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Interpretation of "place of business": Comparison between provisions of the CISG (Article 10) and counterpart provisions of the Principles of European Contract Law

Allison E. Butler [*]
June 2002

1. General interpretation and application in the CISG and the PECL
2. "Place of Business" in the interpretation of the contract
3. Several places of business under the CISG and the PECL
4. Habitual residence
5. Conclusion

1. General interpretation and application in the CISG and the PECL

The content and function of article 7:101(2) and (3) PECL are similar in substance and form to the counterpart provision contained in article 10 CISG. Both provisions exemplify the drafters' intent to adopt the "closest connection" principle in contract interpretation and supplementation when determining the relevant "place of business" of a party absent an express provision.[1]

The PECL Notes to article 7:101(2) and (3) confirm that the basic elements are based on article 10 CISG.[2]

However, although the provisions apply the same theory, its application is limited in scope under 7:101(2) PECL as compared to article 10 CISG.[3] [page 275]

2. "Place of Business" in the interpretation of the contract

Subsection (1) of 7:101 PECL prescribes the place of performance in the event where the location for performance of the contract "is not fixed or determinable from the contract."[4] The PECL expressly addresses the situation where a creditor or debtor has two places of business or does not have a place of business. As such, the concept of place of business as set forth in subsections (2) and (3) operates as a supplementation for determining the location for the performance of a contract, as well as an interpretive guide for defining the location of performance. Thus, the scope of the principle as adapted by the PECL is used to determine the performance of a contract.

In contrast, the issue of determining the relevant place of business of a party is an issue that frequently arises in a number of different provisions under the CISG.[5] However, the primary and most common usage of "place of business" as facilitated under Article 10 CISG is its interpretive part in the unilateral conflict rule contained in Article 1(1)(a) CISG. Hence, when both articles are read in conjunction they "form the lex specialis of conflicts of laws in contract applicable to contracts of sale of goods between parties whose places of business are in different Contracting States to the Convention."[6]

The concept of "place of business" is not defined under the PECL. In the majority of the cases, however, "place of business" refers to a party's permanent and regular place for the transaction of general business and is not a temporary place of sojourn during sales negotiations.[7] Hence, if a corporation conducts business temporarily at a [page 276] location, the PECL would not consider this location a place of business.

Under article 10 CISG, there is an overwhelming cognizance that the place of business is where "the center of the business activity directed to the participation is located," which links the contracting party to the State where the business is conducted, provided the party has autonomous power.[8] Notably, a business's "autonomous power" appears to be the key component when courts have scrutinized this term.[9] Consequently, this assumption, as with the PECL, has led many commentators and courts to conclude that a place of business such as the location of an agent, representative or distributor,[10] liaison office,[11] conference center or exhibition or a rented office(s) at an exhibition, fail to constitute a place of business for the purposes of article 10 CISG, absent facts to the contrary. [page 277] Notably, however, one court did find that a corporate branch was the place of business under article 10 CISG and not the company's headquarters located in a different country. This finding was based on the fact that the branch had the closest relationship to the contract and its performance.[12]

3. Several places of business under the CISG and the PECL

Article 7.101(2) PECL provides for the determination of place of performance when a party has more than one place of business: the place of business that has the closest relationship with the contract and its performance having regard to the circumstances known to or contemplated by the parties at the conclusion of the contract. Thus, the PECL will look to the knowledge and intent of the parties when determining the place of business.

Article 10(a) CISG also establishes similar criteria to resolve this issue. Notably, when reference is made to the performance of the contract, it is referring to the performance that the parties knew or contemplated when they were entering into the contract. For example, if it was contemplated by a party that performance of the contract would be in State A, a determination that her or his place of business was in State A would not be altered by his or her subsequent decision to perform the contract at his or her place of business in State B.

In judicial application of Article 10 CISG, however, the courts have routinely looked not only to the intent of the parties but also to the "totality of the contract."[13]

This term is used as an examination of the contract as a whole. Hence, the fact that a third party negotiated a contract has had little significance to the courts when determining the [page 278] "place of business." However, certain factors that are not known or contemplated by both parties at the time of entering into the contract may not be taken into consideration. Such factors include, but are not limited to, supervision over the making to the contract by a head office located in another State, or the foreign origin or final destination of the goods.[14] As with Article 7:101(2) and (3) PECL, these matters are reviewed subjectively.

