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Presentation National Contract Management Association

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									 Effective Choice of Law – Understanding
 UNCITRAL, the U.N. Convention, and Specific
 Country Codes
 Breakout Session # 1
 Thomas M. Abbott, Esq., Partner
 McKenna Long & Aldridge LLP
 Los Angeles, California

 April 7, 2003
 10-11 am

 Understanding the possibilities and ramifications for choice of law in contracts that cross borders is
 critical to the success of contract performance

NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders      The Fairmont Dallas, Dallas, TX   1
 INTRODUCTION




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders   2
 UNCITRAL
 •   UNCITRAL is the United Nations Commission on International Trade Law
 •   The U.N. General Assembly established UNCITRAL in 1966 to remove
     obstacles to the flow of trade that result from disparities in national laws
     governing international trade
 •   UNCITRAL is the core legal body of the U.N. in the field of international
     trade law
 •   UNCITRAL has drafted several uniform rules in specific areas of
     international trade law including:
       – International commercial arbitration and conciliation (UNCITRAL Rules of
         Arbitration and Conciliation) (Allen Green will discuss these issues in a
         breakout session during the afternoon); and
       – International sale of goods (U.N. Convention on Contracts for the International
         Sale of Goods)


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                      3
 The United Nations Convention on Contracts
 for the International Sale of Goods
 • U.N.’s effort to create an international commercial code that will
   foster world trade by acting as a bridge to improved
   understanding in business dealings between people from different
   countries
 • Also known as the U.N. Convention, the Vienna Convention, and
   the CISG
 • Became effective on January 1, 1988 with 11 original Contracting
   States (including the U.S.)
 • Presently there are 62 Contracting States, which account for ⅔ of
   all goods moving in trade (including the U.S., Mexico, Canada,
   Germany, France, and Russia)


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders   4
 The Scope of the CISG
 • The CISG covers:
       – The formation of contracts for the international sale of goods; and
       – The rights and obligations of the parties to those contracts

 • The CISG does not cover:
       – Issues relating to contractual validity;
       – Property consequences of a sales contract;
       – Liability for death caused by a defect in goods sold; or
       – Contracts that are ancillary to a sales contract, such as distribution
         agreements, contracts of carriage and insurance, and dispute
         resolution clauses



NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders             5
 When Does the CISG Apply?
 •   The CISG applies to:
       – Contracts for the sale . . .
       – of goods . . .
       – when the transaction is international

 •   “Contracts for the sale”
       – Must be a commercial sale
             • ―Commercial‖ does not include consumer sales for personal, family, or household
               use
             • ―Sale‖ does not include leases or licenses
             • Seller must deliver the goods, hand over any documents relating to them, and
               transfer the property in the goods
             • Buyer must pay the price for the goods and take delivery of them
             • The CISG makes it clear that it covers the contractual aspects of the sale and not
               the property aspects


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                               6
 When Does the CISG Apply? (cont’d)
  •   “of goods”
        – The CISG does not define ―goods,‖ but the term is generally understood to
          mean ―tangible movables‖
        – Does not apply to sales of ships, vessels, hovercraft, aircraft, or electricity
        – Probably applies to software, although this is uncertain. If the contract is for
          software, the parties should reach an agreement on the applicable law and
          include a contract clause specifying the law that will control the relationship of
          the parties
        – Does not cover contracts for services (e.g., construction contracts)
        – If the contract is a mixed contract covering goods and services, the CISG will
          apply unless ―the preponderant part of the obligations of the party who
          furnishes the goods consists in the supply of labour or other services.‖ If the
          contract is a mixed contract, the parties should reach an agreement on the
          applicable law and include a contract clause specifying the law that will
          control the relationship of the parties


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                          7
 When Does the CISG Apply? (cont’d)
 • “when the contract is international”
       – Under the CISG, a contract is international when the seller and buyer
         have their places of business in different countries and both such
         countries have ratified the CISG
       – When there are multiple business locations, the applicable place of
         business is the one ―which has the closest relationship to the
         contract and its performance‖
       – If the contract is international within the meaning of the CISG, the
         CISG will apply automatically unless the agreement between the
         parties specifies otherwise




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders            8
 Choosing/Opting Out of the CISG
 •   Parties who otherwise would be bound by the CISG can choose to opt
     out of the CISG
 •   In order to opt out of the CISG, the contract should explicitly
       – exclude the application of the CISG; and
       – indicate what law should govern (e.g., Uniform Commercial Code adopted
         under state law)
 •   Sample clause: ―The rights and obligations of the parties under this
     Agreement shall not be governed by the provisions of the 1980 United
     Nations Convention on Contracts for the International Sale of Goods;
     rather, these rights and obligations shall be governed by the law of the
     State of ____________, including the Uniform Commercial Code as
     enacted in ____________.‖
 •   The facts and circumstances of each transaction should be considered
     carefully before determining the law that should apply. CONSULT
     LEGAL COUNSEL.


