June 15, 1984

June 15, 1984 | Backgrounder on International Organizations

Why Congress Should Be Wary of the U.N. Convention on theInternational Sale of Goods

(Archived document, may contain errors)

361 I June 15, 1984 WHY CONGRESS SHOULD BE WARY OF THE U.N. CONVENTION ON THE INTERNATIONAL SALE OF GOODS INTRODUCTION Next week the Senate Foreign Relations Committee will con sider whether to refer the United Nations Convention on Contracts for the International Sale of Goods (CISG) to the Senate for ratification. conference convened in Vienna in 1980, and was based almost completely on a draft provided by the U.N. Commission on Interna tional Trade Law (UNCITRAL). A non-permanent U.N. body, UNCITRAL was established by the U.N . General Assembly in 1966 to prcmote the Ilprogressive harmonization and unification of the law of international trade. I The convention was produced by an international The Convention's purpose is to simplify contracts for the international sale of goods by subjecting them to a single uniform law, and to eliminate wrangles over which particular national law should apply to an international contract. The Convention has a history dating back to the 1930s predecessors, the 1964 Hague Conventions governing th e interna tional sale of goods, were not signed by the United States and were subject to considerable American criticism. Fifteen years ago, UNCITRAL formed a IWorking Groupll to study and revise these conventions, which resulted in the current U.N. Conven tion in 19

80. While the negotiations leading to the Vienna diplomatic conference and the conference itself, which produced the Conven tion, all occurred before the Reagan Administration took' office the promise offered by the CISG of clarity and uniformit y in the law of international business transactions has won the support of the White House, State Department, many prominent legal practi- tioners and scholars, and several major corporations Its immediate There are serious problems with CISG, however, wh i ch the Senate should consider before voting on it. The harmonization of 2 world commercial law is a highly desirable pr0cess.l tion of the Convention's rigid and conceptual approach to codifi cation of international contract rules will not achieve this Bu t adop While most buyers and sellers in domestic markets today engage in trade with international aspects, the Convention's approach of creating separate legal rules for domestic and international transactions will complicate the lives of businessmen rathe r than make them more simple or harmonious small buyers and sellers who are unlikely to have specialized legal counsel, the CISG will complicate matters by presenting them with two basic sets of legal rules where now only one applies produced by representa t ives of widely disparate legal, economic and social systems. As such, real problems had to be buried or fudged" in verbal formulations which are claimed to be "compro mises but in reality perpetuate their essential di~agreement This means that problems of interpretation abound, and courts sitting in the myriad jurisdictions of the world cannot-be ex pected to achieve uniform interpretation of Convention provisions.

Even within a single jurisdiction, significant time will elapse before case law--in those co untries where case law has any inter pretative value--provides a full judicial interpretation of the Convention From the perspective of Another problem with CISG is that it is a consensus document Of further significant concern is the propriety of preempt ing through U.N. treaty the role of states in regulating international contracts. This is, in effect, what Senate ratification of the CISG would achieve.

The U.S. Senate should not ratify this Convention until all the many significant concerns of the Treat y's critics have been adequately answered SEVEN MAJOR CONCERNS WITH CISG Among the specific concerns raised by international legal experts are 1) CISG is the first use of the treaty power under the U.S.

Constitution to reform U.S. private law. The Senate should consider whether domestic private law reform--in contrast to Statement by Professor Arthur Rosett, University of California at Los Contracts for the International Sale of Goods, Submitted to the United States Senate Committee on Foreign Relations, for hearings on April 4 Angeles, Regarding Ratification-of the United Nations Convention on 3 public law reform--should.be accomplished by the use of a treaty or, as a political matter, be done only by both houses of Congress.

Ratification of this Treaty will allow it to preempt all federal and state law, in particular the Uniform Commercial Code (IJCC).

The Code is a model law governing, among other matters, the sale of goods between contracting parties It was adopted by 49 U.S states, with certain statutory variations, by 19

67. Since Arti cle VI of the Constitution provides that treaties are part of th e supreme federal law of the U.S CISG, if ratified, would preempt state contract law and replace the Uniform Commercial Code in governing international sales contracts to which U.S. law applies.

There are several areas in which the CISG diverges significa ntly from the Uniform Commercial Code, particularly in the areas of breach of contract, damages, warranties, material differences of contractual conditions Itgood faith, I' and "excuse/force majeure 2 cable to a sales contract concluded and wholly perform e d within the United States. The only qualification is that the parties must have places of business in different nations it is not even required that they be their principal places of business It seems strange to make a sale of goods that is entirely nego tiated and performed in the U.S with delivery and payment in the U.S., subject to a law other than the law of a state of the United States--simply because the buyer has a place of business which could be his principal place of business--in Buenos Aires or Paris It seems even more strange if, as is sometimes the case, the goods remain, and are intended to remain, in the United states Under Article 1 of the CISG, the Convention would be appli 3) The proposed rules of the U.N. Convention will govern private r ights and obligations of U.S. exporters and importers contracting with parties in any country which has also ratified the Convention.