4. Habitual residence

article 7:101(3) PECL specifically deals with the case where one of the parties does not have a place of business. In such circumstances, a factual determination is to be made as to the party's habitual residence. Upon such finding, performance is to be effected at the party's habitual residence. "Habitual residence" is where the party actually lives.[15] Notably, it is irrelevant as to whether he or she has a permit to live in the country or as to whether the party frequents another country, provided he or she normally returns to the first place.

Article 10(b) CISG provides for a similar situation, so long as the contract is for sale of goods intended for commercial purposes and not simply for "personal, family or household use" within the meaning of article 2(a) CISG.[16]

5. Conclusion

A comparison of the two documents illustrates that both the CISG and the PECL adopt the "closest relationship" theory to determine the relevant "place of business." However, in application, it is apparent that article 10 CISG is broader than Article 7:101(2) and (3) PECL; the latter relies solely on the place of performance of the contract. In contrast, article 10 CISG, not only extends beyond its jurisdictional application in conjunction with article 1(1)(a) CISG but also has further application and reference throughout the CISG. [page 279]

Moreover, judicial review has further refined the definition by expressly excluding those places that do not contribute to the totality of the sale, which the parties had intended. CISG case law has thus provided a valuable insight into the terms and application of the "closest connection" principle. [page 280]


FOOTNOTES

* The author received her JD from Loyola University School of Law, New Orleans, Louisiana, USA (Common Law Program) and her B.A. in International Relations, with honors, from the University of South Florida, Tampa, Florida, USA. She is a published author and a private practitioner in Martin County, Florida, USA.

This comparative is also published at 6 Vindobona Journal of International Commercial Law and Arbitration (2002-2) 275-280. Pagination to that publication is provided to facilitate citation to the Vindobona text.

1. See art. 10 CISG; Art. 7:101(2) PECL. The "closest relationship theory" is the place of business having the closest relationship with the contract. In contrast, there is the "theory of the principal place of business," which is the relevant place of business is where the main seat is located. See generally, Franco Ferrari, Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing, 15 Journal of Law and Commerce (1995), Section II. 4. "The 'Place of Business' under CISG", available at <http://cisgw3.law.pace.edu/cisg/biblio/2ferrari.html>. The original intent of the drafters of the CISG to adopt the theory of "principal place of business" as evidenced by the proposal reprinted in UNCITRAL Yearbook, vol. II (1971) 52, available at: <http://www.uncitral.org/english/yearbooks/yearbook-index-e.htm>; however, this was later rejected.

2. Ole Lando and Hugh Beale, eds., Principles of European Contract Law: Part I and II, Kluwer Law International (2000) 330-330, 332.

3. Under 7:101(2) PECL the principle is applied to determine the place of business relevant for place of performance when the term is absent from a contract and there is more than one place of business. In contrast, however, the theory of "closest connection" is not limited to its content under the CISG. For example, the closest relationship theory as set forth in article 10 is used to determine the place of business relevant for the determination of choice of law under an international sales contract when there is more than one place of business as well as other applications throughout the CISG. See infra, note 5. Both 7:101(3) PECL and Article 10 CISG are identical in their treatment of parties without a place of business.

4. See Article 7:101(1) PECL.

5. There are numerous applications of the place of business, in particular provisions of the Convention; see the examples offered in the Secretariat Commentary to the Draft Convention as manifestations of the concept (e.g. Arts. 12, 20(2), 24, 31(c), 42(1)(b0, 57(1)(a) and 96) CISG; Text of Secretariat Commentary on article 9 of the 1978 Draft [draft counterpart of Art. 10 CISG], available at: <http://cisgw3.law.pace.edu/cisg/text/secomm/secomm-10.html>.

6. Carolina Saf, A Study of Interplay between the Conventions Governing International Contracts of Sale, available at: <http://cisgw3.law.pace.edu/cisg/biblio/saf.html>. See illustrative case, Germany 13 April 2000 Amtsgericht [Lower Court] Duisburg [English translation available online at http://cisgw3.law.pace.edu/cases/000413g1.html].

7. See Comments and Notes to Article 7.101(2) PECL, Comment E. Precisely the same approach applies to the CISG. In corroboration, Honnold states: "During the preparation of the Convention, some delegates were concerned lest 'place of business' be construed to extend to a hotel room or other temporary place where a traveling agent might conduct negotiations. Referring to a 'permanent' place of business presented drafting difficulties, and most delegates concluded that temporary sojourns would not establish a 'place of business'. The term that corresponds to 'place of business in the official French text is établissement and in the official Spanish text is establecimiento - words that seem to be inconsistent with a temporary stopping place." John O. Honnold, Uniform Law for International Sales, 3rd ed., Kluwer (1999) 132 [citations omitted].

