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Choice of Law in Sales Contracts

Originally published: May 2013


Business in today’s global marketplace is transacted at lightning speed. Sales are generated and finalized in the time it takes to make a phone call, send a fax or receive an email.  With the speed of sales activity and the ease of access to multinational markets, practically every U.S. company is now involved in some form of international transaction. The relative inexperience of many of the new players in foreign trade sometimes results in a lack of attention to the applicable contract law.

Uniform Commercial Code (UCC)

In the American federal system, laws can be enacted by the national government, state governments and local governments. Historically, laws affecting business transactions and sales contracts have fallen under the jurisdiction of the states. However, as the states became more interdependent, and interstate commerce increased, the necessity to develop some uniformity in the various laws became apparent.

The United States Uniform Commercial Code, first published in 1952, is the most successful and important of a number of uniform acts developed to harmonize disparate laws among the U.S. states. The UCC is not a law in and of itself. Rather, it functions as proposed legislation for consideration by the various state legislatures. The states then have the option to accept in full or in part, to modify, ignore, or reject entirely any of its provisions.

Domestic sales contracts are generally drafted according to the basic principles of U.S. contract law – primarily those set out in Article 2 of the UCC.
All U.S. states and territories have adopted the UCC recommendations in general, but many have made changes to some of the rules to suit their specific situations.

UCC and Choice of Law

The Uniform Commercial Code provides that the choice of law will be the buyer’s locale. However, it does allow the buyer and seller to negotiate the particular jurisdiction which will apply to the transaction, thus overriding the UCC rules on the choice of law.

Many sellers incorporate a “Choice of Law” clause in their sales contracts for exactly that reason – to override UCC requirements. An example would be: “This contract shall be interpreted under the laws of the State of New York.”

A choice of law clause like the above example seems a good idea. However, when it stands alone, without a venue (location) for the resolution of any disputes, it can generate difficult consequences.

A stand-alone clause like “the laws governing the State of New York” could actually end up directing a French judge holding a trial in a French court to utilize New York law. For obvious reasons, that places the French judge in an impossible position. What would he know about New York law? French attorneys for both the plaintiff and the defendant would be at a similar disadvantage.

Choice of Venue

In order for a “Choice of Law” clause to have any real effect, there must also be an accompanying “Choice of Venue” clause, whereby both parties agree to a particular place as the proper location to resolve any disputes. An example of this clause might be: “All disputes shall be resolved by a court of competent jurisdiction in the State of New York”. This not only designates that disputes will be adjudicated according to New York law, but also by a court with extensive knowledge in New York commercial law, i.e. a New York court.

International Sales Contracts

Defining both a Choice of Law and Choice of Venue, however, is still not enough protection for international sales. Sellers must also ensure that any judgment they obtain in their home venue will be enforceable by the courts in the debtor’s location. If there is no reciprocal treaty between the seller’s and buyer’s countries to guarantee the enforceability of judgments, Choice of Law and Venue clauses have no advantage.

For example, a seller in California could obtain a California judgment against a buyer in India. Because there is no treaty between the U.S. and India regarding the reciprocal validity of judgments, the Indian court rules the California judgment invalid. The only recourse for the seller is to commence a new legal action in the Indian courts.

Prior to 1988, the legalities of domestic and international claims were generally handled in a similar manner. That is, the party with the most bargaining power (often the buyer) imposed its standard terms and national law. In the U.S., that would be some form of UCC-2. If the parties were from different legal cultures, for instance civil law versus common law countries, then understanding and negotiating contract terms was fraught with difficulties.

UN Convention on Contracts for the International Sale of Goods

A United Nations treaty, the United Nations Convention on Contracts for the International Sale of Goods (CISG) was the first instrument to establish a comprehensive code governing international sales of goods. One of its primary purposes was to harmonize international trade terms by reducing to a minimum the role played by national systems of law.

Adoption of the CISG provides important benefits as it circumvents one of the most contentious issues in international sales, i.e. choice of law and venue. With certain exceptions, the CISG applies automatically to all contracts for the sale of goods between traders from two different countries, where both countries have ratified the CISG.

The United States was among the first ten signers of the CISG in 1988. As of March 5, 2013, 79 countries had adopted the convention. In ratifying the CISG, the U.S. specifically stipulated that, absent express agreement to the contrary, the CISG applies to contracts between a U.S. party and a party whose place of business is in a country that has also adopted the Convention.  In other words, the CISG overrides U.S. state laws under these circumstances.

As with the UCC, it is possible to opt out of specific CISG provisions or the CSIG entirely. However, doing business where both countries have adopted the treaty can establish a completely new legal requirement.

Many U.S. exporters and importers assume that the governing law of any sales contract will be the UCC code of the state specified in the purchase order or sales contract. This is not always the case. Unless specifically opting out of the CISG, both parties may be operating under the CISG rules whether they realize it or not. To ensure opt out, the contract should explicitly state something to the effect that:

The law of (your country/state/jurisdiction) is the governing law and the Convention for the International Sales of Goods (CISG) shall not apply.


Conclusion

This article is a brief overview of issues related to the choice of law in sales contracts for goods. The requirements of both the U.S. Uniform Commercial Code and the UN Convention on Contracts for the International Sale of Goods are extensive, can be confusing and should not be ignored.

When entering a new market, domestic or international, do not assume that your standard sales agreement will be good enough. Consult an attorney with knowledge of the local commercial law and the UCC or CISG, whichever applies.

Sample Sales Contracts

To get you started, you can find sample sales contracts at: