Effective Choice of Law – Understanding UNCITRAL, the U.N. Convention, and Specific Country Codes

1. Effective Choice of Law – Understanding UNCITRAL, the U.N. Convention, and Specific Country Codes Breakout Session # 1 Thomas M. Abbott, Esq., Partner McKenna Long & Aldridge LLPLos Angeles, California April 7, 2003 10-11 am Understanding the possibilities and ramifications for choice of law in contracts that cross borders is critical to the success of contract performance NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

2. INTRODUCTION NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

3. UNCITRAL • UNCITRAL is the United Nations Commission on International Trade Law • The U.N. General Assembly established UNCITRAL in 1966 to remove obstacles to the flow of trade that result from disparities in national laws governing international trade • UNCITRAL is the core legal body of the U.N. in the field of international trade law • UNCITRAL has drafted several uniform rules in specific areas of international trade law including: • International commercial arbitration and conciliation (UNCITRAL Rules of Arbitration and Conciliation) (Allen Green will discuss these issues in a breakout session during the afternoon); and • International sale of goods (U.N. Convention on Contracts for the International Sale of Goods) NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

4. The United Nations Convention on Contracts for the International Sale of Goods • U.N.’s effort to create an international commercial code that will foster world trade by acting as a bridge to improved understanding in business dealings between people from different countries • Also known as the U.N. Convention, the Vienna Convention, and the CISG • Became effective on January 1, 1988 with 11 original Contracting States (including the U.S.) • Presently there are 62 Contracting States, which account for ⅔ of all goods moving in trade (including the U.S., Mexico, Canada, Germany, France, and Russia) NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

5. The Scope of the CISG • The CISG covers: • The formation of contracts for the international sale of goods; and • The rights and obligations of the parties to those contracts • The CISG does not cover: • Issues relating to contractual validity; • Property consequences of a sales contract; • Liability for death caused by a defect in goods sold; or • Contracts that are ancillary to a sales contract, such as distribution agreements, contracts of carriage and insurance, and dispute resolution clauses NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

6. When Does the CISG Apply? • The CISG applies to: • Contracts for the sale . . . • of goods . . . • when the transaction is international • “Contracts for the sale” • Must be a commercial sale • “Commercial” does not include consumer sales for personal, family, or household use • “Sale” does not include leases or licenses • Seller must deliver the goods, hand over any documents relating to them, and transfer the property in the goods • Buyer must pay the price for the goods and take delivery of them • The CISG makes it clear that it covers the contractual aspects of the sale and not the property aspects NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

7. When Does the CISG Apply? (cont’d) • “of goods” • The CISG does not define “goods,” but the term is generally understood to mean “tangible movables” • Does not apply to sales of ships, vessels, hovercraft, aircraft, or electricity • Probably applies to software, although this is uncertain. If the contract is for software, the parties should reach an agreement on the applicable law and include a contract clause specifying the law that will control the relationship of the parties • Does not cover contracts for services (e.g., construction contracts) • If the contract is a mixed contract covering goods and services, the CISG will apply unless “the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.” If the contract is a mixed contract, the parties should reach an agreement on the applicable law and include a contract clause specifying the law that will control the relationship of the parties NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

8. When Does the CISG Apply? (cont’d) • “when the contract is international” • Under the CISG, a contract is international when the seller and buyer have their places of business in different countries and both such countries have ratified the CISG • When there are multiple business locations, the applicable place of business is the one “which has the closest relationship to the contract and its performance” • If the contract is international within the meaning of the CISG, the CISG will apply automatically unless the agreement between the parties specifies otherwise NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

9. Choosing/Opting Out of the CISG • Parties who otherwise would be bound by the CISG can choose to opt out of the CISG • In order to opt out of the CISG, the contract should explicitly • exclude the application of the CISG; and • indicate what law should govern (e.g., Uniform Commercial Code adopted under state law) • Sample clause: “The rights and obligations of the parties under this Agreement shall not be governed by the provisions of the 1980 United Nations Convention on Contracts for the International Sale of Goods; rather, these rights and obligations shall be governed by the law of the State of ____________, including the Uniform Commercial Code as enacted in ____________.” • The facts and circumstances of each transaction should be considered carefully before determining the law that should apply. CONSULT LEGAL COUNSEL. NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

10. Comparing the CISG with the UCC • Key Differences: • Whether a writing is required to hold an offer in the absence of consideration • UCC requires a writing to hold an irrevocable offer open without any exchange for value (i.e., consideration) • Under the CISG, an offer will remain irrevocable so long as: • The other party relies on the offeror’s stated date or time; or • The offeror calls the offer “irrevocable” NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

11. Comparing the CISG with the UCC (cont’d) • Key Differences (cont’d) • Whether a settled price term is required to form a contract • UCC does not require a settled price term for a contract to exist • If the contract does not specify the price term and does not provide for its specification, then no contract exists under the CISG • The contract can refer to a method of determining the price (e.g., refer to a pricing prevailing in a particular market) • The CISG will look to “all relevant circumstances” to determine parties’ intentions with respect to price (e.g., if a buyer send an order for goods listed in a seller’s catalog without specifically referring to price, the buyer’s action alone may imply that he is offering to pay the then current price) NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

12. Comparing the CISG with the UCC (cont’d) • Key Differences (cont’d) • When a contract is created • Under the UCC, a contract is created when the acceptance is mailed or transmitted • Under the CISG, a contract is created when the offeror receives the acceptance • There is not much practical difference, however, because the offeror’s ability to revoke his offer is suspended when the acceptance is mailed or transmitted NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

