Differences between the UCC and the CISG
There are many important differences between the CISG and the UCC. For example, sellers may receive consequential damages under the CISG even though the UCC generally prohibits them. Other examples of differences between the CISG and the UCC arise in the areas of the rules for contract formation, the statute of frauds, and the parol-evidence rule – just to name a few. The following discussion describes just a few of those differences.
Contract Formation
The UCC section often referred to as the battle of the forms, Section 2-207, and the other UCC Article 2 sections on contract formation are good examples of important differences in how the CISG and the UCC treat contract formation and different or additional terms. The UCC drastically changed the common law contract rule, nicknamed the “mirror image” rule. Instead of following the common law rule that communications with additional or different terms are rejections of offers and become counter offers, thereby often allowing the last major communication with changes to control the deal, the UCC rejected this approach to contracting. The UCC’s rules are somewhat more complicated when determining the exact terms in a deal; however, the most important change rejected the mirror image rule by allowing a communication with additional or different terms following an offer to become an acceptance, even though the new terms changed the offer. Whether those terms become part of the contract requires an analysis of Section 2-207 that is beyond the scope of this brief article.
The CISG does not follow the same contract formation rules as the UCC or the common law. The CISG, by combining both rules, developed a new way to determine whether a contract has been formed in an international sales contract and what terms to include. If an attorney believes the UCC applies to her or his contract but later learns that the CISG rules apply, that attorney could be in for a rude awakening.
A case that illustrates this potential problem is Allied Dynamics Corp. v. Kennametal, Inc., 2014 WL 3845244 (E.D.N.Y. 2014). The main issue in this case was whether a forum-selection clause was part of the contract between Allied, a New York buyer, and Kennametal, the parent company of MFS, an Italian company that manufactures investment castings for gas turbines. That answer turned on the rules of contract formation. Allied did not want a forum-selection clause requiring litigation of disputes in Milan, Italy, contained in Kennametal's documents to be part of the sales contract. Had this contract been governed by the UCC, that argument might have won the case. However, the CISG applied.
Kennametal produced a quote for a customer after receiving an initial inquiry from a potential buyer. These quotations did not state quantities and only listed prices for “budgetary” considerations because Kennametal needed to conduct more testing and determine other specifications for the product. After Kennametal sent a quotation to Allied, Allied replied with various purchase orders (POs). These POs contained quantities, costs, the parts desired, and other important specifications. Once Kennametal received the POs from Allied, it conducted an internal review to ensure that the POs matched the original quotation. Then, it sent a four-page document to Allied acknowledging the order and finalizing the order confirmation. That order confirmation contained additional general terms and conditions, including the disputed forum selection clause.
Although the court acknowledged that sales quotations could be offers under the CISG, they were not in this case because they were listed as "budgetary" and did not state the quantities that Allied would order. The result under the UCC likely would be the same. The POs that Allied sent after receiving the quotes, however, were definite enough to be offers under the CISG and the UCC. After Kennametal received the POs, they sent order confirmations containing the forum selection clause, as well as detailing the order and other terms and conditions. If this contract were governed by the UCC, those order confirmations could be acceptances under 2-207 (1), despite the fact that they contained new and different terms. Whether the forum selection clause was included would depend on §2-207 (2) and Allied might be able to knock the forum selection clause out of the contract if it materially altered the contract. However, under Article 19 of the CISG, Kennametal's order confirmations were rejections that became counter offers because they incorporated new standard terms and changed the payment terms in the contract, which materially changed the original offer. The UCC does not allow a material change to thwart an acceptance. Instead, a material change becomes relevant under the UCC after the acceptance occurs, when determining whether the term is part of the contract.
Although there was some dispute about how and whether those counter offers were accepted, the court ultimately decided that the credible evidence showed that the parties intended to contract and that the counter offers were accepted when Allied did not object to the inclusion of the new terms and conditions. Because this case was governed by the CISG, the contract was formed at a different point than it would have been under the UCC.
