CISG Opt-Outs and Party Intent

The United Nations Convention on Contracts for the International Sale of Goods (CISG) is one of the most widely adopted commercial law treaties in the world. It functions as an “international” version of Article 2 of the Uniform Commercial Code (UCC) and, as such, provides the governing law for many cross-border agreements involving the sale of goods. The parties to these agreements may, however, opt out of the CISG by writing language into their contract indicating that this is their intent. A recurring interpretive question in the United States is whether a generic choice-of-law clause selecting the law of a U.S. state—“This Agreement shall be governed by the laws of the State of New York.”—should be construed to exclude the CISG.

In this post, I briefly survey the arguments on both sides of the issue and then make three points. First, the goal of interpretive rules relating to contracts is to reflect the preferences of most contracting parties. Second, there is considerable evidence that most companies in the United States do not intend to select the CISG when they write a choice-of-law clause selecting the law of a U.S. state into their agreement. Third, choice-of-law clauses such as the one above should be construed to exclude the CISG.

Contract Ambiguity and CISG Opt-Outs

When applicable, the legal rules set forth in the CISG provide the governing law for many contracts involving the sale of goods across national borders. The treaty is not, however, always applicable. Under Article 6 of the CISG, the contracting parties may “exclude the application of this Convention or . . . derogate from or vary the effect of any of its provisions.”

The simplest way to opt out of the CISG is to include language in the contract expressly stating that it will not apply—for example, “the United Nations Convention on Contracts for the International Sale of Goods shall not apply.” These cases are easy. Other cases are harder. Consider a choice-of-law clause which simply states that the agreement shall be “governed by the laws of the State of New York.” Does this language operate to exclude the CISG? The answer is unclear. On the one hand, the clause could be read to select the CISG because under the Supremacy Clause of the U.S. Constitution federal treaties are understood to be a part of the laws of New York and the clause, by its terms, selects the laws of New York. On the other hand, the clause could be read to exclude the CISG because the New York legislature has enacted a law—Article 2 of the UCC—that expressly governs contracts for the sale of goods. When contracting parties select the laws of New York without making any mention of the CISG, it is possible that they intend to select Article 2 rather than the treaty.

The View from the Bench

When U.S. courts encounter this issue, they generally interpret the choice-of-law clause to select the CISG. As a federal district court in Minnesota explained:

A majority of courts interpreting . . . choice of law provisions . . . conclude that a reference to a particular state’s law does not constitute an opt out of the CISG; instead, the parties must expressly state that the CISG does not apply. These courts reason that even if a choice of law clause refers to the laws of a particular state, the state would be bound by the Supremacy Clause to the treaties of the United States. Accordingly, under the Supremacy Clause, the law in every state is that the CISG is applicable to contracts where the contracting parties are from different countries that have adopted the CISG. Thus, absent an express statement that the CISG does not apply, merely referring to a particular state’s law does not opt out of the CISG.

Viewed from the perspective of a judge, this interpretive rule is entirely sensible. It is consistent with prior Supreme Court precedent concerning the relationship between state and federal law. It is clear and easy to apply. And it promotes the wider use of the CISG. The only problem with this interpretive rule is that it completely at odds with the preferences of most contract drafters in the United States.

The View from the Drafting Table

Several years ago, I sought to ascertain how practicing lawyers in the United States interact with the CISG. I conducted interviews, engaged in structured email exchanges, and reviewed thousands of actual contracts. I ultimately published a paper in which I made the following observations:

• A substantial number of U.S. attorneys have no idea that the CISG exists. These attorneys are unaware that they must opt out of the treaty if they want their international sales contracts to be governed by domestic sales law.
• When a company chooses the law of a U.S. state to govern an international sales agreement without making any reference to the CISG, the company typically does not intend to select the CISG. It intends to select the sales law of the U.S. state named in the clause. As one lawyer put it: “We would never select the law of Indiana, say, as a means of getting the [CISG]. We are just not that Machiavellian.”
• Very few U.S. companies affirmatively select the CISG to govern their contracts. I reviewed 5,092 contracts filed with the SEC between 1988 and 2014 that mention the CISG. I found that 5,028 of these contracts referenced the CISG to exclude it. Only 64 contracts specifically chose the CISG. I also found that the number of contracts selecting the CISG steadily declined between 1996 and 2014.
• I was unable to identify a single U.S. company that regularly chooses to have its international sales contracts governed by the CISG. Every company that I contacted reported that its policy was to opt out the CISG.

