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Opting Out of the CISG: A Standard Choice of Law Clause is Not Enough

Standard Choice of Law Clause is Not Enough to Opt Out of the CISG

Consider the following scenario: A South Dakota business finds a new seller of goods located in Manitoba, Canada. The business owner has entered countless transactions with other suppliers located in neighboring states such as Iowa and Minnesota, and is experienced enough to know that including a choice of law clause may be a good idea.

The business owner ensures that the contract specifies that the agreement shall be governed by and construed in accordance with the laws of South Dakota. Should a dispute arise, the business owner feels confident the transaction will be governed by South Dakota law, specifically the Uniform Commercial Code (UCC) as adopted in South Dakota, and not Canadian law.

While the business owner may be correct that Canadian law will not apply, what she may not have expected was that the transaction would be governed by the United Nations Convention on Contracts for the International Sale of Goods, otherwise known as the CISG.

The CISG is a treaty that has been ratified by 81 countries, intended to provide a uniform body of international sales law. The United States ratified the CISG in 1988. The CISG has been ratified by numerous important trade partners of the United States, including Canada and Mexico. The CISG automatically applies to any contract for the sale of goods between parties whose principal places of business are in different CISG countries, although parties may agree to “opt out” of the CISG.

A common mistake made by businesses and attorneys alike is to assume that a standard choice of law clause is sufficient to opt out of the CISG. On the contrary, as would be discovered by the business owner in the above scenario, selecting the law of South Dakota would not bar application of the CISG. The “law of South Dakota” includes the CISG as a federally ratified treaty. Stated differently, the CISG preempts or supersedes South Dakota’s UCC provisions.

Instead, courts have held that the choice of law provision must expressly exclude application of the CISG. Failing to appreciate this requirement can result in an unintentional application of the CISG, which differs from the UCC in several material aspects. For example, the CISG does not contain an equivalent to the statute of frauds. Similarly, the CISG does not contain the equivalent to the parol evidence rule. While there may be sound reasons to enter a contract subject to the CISG, parties should be aware of how to effectively exclude its application.

July 31, 2014