Statute of Frauds
The CISG has no statute of frauds. Instead, under Article 11, contracts memorialized by a writing are not privileged over verbal contracts. However, a country can choose to enter a declaration pursuant to Article 96 of the CISG opting out of certain CISG Articles, including Article 11. This effectively reanimates the statute of frauds for that country’s purposes. The more important question is, what happens when a dispute arises between parties from one country with an Article 96 declaration and one with none? This issue was explored in Forestal Guarani S.A. v. Daros International, Inc., 613 F.3d 395 (3d Cir. 2010).
In this case, which involved a dispute between New Jersey buyer Daros International, Inc., and Argentinian seller Forestal Guarani S.A, nearly 2 million dollars’ worth of lumber products had been contracted for by verbal agreement. Although there was indisputably a contract, the contract was not memorialized by a writing. Daros paid the first $1.4 million, but refused to pay the balance, claiming that its liability for the additional sum could not be established in writing. The parties agreed that the CISG applied: the complication was that Argentina, but not the United States, has made an Article 96 declaration.
The court noted a difference in approach between courts, with the minority holding that a writing is required if either country has issued an Article 96 declaration, and the majority requiring a choice-of-law analysis to determine which country’s law should apply – and thus whether a writing should be required. The minority approach would allow one country’s approach to trump the other’s.
The court found that the CISG did not "expressly settle" how to address a situation in which one country, but not both, had opted out of Article 11, and held that the "general principles" referenced by Article 7(2), which are normally used to fill gaps in the language of the convention, did not provide sufficient guidance to fill the gap. Thus, the court applied the rules of private international law as directed by Article 7(2). Lacking sufficient information in the record to complete a choice-of-law analysis, the court remanded the matter for the trial court to do so.
Parol Evidence
Article 8(3) has been described as a “command” to give “due consideration” to parol evidence in all circumstances. The “due consideration” language leaves leeway for courts to decide how much consideration to give, depending on the specific evidence in question.
Cedar Petrochemicals, Inc. v. Dongbu Hannong Chemical Co., Ltd., 2011 WL 4494602 (S.D.N.Y. 2011), involved the sale of phenol from Dongbu Hannong Chemical Co., Ltd., a South Korean seller, to Cedar Petrochemicals, Inc., a New York buyer, and ultimate resale to a third party, Erista. The parties’ final agreement specified phenol meeting a color specification of 10 Hazen units maximum on the Platinum-Cobalt Scale. The phenol was conforming when it was inspected in the South Korean port where delivery took place. By the time the phenol reached Rotterdam, on its way to be resold to Erista, the color had degenerated to over 500 Hazen units.
The question was whether the phenol was conforming because it met the contractual specifications at the time of delivery, even though it later degraded. Cedar presented conflicting narratives – one in which it informed Dongbu of the intention to resell the phenol to Erista before the contract was concluded, and one in which it informed Dongbu of this intention after the contract was concluded. In each instance, Cedar argued that the fact that Erista required phenol of 10 Hazen units maximum became part of the parties’ contract. Dongbu contends that the Erista specifications never became part of the parties’ contract and that, because the phenol was conforming at delivery, there was no breach.
Dongbu alleged that the court could not consider extrinsic evidence regarding either the ordinary use of phenol or Cedar’s intent to resell the phenol to Erista, because the contract contained a merger clause. In rejecting this argument insofar as the “ordinary use” evidence was concerned, the court held that, even if the merger clause were dispositive as to the kind of parol evidence mentioned in CISG Article 8, the evidence would still be admissible as a trade usage pursuant to CISG Article 9. In addition, insofar as Cedar’s intent to resell the phenol was concerned, the court held as a preliminary matter that the mere existence of the merger clause would not be dispositive. Instead, “extrinsic evidence . . . should not be excluded, unless the parties actually intend the merger clause to have this effect.” In addition, even were the merger clause found to signify that extrinsic evidence not be considered, thus effectively “re-animat[ing] the parol evidence rule,” the parol-evidence rule would not block consideration of any post-contractual discussions. Since the evidence was in conflict as to whether Cedar informed Dongbu of its intentions before or after the contract was memorialized, this issue could not be decided at summary judgment.
Conclusion
The increased use of the CISG by U.S. courts represents a positive trend. Therefore, it has become important that U.S. attorneys be familiar with the CISG to properly represent their clients by either planning for the transaction to be governed by the CISG or by choosing to opt out of it, and doing so effectively.