By Gregory J. Reigel
© April, 2019 All rights reserved.
In the current business aircraft sales market it is not uncommon for a transaction involving a business aircraft to have either a buyer or a seller from another country. In those situations, when the parties are drafting their aircraft purchase agreement, they should be aware that the United Nations Convention on Contracts for the International Sale of Goods(“CISG”) could apply to their transaction.
What Is The CISG?
The CISG is an international treaty that was ratified by the United States Senate in 1986. It was intended to be a uniform and fair set of rules for contracts for the international sale of goods to prevent parties to an international transaction from having to analyze the various national or international laws to determine the law applicable to the contract. One of the primary goals of the CISG is to facilitate certainty and predictability of international sales contracts. which, in theory, then decreases transaction costs.
By signing on to the CISG, a country adopts the terms of the CISG as its national law. In the case of the United States, the CISG is now part of U.S. federal law. When it applies to a transaction, the CISG generally replaces the uniform commercial code, adopted by most states within the U.S., with its own provisions regarding contract formation, obligations of the parties, breach, remedies, damages, etc.
When Does the CISG Apply?
The CISG applies to contracts for the sale of goods, including aircraft, between parties whose places of business are in different countries where both countries are contracting states under the CISG (e.g. have agreed to be bound by the CISG). (Note: the CISG only applies to transactions between businesses, not consumer transactions or sales of services). Although the CISG does not apply to the sale of an aircraft, it may apply to parts, components or other goods that are not installed on an aircraft but are otherwise being sold with the aircraft. When a dispute arises out of a contract for sale of goods between parties from contracting states the CISG will apply to the dispute unless the parties elected to exclude its application to their transaction.
Thus, the American business owner of an aircraft will be bound by the terms of the CISG if it contracts with a party whose “place of business” is in a country that is a signatory to the CISG at the time the aircraft purchase agreement was signed, unless the agreement specifically excluded application of the CISG. Since the United States is a signatory, in order to determine if the CISG applies to a business aircraft transaction an American owner must determine whether the other party’s “place of business” with the closest relationship to the aircraft purchase agreement is also within a contracting state.
Article 10 of the CISG provides, “[I]f a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time or at the conclusion of the contract.” The “place of business” determination requires analysis of where the communications about the contract or representations about the product originated, as well as when those communications occurred. This means the communications relating to the entire transaction, including the offer and acceptance as well as performance of the contract. And for those who may be thinking along the lines of where the business is incorporated or where its home office is located (the analysis required for exercise of jurisdiction over a business), that isn’t the case under the CISG. Rather, a location is only relevant if it has the closest relationship to the contract and its performance.
Why Does It Matter?
If application of the CISG applies and has not been specifically excluded in the purchase agreement, then the parties to a business aircraft transaction may be stuck with CISG provisions that may or may not be consistent with the state law otherwise selected or preferred. For example, in the event of a dispute the applicable CISG remedies or damages provisions may be more limited than what would otherwise be provided under state law. Or the CISG’s incorporation of INCOTERMS may be beyond applicable state law. And this is especially true where U.S. courts have either failed to recognize the CISG’s existence in applicable cases or misapplied the body of law to the transaction.
What Can You Do?
If the CISG would otherwise apply to a business aircraft transaction but you do not want it to apply, you must affirmatively opt-out of its application. To do that, you can specifically disclaim or exclude application of the CISG by including language in your aircraft purchase agreement. Merely including choice of law language in an agreement is not considered clear intent of opting-out. Rather, opt-out language should be similar to the following:
“The parties agree that the 1980 United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement.”
So, if you are more comfortable with state law, or you are unfamiliar with the provisions of the CISG and don’t want to take the chance on whether the CISG will beneficial or unfavorable, you will want to include disclaimer language in your aircraft purchase agreement. Inclusion of disclaimer language relieves the parties of having to determine exactly what Article 2 does or does not cover, especially since the CISG’s exclusions must be interpreted narrowly. Otherwise, if you enter into an aircraft transaction to which the CISG applies and do not include disclaimer language, you may be in for a surprise if a dispute arises from the transaction.