When a US business enters a commercial contract with a party in another country, the governing law question becomes significantly more complex than it is in purely domestic transactions. The choice of which country’s law, and sometimes which US state’s law, governs the agreement can determine whether key provisions are enforceable, what implied obligations exist, how disputes will be resolved, and whether any judgment or arbitration award can be collected against assets abroad. For US businesses that are new to international contracting, the international dimension can seem daunting. The good news is that the key concepts are manageable, and the same careful thinking that goes into domestic governing law selection applies in the international context, supplemented by a few additional frameworks.
The most important of these additional frameworks, and the one that catches the most US businesses by surprise, is the United Nations Convention on Contracts for the International Sale of Goods, commonly called the CISG. The CISG is an international treaty that the United States has ratified, along with over ninety other countries, and it automatically applies to contracts for the international sale of goods between parties whose businesses are located in different signatory countries unless the parties have expressly excluded it. Many US businesses are entirely unaware of the CISG and discover its existence only when a dispute arises and they learn that an international treaty, not their expected state law, governs their contract.
What Is the CISG and When Does It Apply
The CISG is a uniform international law for contracts for the sale of goods between commercial parties in different countries that have both ratified the Convention. The treaty covers formation of contracts, the obligations of buyers and sellers, remedies for breach, and related matters. It creates a single set of legal rules that applies across national borders, reducing the uncertainty that would otherwise exist when, say, a US manufacturer sells goods to a German distributor and both sides have different expectations about what the law requires.
The CISG applies automatically when two conditions are met: the contract involves the sale of goods, and both parties have their places of business in different countries that are both CISG signatories. The United States, Germany, France, China, Mexico, Canada, Italy, and most major trading partners of the United States have ratified the CISG. If you are a US business selling goods to a company in any of these countries, the CISG applies to your contract unless you have specifically excluded it. The CISG does not apply to service contracts, employment agreements, or contracts for the sale of goods purchased for personal or household use.
The CISG’s rules differ from US commercial law in ways that can matter in practice. Under the CISG, the battle of the forms analysis, which determines which party’s standard terms govern when two businesses exchange forms with conflicting standard terms, differs from the UCC approach. The CISG has different rules for when a contract is formed, when an offer becomes irrevocable, and what constitutes acceptance. The CISG’s approach to damages, while generally compensatory, uses different principles than the expectation damages framework most US lawyers are trained in. A business operating under the assumption that UCC rules govern its international sales contracts may be in for surprises if a dispute arises under the CISG.
Excluding the CISG
The CISG can be excluded by agreement. Article 6 of the CISG expressly permits parties to opt out of the Convention entirely. Many US businesses, once informed of the CISG’s existence and its differences from US commercial law, choose to exclude it in their international contracts. The exclusion clause is typically simple: language such as ‘This agreement shall be governed by the laws of the State of New York, United States of America, and the parties expressly exclude the application of the United Nations Convention on Contracts for the International Sale of Goods’ accomplishes the exclusion cleanly.
Whether to exclude the CISG depends on the circumstances. For US businesses that are familiar with US state commercial law and whose counsel is versed in UCC-governed transactions, exclusion of the CISG and substitution of a familiar US state’s law is often the pragmatic choice. It eliminates a source of legal uncertainty and allows the dispute to be analyzed under rules that the parties’ legal advisers know well. For businesses that regularly contract with parties in many different countries, using the CISG rather than excluding it can be advantageous because it provides a neutral, internationally recognized framework that neither party’s home country law exclusively governs.
Foreign counterparties may also have preferences on the CISG question. A European or Chinese counterparty that is familiar with the CISG may prefer to apply it rather than submit to US state law that their counsel does not know. In negotiations where both sides have approximately equal bargaining power, the CISG sometimes represents a genuinely neutral compromise: neither side has to accept the other’s home country law, and both sides can point to an internationally recognized and well-understood legal framework.
Choosing Governing Law in International Contracts
When parties to an international commercial contract choose a governing law, they face the same basic considerations as in domestic contracts, plus some additional ones unique to the international context. The first consideration is whose law is more neutral and acceptable to both sides. US state law may seem like an imposition to a foreign counterparty with no connection to the designated state. English law, Swiss law, or Singapore law are sometimes used as neutral governing law choices in international contracts because of their reputation for commercial sophistication and their acceptance in the international business community.
