, are acceptable and which ones are not such that one can draft around the unacceptable provisions.
In the United States CISG preempts any state law that governs the rights and obligations of the seller and buyer. However, CISG does not apply to issues regarding the validity of an agreement (e.g, sufficiency of consideration provided or the authority of a party to enter into it) or for claims sounding in tort. Instead, CISG applies to claims concerning delivery, conformity of goods and payment which, incidentally, is an absolute obligation; and the seller is not required to provide any notice or demand for payment. Similar to the UCC, the buyer has both the right and duty to inspect and to timely advise the seller of any defect or nonconforming merchandise and, in turn, the seller’s entitlement to cure is, under certain circumstances, unconditional (e.g., right to cure before arrival of agreed delivery date by substitution or otherwise).
Since sales of goods contracts in modern international commerce invariably involve a third-party carrier to transport the goods, the issue of risk of loss is more complicated. There are three (3) general types of carriage contracts: shipment, destination and transshipment. In a shipment contract, the seller is required to deliver the goods to a carrier designated by the buyer, and risk of loss passes to the buyer upon the carrier’s receipt of the goods. This type of arrangement is most commonly associated with F.O.B. transactions. In a destination contract the seller is required to arrange carriage of the goods and deliver them to the destination of buyer’s choice. This type of arrangement is most commonly associates with C.I.F. transactions. In a transshipment contract, the seller is required to deliver the goods to a specific vessel or vehicle (as opposed to a carrier) that will further carry the goods to the buyer; here, the seller retains risk of loss until it delivers the goods to the designated vessel or vehicle. This is another type of arrangement most commonly associated with F.O.B. transactions.
To the extent that your business may want to opt out of some, or all, of the CISG provisions, it is imperative that you do so affirmatively by employing clear exclusionary language stating that CISG does not govern the contract; otherwise, there are likely to be instances where the application of CISG is unavoidable.