When Does a Domestic Choice of Law Provision Result in the Application of International Contract Law?
By: HARLEIGH E. BROWN & S. JAMAL FALEEL
Imagine the company you work for is entering into a commercial contract for the sale of goods with a party based in a foreign country. As an attorney trained in the U.S., you want the basic principles of U.S. contract law as set forth in Article 2 of the Uniform Commercial Code (UCC) to apply to the contract. So you include a standard choice-of-law provision stating that the laws of your state will apply without regard to choice-of-law principles. Would a court, in adjudicating a claim under such a contract, apply the UCC?
In Minnesota, a federal district court deciding this issue held that the Minnesota Commercial Code would not apply to such a contract; instead, finding that the contract would be governed by the United Nations Convention on International Sales of Goods (CISG). This article will consider the court’s decision in the context of decisions of other courts who have examined this issue. But first, a brief overview of the breadth and scope of the CISG would be useful in providing a context for understanding this decision.
The CISG is a treaty that applies to commercial contracts for the sale of goods between parties that have their places of business in different countries that are signatories to the treaty. The U.S. and more than 70 other countries are parties to the CISG. The list of participants reads like a “who’s who” of our major trading partners, including Canada, Mexico, and countries throughout Europe and Asia. Clearly, the CISG can have a significant impact on U.S. companies doing business abroad.
The CISG differs in a number of ways from the UCC’s Article 2 on principles of contract formation, performance, breach, and remedies.1 While a full discussion of these differences is beyond the scope of this article, the article “Special Issues In Cross-Border Contracts,” written by Steven J. Dickinson for the March 2006 issue of Fredrikson & Byron’s International Focus newsletter, provides a good discussion of some of these characteristics. It also considered how Minnesota courts might apply the CISG to contracts when faced with a valid choice-of-law clause that does not expressly exclude the CISG, but refers only to the application of a particular state’s law.
As predicted, the Minnesota federal district court’s decision in Travelers Property Casualty Co. America v. Saint-Gobain Technical Fabrics Canada, Ltd., proved to be just the latest in a long line of decisions which held that even a valid choice-of-law provision that specifically identifies a particular state’s law is not sufficient to preclude application of the CISG. Civ. No. 04-4386 (ADM/AJB), 2007 WL 313591 (D. Minn. Jan. 31, 2007). Travelers Property, like each of the other cases, called for the automatic application of the CISG, absent evidence of a clear intent to exclude its application. Travelers Property involved a dispute between a Minnesota business that purchased glass fiber reinforcing mesh from a Canadian manufacturer for use in the construction of the Pepsi Center, a multi-purpose arena located in Denver. In opposing a motion for partial summary judgment, the Canadian manufacturer sought to invoke the choice-of-law clause in the purchase order used by the Minnesota buyer. Namely, the purchase order contained general terms and conditions of purchase and called for the application of Minnesota law in resolving any disputes.2
In arriving at its decision, the Minnesota federal district court joined “a majority of courts interpreting similar choice of law provisions . . . conclud[ing] that a reference to a particular state’s law does not constitute an opt out of the CISG . . .,” and instead requiring that “parties must expressly state that the CISG does not apply.3 Travelers Property, 2007 WL 313591, at *6. The Minnesota court explained that merely referring to a particular state’s law does not sufficiently evince an intent to opt out of the CISG, because as a self-executing treaty to which the United States is a signatory, the CISG is the law in every state by way of the Supremacy Clause of the United States Constitution. Therefore, “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,’” and referring to a specific state’s law does nothing to demonstrate an intent to exclude application of the CISG. Id. In so holding, courts hope to “‘promote uniformity and the observance of good faith in international trade, two principles that guide interpretation of the CISG.’” Id. (quoting BP Oil Int’l., Ltd. v. Empresa Esatal Petroleos, 332 F.3d 333, 332 (5th Cir. 2003)).
Transactions involving the sale of goods between American businesses and most of its major trading partners are automatically subject to the CISG. Its reach is expansive and can prove outcome determinative. The standard choice-of-law provisions used by most businesses to ensure that predictable and familiar state laws apply do not effectively guard against application of the CISG. Although the CISG’s unique characteristics can prove to be a valuable tool for the well-informed business, failure to understand its defining principles and differences from the UCC can be at best unsettling, and at worst costly. It is, therefore, important for businesses to consult with knowledgeable legal counsel before negotiating or entering into such contracts. This can make the negotiation and performance of such contracts more efficient, and provide more predictability in the event of litigation.
1 Despite its broad scope, the CISG does not apply to consumer sales, the sale of goods at auctions or the sale of securities.
2 The clause specifically provided that “[t]he validity, interpret[ation], and performance of these terms and conditions and all rights and obligations shall be governed by the laws of the State of Minnesota.” Travelers Property, 2007 WL 313591, at *4.
3 Although an express statement excluding the CISG appears to be what most courts require, “selection of a particular choice of law such as ‘the California Commercial Code’ . . . could amount to implied exclusion of the CISG.” Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F.Supp.2d 1142, 1150 (N.D. Cal. 2001).