International Business Advisory – Distribution Agreements Under International Sales Laws
Unless specifically disclaimed by agreement of the parties, most sales contracts entered into by U.S. companies to export or import goods are governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG). With the exception of the United Kingdom and Hong Kong, most of our major trading partners have joined the USA as “contracting states” under the CISG.
As provided in Article 1, the CISG applies to contracts for the sale of goods between parties whose places of business are in different [contracting] states.” A domestic distribution agreement is considered a contract for the sale of goods under the Uniform Commercial Code. However, is an international distribution agreement, which governs the entire business relationship between the supplier and the distributor, a contract for the sale of goods covered by CISG? Most U.S. courts interpreting the CISG say “no.”
These courts have held that the CISG does not apply to distribution agreements because they merely “create a framework for the future sale of goods.” A sales contract under the CISG must specify the quantity (and, explicitly or implicitly, the price) of goods to change hands; distribution agreements usually do not do so.
Although the distribution agreement itself may require the application of one party’s national law, the individual sales contracts to be formed whenever a distributor places a purchase order with its foreign supplier will likely be governed by the CISG unless the parties have expressly agreed to exclude the CISG.
This is yet another reason to consider annexing agreed-upon “terms and conditions of sale” (T/Cs) to the distribution agreement. By establishing such T/Cs of up front, subsequent disputes over issues such as warranty coverage, limitations of liability, recoverable damages, finance charges, governing law and forum selection (among others) may be avoided.
For example, does the buyer have a right to set off against amounts owed the seller on one transaction the sum of credits that the buyer might claim from other transactions where the seller did not deliver as promised? Under Section 2-717 the Uniform Commercial Code, the answer would be “no.” However, if the parties allow CISG to govern the individual sale/purchase transactions occurring within their distribution relationship, then the answer is not so clear and should be resolved by an express provision in the T/Cs.
Are purchase orders issued by the distributor and sales confirmations issued by the supplier required to be in writing? Under the UCC’s ‘Statute of Frauds,’ there must be a writing to memorialize any sale of $500 or more. If the CISG applies, however, a sales contract need not be documented in writing unless so stipulated by the parties. Therefore, it may behoove the supplier to stipulate in the T/Cs that purchase orders are non-binding unless accepted in writing by the supplier.
Suppose there is a written purchase order or sales contract, but either the seller or buyer claims that the parties orally agreed to terms not found in such documents (e.g., product performance criteria or payment terms). Under the “parol evidence rule” normally observed in U.S. courts, evidence of such oral or “extrinsic” understandings would usually not be admitted to define the parties’ contractual intentions as expressed in writing. Article 8(3) of the CISG, however, provides that oral statements are relevant in determining the parties’ contractual intentions, even if there is a written contract. Accordingly, it would be prudent for the supplier and distributor to agree upon T/Cs that spell out their respective rights and obligations on each sale occurring between them — and expressly exclude oral understandings that purport to modify the T/Cs.
We invite your questions and feedback on how the CISG affects your business. Also, please plan to join us for an International Sales Law Webinar covering the CISG and related topics on May 22, 2014 at 12:00 noon EDT. – Chuck McPhillips
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2021.