Provision is made for the parties to !'opt out of the Convention's legal rules, but only if both parties agree. Since 90 p ercent of U.S. foreign trade transactions are in the form of non-negotiated contracts, they will be brought under the umbrella of the U.N Convention. The opportunity to Itopt out will be the exception rather than the rule 4) The U.N. Convention is designe d to harmonize--but not make uniform--some of the rules of sales law in international trade.

CISG would fail to do this for two main reasons: first, the Responses of Frank A. Orban, 111, Esq International Counsel, Armstrong World Industries, Inc to Questio ns on the U.N. Convention on Contracts for the International Sale of Goods, Submitted by the Senate Foreign Relations Committee, May 1984.

Statement of Dr. Harold J. Berman, James Barr Ames Professor of Law Harvard University, in a memorandum to the Unite d States Senate Conmittee on Foreign Relations, on Ratification of the United Nations Convention on Contracts for the International Sale of Goods, April 10, 1984. 4 Convention itself expressly excludes from its coverage various types of international sale s contracts and various types of questions that may arise in almost any type of international sales contract; and second, most matters are dealt with in the Convention in very broad terms--asI indeed, they must be, given the nature of the document. Therefo r e, the courts and arbitra tion tribunals will not escape the necessity of looking to the Itrules of .private international law" in order to fill the gaps and resolve the inevitable ambiguities.6 It seems strange, in a Convention intended to reduce the imp ortance of private interna tional law in the settlement of disputes arising from interna tional sales contracts, that the very applicability of the Convention would require determination of the applicable law.

This raises the question of how much the U.S. actually gains by signing the Convention 5) American private sector participation in the development of the U.N. Convention has been extremely limited. Neither the U.S.

Chamber of Commerce, the National Association of Manufacturers nor any other major domestic business organization participated.

The directors of the American Corporate Counsel Associatioh ACC which has not endorsed the Convention, have voiced concern that the existence of the U.N. Treaty and its effect on interna tional sales is not yet wi dely known throughout the business community or by corporate counsels representing medium and small companies. One of the current advantages enjoyed by those who wish to rush the Treaty through Senate ratification is that so few businesses or internationa l corporate counsels have familiar ized themselves with the provisions of the Convention 6) Very few of the U.N. officials involved in drafting and editinq the Treaty had backqround in international trade law per se: Almost none had any concept of the impa ct that such a Convention might have on 'the international business community.

U.S. negotiators at the U.N. Law of the Sea Conference, and in discussions regarding a Code of Conduct for Transnational Corporations, have found that this lack of expertise is not unusual in such U.N.-sponsored negotiations. The U.S. Senate however, cannot afford to ratify this Convention withoEt taking a much more careful look at its potential impact on international transactions 7) No mechanisms exist for the fine-tuning or a l teration of the Convention. The rules of law contained in the CISG cannot be altered by any sovereign state or even a group of states which is presumably less than the entire body of voting members of the U.N. Commission on International Trade Law (UNCITR A L The monumental political process involved in changing the Conven tion's text vi,rtually assures that changes would take many years or even decades and would probably require that the industrialized Ibid 5 countries ask significant concessions from the r adicalized Group of 77 of the less-developed countries and from the Communist bloc, who undoubtedly would expect a significant quid pro quo.

Any changes would then require another round of ratifications by the various UNCITRAL member-states, which by itsel f could take many years, even if the UNCITRAL members were to agree to them.7 CISG AS A MODEL FOR OTHER U.N. TREATIES High level United Nations officials in UNCITRAL have virtu ally admitted that the CISG is a Ilmodel case" for a wide range of other treat i es which are currently under consideration within UNCITRAL. The U.N. Commission is preparing, for example, a draft treaty on the use of international checks for business transac tions. The current draft makes no mention of the widely employed practice of e lectronic fund transfers, since, when negotiations began, such transfers were only rarely used. While many of these proposed U.N. treaties may deserve U.S. support, others may preempt U.S. law in a way that is not helpful either to the U.S or its major tr ading partners.

