What Laws Apply for International Sale of Goods Between China and U.S.

Case Sample: On May 1, 2014, company A from California, U.S. ordered 10,000 bedding sets from factory B from Zhejiang, China, at a price of $25 per set, including freight costs to port of Long Beach, with a total price of $250,000 with 20% or $50,000 deposit paid immediately and the balance to be paid within 90 days, and goods to be delivered within 30 days of deposit. On May 2nd, factory B replied an email accepted the 10,000 sets and payment terms, but countered unit price to be $30 and total price to be $300,000. Company A replied an email accepting the new price, and wired $60,000 to factory B. Factory B shipped all goods on May 31st. As of September 2nd, not receiving the balance payment from company A, factory B emailed company A for the payment. For the first time, company A raised quality issue of the bedding sets, alleging loss of sales and revenues and customer complaints due to the defective goods, causing it suffered $100,000 in damages which shall be deducted from the $240,000 balance. Factory B denied any quality issue and insisted on full payment. Company A refused to pay any sum. Factory B decided to sue company A in the U.S. and wants to know how the laws can help it.
I. When A Contract Doesn’t Specify, The United Nations Convention on Contracts for the International Sale of Goods (“CISG” or the “Vienna Convention”) Applied
A. Sphere of Application and General Provisions of The CISG
The CISG is a treaty that is a uniform international sales law. Now it has been ratified by more than 83 countries that account for a significant proportion of world trade, making it one of the most successful international uniform laws.
The CISG was developed by the United Nations Commission on International Trade Law (UNCITRAL), and was signed in Vienna in 1980. The CISG is sometimes referred to as the Vienna Convention
The CISG allows exporters to avoid choice of law issues, as the CISG offers “accepted substantive rules on which contracting parties, courts, and arbitrators may rely”. Unless excluded by the express terms of a contract, the CISG is deemed to be incorporated into (and supplant) any otherwise applicable domestic laws with respect to a transaction in goods between parties from different Contracting States.
The CISG has been regarded as a success for the UNCITRAL, as the Convention has been accepted by states from “every geographical region, every stage of economic development and every major legal, social and economic system”. Countries that have ratified the CISG are referred to within the treaty as “Contracting States”. Of the uniform law conventions, the CISG has been described as having “the greatest influence on the law of worldwide trans-border commerce”. It has been described as a great legislative achievement, and the “most successful international document so far” in unified international sales law, in part due to its flexibility in allowing Contracting States the option of taking exception to certain specified articles. This flexibility was instrumental in convincing states with disparate legal traditions to subscribe to an otherwise uniform code.
Both China and United States have ratified the CISG, while Hong Kong and Taiwan are some major trading countries that have not yet ratified the CISG.
The CISG applies to contracts of the sale of goods between parties whose places of business are in different States, when the States are Contracting States. Given the significant number of Contracting States, this is the usual path to the CISG’s applicability.
The CISG also applies if the parties are situated in different countries (which need not be Contracting States) and the conflict of law rules lead to the application of the law of a Contracting State. For example, a contract between a Japanese trader and a Brazilian trader may contain a clause that arbitration will be in Sydney under Australian law with the consequence that the CISG would apply. A number of States have declared they will not be bound by this condition.
The CISG is intended to apply to commercial goods and products only. With some limited exceptions, the CISG does not apply to personal, family, or household goods, nor does it apply to auctions, ships, aircraft, or intangibles and services. The position of computer software is ‘controversial’ and will depend upon various conditions and situations.
The CISG is not a complete qualification by its own definition. There gaps must be filled in by the applicable national law under due consideration of the conflict of law rules applicable at the place of jurisdiction.
B. Formation of the Contract Under CISG
An offer to contract must be addressed to a person with definite terms such as describe the goods, quantity, and price – and indicate an intention for the offeror to be bound on acceptance. The CISG does not appear to recognize common law unilateral contracts but, subject to clear indication by the offeror, treats any proposal not addressed to a specific person as only an invitation to make an offer. Further, where there is no explicit price or procedure to implicitly determine price, then the parties are assumed to have agreed upon a price based upon that ‘generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances.
Generally, an offer may be revoked provided the withdrawal reaches the offeree before or at the same time as the offer, or before the offeree has sent an acceptance. Some offers may not be revoked; for example when the offeree reasonably relied upon the offer as being irrevocable. The CISG requires a positive act to indicate acceptance; silence or inactivity are not an acceptance.
