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Published in Galston & Smit ed., International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender (1984), Ch. 3, pages 3-1 to 3-18. Reproduction authorized by Juris Publishing.

Formation of Contract

by E. Allan Farnsworth

§ 3.01 Introduction
§ 3.02 History
§ 3.03 The Formation Provisions in General
§ 3.04 Four Problems With the Provisions
            [1] The Problem of the Unstated Price
            [2] The Problem of the Firm Offer
            [3] The Problem of the Mailbox Rule
            [4] The Problem of the Battle of Forms
§ 3.05 Conclusions

§ 3.01 Introduction

The Vienna Convention's provisions on formation of contract are set off from the Convention's other provisions in a separate "part" -- Part II, sandwiched between the introductory provisions of Part I and the substantive sales provisions of Part III.[1] Part II has, in a somewhat perjorative sense, its own special status.[page 3-1]

The Convention accords Part II this status by providing in article 92(1),

"a Contracting State may declare ... that it will not be bound by Part II of this Convention."

Thus a country is permitted to take the rest of the Convention but leave out the rules on formation, and some countries have indicated that they intend to do this. (A country is also permitted to take only the rules on formation but not the substantive sales rules, but this option is unlikely to be availed of.) I shall first briefly detail the history of the rules on formation, so that you can see how it came about that the rules on formation were singled out for this special status. Then I shall discuss the substance of the. rules on formation, so you can see why they might be thought to be particularly controversial.[page 3-2]

§ 3.02 History

The work on formation of contracts for the international sale of goods began in 1934. In that year the International Institute for the Unification of Private Law in Rome (UNIDROIT) separated out formation from the Institute's general work on the international sale of goods. By 1936, a draft Uniform Law on International Contracts by Correspondence had been prepared. As was the case for the general work on international sales, progress was halted by World War II, and the work was not resumed until 1956.

By 1956 a new draft had been prepared by the Council of UNIDROIT. Meanwhile, the general work on sales had culminated in a Draft Uniform Law on the International Sale of Goods, which was revised by a special committee named at a conference in The Hague in 1951. In 1959, after the Dutch government decided to hold a diplomatic conference on this revised draft on international sales, UNIDROIT transmitted its draft on formation to the Dutch government in the hope that it might be brought before the same diplomatic conference.[2]

In 1964 the draft was submitted to the same diplomatic conference at The Hague that had before it the international sales draft. The result was two separate conventions, one dealing with the substantive law of sales and the other dealing with the formation of sales contracts -- a Uniform Law on the Formation of Contracts for the International Sale of Goods. It came into force and was ultimately adopted by seven countries.[3] Before it became effective, however, UNCITRAL was already at work revising the law on international sales.[page 3-3]

When the UNCITRAL working group on sales had finished its work on the substantive sales provisions, it devoted two meetings in 1977 to formation. In addition it considered a UNIDROIT draft on the validity of contracts and decided to incorporate into the provisions on formation one of that draft's articles that dealt with interpretation. In 1978, UNCITRAL reviewed the Working Group's draft and decided to integrate the draft into the substantive sales provisions that it had already approved as Part II of CISG in much the same way that provisions on formation form part of Article 2 of the Uniform Commercial Code. Because some of the provisions of Part II were regarded as controversial, however, it was decided that a country should have the option to decide to ratify the rest of the Convention but leave out Part II.

From this point on, the formation provisions followed the same course as the rest of CISG. Though some may have regarded them as controversial, they underwent relatively few changes at the Diplomatic Conference in Vienna in 1980.[page 3-4]

§ 3.03 The Formation Provisions in General

Part II contains eleven articles. They are based on the traditional premise that a contract is formed by means of an offer and an acceptance.[4] Thus the first four articles (arts. 14-17) deal with the offer, the next five (arts. 18-22) with the acceptance, and the last two (arts. 23-24) with the time when a contract is concluded. I shall begin with a brief discussion of the Convention's requirements for an offer and an acceptance and then discuss four particularly troublesome problems of contract formation. Since the scope of this talk is confined to Part II, I shall not discuss three articles that might be thought of as dealing with aspects of formation but that appear outside of Part II: articles 11 and 12, which deal with the requirement of a writing and are found in Part I, and article 29, which deals with the modification of a contract and is found in Part III.