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders             9
 Comparing the CISG with the UCC
 • Key Differences:
       – Whether a writing is required to hold an offer in the absence of
         consideration
             • UCC requires a writing to hold an irrevocable offer open without
               any exchange for value (i.e., consideration)
             • Under the CISG, an offer will remain irrevocable so long as:
                    – The other party relies on the offeror’s stated date or time; or
                    – The offeror calls the offer ―irrevocable‖




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                   10
Comparing the CISG with the UCC (cont’d)

• Key Differences (cont’d)
     – Whether a settled price term is required to form a contract
           • UCC does not require a settled price term for a contract to exist
           • If the contract does not specify the price term and does not
             provide for its specification, then no contract exists under the
             CISG
                 – The contract can refer to a method of determining the price (e.g.,
                   refer to a pricing prevailing in a particular market)
                 – The CISG will look to ―all relevant circumstances‖ to determine
                   parties’ intentions with respect to price (e.g., if a buyer send an order
                   for goods listed in a seller’s catalog without specifically referring to
                   price, the buyer’s action alone may imply that he is offering to pay the
                   then current price)


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                          11
Comparing the CISG with the UCC (cont’d)

• Key Differences (cont’d)
     – When a contract is created
           • Under the UCC, a contract is created when the acceptance is
             mailed or transmitted
           • Under the CISG, a contract is created when the offeror receives
             the acceptance
           • There is not much practical difference, however, because the
             offeror’s ability to revoke his offer is suspended when the
             acceptance is mailed or transmitted




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders          12
Comparing the CISG with the UCC (cont’d)

• Key Differences (cont’d)
     – Whether the terms of an acceptance can differ from the terms
       of the offer
           • The UCC allows a ―battle of the forms,‖ which means that the UCC
             will find a contract to be formed by an acceptance which differs in
             immaterial respects from the offer or which merely adds additional
             terms
           • The CISG requires that the acceptance of the offer mirror the
             terms of the offer
           • Acceptances which do not conform with the terms of the offer
             generally operate only as counteroffers under the CISG



NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders              13
Comparing the CISG with the UCC (cont’d)

• Key Differences (cont’d)
     – Whether the formalities of a writing are required to form a
       contract
           • The UCC includes a ―statute of frauds,‖ which generally requires
             contracts for the sale of goods over $500 to be evidenced in
             writing
           • The CISG does not require that a contract be evidenced in writing
           • The CISG permits a contract to be proven by any means, including
             witnesses




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders            14
Comparing the CISG with the UCC (cont’d)
 • Key Similarities
       – The express terms of the contract govern
             • The UCC and CISG are designed only to provide missing terms
               where the parties have not specified their intentions
             • Therefore, under both the UCC and CISG, the parties should
               draft the contract of sale carefully to specify all their rights and
               obligations
       – Course of dealing, course of performance, and usage of trade
             • Under both the UCC and CISG, the intention of the parties will be
               determined by examining all of facts surrounding the transaction
             • Emphasis will be placed on the reasonable interpretations of any
               statements that were made, any practice that the parties may
               have established between themselves, usages, and any
               subsequent conduct of the parties

NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                 15
Comparing the CISG with the UCC (cont’d)

 • Key Similarities (cont’d)
       – Revocation of acceptance
             • Under both the UCC and CISG, the buyer can revoke
               acceptance of a defective good (i.e., a ―lemon‖), return the good,
               and get his money back
             • The CISG allows a buyer to declare a contract ―avoided‖ (i.e.,
               repudiate the contract) if the seller’s failure to perform amounts
               to a ―fundamental breach‖ of the contract




