International Sales Contracts: Do You Know What Your Law Is?

Companies frequently intend to have their contracts operate under one law, but mistakenly write their contracts to have some other law apply.

Let me explain.

With few exceptions, the Uniform Commercial Code (UCC), Section 2, governs the domestic sale of products (goods) in the United States. With few exceptions, international product sales contracts are governed by the United Nations Convention on Contracts for the International Sale of Goods (CSIG) if the contract is between companies from countries that have signed on to CSIG. Nearly all leading commercial nations are signatories to this.

But here is where companies make their mistake. American companies often put in their contracts that they want US law or their own specific state’s law to apply. For purposes of an example here, let’s say that the American company puts in its contract that it wants California law to apply.  The problem with this is that United States law says CSIG is THE law for international sales so if U.S. or California law does apply, that law would say CSIG should apply, not the UCC. (For you lawyers out there, I know I am being lax here when I talk about US law, but you know what I mean.)

In the example above, putting in California law will mean that a court (most likely a California court) will apply California law to your case and that means it will apply CSIG to your case.

There is a way around having a US court apply CSIG and that is to put a provision in your contract making clear that California’s UCC (or any other state’s UCC) should apply and specifically noting that the parties to the contract do not want CSIG to apply.

Now the interesting thing about all this is that the various laws are way more similar than different and so most of the time, the choice of law will not make much if any substantive difference. My law firm’s international dispute resolution lawyers have dealt with these choice of law issues in an international context many times and best as I can recall, the substantive law in most instances was pretty much the same.

The typical and biggest problem with the lack of clarity that comes from a contract written by a lawyer who is not familiar with how all of the above works is greatly increased legal costs if and when there is a dispute. A confusing choice of law provision will require extra attorney time to determine the substantive law and to explain the law under two different legal regimes to your judge or your arbitration panel. In some cases, we have had to bring in foreign lawyers as paid experts to give fuller explanations on their country’s laws.

And note that I said the laws turned out to be “pretty much the same.” Lawyers can write 25 page briefs explaining the difference between “must” and “should” and relatively insignificant differences among laws are perfect fodder for aggressive litigation tactics that lead to bigger legal fees.

The key is often not so much the law to be applied, but rather, the benefits from creating certainty in your contract as to the ONE law that will apply.

Choose your choice of law provision wisely.