Federal Court Rejects Application of CISG

August 2006

Last month the U.S. District Court for Washington, Western Division (Seattle) rejected arguments that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) applied to a contract dispute involving an approximately USD 1,000,000 purchase of red cedar siding for use at a construction site in Moscow.

The plaintiff was a British Virgin Islands supplier of construction materials to clients around the world.  The company had entered into a contract with a Washington corporation for custom-manufactured wood products to be used by the plaintiff's client in Russia.  A second defendant was a Washington corporation that contracted with plaintiff to provide services related to quality control of the good! s supplied by the materials supplier.  The plaintiff alleged the defendants breached their contracts with plaintiff.

In opposing the defendants’s motion for summary judgment, the plaintiff argued the CISG applied.  The court noted that the contracts at issue did not contain choice of law clauses.  The court found that by its own terms, the CISG applies where parties have places of business in different states and those states are contracting states (Art. 1(1)(a)) or when the rules of private international law lead to application of the law of a contracting state (Art. 1(1)(b)).  Although the United States ratified the CISG in 1986, the court noted that neither the British Virgin Islands nor the United Kingdom is a signatory to the treaty.  Accordingly, the court held that Art. 1(1)(a) could not be the basis for applying the CISG in the case.

The court also rejected the plaintiff’s argument that the CISG applied despite the parties not all being located in contracting states.  Relying on Art. 1(1)(b), the plaintiff argued that applying private international law would lead to applying Canadian, U.S. or Russian law, and because all three of these are contracting states, the CISG applies regardless of the plaintiff not being located in a contracting state.  The court noted, however, that when the U.S. ratified the CISG, it invoked Art. 95 of the Convention, which allows contracting states to “opt out” of and not be bound by Art. 1(1)(b).  Therefore, the court held, as a matter of law, the plaintiff could not circumvent the requirement of Art. 1(1)(a) by relying on Art. 1(1)(b).

Companies involved in international business must be familiar with the CISG.  When preparing contracts, purchase orders and other instruments regarding the sale of goods, they must determine whether the CISG will apply and, if so, whether application of the CISG is not desired, so it can be excluded properly in the contract.  This recent case demonstrates how a lack of clarity in an agreement leads companies to litigate preliminary issues before addressing the merits of a dispute, needlessly adding to litigation costs.