UCC and CISG

In the early 1950s the Uniform Commercial Code ("UCC") was created in the United States. Every state in the United States has adopted the use of the UCC. Article 2 of the UCC governs the sale of goods. In 1980 the United Nations enacted the United Nations Convention on Contracts for the International Sale of Goods (CISG). CISG has been adopted by seventy-six countries including most of the major trading countries. Major exceptions are the United Kingdom, Ireland and Brasil. Many countries also have their own statutes or laws regarding the sale of goods between companies.

If you write a contract with a U.S. company and the applicable law is any state but Louisiana, the UCC will apply unless you opt out of having the UCC apply. CISG does not apply to domestic sales within a country. CISG only applies to international sales. If you write a international contract and both parties are in countries that have adopted CISG, CISG will apply unless the agreement specifically disclaims the CISG from applying.

For example, if the parties do not agree to the contrary, a commercial sales agreement between a business in Chicago and one in Toronto would automatically be subject to its provisions. If they agree to exclude CISG from applying:

·       They could agree U.S. law where the UCC would apply.

·       They could agree upon Ontario law, where the Ontario sales laws would apply.

·       They could agree to have the laws of another location apply. This is done when that other location may be more favorable to the specific type of transaction or may have more law or case law on the subject.

In the U.S, the scope and impact of CISG depends upon whether it is purely a domestic sale or international. For domestic U.S. sales CISG does not apply. For international sales the impact is significant, as use of CISG would replace UCC Article 2. Many U.S. companies opt out of using CISG, preferring to use the familiar UCC where there is substantially more case law.  As most purchase orders of U.S. Companies are drafted relying upon the protections of the UCC, if you will use your purchase order form for international purchases, the purchase order terms should also opt out of CISG.

In foreign transaction whether CISG should be used will depend upon a number of factors because there are differences between CISG and the UCC and there will be differences between CISG and local sale of goods laws.

For example, here are a few differences between the UCC and CISG,

	UCC	CISG
Applicable transactions	Applies to both consumer and commercial transactions	Specifically excludes consumer sales from its provisions
Coverage	Sale of goods	Excludes goods purchased at auction, securities, aircraft, ships, electricity, and service contracts.
Statute of Frauds	Requires writing over $500	Writing not required
Requirements of contract	Mutual assent, consideration, legal capacity, legal purpose.	Not directly concerned with validity of the contract
Offer & Acceptance	Modifications in acceptance are counter offer.	Modifications are counter-offer, unless they do not materially alter the terms and are not objectionable to the offeror. Requires offeror to object verbally without undue delay, or terms become those of the offer, as modified by the acceptance.
Breach	Buyer has the right to terminate when the seller has breached a "condition" of the sale, no matter how minor.	Allows the seller who fails to perform on time, or who delivers nonconforming goods, to correct the performance as long as it does not cause the buyer an unreasonable delay or inconvenience.
Withholding shipments	Unless authorized by the contract, Seller has no right to withhold delivery simply due to fear of non-payment.	If seller provides notice, they may suspend delivery or prevent the release of goods if buyer may not have the ability to pay for the merchandise. Seller must deliver if the buyer then provides adequate assurance of payment.
Price reduction for non-conforming goods	Would be addressed as damages for breach	Allows buyer the right to reduce the price in the same proportion as the decrease in the value of the goods.
Damages	Includes incidental and consequential damages. Consequential damages are limited to those that could not be reasonably prevented.	Includes lost profit that the other party foresaw or should have forseen.

When might the use of CISG make sense for U.S. based companies? The first thing you would consider is whether the country you are dealing with has adopted CISG. If they have not it would not automatically apply as it will only automatically apply to transactions between countries that have adopted CISG.  If the buyer or seller are from countries that haven’t adopted it, it doesn’t automatically apply although the parties could mutually agree to have CISG apply.

If you were doing an international transaction with a supplier that was unwilling to agree to have U.S. law be applicable to a transaction, you would need to get local guidance on which approach will better protect the buyer. Will it be local sales laws or CISG?  A problem with having CISG apply for a buyer or seller that is located in a country that has not adopted CISG is since it hasn’t been adopted there will be no local case law governing its interpretation. If CISG was determined to be the better alternative than local sales law, you could always agree to have the applicable law and jurisdiction become a third country that has adopted CISG.

My own opinion of CISG is I feel that it is more favorable to sellers than buyers.

Want to learn more? The companion book "Negotiating Procurement Contracts - The Knowledge to Negotiate" is now available on Amazon.com.