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International Contract Management—Better Business by Crossing Borders               16
Comparing the CISG with the UCC (cont’d)
 • Key Similarities (cont’d)
       – Warranties
             • Under both the UCC and CISG, the seller creates an express warranty
               when he agrees to deliver goods of a certain quantity, quality and
               description under the contract; makes a statement about the goods; or
               shows a sample or model which possesses certain qualities;
             • The UCC and CISG also provide for the following implied warranties:
                    – That the goods will be fit for the purpose for which they are ordinarily used;
                    – That the goods will be contained or packaged in the manner usual for such
                      goods, or where there is no such manner, in a manner adequate to preserve
                      and protect the goods; and
                    – That the goods will be fit for any purpose expressly or impliedly made known
                      to the seller at the time of the conclusion of the contract, except where the
                      buyer did not actually or reasonably rely on the seller’s skill and judgment




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                                  17
Comparing the CISG with the UCC (cont’d)
 • Key Similarities (cont’d)
       – Notice
             • Under both the UCC and CISG, the buyer must provide notice to the
               seller of any lack of conformity within a reasonable time after the buyer
               has discovered or should have discovered such nonconformity
             • The buyer loses the right to assert that the seller breached the contract if
               he does not provide such timely notice

       – Excuse
             • Under both the UCC and CISG, a party will be excused from performing
               a contractual obligation if an event occurs that makes such performance
               commercially impractical
             • The event must have been beyond the party’s control and not reasonably
               foreseeable at the time the parties entered into the contract



NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                         18
Comparing the CISG with the UCC (cont’d)

 • Key Similarities (cont’d)
       – Remedies
             • The concept for remedies under both the UCC and CISG is to
               make the damaged party whole, which means putting him in the
               same position that he would have been in had the other party
               performed its contractual obligations

       – Cover
             • After a seller or buyer fails to perform, both the UCC and CISG
               permits the damaged party to undertake a reasonable, substitute
               transaction, and to recover the difference between the contract
               price and the price in the substitute transaction, as well as any
               additional damages


NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders              19
Comparing the CISG with the UCC (cont’d)

 • Key Similarities (cont’d)
       – Adequate assurances of performance
             • Under both the UCC and CISG, a party will be entitled to
               adequate assurances from the other party if something happens
               that creates doubt about such performance
             • If the other party fails to provide such assurances, then the
               unassured party can cancel the contract




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders          20
 Comparing the CISG to the Laws of Other
 Countries that Are Not Contracting Parties to
 the CISG
 • United Kingdom – English Sale of Goods Act of 1979 (―SGA‖)
       – Specific performance
             • Under the SGA, only a court can grant specific performance
             • Specific performance is an extraordinary remedy under the SGA, granted
               in very limited circumstances (where goods are ―specific‖ or
               ―ascertained‖)
             • Even if a party prevails on the merits, it is uncertain that an English court
               will grant specific performance
             • In contrast, the CISG gives the buyer the option to require specific
               performance of the seller without having to resort to a court




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                          21
 Comparing the CISG to the Laws of Other
 Countries that Are Not Contracting Parties to
 the CISG (cont’d)
 • United Kingdom – English Sale of Goods Act of 1979 (―SGA‖)
       – Granting additional time to a defaulting party
             • The SGA does not provide a remedy which deals with the granting of
               additional time to a defaulting party
             • In contrast, the CISG allows a buyer to establish an additional period of
               time for the seller to the perform its obligations, after which the seller’s
               continued nonperformance would permit the buyer to repudiate the
               contract on the basis of a fundamental breach




NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                         22
 Comparing the CISG to the Laws of Other
 Countries that Are Not Contracting Parties to
 the CISG (cont’d)
 • Japan – Japanese Civil Code
       – Time of formation of a contract
             • Under the Japanese Civil Code, a contract is formed when the acceptor
               sends the notice of acceptance (similar to the UCC)
             • Under the CISG, a contract is created when the offeror receives the
               acceptance

       – Validity of a contract
             • Under the Japanese Civil Code, if the parties could have foreseen that
               the performance of a contract would be impossible, then the contract is
               void
             • Under the CISG, if the parties could have foreseen that the performance
               of a contract would be impossible, then the defaulting party is considered
               to have assumed the risk of such impossibility

NCMA 3rd Annual Commercial Contract Management Conference
International Contract Management—Better Business by Crossing Borders                       23
 Other Considerations
 • Many consider the CISG to be a neutral body of law and may be
   more willing to accept its terms. However, many also are
   unfamiliar with the terms of the CISG
 • Like other laws, the CISG leaves numerous gaps. Even if the
   parties choose the CISG to apply to their contract, they also may
   want to specify the law that will apply to the issues that are not
   resolved by the CISG
 • The best protection against uncertainty is to resolve as many
   potential issues in the contract itself




NCMA 3rd Annual Commercial Contract Management Conference
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