China Law Blog

Will Lewis over at Experience Not Logic (ENL) does an excellent job explaining a somewhat difficult but important legal concept in the international sale of goods. The concept is choice of law and the point of ENL's post, entitled, "Sales To and From China. What Does Your Choice of Law Clause Look Like?" is that companies frequently intend to have their contracts operate under one law, but mistakenly write their contracts in a way that some other law will apply. Let me explain.

With few exceptions, the Uniform Commercial Code (UCC), Section 2, governs the domestic sale of products in the United States. With few exceptions, international product sales contracts are governed by the United Nations Convention on Contracts for the International Sale of Goods (CSIG), if the contract is between companies from countries that have signed on to CSIG. Both China and the US are signatories, as are nearly all other leading commercial nations.

But here is where companies make their mistake. American companies oftentimes will put in their contracts that they want US law or their own specific state's law (ENL uses California by way of example) to apply. The problem with this is that US law says CSIG is THE law for international sales so if US or California law does apply, that law would say CSIG should apply, not the UCC. (For you lawyers out there, I know I am being lax here when I talk about US law, but you know what I mean.)

ENL also analyzes how China would treat a provision calling for application of China law and concludes that CSIG would probably apply, but some courts might apply China's contract law.

There is a way around having a US court apply CSIG and that is to put a provision in your contract that you want California's (or any other state's) UCC to apply and specifically noting you do not want CSIG to apply.

Now the interesting thing about all this is that the various laws are way more similar than different and so most of the time, the choice of law will not make any substantive difference. I have dealt with these choice of law issues in an international context maybe 10 times in my career, mostly with contracts involving Russia, China, and Korea, and best as I can recall, the substantive law in every instance was pretty much the same.

The real problem with the lack of clarity regarding applicable law is greatly increased legal costs if and when there is a dispute. Though the substantive law turned out to be the same the 10 or so times I had to deal with a confusing choice of law provision, in each of those instances, I had to conduct double the research to determine the substantive law and then spend additional hours explaining to the arbiter the law under two different legal regimes. In some of those cases, I had to bring in foreign lawyers as paid experts to give fuller explanations on their country's laws.

And note that I said the laws turned out to be "pretty much the same." Lawyers can write 25 page briefs explaining the difference between "must" and "should" and relatively insignificant differences among laws are perfect fodder for aggressive litigation tactics and for larger legal fees.

The key is often not so much the law that is to be applied, but rather, to create certainty in the contract as to the ONE law that will be applied. We generally use CSIG in our international contracts simply because it is generally accepted by all parties without much fight and because it generally works just fine.