Choice of Law Provisions in International Transactions

Knowing How to Opt Out of the CISG

Excerpt from The Basics of the CISG by Allison E. Butler, Esq. © 2007.  All Rights Reserved.  Portions of this article were originally published in California International Law Journal, Volume 15, No. 1, 2007.

The choice of law provision or governing law clause of a contract can be relevant regarding what law will govern a contract.  However, if the contractual parties fail to designate a governing law, then issues can arise as to the applicable interpretation of provision or other legal consequences.  This is true for international transaction particularly if both parties are merchants in the sale of goods.  In that case, the United Nations Convention on Contracts for the International Sale of Goods of 1980 (CISG) might govern their contract absent an opting out provision under current U.S. law.

The CISG is a multilateral treaty that governs commercial transactions between signatory countries or contracting states to the CISG.  In 1986, the United States ratified the CISG, which is often referred to in legal texts as the “Vienna Convention,” “U.N. Sales Convention,” “the Convention,” U.N. Commercial Law,” or “the International Sales Law.” Currently, 94 countries have adopted the CISG.  The CISG is a commercial code resulting from various compromises between civil and common law nations regarding international commercial contracts.  Similar to the Uniform Commercial Code (U.C.C.) in the U.S., the CISG contains specific limitations to its application and includes several different legal and contractual concepts.

Overall, the CISG has four parts – Part I – Sphere of Application; Part II – Formation of Contract; Part III – Sale of Goods; and Part IV – Final Provisions.  The CISG does not nullify the terms of a contract between parties; instead, it provides a statutory authority from which contract provisions are interpreted, fills gaps in contract language, and governs issues not addressed by the contract.  Therefore, the terms of the parties’ agreement control provided the parties have addressed the issue. If not, the CISG may be applicable in that case, provided both parties come from Contracting States and concerns the sale of goods.

The CISG terms provide guidance to determine if a contract is subject to the CISG.  Article 1(1) of the CISG states the following:

(1) This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State.

(2) The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract.

(3) Neither the nationality of the parties nor the civil or commercial character of the parties or of the contract is to be taken into consideration in determining the application of this Convention.

Article 1 is often referred to as the “internationality” provision because it provides the nomenclature, which extracts the contract between parties who have places of business in countries that are signatories to the CISG or “Contracting States,” into the realm of the CISG unless the parties have elected to opt out of its application.  However, the application of Article 1 is subject to whether a Contracting State has excluded various applications of the CISG through a Declaration.  The United States, at the time of ratification of the CISG, declared that it was not bound by Article 1(1)(b).  The application of this reservation mandates that under Article 1 (1)(a), courts in the United States must apply the CISG only when the places of business of both parties to the sale contract are each in different States, and both of those states are Contracting States to the CISG.  In general, this means that if a U.S. Corporation enters into a contract with a corporation from Germany, then the CISG would apply to the contract unless they opted out of its application.  In contrast, if a U.S. corporation entered into an agreement with a company from England, then the CISG would not apply because England is not a Contracting State to the CISG.  As with many laws, there are numerous exceptions, and various countries adopted different reservations to the CISG.

As an international treaty, U.S. primary sources of law provide guidance with reference to the application of the CISG.  Notably, the Supremacy Clauseand case law have concluded that absent a sufficient “opt-out provision,” specific contract causes of action were preempted by the CISG.  Therefore, the CISG applies to contracts where the contracting parties are from CISG signatory states, and there is a sale of goods.  In the absence of clear language indicating that both contracting parties intended to opt out, the CISG governs the agreement.

As contractual parties are often concerned with the business terms, it is essential to review the choice of law provision that will govern the contract.  Notably, if both parties are merchants from contracting states to the CISG, such as the U.S., and the contract is for the sale of goods, then the CISG could govern a dispute within a transaction absent an express opt out provision concerning the CISG.

See Sample Opting Out Clauses; for information about the CISG, see United Nations Commission on International Trade Law; see also Institute of International Commercial Law