By: Omar Sawaf
In an increasingly globalized world, mid/small sized U.S. manufacturers are tapping into international markets to boost revenues (and vice versa). These efforts offer tremendous opportunity, but also carry risk for the inexperienced firm. A critical issue is the lack of contractual documentation associated with most sales transactions. In particular, international parties rarely enter into formal contracts. Rather, the typical transaction involves some variation of the following:
- The seller issues buyer a price quote, which is the basis of the parties negotiating/finalizing the “dicker terms”, which are the essential terms of the transaction, including the quantity and price terms and a description of the goods.
- The Buyer issues a purchase order that typically contains its standard terms and conditions.
- The Seller issues its confirmation/acknowledgement of the sale, which includes its own terms and conditions.
Later, there are issues with the transaction and each party is left to contemplate fundamental questions including: (i) do we have a binding contract?; (ii)what law governs the contract; (iii) what are the terms of any contract; and (iv) what is the forum for any claim under the contract and can a remedy be secured. An attorney brought in late in the process rarely has answers. We discuss some of these preliminary contractual questions below:
Do you have a binding contract?
The threshold question is do the parties have a contract. This is important because the Seller may have commenced works on the product, or alternatively, the seller may wish to terminate the transaction altogether. The buyer, in turn, may want to complete the transaction having determined there is no alternative product available, or may wish to exit the deal.
In circumstances where U.S. law (i.e., the applicable provisions of the Uniform Commercial Code (UCC)) governs the transaction, the answer will typically be yes. In such case, Article 2-207 of the UCC will govern, a flexible provision that goes to tremendous lengths to find an enforceable contract.
The United Nations Convention on Contracts for the International Sale of Goods (CISG) will govern the sale of non-consumer goods between parties whose place of business are in different countries that have ratified the CISG.[1] If applicable, Article 19 of the CISG is far more restrictive, and a court/arbitration tribunal applying it will be less likely to find a binding contract on the basis of the documents. This creates significant contractual exposure for parties that expend effort /money in reliance on contracts that are of questionable validity.
Still further, the courts of some countries will apply private international law (or more likely, their own domestic law) and find that the laws of the forum state apply. In which case, the question of whether the contract is binding will vary.
So what law governs the transaction?
This is the essential question and will dictate the terms of the parties contract (if any). Unfortunately, there is no easy answer and a wide array of possibilities. As a preliminary matter, if the parties have agreed the ‘choice of law’ term that will control. However, it is rare the parties contractual documentation will demonstrate such agreement with each party likely opting for its home state’s law.
Alternatively, if the CISG is applicable to the transaction, it will apply absent the parties expressly contracting out of its application, which is unlikely when the parties have no formal agreement. If not applicable, a U.S. court may apply its own choice of law rules, and if the transaction bears a reasonable relationship to the forum state, it will apply its own domestic law, including relevant provisions of the UCC. A foreign court will often take a similar approach and apply its own domestic law.
This reality could trigger a rush to the courts, with one glaring problem: What value is there in securing a judgment in one party’s home state, if that judgment will not be recognized/enforced in the other party’s home state? This is, of course, why most parties agree to international arbitration (and the protections of the NY Convention) to settle disputes.
What are the terms of the contract?
This will depend on a variety of factors which (again) gives rise to various outcomes. A full “battle of the forms” analysis is beyond the scope of this article, but it is worth noting that depending on what law governs the transaction, any of the following may determine the terms of the contract: (i) the buyer’s purchase order with accompanying terms and conditions; (ii) the seller’s acknowledgment/confirmation with accompanying terms and conditions; or (iii) default gap filler terms supplied by the forum state.
What can the parties do to create certainty?
There a variety of ways the parties can greatly mitigate the contractual risk of a transaction. The simple answer is: the parties can negotiate the terms of a formal contract, which may make sense for a large transaction or a repeat customer. However, this may be impractical on smaller deals.
The parties can, at a minimum, agree the essential business terms of the transaction together with choice of law and dispute resolution terms. This would at least give the parties certainty as to the law that will govern the transaction and the appropriate forum to govern the dispute, which will go a long way in determining the actual terms of the contract.
A savvy buyer could require that the seller sign its terms and conditions accompanying the purchase order. The seller could similarly require the buyer to sign its terms and conditions accompanying its acknowledgement/confirmation. The relevant party’s terms and conditions would also expressly state that they exclusively govern the transaction and that any different and additional terms are excluded and do not impact the application of the relevant party’s terms and conditions.
[1] The US ratified the CISG with an effective date of January 1, 1988.
