Drawing Inferences from CISG Opt-Outs
July 27, 2023
The United Nations Convention on Contracts for the International Sale of Goods (CISG) and the Uniform Commercial Code (UCC) both supply rules to govern contracts for the sale of goods. The UCC applies to purely domestic transactions. The CISG applies to many international transactions. When a contract involves the mixed sale of goods and services, a U.S. court will first make a threshold determination as to the predominant purpose of the contract. If its predominant purpose is the sale of goods, the court will apply the CISG or the UCC. If the predominant purpose is the provision of services, then the court will apply the common law.
In determining the predominant purpose of a mixed contract, the courts sometimes look to the language of the agreement. In a recent case, Alcala v. Verbruggen Palletizing Solutions., Inc., the Idaho Supreme Court made precisely this doctrinal move in seeking to determine the predominant purpose of a contract between an Idaho company and a Dutch company. In considering this issue, the court looked to an unusual section of the contract for guidance—the choice-of-law clause. Specifically, the court held that language in the choice-of-law clause stating that the CISG would not apply made it “reasonable to infer” that the agreement in question was a contract for the sale of goods. If the agreement was not for the sale of goods, the court reasoned, then there would have been no need to exclude the CISG.
In this post, I want to throw a bucket of cold water on this line of reasoning. Although I agree that the contract in Alcala was a contract for the sale of goods, I strongly disagree with the notion that the language in the choice-of-law clause excluding the CISG provides much in the way of support for this conclusion.
In prior work, I examined more than 5,000 contracts that referenced the CISG. I found that companies in the United States routinely exclude it from contracts to which it would never apply. It is common, for example, for companies to exclude the CISG from wholly domestic contracts. This exclusion is unnecessary because the CISG only applies to international contracts. It is also common for companies to exclude the CISG from share purchase agreements, stockholder agreements, or master services agreements. These exclusions are similarly unnecessary because none of these agreements involve the sale of goods.
Overall, I found that approximately 69% of U.S. contracts filed with the Securities and Exchange Commission between 2009 and 2014 that opted out of the CISG did so needlessly. In light of this finding, I argued that many U.S. companies have adopted a policy of excluding the treaty from all of their contracts irrespective of whether the contract in question involved the sale of goods. If this proposition is true—and the empirical evidence strongly suggests that it is—then there is no basis for inferring that a contract is for the sale of goods based on language in the choice-of-law clause excluding the CISG. There simply too many examples of this language being used in contracts not involving the sale of goods to make the inference reasonable.