Common Law vs UCC vs CISG Contracts

 "One more such 'victory' and we shall be utterly ruined"

King Pyrrhus

(After defeating the Romans at battle of Asculum in 279 BC)

When buying or selling goods, it is important to understand whether you are dealing with the Common Law of contracts or a transaction governed by the Uniform Commercial Code, Article 2- the Sale of Goods (“UCC”) or some other statute based commercial terms and conditions such as the U.N. Convention on Contract for International Sale of Goods (“CISG”). While, in the absence of a traditional Common Law contract (i.e. both parties sign and agree to identical terms), the UCC governs the purchase of goods via an exchange of forms in the case of domestic (USA) transactions while the CISG governs the purchase of goods via an exchange of forms between parties “residing” in different countries which have adopted the CISG, subject to “opt-out” provisions. This is a threshold issue and choosing the “wrong door” can have both unintended and serious consequences. Despite the fact of a “global economy”, many attorneys and judges are not even aware that the CISG exists. Moreover, many executives are not aware of the risks involved in doing business via an exchange of forms, i.e. buyer’s purchase order followed by seller’s acknowledgment.

Many buyers take great comfort doing business under the UCC. They like the fact that the UCC is commonly regarded as somewhat “pro-buyer” and that it has dispensed with many of the traditional contract formalities. It is certainly convenient to be able to create a binding contract for the purchase or sale of goods by exchanging forms between the buyer and the seller, even if the parties’ respective forms contain contradictory contract terms. Under the UCC, the contradictory contract terms would cancel each other out and the UCC’s provisions would apply. This can lead to unhappy and unintended consequences.

Such a scenario sets up the classic “battle of the forms”. Indeed, allowing parties to create enforceable agreements by an exchange of conflicting contract terms has been described by some learned commentators as the “…greatest statutory mess of all times”. Careful draftsmanship might give buyers a slight advantage in winning the “battle of the forms”; however, the only guaranteed way to win the “battle of the forms” is not to fight it. Moreover, even if you win “the battle”, there is still the cost of battle and any victory may well be a Phyrric Victory. Parties should also be cautious about relying too heavily on the UCC to protect them. There is simply too much ambiguity about what the UCC provisions say and mean. Some of the many sources of that unavoidable ambiguity are discussed below.

The UCC was first published in 1952 as a joint project between two private institutions; namely, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) and the American Law Institute (“ALI”). Top legal scholars were enlisted with the goal of harmonizing the law of sales and other commercial transactions throughout the United States. The NCCUSL and ALI have a permanent editorial board that periodically updates the code with official comments or revisions. The goal of harmonizing the law in this area was and remains laudable but quite ambitious given the complexity of the issues and the nature of language. The drafters necessarily had to resort to some rather vague terms and concepts such as “good faith”, “commercial impracticability”, “unconscionability”, “essential purpose”, “reasonable efforts”, “material alterations”, “rightful” and the like. Even the definition of “merchant” (someone regularly dealing with goods of the kind) can prove problematic, especially in certain situations such as software or infringement claims. Thus, the ambiguity of language becomes the first “layer” of potential confusion. More potential confusion to come. 

The UCC only becomes “law” when individually adopted by each State. Some States have chosen to adopt different versions of the UCC or selected portions thereof. This means that the statutory versions of the UCC may differ State by State. This is yet another potential “layer” of confusion. This statutory language, whether similar or identical to the original version of the UCC, is then applied to particular facts and circumstances by State courts. It is easy to imagine that different judges in different jurisdictions might read the complex language of the UCC, as adopted by their particular State, differently. This is a third and very real potential “layer” of confusion. Of course, the UCC does not apply to contracts purely for services. However, in “hybrid” situations where both goods and services are being purchased the UCC applies where the transaction is “predominantly” for the purchase of goods. This is a fourth potential “layer” of confusion. Therefore, when parties choose to contract via purchase order, i.e an exchange of contradictory documents (e.g. requests for proposals, proposals, boiler plate, pricing data, promotional material, meeting minutes, scope documents, etc.) the stage is set for dreaded and destructive ambiguity; the Hobgoblin of all contracts. 

