The United Nations Convention on Contracts for the International Sale of Goods – PART 2 What does it mean and how does it affect Texas businesses?

Gus J. Bourgeois, III

January 23, 2012

The United Nations Convention on Contracts for the International Sale of Goods (CISG) is an international treaty providing a uniform international sale law for buyers and sellers of goods with places of business in different Contracting States.  The practical effect of the CISG is that, for example, if you are a business located in Texas and engaged in buying goods from, or selling goods to, a party located in another country that has ratified the CISG (a “Contracting State”), the terms of that transaction are likely governed by the CISG, even if the contract states that the laws of another jurisdiction (such as Texas) apply — unless the contract specifically says that the CISG does not apply. So what are some of the implications of having the CISG apply?

First, consider the statute of frauds, which (as codified by Texas’ version of the Uniform Commercial Code) holds that a contract for the sale of goods with a price over $500 is generally not enforceable unless in writing and signed by the party against whom enforcement is sought. This long-standing bias against the enforceability of oral contracts is reversed under the CISG, which instead holds that a contract for the sale of goods under the CISG need not be in writing. Significantly, under the CISG, contracts for the sale of goods generally may also be amended orally, even if the original contract was in writing, unless the original contract expressly requires written amendment.

Second, consider the “battle of the forms”, for example, when a buyer of goods issues to seller a purchase order with buyer-friendly terms and conditions, and seller issues an acknowledgment of the commercial terms of the order (price, quantity, etc.) backed with a separate set of different (seller-friendly) terms and conditions.  In the absence of any other communication or conditions, seller’s acknowledgement would generally be deemed to be acceptance of buyer’s offer under the Texas UCC, and a binding and enforceable contract would be created. To the extent that seller’s terms and conditions materially differed from buyer’s, the different provisions would be considered to be proposals amending buyer’s initial terms and conditions. Under the CISG, however, seller’s response would be considered to be a rejection of buyer’s initial offer, and a separate counteroffer.  At this stage, either party could “walk away” from the proposed transaction, without obligation.  In the absence of any further communication, if the parties thereafter “perform”, the CISG would generally hold that the performance was pursuant to seller’s terms and conditions, which buyer would have accepted by performance. Thus, in such a scenario, the CISG favors the “last form”, while the Texas UCC favors the “next-to-last” form.

Third, while the CISG provides for many of the same types of damages in the event of breach as does the Texas UCC, the CISG provides an additional “self-help” remedy to buyers of goods. If the goods purchased do not conform to the contract, then the buyer may unilaterally reduce the purchase price in proportion to the non-conformity, even if the full purchase price has already been paid, unless the buyer can cure the non-conformity without unreasonable delay or inconvenience. There is no equivalent to this remedy under the Texas UCC, and obviously the exercise of such a remedy could be quite a surprise for an unsuspecting Texas seller.

While the differences between the CISG and the Texas UCC noted above are illustrative only, they support the idea that a Texas buyer or seller of goods may be better served by disclaiming the application of the CISG entirely. We’ll discuss how and when to do so in part 3 of the article.