U.N. Convention Shakes Up International Sales Law

    By Charles V. McPhillips

    In 1986, the United States ratified the United Nations Convention on Contracts for the Intentional Sale of Goods. By 2009, 72 other countries had joined the Sales Convention, including most (but not all) of the United States’ major trading partners. Brazil, South Africa and Great Britain are the most notable hold-outs.

    The Sales Convention applies to any sale of goods between parties whose places of business are in different treaty countries. The nationality of the parties is not controlling. Accordingly, a sales transaction between the Canadian division of a British company and the U.S. division of a Brazilian company would be governed by the Sales Convention as both Canada and the United States are parties to the Sales Convention.

    In any event, the substantial majority of transactions in which an American company purchases or sells goods abroad will be governed by the Sales Convention rather than familiar U.S. domestic law as found in the Uniform Commercial Code. Consequently, it is important for American companies which either buy or sell overseas to know how the Sales Convention changes the legal rules that govern such transactions.

    What are these key differences?

    Oral Contracts. First, except when dealing with parties located in Argentina, Armenia, Chile, China, Hungary, Latvia, Lithuania, Paraguay, Russia and Ukraine (all of which made special declarations when adopting the Sales Convention), the Sales Convention validates oral or other unsigned contracts, regardless of the size of the deal.

    Battle of the Forms. Under the UCC, a buyer can place a purchase order loaded with pro-buyer boilerplate language, and the seller can accept the order in a confirmation loaded with pro-seller boilerplate language, and still form a contract despite the conflicting terms. Under the Sales Convention, however, the offer and acceptance must be mirror images of each other as to all material terms. These material terms include price; payment terms; quality and quantity of the goods; place and time of delivery; extent of one party’s liability to the other; and settlement of disputes.

    Extrinsic Evidence. Under domestic U.S. law, evidence of oral statements or other extrinsic facts usually will not be permitted into evidence if there is a written contact between the parties that purports to state their entire agreement. This so-called parol evidence rule bars evidence of an earlier or contemporaneous oral understanding that would contradict or vary the terms of a written contract between the parties.

    Not so under the Sales Convention. Under Article 8 of the Sales Convention, proof that either party was aware or could not have been unaware of the other party’s subjective intent in agreeing to certain words on paper will be considered in determining the operative terms and conditions of the parties’ agreement.

    Revocation of an Offer. While the UCC as in effect in the United States would allow a party to withdraw an offer at any time prior to it being accepted by the opposite party, the Sales Convention makes an offer irrevocable if the recipient of the offer has taken action in reasonable reliance upon the offer before learning it has been revoked. Thus, if a U.S. importer attempted to withdraw a purchase order that had not yet been accepted by a foreign supplier, that foreign supplier may be entitled to enforce the buyer’s order if it has already incurred costs in sourcing raw materials or producing goods to fill the order.

    Standards of Performance. The UCC implements a perfect tender rule, permitting a buyer to reject products that fail to conform to the contract in any respect. Only if it is found reasonable under the circumstances, the seller may have the right to promptly cure the defect in order to preserve the buyer’s purchase obligation.

    Under the Sales Convention, however, a buyer may cancel or avoid the contract only if the defective performance by the seller amounts to a fundamental breach of the contract. In order to establish a fundamental breach, the buyer would have to show that the seller’s default substantially deprived the buyer of its rightful expectations under the contract.

    In a case of an unfilled purchase order in a transaction governed by the Sales Convention, a buyer might give the seller a Nachfrist notice under Article 47, allowing the seller to complete its performance within a reasonable amount of additional time specified in the notice. Then, if the seller still failed to perform within that additional time period, the buyer would be permitted to cancel the contract.

    Remedies. Lost profits are typically hard to prove or recover under U.S. law. However, the Sales Convention specifically identifies lost profits as an element of damages for breach of contract.

    Likewise, a decree of specific performance (i.e., a court order mandating that a defaulting party perform its obligations under the contract) is a fairly unusual remedy under U.S. domestic law, especially in a sales transaction. By contrast, under the Sales Convention, specific performance is a recognized, ordinary remedy. However, the Sales Convention does stipulate that the court hearing a lawsuit may deny specific performance if domestic law would not entitle the non-breaching party to such a remedy. (Therefore, one might focus on the choice-of-venue provisions under the contract if specific performance is either preferred or anathema.)

    Opt Out. Article 6 of the Sales Convention permits the parties to opt out of the Sales Convention, in whole or in part, by agreement. Since the Sales Convention is a treaty, however, a standard choice of law provision which simply states that the contract will be governed by the law of the Commonwealth of Virginia would, under the Supremacy Clause of the United States Constitution, surprise the drafter (and the drafter’s client) by actually choosing the Sales Convention as the governing law (i.e., as a U.S. treaty, the Sales Convention is part of the Supreme Law of the Land, binding upon the judges in every State). Therefore, in order to opt out of the Sales Convention, the contract should expressly exclude its application in favor of another body of law.

    This article originally appeared in the September 30, 2009 edition of Beyond Virginia and was reprinted with permission.

    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.

    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 2024.