Sales To and From China. What Does Your Choice of Law Clause Look Like?
If the US party is drafting the sales contract then it probably says something like, “The sales law of the State of California shall govern this contract,” with the intention that California’s version of UCC Article 2 will govern the contract. If the goods are destined to China for a client with sufficient bargaining power then the contract probably reads something like, “This contract is governed by the laws of China,” with the intention that the Contract of Law of China (CCL) govern the contract. Neither might get you want you actually want, and a professor of mine liked to tell us that when attorneys make that assumption they’re committing an act which is “tantamount to malpractice.” Why? Because as worded, the contract is actually governed by the CISG in the US, and by some hybrid of the CISG and the CCL in China.
If the sales contract is between parties in California and China, and the contract is supposed to be governed by California law then the ‘why’ is more easily analyzed. The Supremacy Clause of the US Constitution says that after a self-executing treaty, such as the CISG, has been approved by Congress and made the President, the treaty then becomes the law of the States. Article 1 of the CISG is quite clear that when a contract for the sale of goods is entered into by two Contracting States, which China and the US both are, the CISG governs the contract. This means that for an international sale of goods from the US to China, the sales law of the State of California is not UCC Article 2, but the CISG.
Did that throw you off? You’re not alone. Michael Wallace Gordon did an experiment with the Florida Bar and Florida Judges over 10 years back in which he sent surveys to 100 randomly selected members of the Florida Bar and 100 Judges who sit for civil matters on the Florida Circuit Court. One of the questions was:
“Would you consider a clause in an international contract which states that ‘The Law of Florida shall apply’ to mean - (1) you have opted out of the CISG in favor of the UCC, or (2) since the CISG is the law of Florida the CISG would apply?” [I can't find a free version of the article on the web, but here's a cite: 46 Am. J. Comp. L. 361.]
50% of the practitioners, but not a single judge properly identified that the UCC would not apply and the CISG would apply. Troubling… But, the judges would at least be overruled on appeal.
How does it work in China? Differently… Chinese scholars are divided over whether there is actually such thing as a self-executing treaty in China. The side that says there is no such thing as a self-executing treaty argue that treaties only become laws after implementation through statute. The other side argues that once China ratifies a treaty it becomes a part of internal law. The history of the Foreign Economic Contract Law (FECL), CISG, and CCL shows that in the case of international sales law, China has sort of followed both paths.
The FECL was drafted before China ratified the CISG in 1988, but the CISG was finished well before the FECL was begun. A Chinese scholar, Ding Ding, says that China’s legislative history shows that the FECL was written with adherence to the CISG in mind. This resulted in judges and arbiters applying two main types of law: either wholly domestic sales law, or application of the FECL with gap filling by the CISG. CIETAC followed the second approach and led the way in spreading the influence of the CISG in China. This was the common method until the adoption of the CCL in 1999.
The NPC itself wrote that the CCL was based on the CISG and the UNIDROIT Principles. An author analyzing CIETAC cases published at Pace University’s CISG website found that post CCL, CIETAC has adhered to the CISG more strongly over the application of Chinese domestic law.
What’s the lesson? Draft your contract with a solid choice of law clause. A flimsy clause is gonna cause some headaches. The greater opacity of the Chinese legal and arbitral systems means that if your sales contract refers to the “sales of law China,” you’d better be prepare arguments under the CCL, the CISG, and a hybrid of the two becaues it is uncertain which will be applied. This is unlike the US where you can be certain that the “sales law of California” means that the CISG is the applicable law governing the contract.