Purchase orders no doubt have their place for routine and safe transactions. But where certainty and predictability are important, the UCC allows the parties to contract in the traditional way by having both parties formally sign an agreement by their respective duly authorized representatives which clearly and completely reflects the rights, remedies and responsibilities of the parties, i.e. a contract. As a broad proposition, a well-crafted transaction specific contract provides far greater certainty and predictability than relying on the language in the various versions of the UCC as adopted and interpreted by individual States. It really boils down to the parties’ tolerance for uncertainty… “risk”.

Another factor which could seriously affect certainty as well as rights and remedies, is whether the transaction falls under the CISG. Many countries, including the United States, have agreed to a treaty which adopts the CISG as applicable to international business transactions between parties residing in different countries. The CISG is essentially the effective sales law of North American Free Trade Agreement (“NAFTA”). While the UCC is commonly regarded as “pro-buyer”, the CISG is often viewed as “pro-seller”. Unless a party chooses to expressly “opt out” of the CISG, the CISG (together with the Incoterms, developed by the International Chamber of Commerce) is likely to govern in the case of international transactions. If you opt out of CISG, then domestic law would typically apply. Like the UCC, the CISG also allows you to do business via an exchange of contradictory forms, but the rules are slightly different as compared to the UCC. However, the same “layers” of potential ambiguity discussed above in the context of the UCC, are alive and well when dealing with the CISG. In addition, although about 85 countries have adopted the CISG as of February 2017, there are notable exceptions including the United Kingdom. Other countries have adopted the CISG subject to certain “interpretive comments”. Other countries have declared that the CISG would not apply within certain trading circles (e.g. inter-Scandinavian trade). Other countries have applied territorial restrictions to the applicability of the CISG. Naturally, just like the UCC, the CISG has its own linguistic challenges.

Consider the case of Asante Technologies Inc. vs PNC- Sierra Inc. (C 01-20230 JW) where a US buyer sought to obtain electronic components from a Canadian seller via an exchange of purchase orders and other documents. The court noted that there was no single contract embodying the parties’ agreement but instead consisted of five purchase orders which contained technical specifications. The buyer claimed a breach and filed suit in state court under the UCC, but the seller had the case removed to federal court given that the transaction was held to fall under the CISG. The federal court held that absent a sufficient “opt-out” provision, the CISG applied. The choice of law provision was not sufficient to avoid falling under the CISG.

Why expose yourself to such uncertainty? If you are purchasing critical components with strict technical specifications it would seem only prudent to have the transaction be subject to a traditional contract where both parties indicate their agreement by signing the same document. 

Given the fact that it is relatively easy to “opt out” of the CISG and that many US firms may prefer to do business under the laws of the United States, knowing about the Common Law of Contracts and the UCC has relevance for international as well as domestic transactions. A word of caution: as noted above, simply having a choice of law provision in your contract is generally not sufficient to get you out from under the CISG. Some jurisdictions take a different view and hold that a choice of law provision takes you out of the CISG… but why take the risk. There is specific “opt-out” language that should be used.

If you are in the business of managing risk the lesson is clear: when the stakes are high use a well-crafted common law contract and avoid the ambiguities of doing business via an exchange of competing forms under either the UCC or the CISG. Avoid the Hobgoblin.

X. Paul Humbert, Esq. has over twenty years of legal experience in negotiating and structuring complex commercial transactions of all types. Mr. Humbert heads The Humbert Group (“THG”), specializing in assisting management professionals in all phases of execution and process improvement. In addition to full-time consulting for both public and private clients, Paul lecturers at Rutgers University where he teaches Contract Management to MBA candidates. Paul has co-authored: Contract and Risk Management for Supply Chain Professionals; Model Contract Terms and Conditions with Annotations and Case Summaries; and Build Your Playbook for Managing Supply Chain Transactions.