1. United Nations Convention on Contracts for the International Sale of Goods (“CISG”)
Matt Bradshaw

2. Important Information
This presentation is similar to any other seminar designed to provide general information on pertinent legal topics. The statements made and any materials distributed as part of this presentation are provided for educational purposes only. They do not constitute legal advice nor do they necessarily reflect the views of Holland & Hart LLP or any of its attorneys other than the speakers. This presentation is not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel. All Presentations and Other Materials © Holland & Hart LLP 2016

3. What is it? History April 11, 1980
Formally ratified by 11 nations in 1986 (including U.S.), became effective January 1, 1988
Purpose
Does Not Apply to:
Sales in which labor or other services constitute a “preponderant part” of the transaction
Economic Value Test; then
Essential Test
Manufacturing contracts where the buyer supplies a “substantial portion” of the materials
Consumer Contracts or Investment Securities, etc.

4. What is it? (cont.) Current State of CISG
“Contracting States” = 84 nations
Contracting States represent more than 80% of all world’s trade

5. What is it? (cont.)
Notable Omissions: England, South Africa, India, Portugal, Ireland, Pacific Islands, portions of Central America

6. What is it? (cont.)
Some variation and exclusions exist between countries, but these are the exception rather than the rule
E.g., U.S. and China have filed an “Article 95 reservation”

7. Applicability Supremacy Clause of the United States
For international contracts between Contracting States (including U.S.), the CISG ALWAYS applies unless expressly excluded or varied:
“This Agreement shall be governed by laws of the State of Idaho.”
“This Agreement shall be governed by the laws of the State of Idaho and Article 2 of the Uniform Commercial Code as enacted in the State of Idaho. Pursuant to Article 6 of the CISG, the parties expressly exclude application of the CISG in its entirety to this Agreement.”

8. Applicability: Where is the business?
Does the counterparty reside in a Contracting State?
2 Hypothetical Scenarios:
Multi-national corporations who may be administratively headquartered in one country but is shipping, receiving or manufacturing product in another country
Assignment of one party from a Contracting State to a Non-Contracting State after some but not all performance in complete
Courts have generally read the “before or at the conclusion of the contract” language of Article 1(2) of the CISG broadly and applied the CISG where in question

9. Applicability (cont.)
GOLDEN QUESTION – Should you want the CISG to apply to your international transactions relating to the purchase and sale of goods?
The answer - “maybe”
The CISG is generally considered to be more seller friendly than the UCC

10. Some of the Differences For Better or Worse …
Battle of the Forms
Non-Conforming Goods
Unilateral Price Reduction
Oral Contracts
Risk of Loss

11. #1: Battle of the Forms “BATTLE OF THE FORMS”
Disputes reach a different result under the UCC (typically pro-buyer) then under the CISG (typically pro-seller).

12. #1: Battle of the Forms Standard Hypothetical:
Step 1: Buyer makes a price inquiry
Step 2: Seller provides price quote (and perhaps some additional terms but generally this is considered to be an invitation to negotiate terms)
Step 3 (the “Offer”): Buyer sends purchase order (“first shot”) with Buyer’s standard T&C (generally contains language limiting acceptance to terms of the PO and objects to any differing or additional terms)
Step 4 (the “Acceptance”): Seller acknowledges the order and provides different T&C. May:
Contain T&C materially different from Buyer’s T&C and/or
Acceptance is conditioned on Buyer’s assent to Seller’s T&C
At This Point: No contract exists, either party can walk away
Step 5: Manufacture and/or Ship (conduct manifesting the existence of contract)
Step 6: Delivery & Acceptance (conduct manifesting the existence of contract)

13. #1: Battle of the Forms (cont.)
Under the UCC: 2-207
2-207(1) Written Acknowledgement (even with additional or different terms) is an Acceptance unless acceptance is expressly made conditional on assent to additional or different terms.
2-207(2) Between merchants “new” terms become part of the contract unless:
Offer expressly limits acceptance to the “original” terms
“New” terms materially alter “original” terms
Previous rejection or rejection within a reasonable time
2-207(3) Conduct creates contract. Agreeable terms between “original” and “new” terms are incorporated, with gap-fillers (also known as default rules) coming from UCC Article 2.

14. #1: Battle of the Forms (cont.)
UNDER UCC: (PRO-BUYER) “Master of the Offer”
Either:
“Knockout Rule” applies and knocks out the additional and or different terms; and
“Material Alteration Rule” Seller’s material terms altered the contract and are not included.
Or:
No written contract was formed. BUT, a contract was formed by conduct and gap-fillers come from the UCC
Result:
In either case, Buyer’s terms (or Buyer friendly terms) are the underlying terms used. BUYER WINS!

15. #1: Battle of the Forms (cont.)
UNDER CISG: (PRO-SELLER)
Article 19: A reply with additions, limitation, or other modifications is considered to be a rejection and counter-offer.
Known as the “Mirror Image Rule”
In the hypothetical, the order acknowledgement becomes a counteroffer which Buyer accepts by taking the goods.
Contract is formed on the Seller’s T&C (“Last Shot Rule”). SELLER WINS!

16. #2: Non-Conforming Goods
UCC:
“Perfect Tender”: Buyer has the legal right to reject goods that fail in any aspect to conform to the contract.
CISG:
“Fundamental Breach”: Buyer may declare the contract voided only if the failure constitutes a fundamental breach.
Logical Conclusion

17. #2: Non-Conforming Goods (cont.)
Additional Side Notes:
Both the UCC and CISG use a “reasonable time” standard for a buyer providing notice of the non-conformity, the CISG has been interpreted to require a quicker response time than the UCC.
CISG mandates more specificity in the notice of nonconformity.
Pro-Seller Result.

18. #3: Unilateral Price Reduction
Perhaps to offset the Non-Conforming Goods rules, the CISG grants Buyers a unilateral price reduction self-help remedy
Under 2-601, 2-711, and of the UCC, a Buyer can reject non-conforming goods, cancel the contract, or seek damages. The UCC would require a lawsuit or negotiated settlement to reach any of these results

19. #3: Unilateral Price Reduction (cont.)
Under Article 5 of the CISG, if the goods “do not conform with the contract the Buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that the conforming goods would have had at that time.”
Pro-Buyer Result.

20. #4: Oral Contract Under UCC 2-201:
Any contract for the sale of goods for the price of $500 must be in writing (Statute of Frauds)
Amendments or modifications must also be in writing
Article 11 of CISG:
A contract of sale need not be concluded in or evidenced by a writing
Many nations (but not the US, nor China) have made a reservation requiring a writing

21. #5: Risk of Loss (Default Rule)
UCC 2-509(1):
If contract does not require delivery to particular destination, risk of loss transfers to Buyer when goods are delivered to carrier
If particular destination is required, Buyer takes the risk when goods are tendered for delivery
CISG Article 31:
If providing carriage (use of third-party carrier), risk of loss transfers to Buyer when goods are delivered by Seller to the carrier
If no carriage, risk of loss transfers to Buyer when the Buyer takes or should have taken over the goods
Note: Dependent on use of a carrier, rather than inclusion of delivery location

22. Tip Sheet/Conclusion
TIP 1: Know what law applies and what law you want to apply
TIP 2: Avoid utilizing form purchase orders and acknowledgements to establish your contracts. Negotiated agreements only!
TIP 3: Utilize an integration clause and avoid oral amendments
TIP 4: Review your existing agreements in order to better leverage your business position

23. Matt Bradshaw mvbradshaw@hollandhart.com 208-383-3976
Questions?
Matt Bradshaw