Tag / contract administration

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Understanding the United Nations Convention on Contracts for the International Sale of Goods

The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is an international treaty that governs most sales of goods between a buyer and seller that reside in different countries that have adopted the CISG. It has been adopted in the US and more than 70 other countries.

Background on the CISG

The United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is an international treaty that governs most sales of goods between a buyer and seller that reside in different countries, if those countries have adopted the CISG. It has been adopted in the US and more than 70 other countries. In fact, signatory countries account for more than two-thirds of all goods moving in international trade and encompass a majority of the world’s population. Significant trading partners that have adopted the treaty include Mexico, China, Japan, South Korea, Singapore, most of Western Europe (excluding Great Britain) and Canada.

In the United States, the sale of goods between businesses is generally governed by state-adopted versions of Article 2 of the Uniform Commercial Code (“UCC”). When contracting parties in the U.S. agree to terms, the UCC serves as a backdrop, filling certain gaps that the parties may have failed to address, establishing certain standards on warranties and disclaimers, etc. The CISG performs a similar role in an international transaction, but differs from the UCC in important ways. Set forth below is a brief summary of some of the key aspects of the CISG, as well as differences between the UCC and the CISG.

When the CISG Applies

As noted above, the CISG applies to the sale of goods between parties residing in different jurisdictions that have adopted the CISG. The CISG, however, does not apply to sales (1) of consumer goods; (2) by auction; (3) of securities or negotiable instruments; (4) of ships, vessels, or aircraft; or (5) electricity. The CISG is also not applicable to so-called “assembly contracts” where the party that orders goods to be manufactured supplies a substantial part of the materials necessary for such manufacture or production of the goods.

It is important to note that when applicable, the CISG is likely to apply unless expressly disclaimed in the contract. Case law suggests, for example, that if you are selling equipment to a Canadian buyer and your contract says something to the effect of, “the parties agree that the laws of Wisconsin will govern this transaction, except the conflict of law provisions therein,” the CISG will still likely trump Wisconsin law unless the contract goes on to state expressly that the CISG does not apply.

Differences between the CISG and the UCC

Should you care if the CISG applies? It depends. But you should know what you are agreeing to so you can make a reasonable choice.

CISG Applies to Oral Contracts

One significant difference between the CISG and the UCC is that the UCC limits the enforceability of oral contracts. The CISG states that a contract of sale need not be evidenced by writing and is not subject to any other requirement as to form. A contract may be proven by any means, including witnesses. Furthermore, in the absence of a specific clause to the contrary, the CISG generally permits oral amendments or modifications to contracts.

Battle of the Forms

The CISG and UCC also differ in their approaches to the “battle of the forms.” Under the UCC, a final form that is not intended specifically as a counteroffer will act as an acceptance, even though it contains different or additional terms to those contained in the prior form. The additional terms are considered as proposals for additions to the contract and, as between merchants, become part of the contract, unless (1) the offer expressly limits acceptance to the terms of the offer; (2) the terms materially alter the offer; or (3) notification of objection to the terms already has been given or is given within a reasonable time after notice has been received.

The CISG departs from the UCC approach and, instead, says a reply to an offer that purports to be an acceptance but contains material additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer. Thus, at least prior to performance, either party may be able to claim successfully that no enforceable contract exists under the CISG. After delivery and acceptance, a contract will undoubtedly be deemed to have existed. Although the terms of the contract may be subject to dispute, the CISG generally favors the last party to submit materially different terms.

Disclaimer of Warranties Less Formal Under the CISG

The UCC and the CISG have similar provisions for warranties, but the requirements to disclaim warranties differ. The CISG contains no provisions comparable to the disclaimer procedures that sellers may use under the UCC. For example, under the UCC, an effective disclaimer of the implied warranty of merchantability generally must mention “merchantability” and must be in conspicuous writing. Similarly, an effective disclaimer of an implied warranty of fitness must be in writing and conspicuous. The CISG is less formalistic and appears to permit disclaimers of warranties as long as the “parties have agreed” in writing or orally.

UCC Follows the “Perfect Tender” Rule

Under the UCC, a buyer is generally entitled to reject goods that fail in any respect to conform to the contract. This is known as the “perfect tender” rule. Under the rule, generally speaking, a buyer may in good faith reject goods and cancel the contract, even if a defect in tendered goods is not serious and the buyer would have received substantially the goods for which it bargained. The CISG departs from the perfect tender rule and makes rejection or cancellation more difficult. The buyer may void a contract only if the failure by the seller to deliver goods constitutes a fundamental breach. Under the UCC, the buyer has a reasonable opportunity to inspect the goods. However, under the CISG, the buyer must inspect the goods within as short a period as is practicable under the circumstances.

CISG Has a “Self-Help” Remedy

The CISG allows for many of the same damage remedies as those available under the UCC. Generally, a buyer may claim damages if the seller fails to perform. Under the CISG, damages typically equal the loss suffered as a consequence of the breach, including the loss of profit. These types of damages are similar to the direct, incidental, and consequential damages available under the UCC. However, the CISG includes a novel unilateral price reduction remedy: if the goods do not conform with the contract, the buyer may reduce the price. This self-help remedy is not available if the seller is able to cure non-conformity without causing unreasonable delay or inconvenience to the buyer.

