International Sales Contracts: Square Peg, Round Hole

The purpose of a sales contract is to define the parties’ obligations and to optimize outcome if a dispute arises. As such, a contract is a tool to manage risk and prevent loss. The good news is the vast majority of contracts are performed as planned, and no issues arise. The bad news is when issues arise, they can be costly, eroding or eliminating the anticipated profits, or causing loss from the transactions.

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David Conaway ‖ dconaway@slk-law.com ‖ 704.945.2149
Manufacturing • Customers • Vendors • Supply Chain
Insolvency • Litigation • Commercial and Financial Contracts • Cross-Border
The key provisions to address in international sales contracts,
other than normal trade terms, include:

What Law Applies

Most contracts provide that the laws of a particular U.S. state
apply, which would incorporate Article 2 of the Uniform Com-
mercial Code. However, the United Nations Convention on
Contracts for the International Sale of Goods (CISG) is a treaty
that, as a species of federal law, would trump application of
U.S. state law. The CISG applies to any sales contract between
parties from signatory countries. To date, 84 countries
(covering over 80% of world trade) are signatories to the CISG
treaty including the U.S., Canada, China, Germany, Japan, and
Mexico. To exclude application of the CISG and to provide for
the UCC to control, the contract must expressly exclude appli-
cation of the CISG, and provide that the UCC governs.

The relative bargaining position of the parties may compel us-
ing an “international” law, rather a U.S. law. Whether or not
the UCC or the CISG is preferable focuses on a comparison of
the seemingly similar, but materially different, laws. A compar-
ison of the UCC and the CISG is beyond the scope of this article,
but one example relates to a common occurrence in commer-
cial transactions: the battle of the forms. Often parties utilize
purchase orders, order acknowledgements, invoices, terms and
conditions of sale, and sales contract, some or all of which may
be electronic. Naturally the seller’s and buyer’s forms have
materially conflicting provisions reflecting the parties’ differing
The purpose of a sales contract is to define the parties’ obliga-
tions and to optimize outcome if a dispute arises. As such, a
contract is a tool to manage risk and prevent loss. The good
news is the vast majority of contracts are performed as
planned, and no issues arise. The bad news is when issues
arise, they can be costly, eroding or eliminating the anticipated
profits, or causing loss from the transactions.

In particular, sales contracts for the sale of goods are based on
Article 2 of the Uniform Commercial Code, which has been
adopted by every U.S. state. When disputes have arisen, U.S.
court rulings have been largely uniform and predictable. Litiga-
tion outside the U.S. can be less predictable and before courts
that are less impartial.

We have noted a prevalent use of U.S. contracts, originally de-
signed for domestic sales, in transactions involving foreign cus-
tomers or supply chain. Usually these contracts have few or no
modifications to address the laws, court systems or country
risks of the foreign country.

Companies ideally would have bespoke contracts that address
these differences. However, given that many companies do
business in numerous foreign countries, it may be impractical
to have a bespoke contract for every country. A reasonable
approach would be to consider an over-arching “international”
sales or supply contract, and variations for key market coun-
tries, or material customer relationships.

The contents of this newsletter are offered as general information only and are not intended for use as legal advice on specific matters. | 1 |
April, 2016
International Sales Contracts:
Square Peg, Round Hole
interests. When this occurs, the UCC would nevertheless create
a contract, incorporating all the terms that are in common, and
any non-material additional terms. However, any material addi-
tional terms, such as a warranty disclaimer, an arbitration
clause, or an attorneys’ fees provision, are excluded.

By contrast, the CISG utilizes more of a “mirror-image” rule.
Unless the parties’ forms are virtually identical, there is no con-
tract. The seller’s order acknowledgement, for example, con-
taining additional terms or conditions, would be considered a
counter-offer, typically accepted by performance of the parties.
In this sense, the seller gets the “last shot”, and the CISG pro-
tects the seller’s forms to a greater extent.

In the context of a customer Chapter 11 filing, a seller of goods
may have an enhanced recovery opportunity for goods shipped
to and received by the customer within 20 days prior to the
filing. The UCC provides that goods are received upon physical
possession, while the CISG does not define when receipt occurs.
A recent Bankruptcy Court (World Imports, E.D.Pa. 2014), in the
context of Chinese suppliers of goods, ruled that the CISG ap-
plied and that the U.S. buyer received the goods when
“delivered”, which is when goods are loaded for delivery in an
FOB plant contract. The CISG “receipt” would almost always
occur earlier and outside the 20 day period, denying the seller
the Section 503(b)(9) remedy. Of course, whether or not a sell-
er of goods may or may not obtain a favorable Section 503(b)(9)
treatment in future Chapter 11 filings of customers is not suffi-
cient business justification to exclude application of the CISG.
Rather, it is a factor to consider.

Where Will Disputes be Resolved

Parties naturally seek the “home court advantage” of courts in
their particular jurisdiction. Again, this may not be possible
depending on relative negotiating advantage of the parties.

More importantly, parties should consider how a judgment
would be enforced, which largely depends on where the coun-
ter-party’s assets are located. The U.S. is not a signatory to any
ratified international treaty for the recognition or enforcement
of foreign court judgments. U.S. courts have and will enforce
foreign judgments in the U.S. based on comity and U.S. state’s
laws, but without a treaty, foreign courts likely will not recipro-
cate. Thus, obtaining a U.S. judgment may be a waste of time, if
the counter-party has no assets in the U.S.

To enforce any judgment obtained from a U.S. court, the U.S.
company would be required to commence a separate, essential-
ly duplicative, action in the customer’s jurisdiction.

Arbitration of Foreign Disputes

By contrast, the U.S. is a signatory to the United Nations Con-
vention on the Recognition and Enforcement of Foreign Arbitral
Awards (the New York Convention). 156 countries are signato-
ries, including U.S., Canada, China, Germany, Japan, and Mexi-
co. Clearly, arbitration has developed to be the preferred dis-
pute resolution mechanism for international business disputes.

U.S. companies naturally gravitate to U.S.-based arbitration
institutions such as American Arbitration Association to conduct
arbitrations in the U.S. However, if an arbitration award must
be enforced by a foreign court (where assets are located), it is
necessary to consider whether the foreign court favors or disfa-
vors the arbitration rulings of certain arbitration institutions.
For example, Chinese courts generally will only enforce arbitral
awards of CIETAC (China International Economic and Trade Arbi-
tration Commission). Mexican courts generally favor the arbi-
tral awards of the ICC (International Chamber of Commerce),
CAM (Arbitration Center of Mexico) and ICDR (International
Center for Dispute Resolution), CAMCA (Commercial Arbitration
and Mediation Center of the Americas).

Contract parties may not be willing to submit to the jurisdiction
of the other party’s forum. An international arbitration institu-
tion provides a neutral forum for dispute resolution.

Who Pays the Costs of Dispute Resolution

In the U.S., the majority “American” rule is that each party to a
dispute bears its own legal costs, unless that risk is shifted by
contract.

The contents of this newsletter are offered as general information only and are not intended for use as legal advice on specific matters. | 2 |
International Sales Contracts:
Square Peg, Round Hole
By contrast, most countries have adopted the “English” rule
that requires the loser to pay the winner’s reasonable attor-
neys’ fees.

Because legal costs of dispute resolution are material, and shift-
ing the risk among the parties can impact incentives to initiate a
dispute in the first instance, and to efficiently resolve a dispute,
it is important that such provisions in international sales con-
tracts are clear and comprehensive. The enforceability of such
provisions varies among countries, but increasingly courts are
recognizing the parties’ rights to shift risks in their business
dealings.

Miscellaneous Important Contract Provisions

A. Intellectual Property Rights should be protected by appro-
priate registration. Patent, trademark and copyright pro-
tection varies on a country-by-country or regional basis.
Because of the time required to obtain these rights, the
need to file should be anticipated, and initiated as soon as
the need is recognized. Because of the cost involved,
whether and how to shift these costs should also be taken
into account.

A seller of goods with associated patents or trademarks
may also consider provisions terminating any express or
implied license to sell or use its goods upon a default by the
counter-party.

B. Certain goods may require special import/export or other
regulatory compliance or government approvals.

C. As financial distress of contract counter-parties increases,
parties should consider hedging the credit risk with securi-
ty, title retention, credit insurance, or vigorous internal
credit risk assessment, which includes country risk analysis.

D. Force majeure (act of God, strikes, political unrest) clauses
are increasingly important to hedge risks created by turbu-
lent financial markets and global conflicts and crises.

E. Currency fluctuations and risks are important considera-
tions in contract profitability. Parties should certainly in-
clude contract provisions that allocate this risk. Moreover,
parties are well-advised to evaluate financial products that
hedge such risks.

F. The parties must also take care about the flow of electronic
information that may be shared pursuant to the Agree-
ment, particularly if it involves the transfer between coun-
tries of any sensitive personal information of customers,
employees, or other users. Some countries may prohibit
the transfer of certain information, and others, most nota-
bly the EU countries, require agreements addressing data
privacy and breach, with additional EU data protection reg-
ulations effective in 2017.

We hope you found this useful and informative, and feel free to
share this with others in your company. Please contact us if you
have any questions about this, or any other matter.

©David H. Conaway
The contents of this newsletter are offered as general information only and are not intended for use as legal advice on specific matters. | 3 |
David Conaway ‖ dconaway@slk-law.com ‖ 704.945.2149
Manufacturing • Customers • Vendors • Supply Chain
Insolvency • Litigation • Commercial and Financial Contracts • Cross-Border

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