8. See, Ferrari, supra note 1, referencing German Federal Supreme Court's interpretation of "place of business" in ULIS Article 1. Judgment of June 2, 1982, BGH WM 846 = 83 IPRax 212.

9. See the relevant case law:

- Germany 28 February 2000, Oberlandesgericht [Appellate Court] Stuttgart [English translation available at http://cisgw3.law.pace.edu/cases/000228g1.html] (holding Spanish representative of German manufacturer-seller in Spain was not a place of business absent legal authority to bind the German manufacturer to Spanish buyer);

- Germany 13 November 2000, Landgericht [District Court] Köln, <http://cisgw3.law.pace.edu/cases/001113g1.html> (holding Italian agent in Germany had not authority to bind Italian company in German-Italian contract dispute);

- United States 27 July 2001, Federal District Court, Asante Technologies, Inc. v. MC-Sierra, Inc., <http://cisgw3.law.pace.edu/cases/010727u1.html> (holding U.S. nonexclusive distributor not acting as agent absent authority to bind U.S. company in contract with Canadian company);

- France 4 January 1995, Cour de Cassation [Supreme Court], Fauba France FDIS GC Electronique v. Fujitsu Mikroelectronik GmbH [English translation available online at http://cisgw3.law.pace.edu/cases/950104f1.html] (holding liaison office of German company in France was not principal place of business absent corporate status in action against French buyer);

- ICC Arbitration Case No. 7531 of 1994, <http://cisgw3.law.pace.edu/cases/947531i1.html> (holding Austrian-buyer liaison located in China was not place of business in Chinese-Austrian dispute, notwithstanding that the liaison office in China may have been involved in the negotiating process.

10. See, Germany 28 February 2000, Oberlandesgericht [Appellate Court] Stuttgart, supra note 9; Germany 13 November 2000, District Court Köln, <http://cisgw3.law.pace.edu/cases/001113g1.html>; U.S. 27 July 2001, Federal District Court, Asante Technologies, Inc. v. MC-Sierra, Inc., supra note 9.

11. See France 4 January 1995, Cour de Cassation [Supreme Court], Fauba France FDIS GC Electronique v. Fujitsu Mikroelectronik GmbH, supra note 9; ICC Arbitration Case No. 7531 of 1994, supra note 9.

12. Switzerland 20 February 1997, Zivilgericht [District Court] Saane, <http://cisgw3.law.pace.edu/cases/970220s1.html>. This is a very interesting case as it illustrates the flexibility and subjectivity in the judicial application of Article 10 CISG. In this case, an Austrian company entered into a contract with the Swiss branch of a company with headquarters in Liechtenstein for the purchase and transport of spirits to Russia. Notably, Liechtenstein is not a Contracting State to the CISG. A contractual dispute arose between the parties and the contract was never performed. The court found that the CISG was applicable because the Swiss branch, not the Liechtenstein headquarters, was the place of business that had the closest relationship to the contract and its performance (Articles 1(1)(a) and 10(a) CISG).

13. See also Secretariat Commentary on article 9 of the 1978 Draft Convention [draft counterpart of CISG article 10], Comment 6, which states: "Subparagraph (a) lays down the criterion for determining the relevant place of business: it is the place of business "which has the closest relationship to the contract and its performance." The phrase "the contract and its performance" refers to the transaction as a whole, including factors relating to the offer and the acceptance as well as the performance of the contract." Secretariat Commentary, supra note 5.

14. Secretariat Commentary, op. cit., Comment 8.

15. See Comments and Notes to PECL Article 7.101(3), Comment G: "This is a 'factual' not a 'legal' concept."

16. See Secretariat Commentary, op. cit., Comment 9. See also, e.g., Austria 10 Oberster Gerichtshof [Supreme Court], 10 November 1994 [English translation available online at <http://cisgw3.law.pace.edu/cases/941110a3.html>] finding that an international sale occurred under CISG in a contract of sale of Chinchilla furs between breeder and buyer.


Pace Law School Institute of International Commercial Law - Last updated November 20, 2002
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