Conclusion

Whether you will be helped or hurt by the CISG depends on the circumstance. In the ever-increasing world of global trade, however, buyers and sellers should be aware that it will likely apply unless expressly disclaimed and it will impact how their contract for the sale of goods is enforced. Detailed information about the CISG can be found at the website of the Institute of International Commercial Law at Pace University School of Law.

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Effective Contract Management

Effective contract management can save time and money and mitigate risk. Depending on the company’s current and anticipated needs, the solution may be a simple spreadsheet, a database, a licensed software application, or a web-based hosted service. Equally important as choosing an appropriate contract management tool is designating a qualified administrator.

Effective contract management can save a company time and money and mitigate risk. Even so, often after companies painstakingly negotiate agreements, they frequently file them away and move on to the next business negotiation without giving them much further thought. Getting control of contracts then can become a fire drill after deadlines are forgotten or when a potential strategic partner or acquirer wants to look at a company’s contracts.

Contract management is often ignored or relegated to the backburner due to more pressing daily demands or delegated to someone without the time or ability. Plus, for some companies without relevant expertise or time, it can be daunting to select a contract management solution and integrate the company’s contracts into the management tool. The earlier a company develops discipline in managing its contracts, the earlier it will reap the powerful rewards, including the ability to quickly and easily do the following:

  • anticipate expiration and renewal dates
  • manage its own deliverables
  • monitor third party performance
  • monitor and understand trends within recurring contracts
  • produce custom reports based on unique search criteria

Having a good contract management system may also speed the due diligence process of a significant business transaction, as the contracts will have already been reviewed for completeness, summarized for searching and reporting purposes, and scanned for ready delivery. With more sophisticated contract management systems, not only are executed contracts managed better, but the contracting process on the front end can become more streamlined and efficient and yield higher quality and consistency among contract terms.

Variables to Consider when Selecting the Appropriate Contract Management System

When selecting a contract management system for an organization, it is important to consider both the complexity of the organization’s contracts as well as current and anticipated future needs of the organization. Here are some considerations:

  • How many people are involved in contract administration, and how many people need to have read-only access?
  • Do the users need to have electronic access to the agreements?
  • Do the users need to have access to agreement summaries?
  • Is it desirable for the agreement text to be searchable as well as the summary?
  • Are there certain controls the organization would like to have in limiting access by some people to only certain types of contracts?
  • How comfortable are the users with spreadsheets, databases and vendors’ applications?
  • How many contracts, what types of contracts, and what variations in those contracts does the organization have?
  • What key elements of a contract does the business want to monitor?
  • Are email reminders of key dates needed?
  • How important is it to have a turnkey solution that provides customer relationship management and full contract lifecycle management, including a contracting approval process?
  • Is it desirable to use a hosted solution as a document repository to free up space on the company’s network?
  • What is the budget?

Depending on the company’s current and anticipated needs and desires, the solution may be a simple spreadsheet, a homegrown database, a licensed software application, or a web-based hosted service. Ideally, the solution should be scalable so it can grow with the business, or at least the data should be easily exportable, in case a different contract management system is more appropriate as the business evolves.

Using Spreadsheets for Contract Management

A simple spreadsheet is better than nothing and may suffice if the business has relatively few contracts or many of a similar, simple standard form. The advantages of a spreadsheet are that it is inexpensive and easy to use. A spreadsheet can also be supplemented by scanning the agreements as text searchable PDFs. However, a spreadsheet has limited or no functionality to provide email reminders, tailored permissions by document or category, multiple non-standard contract elements, advanced searches, and various reports.

Using Databases for Contract Management

If the business has an employee or advisor experienced with creating databases, that person could create a tailored database for the business, with specialized contract clause fields, a user-friendly form interface, and customized searches and reports. Vendors’ database products frequently offer greater functionality, such as the following:

  • email reminders
  • tailored permissions
  • customizable fields
  • ability to upload agreements and make them searchable
  • auto extraction of key data
  • sophisticated searches and reports
  • an unlimited hosted document repository
  • customer support
  • military-grade security

Pricing can be surprisingly reasonable. It depends on the sophistication of the software, the number of users, and whether it is a software license with one-time license fee and annual maintenance fees, or a hosted solution with ongoing subscription fees that include customer support.

Designating a Contract Administrator

Equally important as choosing an appropriate contract management tool is designating one or more qualified administrators to assume the contract administration function. The administrator(s) should (1) be able to interpret and summarize legalese, (2) be comfortable with the contract management system selected, and (3) have the time to dedicate to contract administration. Consistency of data entry wording is also important for helping retrieve data through searches of summaries. As the adage goes: Garbage In-Garbage Out! If the business does not have a qualified contract administrator in-house, a corporate paralegal at a law firm can fulfill that role or train someone within the organization to serve in that role.

While implementing effective contract management takes some planning and resources, for most businesses the benefits are well worth it. The earlier a business commits to contract management, the sooner it will begin reaping the rewards.