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Insights Into Law: Know Your International Sales Contract
Hidden legalities may govern your binding agreements.
by Glenn P. Hendrix and John L. Gornall
January 7, 2009
F
inally, after extensive negotiations and numerous drafts, the contract has been signed.
Fictitious Georgia elevator corporation, ATLCo, has signed a contract to purchase 250,000 push
buttons from LiftKo, a Korean-based elevator parts manufacturer.
The contract states that, "the law of the State of Georgia, U.S.A. will apply." ATLCo's
principal place of business is Georgia, and LiftKo operates in Korea. As an adept business
executive, you have years of experience with the uniform commercial code (UCC) and are confident
that you understand ATLCo's and LiftKo's contract rights and obligations.
Unbeknownst to both companies, the contract is governed by the Convention on Contracts for
the International Sale of Goods (CISG). Georgia law incorporates federal treaties, such as the
CISG, into international contracts. This applies to contracts with two parties that are in separate
countries that have ratified the CISG. In this case, both United States and Korea have ratified the
CISG.
While CISG is not specifically mentioned in your contract, you have unintentionally chosen a
set of legal rules for contract formation, rights and obligations, and you are likely not familiar
with these terms. These rules are substantially different than those that typically govern such
issues in the United States.
CISG attempts to bridge the gap between the laws governing sales of goods in common law
countries, such as the United States and England, and civil law countries like Germany, France and
largely the rest of the world.
Under civil law, if LiftKo as a seller defaults, courts in Korea would order LiftKo to
produce and deliver the push buttons if ATLCo elected to pursue the matter. Similarly, if a Korean
court had jurisdiction over ATLCo, and ATLCo did not pay the purchase price of the push buttons as
provided in the contract, the Korean court could order the company to pay the contract purchase
price for the items. The basic civil law approach is that the parties to a contract should perform
their contract obligations. The usual civil law remedy, known as specific performance, is for the
court to order the defaulting party to perform.
Under familiar uniform commercial code rules as practiced in the United States, ATLCo would
not usually be entitled to specific performance; instead it would be entitled to an action for
damages against LiftKo. Similarly, under UCC rules, LiftKo would typically be entitled to an action
for damages, not payment of the contract purchase price.
To avoid this and other potentially costly scenarios, the CISG permits the parties to agree
that the contract will not be governed by the CISG. Many business executives and their attorneys
routinely seek to "opt out" of these rules.
In our fictional example, ATLCo's executives may be very happy to learn that under the CISG,
if LiftKo does not deliver the push buttons in a timely manner according to the contract, a Korean
court is likely to order LiftKo to produce and deliver the items as agreed, a remedy not usually
available under the UCC.
ATLCo may prefer this remedy to obtaining the parts from another supplier ("covering") and
then pursuing an action for damages against LiftKo. LiftKo is likely to be more familiar and
comfortable with the CISG rules, including remedies, than those available under the United States
UCC.
Some foreign buyers and sellers based in civil law countries will not "opt out" of the CISG
and insist that it apply to their international sales contracts.
Disregarding the CISG - as it may relate to your international sale contracts - even without
being specifically mentioned in those contracts - could be expensive. Resistance to U.S.
businesses' desire to opt out of the CISG is growing. The CISG appears to be gradually becoming the
"rules of the road" for contracts of the international sale of goods.
Glenn P. Hendrix is managing partner of Atlanta law firm Arnall Golden Gregory.
John L. Gornall is a partner with Arnall Golden Gregory and chair of the Economic Development Practice Team.
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