The CISG attempts to resolve the common situation where an offeree’s reply to an offer accepts the original offer, but attempts to change the conditions. The CISG says that any change to the original conditions is a rejection of the offer or a counter-offer, unless the modified terms do not materially alter the terms of the offer. Changes to price, payment, quality, quantity, delivery, liability of the parties, and arbitration conditions may all materially alter the terms of the offer.
C. Sale of Goods Under CISG
The CISG defines the duty of the seller as the seller must deliver the goods, hand over any documents relating to them, and transfer the property in the goods, as required by the contract. Similarly, the duty of the buyer is to take all steps which could reasonably be expected to take delivery of the goods, and to pay for them.
Generally, the goods must be of the quality, quantity, and description required by the contract, be suitably packaged and fit for purpose. The seller is obliged to deliver goods that are not subject to claims from a third party for infringement of industrial or intellectual property rights in the State where the goods are to be sold. The buyer is obliged to promptly examine the goods and, subject to some qualifications, must advise the seller of any lack of conformity within ‘a reasonable time’ and no later than within two years of receipt.
The CISG describes when the risk passes from the seller to the buyer but it has been observed that in practice most contracts define the seller’s delivery obligations quite precisely by adopting an established shipment term, such as FOB and CIF. The above case is CIF.
Remedies of the buyer and seller depend upon the character of a breach of the contract. If the breach is fundamental, then the other party is substantially deprived of what it expected to receive under the contract. Provided that an objective test shows that the breach could not have been foreseen, then the contract may be avoided and the aggrieved party may claim damages. Where part performance of a contract has occurred, then the performing party may recover any payment made or good supplied; this contrasts with the common law where there is generally no right to recover a good supplied unless title has been retained or damages are inadequate, only a right to claim the value of the good.
If the breach is not fundamental, then the contract is not avoided and remedies may be sought including claiming damages, specific performance, and adjustment of price but it has been argued the test of foreseeability is substantially broader and consequently more generous to the aggrieved party.
The CISG excuses a party from liability to a claim of damages where a failure to perform is attributable to an impediment beyond the party’s, or a third party sub-contractor’s, control that could not have been reasonably expected. Such an extraneous event might elsewhere be referred to as force majeure, and frustration of the contract.
Where a seller has to refund the price paid, then the seller must also pay interest to the buyer from the date of payment. It has been said the interest rate is based on rates current in the seller’s State ‘since the obligation to pay interest partakes of the seller’s obligation to make restitution and not of the buyer’s right to claim damages’, though this has been debated. In a mirror of the seller’s obligations, where a buyer has to return goods the buyer is accountable for any benefits received.
II. When A Contract Does Specify, The Local Contract Laws Applied
While the parties in the above case sample may designate either China, U.S. or other
third country or territory, by using either country’s laws, to adjudicate the contract disputes, none of the parties did so. Therefore, the CISG applies.
III. Differences of The CISG with US legislation (the “UCC”)
In the U.S., all 50 states have adopted common legislation referred to as the Uniform Commercial Code (“UCC”). The UCC is generally similar to the CISG. The UCC differs from the CISG in some respects, such as the following areas that tend to reflect more general aspects of The U.S. legal system:
1. Terms of Acceptance
Under the CISG, acceptance occurs when it is received by the offeror, a rule similar to many civil law jurisdictions which contemplate for service to be effective upon receipt. By contrast, the U.S. legal system allows acceptance occurred at the time the offeree transmits I to the offeror.
2. “Battle of the Forms”
Under the CISG, a reply to an offer that purports to be an acceptance, but has additions, limitations, or other modifications, is generally considered a rejection and counteroffer. The UCC, on the other hand, tries to avoid the “battle of the forms” that can result from such a rule, and allows an expression of acceptance to be operative, unless the acceptance states that it is conditioned on the offeror consenting to the additional or different terms contained in the acceptance.
3. Writing Requirement
The CISG does not require that a sales contract be reduced to a writing. Under the UCC’s statue of frauds, contracts selling goods for a price of $500 or more are generally not enforceable unless in writing.