Department of State to inquire what, if any, future treaties the United States may expect from UNCITRAL and similar international bodies that would have similar preemptive effect as the CISG, and would rely on the CISG as a precedent The Se nate should instruct the CONCLUSION Most countries are waiting to see what the United States will do before taking action themselves on this convention already there have been dissenting voices raised by America's allies on the CISG. The West German Feder ation of Industry and other European industrial groups, for example, are opposed to the Convention. The British Law Society (i.e Bar Association) has recommended that the British government not ratify the Convention.

The position indicated by the Canadian government in 1983, with the support of Canada's legal profession and business community is that Ottawa will seek to exempt application of the Convention to transactions between the U.S. and Canada, due to the large volume of day-to-day cross-border trade , and to the similarity and satisfactory nature of current U.S. and Canadian sales law making a third body of law unnecessary Yet While the goals and objectives of the U.N. Convention are desirable and worthwhile, and while eventual ratification of this Fo r further critique of the CISG, see Harvey Marshall Sonenshine Unifi cation and Certainty: the U.N. Convention on Contracts for the Interna tional Sale of Goods Harvard Law Review, Volume 97, Issue 8, June 1984 I Treaty may be a suitable objective of the S e nate, those responsi ble for ratification should first consider whether such a Conven tion might best be preceded by domestic legislation through which the United States can maintain fundamental control over this critical area of international law. Legisl ation enacted by both Houses of Congress would still have the Ifpreemptiveif effect of the Treaty, but would also importantly provide the U.S. with the ability to amend the legislation, should later changes in the law become necessary.

The Senate should proceed with extreme caution in the rati fication process for the U.N. Convention on Contracts for the International Sale of Goods, and should not ratify this Conven tion until the significant questions that were raised during the Senate hearings on the CISG have been adequately answered.

Roger A. Brooks Roe Fellow in United Nations Studies 7 APPENDIX Adverse Practical Implications of the U.N. Convention on Contracts for the International' Sale of Goods An Example Universal Pipe Inc a sma ller Kansas manufacturer of pipe insulation, attends an international trade fair in New York where its representative meets Eurobuilders, Ltd a builder of industrial facilities from Germany (which along with the U.S. has ratified the U.N. Convention on Co n tracts for the International Sale of Goods--CISG). Euro is interested in Universal's insula tion for use in a refinery in Germany, which fact Euro explains to Universal A month later, Euro sends Universal a $10,000 purchase order with no fine print on it. The order simply requests Universal's standard product to be bought on'an F.O.B. Kansas City plan basis. Universal accepts Euro's order by sending Universal's standard Order Acknowledgement Form, which clearly and conspicu- ously states on the front that I IAll warranties, express and implied, of fitness for a particular purpose and merchantability are excluded'l (see Uniform Commercial Code Article 2-316 Universal's Acknowledgement Form also states that the sale is governed by the laws of Kansas. Euro make s no further reply; and the goods are shipped one month later.

Under the laws of Germany and Kansas, the contract was formed when Universal accepted Euro's order with the Acknowledge- ment Form. The law that both Germany and the U.S. would consider applica ble to the contract would be the law of Kansas. Euro uses the insulation in the refinery, but later discovers that the insulation corrodes the metal of the refinery piping, which piping is governmentally mandated and customarily used in all such facilitie s in Europe A million dollar loss is incurred by Euro.

Euro sues Universal in Kansas City on the grounds that the goods were not fit for the particular purposes (known to Universal and were not merchantable. Universal has sold its product in the U.S. and C anada and has never had a similar problem, but the type of piping used in North America contains different critical alloys.

Kansas which Universal knew well, Universal defends itself by saying that it, in full conformity with UCC 2-316, excluded any impli ed or express warranty of fitness for a particular purpose and merchantability. Such a defense being fully applicable to such a situation had it occurred in the U.S., Euro informs Uni- versal that the sale is not governed by the Kansas Uniform Com mercial Code, but by the U.N. Convention on Contracts for the Under American law (e.g the Uniform Commercial Code,of 8 International Sale of Goods, in particular Articles 19, 35, 36 and 74, among others.

Furthermore, CISG Article 19 states that if an acceptance o f an offer contains different or new material terms to those in t.he offer, such terms do not become part of the contract specifically states that terms altering the extent of one party's liability to the other are Ilmaterial. Therefore, the exclusion of t he implied warranty liability that Universal thought they had achieved does not exist; and Universal is liable to Euro for massive damages far exceeding the cost of goods and probably not covered by insurance, since standard commercial insurance does not u sually cover breach of contract damages (as opposed to product liability or tort damages--here the produce was not Ildefective CISG has no counterpart to UCC 2-316 Article 19(3 but merely -llunsuitablell This is only one example of the type of very common but disastrous pitfalls that can face a U.S. businessman unfamiliar with CISG's implications I

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