When is a proposal an offer? Article 14 lays down two requirements. First, it must be "sufficiently definite," a requirement that is amplified by a statement that:

"A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity or the price."

This sentence raises one of the particularly troublesome problems that I shall discuss shortly -- the problem of the unstated price.

The second requirement laid down by article 14 is that the proposal indicate "the intention of the offeror to be bound in case of acceptance." This requirement is amplified, in the case of a general or public offer, by article 14(2):

"A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation [page 3-5] to make offers, unless the contrary is clearly indicated by the person making the proposal."

This language is obviously intended to make it clear that price lists, advertising circulars, catalogs and the like are not to be taken as offers. The choice of the phrase "addressed to one or more specific persons" is not a very happy one for this purpose and even if such literature is mailed to designated addressees, they should not be regarded as "specific persons" for this purpose.

When is a response to an offer an acceptance? Paragraph (1) of article 18 provides:

"A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance. Silence or inactivity does not in itself amount to acceptance."

The acceptance is generally effective, under paragraph (2), only "at the moment the indication of assent reaches the offeror." This must happen before the offer lapses. (Two other articles that I shall not take time to discuss are relevant here. Article 20 contains detailed rules for the interpretation of a provision in an offer that fixes a time when the offer lapses. Article 21 deals with the effect of a late acceptance.)

Paragraph (3) of article 18 deals with the problem of acceptance by conduct. It is stated in the form of an exception to the general rule of the preceding paragraph that the acceptance is effective only when it reaches the offeror. The exception reads:

"However, if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage, the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed ..."

as long as it is performed before the offer lapses.

This exception in paragraph (3) appears to be little more [page 3-6] than an extension of the general rule of Article 6, under which "the parties may ... derogate from or vary the effect of any of [the Convention's] provisions." Just as the parties can agree that the offeree's silence or inactivity amounts to acceptance, they can also agree that the offeree's conduct, without notification, amounts to acceptance. If the case comes under paragraph (3), the acceptance takes effect when the act is performed, as long as it is performed within the time required for acceptance, and no notice to the offeror is required. But this exception applies only "if, by virtue of the offer or as a result of practices which the parties have established between themselves or of usage," the offeree may indicate assent in this way without notice. Thus the only significant extension beyond the general rule of Article 6 is to allow the offeror in his offer to vary the rule of paragraph (1). (Since article 6 speaks of variation by "the parties," it might not permit variation by the offeror alone.)

With this brief introduction to the Convention's general provisions on offer and acceptance, I turn to four particularly troublesome problems of contract formation and to their resolution under the Convention. [page 3-7]

§ 3.04 Four Problems With the Provisions

These four problems seem especially worthy of consideration, both because of the controversy that they provoked at UNCITRAL and because of their relation to our own law. They are: the problem of the unstated price, the problem of the revocability of the offer, the problem of the mailbox rule, and the problems of the battle of the forms. You may remember all of them from your law school contracts course.

     [1] The Problem of the Unstated Price

Sometimes a proposal to sell or buy states the price of the goods, and sometimes -- as in flexible pricing -- provides a formula or other method by which the price of the goods can be determined. But sometimes a proposal neither states the price nor provides a method for its determination. Can such a proposal amount to an offer?

Under the Uniform Commercial Code, the answer is that it can. UCC 2-305 provides:

"The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if ... nothing is said as to price... ."

The law in many other countries is less receptive to open price terms, however, and article 14 seems to reflect this more restrictive view. Although it states only that a proposal "is sufficiently definite if it ... expressly or implicitly fixes or makes provision for determining ... the price," there is an unfortunate implication is that it is not sufficiently definite unless it does this. The United States, which had consistently opposed this language, was unsuccessful in attempting to have it deleted at Vienna.

It might at first be hoped that article 55 would lead to a sensible result. It provides:

"Where a contract has been validly concluded but does not [page 3-8] expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned."