13. Comparing the CISG with the UCC (cont’d) • Key Differences (cont’d) • Whether the terms of an acceptance can differ from the terms of the offer • The UCC allows a “battle of the forms,” which means that the UCC will find a contract to be formed by an acceptance which differs in immaterial respects from the offer or which merely adds additional terms • The CISG requires that the acceptance of the offer mirror the terms of the offer • Acceptances which do not conform with the terms of the offer generally operate only as counteroffers under the CISG NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

14. Comparing the CISG with the UCC (cont’d) • Key Differences (cont’d) • Whether the formalities of a writing are required to form a contract • The UCC includes a “statute of frauds,” which generally requires contracts for the sale of goods over $500 to be evidenced in writing • The CISG does not require that a contract be evidenced in writing • The CISG permits a contract to be proven by any means, including witnesses NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

15. Comparing the CISG with the UCC (cont’d) • Key Similarities • The express terms of the contract govern • The UCC and CISG are designed only to provide missing terms where the parties have not specified their intentions • Therefore, under both the UCC and CISG, the parties should draft the contract of sale carefully to specify all their rights and obligations • Course of dealing, course of performance, and usage of trade • Under both the UCC and CISG, the intention of the parties will be determined by examining all of facts surrounding the transaction • Emphasis will be placed on the reasonable interpretations of any statements that were made, any practice that the parties may have established between themselves, usages, and any subsequent conduct of the parties NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

16. Comparing the CISG with the UCC (cont’d) • Key Similarities (cont’d) • Revocation of acceptance • Under both the UCC and CISG, the buyer can revoke acceptance of a defective good (i.e., a “lemon”), return the good, and get his money back • The CISG allows a buyer to declare a contract “avoided” (i.e., repudiate the contract) if the seller’s failure to perform amounts to a “fundamental breach” of the contract NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

17. Comparing the CISG with the UCC (cont’d) • Key Similarities (cont’d) • Warranties • Under both the UCC and CISG, the seller creates an express warranty when he agrees to deliver goods of a certain quantity, quality and description under the contract; makes a statement about the goods; or shows a sample or model which possesses certain qualities; • The UCC and CISG also provide for the following implied warranties: • That the goods will be fit for the purpose for which they are ordinarily used; • That the goods will be contained or packaged in the manner usual for such goods, or where there is no such manner, in a manner adequate to preserve and protect the goods; and • That the goods will be fit for any purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the buyer did not actually or reasonably rely on the seller’s skill and judgment NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

18. Comparing the CISG with the UCC (cont’d) • Key Similarities (cont’d) • Notice • Under both the UCC and CISG, the buyer must provide notice to the seller of any lack of conformity within a reasonable time after the buyer has discovered or should have discovered such nonconformity • The buyer loses the right to assert that the seller breached the contract if he does not provide such timely notice • Excuse • Under both the UCC and CISG, a party will be excused from performing a contractual obligation if an event occurs that makes such performance commercially impractical • The event must have been beyond the party’s control and not reasonably foreseeable at the time the parties entered into the contract NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

19. Comparing the CISG with the UCC (cont’d) • Key Similarities (cont’d) • Remedies • The concept for remedies under both the UCC and CISG is to make the damaged party whole, which means putting him in the same position that he would have been in had the other party performed its contractual obligations • Cover • After a seller or buyer fails to perform, both the UCC and CISG permits the damaged party to undertake a reasonable, substitute transaction, and to recover the difference between the contract price and the price in the substitute transaction, as well as any additional damages NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

20. Comparing the CISG with the UCC (cont’d) • Key Similarities (cont’d) • Adequate assurances of performance • Under both the UCC and CISG, a party will be entitled to adequate assurances from the other party if something happens that creates doubt about such performance • If the other party fails to provide such assurances, then the unassured party can cancel the contract NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

21. Comparing the CISG to the Laws of Other Countries that Are Not Contracting Parties to the CISG • United Kingdom – English Sale of Goods Act of 1979 (“SGA”) • Specific performance • Under the SGA, only a court can grant specific performance • Specific performance is an extraordinary remedy under the SGA, granted in very limited circumstances (where goods are “specific” or “ascertained”) • Even if a party prevails on the merits, it is uncertain that an English court will grant specific performance • In contrast, the CISG gives the buyer the option to require specific performance of the seller without having to resort to a court NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

22. Comparing the CISG to the Laws of Other Countries that Are Not Contracting Parties to the CISG (cont’d) • United Kingdom – English Sale of Goods Act of 1979 (“SGA”) • Granting additional time to a defaulting party • The SGA does not provide a remedy which deals with the granting of additional time to a defaulting party • In contrast, the CISG allows a buyer to establish an additional period of time for the seller to the perform its obligations, after which the seller’s continued nonperformance would permit the buyer to repudiate the contract on the basis of a fundamental breach NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

23. Comparing the CISG to the Laws of Other Countries that Are Not Contracting Parties to the CISG (cont’d) • Japan – Japanese Civil Code • Time of formation of a contract • Under the Japanese Civil Code, a contract is formed when the acceptor sends the notice of acceptance (similar to the UCC) • Under the CISG, a contract is created when the offeror receives the acceptance • Validity of a contract • Under the Japanese Civil Code, if the parties could have foreseen that the performance of a contract would be impossible, then the contract is void • Under the CISG, if the parties could have foreseen that the performance of a contract would be impossible, then the defaulting party is considered to have assumed the risk of such impossibility NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

24. Other Considerations • Many consider the CISG to be a neutral body of law and may be more willing to accept its terms. However, many also are unfamiliar with the terms of the CISG • Like other laws, the CISG leaves numerous gaps. Even if the parties choose the CISG to apply to their contract, they also may want to specify the law that will apply to the issues that are not resolved by the CISG • The best protection against uncertainty is to resolve as many potential issues in the contract itself NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders