X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
International contracts for the sale of goods have become commonplace as advances in transportation and technology have created a truly global marketplace that continues to expand. Businesspeople are feeling more comfortable with international sales contracts, but this comfort only increases their business risks because of the presence of hidden dangers. Most Americans and other businesspeople have only been educated or trained in the local contract law of their area, but most international sales contracts are governed, at least in part, by international law. For example, American-trained businesspeople generally feel comfortable if they understand the Uniform Commercial Code and domestic contract law. As recent court decisions show, this has led them to make major blunders in their international sales contracts, since international law creates contractual results that are exactly the opposite of what American contract law would do. The most significant danger posed by international sales contracts is that, under international law, many oral contracts for the sale of goods are fully enforceable in the same manner as written contracts. This defies the knowledge and expectation that have become second nature to many businesspeople throughout the world who believe that a sales contract for goods must be in writing to be enforceable. Americans, in particular, have learned that contracts for the sale of goods are not enforceable unless they are in writing or are for an amount below $500. This is called the “statute of frauds,” and it is part of the Uniform Commercial Code and U.S. case law. Similar rules exist in many other nations. Unfortunately for Americans and for businesspeople trained in the United States and in other nations requiring written contracts, these rules do not apply to international sales contracts. Most nations today have joined the modern trend toward enforcing oral sales contracts. The most significant development supporting this trend is the Convention on Contracts for the International Sale of Goods, which is the primary international agreement governing international sales contracts. NO LEGAL DIFFERENCE The CISG provides that oral international sales contracts must be given the same legal effect as written sales contracts. There is no legal difference between these two types of contracts under the CISG because the CISG takes the extraordinary step of saying that there are no “form” requirements for sales contracts to be enforceable. Since a writing is a matter of form (as is a seal, a certification or a notarization), this allows businesspeople to enter into oral sales contracts with the assurance that they will be enforceable. See Article 11 of CISG; and Calzaturificio Claudia s.n.c. v. Olivieri Footwear Ltd., 1998 U.S. Dist. LEXIS 4586 (S.D.N.Y. April 7, 1998). It is important to comprehend the full significance of the CISG’s acceptance of oral sales contracts and the extremely different results it has compared to the UCC. If a company wants to purchase goods worth $500, $1 million, $1 billion or any greater amount, businesspeople who work in the United States believe that the contract must be in writing and that there is no dollar limit to the enforceability of such written contracts. If contracts for these amounts are made orally they would not be enforceable under the UCC. However, they would be enforceable under the CISG. There is no dollar limit to the enforceability of oral sales contracts under the CISG, so oral contracts are enforceable for a few dollars and for billions of dollars. An American-style businessperson will believe that he cannot enforce oral contracts that he has made, so he may prematurely abandon them and lose the benefit of the deals he has made. He will also believe that the other party cannot enforce such oral contracts, so he will feel free to abandon other oral agreements without being aware that he is contractually liable. AUTOMATIC APPLICATION The dangers arising from oral contracts under the CISG can be insidious because, like the UCC, the CISG can apply automatically without warning to the parties. The rules for determining when the CISG applies are somewhat convoluted but well-defined. The following examples illustrate these rules. In all contract situations, a businessperson should first determine which law will apply. Under the CISG (and under the UCC and most other laws), the parties can choose which country’s law will apply to the contract, and whether a specific code such as the CISG, the UCC or any other contract law will (or will not) apply to the contract. If the parties fail to decide which specific code of law applies, they may still agree that a particular nation’s law applies. This will facilitate the CISG question to some degree by making clear which nation’s law governs the contract, so that the only question remaining is whether that nation’s law requires the CISG to apply. If they fail to make these decisions, international choice of law rules will apply to determine which nation’s law will apply. Generally, the nation that has the closest relationship to the contract and its performance will be the nation