For US businesses, the practical preference is usually to choose a US state’s governing law rather than a foreign law. Applying foreign law requires having counsel competent in that law, which adds cost and complexity. If a dispute arises and the contract is governed by German law, your US litigation team must either develop expertise in German law or engage German lawyers. The same applies to any foreign governing law choice. From a purely practical standpoint, US businesses are generally better served by designating a US state’s governing law in their international contracts, particularly when the US party is the drafter.
New York is the most common choice for US businesses in international commercial contracts. New York has a statute specifically validating New York governing law choices in international contracts meeting certain financial thresholds, and New York courts are experienced with international commercial disputes. New York commercial law is also familiar to lawyers in many foreign countries because of New York’s role as the center of global financial markets. Designating New York governing law and New York courts, or international arbitration with New York as the seat, is a well-understood and widely accepted formulation in international commercial contracting.
Enforcement of Judgments and Awards Abroad
One of the most important practical considerations in international contracts is the enforcement of any judgment or arbitration award against assets in other countries. A US court judgment is not automatically enforceable in other countries. The United States is not a party to any general treaty on the mutual recognition of foreign judgments, which means that enforcement of a US judgment abroad depends on the domestic law of the country where enforcement is sought. Some countries enforce US judgments routinely; others require full re-litigation of the merits before enforcing a foreign judgment.
International arbitration awards are substantially easier to enforce across borders than court judgments. The New York Convention, which more than 170 countries have ratified, requires courts in signatory countries to recognize and enforce foreign arbitration awards with very limited exceptions. This enforcement advantage is one of the most compelling reasons for US businesses to choose international arbitration rather than court litigation for their cross-border commercial contracts. An arbitration award issued in New York under JAMS or AAA/ICDR rules can be enforced against assets in China, Germany, France, the UAE, and dozens of other major trading partners with much greater reliability than a US court judgment.
The choice of arbitration institution for international disputes also affects enforceability. Awards from major international arbitration institutions, including the AAA/ICDR, ICC, LCIA, and SIAC, are recognized by courts worldwide as legitimate proceedings by well-established institutions with credible procedures. An ad hoc arbitration award, while potentially valid, may face more scrutiny in foreign enforcement proceedings. If enforcing awards against foreign assets is a real concern for your business, specifying a recognized international arbitration institution in your contract clause is worth the additional specificity.
Key Clauses in International Commercial Contracts
Beyond governing law, several other clauses in international commercial contracts require attention that they might not need in purely domestic agreements. The language of the contract should be specified, particularly when the parties speak different primary languages. When a contract is translated, disputes about the meaning of translated terms can become significant, and a clause specifying which language version controls in the event of a conflict eliminates this ambiguity.
Currency provisions are important in contracts where payment obligations are denominated in a currency that may fluctuate against the dollar. Specifying that all payments shall be made in US dollars, and addressing what happens if the relevant currency is unavailable or restricted by government action in the counterparty’s country, protects your business from currency risk and from the practical problem of being paid in a currency you cannot readily access or convert. Force majeure clauses in international contracts should contemplate not only weather events and domestic disruptions but also government actions such as export restrictions, import prohibitions, currency controls, and sanctions that can prevent performance in cross-border transactions.
Export controls and sanctions compliance provisions have become increasingly important in international commercial contracts. US businesses are subject to the Export Administration Regulations and various sanctions programs administered by the Office of Foreign Assets Control, and these requirements can affect the performance of commercial contracts with foreign counterparties. Including representations by both parties about compliance with applicable export controls and sanctions, along with provisions addressing what happens if performance becomes prohibited by a new sanction or regulatory requirement, is now standard practice in cross-border commercial agreements.
Getting Help Right
International commercial contracts require legal advice from counsel with genuine cross-border experience. The intersection of US law, foreign law, international treaties, and international arbitration norms is a specialized area, and general commercial lawyers may not have the specific expertise needed to advise on the most important clauses in an international agreement. Identifying counsel with actual experience in international commercial transactions in the relevant region or country is a worthwhile investment.
The upfront cost of getting international contracts right is almost always less than the cost of a poorly drafted agreement that becomes the subject of an international dispute. The CISG applicability question, the enforcement question, the currency question, and the governing law question all have answers that experienced international commercial lawyers can provide efficiently. Building these provisions correctly into your initial agreement is far less expensive than litigating their meaning after a dispute arises.