The CISG and Choice-of-Law Clauses
October 5, 2023
Although the United Nations Convention on Contracts for the International Sale of Goods (CISG) has been in force for over 35 years, there is still scholarly disagreement as to how this treaty interacts with choice-of-law clauses (see, e.g., the discussion on this blog: Coyle, Brand and Flechtner, Hayward and Lal). In principle, there seems to be international consensus that the choice of the law of a Contracting State does not as such lead to an exclusion of the CISG under CISG Article 6. The CISG forms part of the legal order of the Contracting States. It is the substantive law for international sales contracts. However, some open questions remain, for instance on how to interpret a choice of the law of a territorial unit of a Contracting State, such as a U.S. state.
By choosing the law of a U.S. state, the parties could be understood as selecting the domestic sales law of the chosen state, e.g., New York’s Uniform Commercial Code (UCC), and excluding the Convention. They could, alternatively, be understood as designating the law that would be applicable in the chosen state, irrespective of its international, federal, or state origin. As John Coyle has shown on this blog, the majority of contract drafters in the U.S. seems to subscribe to the former understanding and expects the domestic sales law of the chosen state to apply. U.S. courts, by contrast, have mostly adopted the latter interpretation, holding that the CISG is part of federal law and thus applies throughout the United States. The mere choice of the law of a state does not suffice to conclude that the parties wanted to exclude the Convention.
Gramercy Holdings I, LLC v Matec SRL
In the recent grant of summary judgment in Gramercy Holdings I, LLC v Matec SRL, the U.S. District Court for the Southern District of New York (Judge John P. Cronan) reaffirmed this line of cases. The district court had to deal with two separate contracts, both of which chose the law of the State of New York. There were however substantial differences in wording. The first contract stated that it “shall be exclusively governed by New York law,” without mentioning the CISG. The second contract provided that it “shall be deemed to be entered into under, and shall be governed by, the substantive laws of the State of New York” and that “[t]he parties expressly agree to exclude the all [sic] revisions of the Convention on Contracts for the International Sale of Goods.” While the parties were in agreement that the second contract was not governed by the CISG, they were divided on which law applied to the first contract.
The Italian seller argued that the first contract was subject to the CISG, whereas the U.S. buyer argued that it was governed by New York’s UCC. The buyer relied on dictum of the U.S. Court of Appeals for the Second Circuit in Rienzi & Sons, Inc. v. Puglisi, in which that court affirmed the district court’s decision to apply domestic New York law based on the submissions of the parties throughout the litigation. In passing, the Second Circuit noted that it “reject[ed] Rienzi’s contention that the CISG is ‘incorporated into’ or ‘a part of’ New York law.” The court further rejected his contention that “the CISG preempts local contract law unless the parties agree otherwise.” Based on these statements, the buyer in Gramercy Holdings argued that the choice of “New York law” referred to laws enacted under New York’s sovereign authority, to the exclusion of the CISG.
The district court hearing Gramercy Holdings rejected this argument. In so doing, it pointed to precedent stating that choice-of-law clauses typically do not address the interaction between state and federal law. The court concluded that “because there is no reason to think that the [f]irst [c]ontract’s choice-of-law clause was intended to exclude federal law generally, it fails to exclude the CISG.”
Some Observations From an International Perspective
From an international perspective, the approach taken by the district court seems convincing. It is indeed hardly plausible to presume that a reasonable person in the shoes of the Italian seller would have understood the choice-of-law clause in favor of New York law that made no reference to the CISG as not including otherwise applicable U.S. federal law of which that treaty is a part. More fundamentally, the decision also contributes to a coherent approach towards choice-of-law clauses in CISG contracts. If the contract falls within the CISG’s sphere of application pursuant to CISG Articles 1–3, the Court needs to apply the Convention to interpret the choice-of-law clause, most importantly CISG Article 8 on the interpretation of statements by the parties. The result reached in Gramercy leads to a uniform application of the Convention, as mandated by CISG Article 7 (1), insofar as, in principle, the interpretation of choice-of-law clauses does not depend on whether contract law falls within the competence of a Contracting State or its territorial units. Thus, absent any further qualifications or pleadings on the basis of domestic law, neither the choice of Italian law nor the choice of New York law will typically lead to the exclusion of the CISG.
While the result therefore fosters the uniform application of the Convention, the district court’s reasoning hardly acknowledges the international context of the transaction. It is mostly concerned with U.S. precedents on the relationship between choice-of-law clauses and different levels of the U.S. legal system. This is surprising, as the interpretation of choice-of-law clauses is an exercise in contractual interpretation that, pursuant to CISG Article 8(2), should take into account what the parties to the transaction could have reasonably understood the clause to mean.
The focus on the national rather than the international context is also regrettable because it might prevent courts faced with similar problems in other Contracting States from embracing the reasoning of the court (for similar discussions in Australia, see the post on this blog). Arguments regarding the application of the CISG could have also been found in the Convention itself: CISG Article 93(4) extends the application of the Convention to all territorial units of Contracting States, unless the Contracting State declares otherwise. Irrespective of the inner workings of the legal order of specific Contracting States, international parties should be able to rely on the fact that the CISG is the substantive law for international sales contracts in all territorial units, unless a declaration under Article 93 is made. Accordingly, from an international perspective, the mere choice of the law of such a territorial unit cannot reasonably be understood as excluding the CISG absent other indications.