4. Warranties and Disclaimers of warranties
The UCC and the CISG have similar provisions for warranties but differ with respect to disclaimers of warranties. Under the CISG, the seller has a four-fold warranty obligation and “must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.” Goods do not conform with the contract unless they “are fit for the purposes for which the goods of the same description would ordinarily be used” and “are fit for any particular purpose expressly or impliedly made known to the seller”. Although the CISG’s merchantability, fitness and title warranties are not identical to the UCC provisions, they are substantially similar and would likely lead to similar results.
However, the CISG does not contain any provisions comparable to the disclaimer procedures that sellers are authorized to use under the UCC. For example, under the UCC, an effective disclaimer of the implied warranty of merchantability must mention “merchantability” and must be in conspicuous writing. Similarly, an effective disclaimer of an implied warranty of fitness must be in writing and conspicuous. The UCC proposes language such as: “There are no warranties which extend beyond the description on the face hereof.” The convention is less formalistic and appears to permit disclaimers of warranties so long as the “parties have agreed” in writing or orally.
5. Perfect Tender Rule
Under the UCC, a buyer is generally entitled to reject goods under a one-delivery contract of sale that fails in any respect to conform to the contract. This is known as the “perfect tender” rule. Under it a buyer may generally (subject to good faith and certain other requirements) reject goods and cancels the contract even if a defect in tendered goods is not serious and the buyer would have received substantially the goods for which it bargained.
The CISG departs from the “perfect tender” rule and makes rejection, revocation of acceptance or cancellation much more difficult. Under the convention’s provisions, a buyer may “declare the contract avoided” only if the failure by the seller to deliver goods constitutes “a fundamental breach” of the contract. A breach of contract is “fundamental” only “if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract” and even then, only if the seller foresaw, or a reasonable party in the seller’s position would have foreseen, such a result.
6. Notice of Non-conforming Goods
The CISG provides that “the buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or should have discovered it.” The buyer bears the burden to establish that notice of non-conformity was given within a “reasonable” time frame. Whether notice was given within a “reasonable” time depends upon the facts and circumstances of the transaction, including the type of goods (for example, notices concerning perishable” time depends upon the facts and circumstances of the transaction, including the type of goods (for example, notices concerning perishable goods should be given more promptly).
Although UCC also requires notice within a “reasonable time”, the CISG approach has been construed far more narrowly and restrictively than the UCC in other nations. Under the UCC, the buyer is afforded “a reasonable opportunity to inspect the goods.” However, under the CISG, the buyer must inspect the goods “within as short a period as is practicable under the circumstances.” Based on these differences, the “reasonable” time periods for notices of non-conformity have been construed abroad as quite short. Further, he specificity mandated by the CISG appears more restrictive than under the UCC. As a result, effective notice of non-conformity under the UCC should be very detailed.
7. Unilateral Price Reduction
The CISG contains many of the same damages remedies as available under the UCC. Generally, a buyer may claim damages if the seller fails to perform. Such damages consist of a sum equal to the loss, including the loss of profit, suffered as a consequence of the breach. These provisions resemble the direct, incidental and consequential damages under the UCC.
However, the CISG includes a novel unilateral price reduction remedy. Under that section, “if the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that the conforming goods would have had at that time.” This pro-purchaser, self-help remedy stems from civil law and has generally not been available in common law jurisdictions such as the United States and England. It is not available if the seller is able to cure non- conformity without causing unreasonable delay or inconvenience to the buyer.
8. Trade Term
The UCC contains some definitions of common trade terms such as F.O.B., F.A.S., C.I.S. and C.I.F. The CISG does not contain any provisions concerning trade terms. The parties may develop their own trade terms to specify the obligations of the parties. However, in the international context (giving varying meanings and nuances), the parties may best achieve clarity by incorporating trade terms from commonly-accepted trade term regimes such as the International Chamber of Commerce Official Rules for the Interpretation of Trade Terms (Incoterms)(2000).
Nevertheless, because the U.S. has ratified the CISG, the CISG in the U.S. has the enforce of federal law and supersedes UCC-based state law under the Supremacy Clause. Among the U.S. reservations to the CISG is the provision that the CISG will apply only as to contracts with parties located in other CISG Contracting States. Therefore, in international contracts for the sale of goods between a U.S. entity and an entity of a Contracting States, the CISG will apply unless the contract’s choice of law clause specifically excludes CISG terms. Conversely, in “international” contracts for the sale of goods between a U.S. entity and an entity of a non- Contracting State, to be adjudicated by a U.S. court, the CISG will not apply, and the contract will be governed by the domestic law applicable according to private international law rules.