These findings provide robust evidence that the prevailing interpretive rule adopted by judges—which holds that a generic choice-of-law clause selecting the laws of a U.S. state operates to select the CISG—is inconsistent with the preferences of most U.S. companies. These companies overwhelmingly opt out of the CISG when they are aware of its existence. When companies write choice-of-law clauses into their agreement that select the laws of New York, they report that they are expecting to get Article 2 of the Uniform Commercial Code. They are not trying to select the CISG indirectly.

Framing the Disconnect

In response to the disconnect identified above, one might be tempted to place the blame on the contract drafters. Courts have been clear about what is necessary to exclude the CISG. If the individuals tasked with drafting contracts cannot be bothered to educate themselves and draft choice-of-law clauses that accord with these rules, they should have to live with the result. On the other hand, it is widely accepted that the purpose of contract interpretation rules is to reflect majoritarian preferences, i.e. what most parties would want. There is robust evidence suggesting that the interpretive rule adopted by the courts with respect to CISG opt-outs is inconsistent with the preferences of most of U.S. contract drafters. Instead of blaming the drafters, one could just as easily blame the courts for adopting an interpretive rule that is out of touch with party preferences.

Judges, unsurprisingly, tend to blame contract drafters. Contract drafters, unsurprisingly, tend to blame judges.

Addressing the Disconnect

If one accepts the notion that there is a significant disconnect between judges and contract drafters on this issue, the logical follow-up question is how to address it. There are several possibilities. The legal community could redouble its efforts to educate lawyers about the CISG. These educational programs could lead to broader awareness of the treaty and, presumably, better drafted choice-of-law clauses. Alternatively, U.S. judges could decide to revisit their prior precedents in light of the evidence relating to party preferences discussed above. They could adopt a rule stating that choice-of-law clauses selecting the laws of a U.S. state operate to exclude the CISG.

While either of these approaches is theoretically possible, neither seems particularly promising. If U.S. lawyers haven’t gone to the trouble to learn about the CISG over the past 34 years—the CISG entered into force in 1988—it seems unlikely that they will start now. It also seems unlikely that judges will jettison an interpretive rule that is consistent with past Supreme Court precedents. If a solution to this interpretive imbroglio is to be found, therefore, one must look elsewhere.

Precedents for a Legislative Solution

Legislatures in the United States sometimes enact laws that assign a presumptive meaning to specific words and phrases that appear in contracts. California, for example, has a statute on the books that tells courts how to interpret contracts of indemnity. Virginia has passed a law directing its courts how to construe phrases such as “exclusive license” and “all possible rights and for all media” when they appear in licensing agreements. If a legislature wanted to pass a law directing courts to interpret the word “law” in the choice-of-law clause of an international sales contract to exclude the CISG, it could look to these precedents for guidance.

In Canada, a province has already gone down this road. The legislature of Newfoundland and Labrador has enacted a statute that reads as follows: “Where the parties select the law of the province or of another jurisdiction as the law applicable to their contract, that contract shall not be interpreted so as to make the [CISG] apply to it.” If a similar statute were to be enacted in the United States, the disconnect between judges and drafters described above would cease to exist. Judges called upon to construe generic choice-of-law clauses would be obliged to construe those clauses to exclude the CISG. Such a law would bring the interpretive rule into line with the reported preferences of U.S. contract drafters.

Federal or State Legislation

Congress clearly has the power under the Foreign Commerce Clause to enact a law modifying the prevailing interpretive rule. It is unlikely to act on this issue, however, because it rarely legislates in the area of private international law. It is easier to imagine a state legislature seizing the initiative to pass a law modeled after the one passed by the legislature in Newfoundland and Labrador. It is unclear, however, whether a state law along these lines would be preempted by federal law.

On the one hand, the federal government clearly has an interest in the uniform application of a federal treaty across the United States. It is not at all clear, however, that the CISG would preempt a state law directing its courts to interpret a choice-of-law clause in a particular way. The CISG by its terms expressly permits private actors to contract around it. Moreover, each U.S. state has the power to define the content of its own law and to legislate in the field of contracts. In cases where a treaty by its terms gives the parties the ability to exclude it, and where the parties to a contract specifically choose to have their agreement governed by the laws of the enacting state, that state’s legislature arguably has the power to adopt a rule that reflects the preferences of the state’s business community. Unless and until a state actually enacts a statute directing the courts to interpret these choice-of-law clauses to exclude the CISG, however, there is no way to know how a court would resolve this particular preemption debate.

Conclusion

Judges and contract drafters do not always see eye to eye when it comes to contract interpretation. Nowhere is this clearer than in international sales contracts. Judges take the position that generic choice-of-law clauses should be read to select the CISG. Contract drafters take the position that these clauses should be read to exclude the CISG. If the prevailing interpretive rule is to be brought into line with party preferences, one must look to state legislatures or (perhaps) to Congress to resolve the impasse.