International Sales Contracts: Common Myths And Misconceptions, Part V


by Keith Larsen

Larsen, Keith
klarsen@mcgrathnorth.com
(402) 341-3070

It seems that U.S. parties tend to misunderstand, or simply fail to consider, the legal implications of entering into international sales transactions.  We have sometimes seen this evidenced by parties using the same form of purchase order (or sales confirmation) for both domestic and offshore dealings, without realizing the differences that might exist between the two types of transactions.  Following is the last installment in a multi-part series that is intended to set the facts straight on several myths, misconceptions and potential traps involving international sales.

Myth #5:  U.S. sales laws – whether federal or state – are similar and much preferred over “international” law.  As discussed in Part IV, state sales laws generally consist of the Uniform Commercial Code, while the United Nations Convention on the International Sale of Goods comprises federal sales law.  This “Sales Convention” is, in fact, a prime example of international law, having now been signed and ratified by over seventy countries.  So, once again, if the idea is to avoid international law, then stick with state law – the UCC – and disclaim the Sales Convention.

Let’s consider, however, whether this approach always make sense.  While familiarity with one’s own state law might raise your comfort level, it does not necessarily make that law the better choice.

A notable difference is that under the UCC, a buyer is entitled to reject goods that fail to comply with the contract in any respect.  This “perfect tender” rule, applicable in a one-time sale, means that a buyer can refuse the goods and cancel the contract even when the nonconformance is insignificant.  (Consider how useful this approach might be to a buyer when the market price has dropped after the original sales contract was formed.)  By comparison, the Sales Convention makes rejection/cancellation of the contract more difficult.  A buyer can void a contract only if the nonconformance constitutes a “fundamental breach” of the transaction.  That is, only if the buyer has been impaired so as to “substantially deprive him” of his contractual expectations, and if that result was reasonably foreseeable to the seller.  From this standpoint, the Sales Convention offers the preferred approach if you are on the selling end of the transaction.

It is worth mentioning that the UCC and Sales Convention also diverge when the formation or terms of a contract are in question.  A good example involves the different approaches taken by the UCC and the Sales Convention in resolving the “battle of the forms”.  Under the UCC, when a sales confirmation or order acknowledgment contains material terms that are different from those in the original purchase order, a contract is created but those different terms are excluded.  Under the Sales Convention, however, no contract exists.  The confirmation will instead be considered a rejection and counteroffer because it did not mirror the original proposal.  Yet another example involves contracts having a sales price of $500 or more which must, under the UCC, be in writing in order to be enforceable.  The Sales Convention, in contrast, requires no writing and oral contracts are generally allowed.  (Keep in mind that some signatory countries have made declarations or reservations as to the scope of the treaty, so certain deviations may exist from country to country.  Refer to http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html for a list of signatories and their declarations and reservations.)

The bottom line is that differences do exist between state (UCC) and federal (Sales Convention) sales laws.  It is wise to understand these differences and use them to your advantage as a buyer or seller in an international transaction.

Conclusion.  It should be evident from this series that overseas sales transactions can, for a host of reasons, differ significantly from sales within the U.S.  These differences often present unique risks from legal as well as business standpoints.  The good news is that these risks can be addressed up front in the sales contract so long as they are recognized and understood.

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