whose law shall apply. Hence, if a contract is negotiated in Germany to produce items for a sale that will take place in Germany, German law should apply. WHEN DOES THE CISG APPLY? Once one determines which nation’s law would apply to the contract, one must ask whether that nation has adopted the CISG. If so, one must use specific CISG rules to determine whether this nation’s law would apply the CISG under the given circumstances. If both parties are from CISG nations, the CISG applies in the form adopted by the nation whose law applies to the contract. See Filanto, S.p.A. v. Chilewich Int’l Corp., 789 F.Supp. 1229, 1237 (S.D.N.Y. 1992). So, if a company in Munich, Germany and a company in New Jersey make an international sales contract under circumstances causing German law to apply, the CISG as adopted by Germany will apply to the contract and an oral contract would be enforceable. (German commercial law would apply to all other aspects of the contract that are not covered by the CISG.) If U.S. law had applied, the U.S. version of the CISG would apply, an oral contract would be enforceable, and the laws of New Jersey (including the UCC) would cover whatever aspects of the contract that are not covered by the CISG. Note that the U.S. version of the CISG is virtually identical in substance to the German version. See Mitchell Aircraft Spares, Inc. v. European Aircraft Service AB, 23 F.Supp.2d 915 (N.D. Illinois 1998). One significant difference between the U.S. version of the CISG and the version adopted by nearly all other CISG nations relates to the applicability of the CISG if only one party to the contract has its place of business in a CISG nation. Nearly all CISG nations have agreed that if one party to the contract is in a CISG nation whose law applies to the contract (e.g., Germany), and the other party is in a nation that does not recognize the CISG (e.g., the United Kingdom), the CISG will apply and will be enforced as part of the CISG nation’s domestic body of law. The United States has rejected this majority position and has adopted the CISG with the reservation that the CISG will not apply to contracts involving a party in the United States if only one party is in a CISG nation. Therefore, if a party in New Jersey makes an international sales contract with a party in a nation that has not adopted the CISG (e.g., the United Kingdom), and New Jersey law applies, the CISG will not apply because the U.K. has not adopted the CISG. In such event the New Jersey version of the UCC would apply and a written contract would be required for amounts of $500 or more. (Note that if the U.K.’s law applied to this contract, the CISG would not have applied since the U.K. has not adopted the CISG, but an oral contract would be enforceable because U.K. law allows oral contracts.) If neither party is in a CISG nation, the CISG can be applicable only if the parties have agreed that it will apply or, in very rare instances, if a court applies the CISG unilaterally for lack of a more appropriate law to govern the circumstances. It is also important to know the rules that establish other prerequisites for the CISG to apply to a particular agreement. The CISG can apply only if the parties are in different nations since the contract must be an “international” contract. The contract also must be a “goods” contract, not a contract primarily for the sale of securities, services, intellectual property or any other matters. If such non-goods matters are involved in the contract, the CISG would apply if the primary nature of the contract is for the sale of goods (e.g., the sale of goods with a particular logo design on them). Also, the CISG applies only if the parties are businesses and does not apply to contracts made by consumers. UNLIMITED FIRM OFFERS The CISG’s enforcement of oral contracts affects another important area of sales law, the “firm offer.” Under the law of the United States and many other nations, consideration (value) must be exchanged by both parties before an enforceable contract can be created that will bind both parties. Consideration usually is given in the form of enforceable promises (e.g., I promise to buy and you promise to sell) because enforceability provides value to the promises. Often, however, a merchant offers to be bound by his offer even though the recipient of the offer is not bound. This is called a “firm offer.” The UCC provides that firm offers are enforceable if they are made in writing and signed by the offeror, even if they lack consideration. Under the UCC, a firm offer can be to buy or sell goods under specific terms for a stated period of time, or for a “reasonable” unstated period of time (neither of which may exceed three months). In such cases, the firm offer is irrevocable until the applicable period expires (or the offeree rejects the offer). The CISG also allows firm offers to buy or sell goods, but it dispenses with the UCC’s restrictions. The CISG’s firm offer can be completely oral. Also, there is no time limit. The CISG allows an oral, unlimited firm offer to exist (i) where the offeror states that his offer is irrevocable or (ii) where the offeree reasonably relies on the offer as being