Using the new international sales rules
If you sell products overseas, you’ve probably realized that the current economic downturn makes competition for buyers fiercer than ever. You’ll rapidly lose revenue and market share if you don’t cater to the expectations of global customers.
But beware — contracting rules for international sales are quite different from those in the United States, and your failure to appreciate those differences can lead to expensive consequences.
Product sales between U.S. businesses are governed by the Uniform Commercial Code, or UCC. These rules are so ingrained that its concepts have been incorporated into most standard business forms, including purchase orders, acknowledgments, shipping documents and invoices.
Outside the United States, the UCC is largely unknown. In an effort to standardize international commercial terms, the United Nations created a set of contracting rules called “The United Nations Convention on the International Sale of Goods” (CISG), which is intended to govern sales of goods between parties located in different signatory countries, which include nearly all major trading countries, including the United States.
In the United States, the CISG has the force of federal law and supersedes UCC-based state law. Thus your international product sale may automatically be governed by the CISG if your buyer is located in a signatory country, even if your PO or contract tries to use a different law.
Although you can opt out of using the CISG or negotiate changes to its terms, it is now the preferred set of international commercial rules. Your competitors are using it, your foreign customers expect it and you’ll lose business if you insist on using U.S. law.
Hazards of CISG
Unlike U.S. law, under which certain agreements must be in writing to be enforceable, CISG allows verbal contracts or modifications, regardless of the price of the goods. Additionally, any evidence can be used to prove the parties’ intent, even if it changes the terms of a written contract. Thus, pre-contract negotiation materials, such as proposals, MOUs, term sheets or letters of intent, can be used as evidence to show what you intended, even if the final contract contains different terms. You can minimize these risks by including a statement in all pre-contract documents that no representations were made that were not incorporated into the pre-contract document and that the pre-contract document will be superseded and extinguished by the final written contract executed by both parties.
You also can insert a provision in the final contract stating that all pre-contract discussions and documents are superseded and extinguished by the written contract executed by the parties which cannot be modified except by a writing signed by the parties.
Also under the CISG, a buyer cannot reject delivery unless the goods are substantially non-conforming and, even then, the seller has the right to attempt to correct the problem.
But the buyer can (and frequently does) unilaterally reduce the purchase price for minor discrepancies regardless of the price stated on the contract. This reduction can be made even after the buyer has already paid for the affected goods.
Thus, a buyer may be looking for a minor non-conformance in order to take advantage of this remedy, particularly where currency fluctuations make the market value of the delivered goods less than the contract price.
If the buyer won’t agree to delete this right from the contract or limit it to major non-conformance, you can mitigate your risk by specifying an acceptance time period, requiring the buyer to notify you in writing of any non-conformance within that period. You also can require the buyer to provide rationale substantiating the amount of any price reduction.
Under the CISG, firm offers can be verbal and do not need to be supported by consideration. To alleviate the obvious risk, all your offers, proposals, bids and quotes should be in writing and include a statement that they are revocable and subject to modification prior to buyer’s acceptance. If you intend for an offer to be irrevocable (for example, in a sealed bid) be sure to specify the time period for which the offer will be irrevocable.
You can’t effectively opt out of CISG simply by including a statement in your documents rejecting the buyer’s law and/or selecting U.S. or New Hampshire law. The opt-out clause should state that CISG will not apply to the agreement, specify which laws will govern the agreement and state that the selected law will govern without regard to its conflicts of laws rules. You must include all three to assure an effective opt out.
While the CISG has been hailed as the most effective set of commercial rules in history, using it effectively takes practice.
Julia Schappals is a Bedford attorney. She can be reached at 603-472-3365.