In 1988, the United States and 10 other countries ratified the United Nations Convention on Contracts for the International Sale of Goods (CISG), which is sometimes referred to as the Vienna Convention. Since then CISG has been ratified by more than 70 other countries, most recently by Vietnam in December 2015. CISG applies to most commercial transactions in which goods are sold by a company in one country (the selling country) to a company in another country (the buying country). When the selling country and the buying country have ratified CISG, then many disputes arising out of the transaction will be governed by CISG, such as whether a contract for the sale of goods was formed, the terms of the contract, whether a breach has occurred, defenses to a claim for breach, and the damages recoverable by the claimant.
In the hypothetical case of a Mexican company selling goods to a company in San Francisco, if a dispute arises out of the sale, the law set forth in CISG will apply, not California law or Mexican law. If California law were applicable, then California's version of Article 9 of the Uniform Commercial Code (UCC) would apply. Article 9 of the UCC sets forth the law governing the sale of goods, and Article 9, in one form or another, has been adopted by most states. But in this hypothetical case, CISG would supersede California's version of Article 9 and a court in California would apply CISG law, not California law, to a claim for breach of the sale agreement.
How does CISG law affect a company's plans to buy or sell goods internationally?
First, determine whether the selling country and the buying country have ratified CISG and the extent of the ratification. Most of the key trading countries in the world have ratified the treaty, with the main exception being the UK. However, some of the ratifying countries have only adopted portions of CISG, so it may be necessary to see which portions of CISG, if any, have been rejected by the two countries.
Second, determine whether CISG applies to the particular transaction. CISG specifically excludes particular sales of goods, such as the sale of goods to consumers, and it excludes the sale of services.
Third, determine whether the provisions of CISG are helpful or problematic given the particular transaction. CISG permits the buyer and the seller to agree that CISG does not apply and that local law of the selling country or the buying country will apply instead of CISG, but there must be a clear agreement rejecting CISG in order for local law to apply.
Fourth, if a dispute arises and CISG applies, then begin the process of analyzing the relevant portions of CISG along with the pertinent provisions of local law to determine the seller's and buyer's legal positions. While CISG was designed to provide a modern and uniform set of legal principles to the international sales of goods, CISG provisions are limited and do not cover many issues that arise in an international dispute. This creates legal complexities which were not the intent of CISG, but they are a CISG reality. When CISG does not provide guidance on a particular issue, then local law will fill in the gaps, and the result is a patchwork of CISG and local law. In the hypothetical above, this means that the California court will apply CISG law along with California's version of Article 9 of the UCC, when California law is necessary to fill in gaps in CISG law.