irrevocable. The UCC has conditioned businesspeople to feel assured that a firm offer must be in writing, and signed, and that it cannot last more than three months. U.S. businesspeople believe that if the law of New Jersey applies, they can rely on these assurances. However, if they contract with a firm in Germany, none of these assurances will apply under New Jersey law because the U.S. version of the CISG allows firm offers to be made orally, for an unlimited period, and even on the mere reasonable reliance of the offeree. Yet even if they learn the CISG’s firm offer rules, they must deal with another confusing twist — if the other party is from the U.K. or another non-CISG nation, the CISG rules do not apply, and the UCC’s written three month rules apply once again. This twist is caused by the U.S. decision to apply the CISG automatically only if both parties to the contract are from CISG nations. Adding to this confusion is the fact that if the New Jersey businessperson is transferred to Toronto, Canada (a CISG nation), and Canadian law applies to the firm offer, the results would be different from those in the United States. Since Canada allows the CISG to apply even if only one party is from a CISG nation, the CISG oral and unlimited firm offer rules would apply to an offer involving a German (CISG) company, a U.K. (non-CISG) company or any other foreign company. REQUIRING WRITTEN CONTRACTS Confusion related to oral contracts for the international sale of goods does not end here, however. The CISG also allows a CISG nation to prevent the oral contract rules from applying to contracts involving a party from such nation. A nation can do this when adopting the CISG by simultaneously declaring that the oral contract rules do not apply to contracts involving a party from this nation. The People’s Republic of China, the Russian Federation and a few other nations (primarily former Soviet Bloc nations) have made this declaration. This adds a very strange quirk to the analysis of whether an oral contract will be enforceable. Obviously, companies in Russia, China and other declarant nations that require written contracts will find this situation most comfortable. If a business in Russia is contemplating an international contract with a business in another CISG nation (i.e., Germany), the business in Russia can rest assured that oral contracts will not be allowed by the CISG. This situation is very confusing for the businessperson in the United States. A businessperson in a U.S. location knows that oral contracts are not allowed if the other party is in New Jersey (since the UCC applies regardless of whose law applies). However, oral contracts are allowed if the other party: is from Germany (the CISG applies regardless of whose law applies); is in the U.K. and U.S. law applies (the United States does not apply the CISG unless both parties are in CISG nations); is in the U.K. and U.K. law applies (the U.K. allows oral contracts, even though it does not recognize the CISG); is from Russia or some other CISG nation that has declared the oral contract rules to be non-applicable; or is from Russia and the Russian business establishes a proper location in Germany, Canada or any other CISG nation that allows oral CISG contracts and the Russian company contracts with the U.S. company from this other location. One can easily imagine many other nuances and twists from the oral contract rules and exceptions. Although the rules discussed herein are very helpful when trying to analyze whether specific oral contracts are binding, management should ensure that its negotiators understand that the best course of action is to resolve these questions before they become issues. This can be done very easily by using the wide freedom granted by the CISG, the UCC and the laws of other nations to choose the law that is applicable to the contract. A simple but explicit sentence or clause stating that the CISG will or will not apply to the contract, or that oral contracts or oral firm offers will or will not be allowed by the parties, will resolve many of the risks arising from oral contractual obligations. Management should encourage its negotiators to resolve such matters up front. It is also important for them to know that such written clauses in letters, side agreements or other writings can become part of larger oral agreements to the extent the parties have allowed this. Even when it is impossible to achieve a written understanding about the CISG, applicable law or oral contract rules, management negotiators should be encouraged to reach an oral agreement as to such matters. If this is not possible, they should state their position as to these matters orally. Such oral agreements and statements can be admissible in court through witness testimony, tape recordings and other forms of evidence. All such oral agreements or statements should be followed promptly with a written confirmation. The authors are solo practitioners, Manna in Brooklyn, Sabino in Manhasset, N.Y., and Wander in Metuchen, N.J. Manna is a professor at St. John’s University, Sabino is as associate professor and Wander is an assistant professor. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.