Unfortunately, article 55 only operates if a contract has been "validly concluded." If the United States were to ratify the Convention but not take Part II, a contract with an unstated price could be validly concluded because UCC 2-305 would then apply. But if we were to ratify the entire Convention, including Part II, it could be argued that article 14 prevented a contract with an unstated price from being validly concluded," so that article 55 could not have effect. Professor Honnold believes that the issue is "resolved" by article 55, which "makes clear that a contract may be 'validly concluded' even though it 'does not expressly or implicitly fix or make provision for determining the price.' "[5] But others, myself included, are less sanguine that bootstrapping will carry the day if a controversy under the Convention arises in a period of rapid price fluctuation in the courts of a country that is not as receptive to open price terms as the United States is under the Code.[6] [page 3-9]

Before we leave the problem of the unstated price, it may be worth pointing out that if a contract for an unstated price is validly concluded, the Convention differs with the Code as to how that price is to be determined. Article 55 refers to "the price generally charged [in the trade] at the time of the conclusion of the contract," while UCC 2-305. refers to "a reasonable price at the time for delivery."

     [2] The Problem of the Firm Offer

The second of the four problems is that of the firm offer. When is an offer irrevocable? Here the drafters had to contend with a three-way split among the world's legal systems. In some systems -- the traditional common law systems -- an offer is always revocable, even if it says that it is firm or irrevocable -- at least unless something has been given as consideration for the offeror's promise not to revoke. In other systems an offer is revocable unless the offer states that it is irrevocable -- as is the case under Uniform Commercial Code 2-205, which impowers a merchant to make a firm offer by means of "a signed writing which by its terms gives assurance that it will be held open." And in still other systems -- notably the German and related systems -- an offer is irrevocable unless the offeror states that it is revocable. These differences provided the thorniest problem to confront the drafters in connection with formation.

From the three solutions, the drafters ultimately chose the second. Article 16 lays down the general rule that offers are revocable, subject to an exception that [page 3-10]

"an offer cannot be revoked ... if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable ... ."

At first glance, this provision appears to be similar to the firm offer provision of the Uniform Commercial Code, with the significant exception that under the Code the indication of irrevocability must be in a writing.[7] Hidden in the Convention's provision there may be, however, an unpleasant surprise for the unsuspecting common law lawyer. If an offeror says, "If I do not hear from you in a week, my offer expires," a judge in a common law system would probably regard this as meaning only that the offer lapses after ten days and not that it is irrevocable for ten days. The result under the Convention, is not entirely clear. Delegates from some civil law countries argued that the fixing of a time, even for lapse, should always make the offer irrevocable for that time, so that the offer just quoted would be irrevocable for ten days -- an unpleasant surprise for an offeror used to the rules of the Uniform Commercial Code. Delegates from United States and other common law countries argued that the fixing of a time should not make the offer irrevocable if the time was fixed for lapse rather than irrevocability. The Convention, by limiting irrevocability to cases in which the fixing of the time "indicates ... that it is irrevocable," seems to support the position that we took in this regard. Nevertheless,[page 3-11] under the Convention an offeror wishing to fix a time for lapse but not for irrevocability should make his intention plain.[8]

Article 16 also provides that, even if an offer does not indicate that it is irrevocable, it becomes irrevocable

"[i]f it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer."

This is the same rule as that laid down in Justice Roger Traynor's memorable opinion in Drennan v. Star Paving Co.[9] It was later restated as follows as Section 87 of the Restatement (Second) of Contracts:

"An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice."

The Convention's rule is substantially the same and makes it clearer than does the Code that reliance, as well as an express provision, can make an offer irrevocable.

     [3] The Problem of the Mailbox Rule

The mailbox rule has long been a subject of fascination for contracts teachers, though its practical importance has diminished in the electronic age. The rule is actually a set of rules used by the common law to determine whether the time of dispatch or of receipt is controlling as to a variety of questions relating to the formation of contracts by correspondence (mail or telegraph). Three of these are of special importance to the law of offer and acceptance: (1) at what [page 3-12] point does the offeror lose the power to change his mind and to revoke a revocable offer?; (2) at what point does the offeree lose the power to change his mind and to withdraw an acceptance?; (3) at what point does the risk of loss of an acceptance or delay in its transmission pass to the offeror? Under the mailbox rule the time of dispatch of the acceptance -- placing it in the mailbox -- is controlling as to all three questions. I shall take up the Convention's responses to the three questions in turn.

As to the first question, which deals with the offeror's power to revoke the offer, article 16(1) follows the common law and applies a dispatch rule.

"Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance."

(Under Article 15(2) any offer, even if irrevocable, may be withdrawn if the withdrawal reaches the offeree no later than the offer does.) This is not only in accord with the law in the United States, but is a sensible rule in a system where offerors generally have a broad power of revocation, for it helps to redress the balance in favor of offerees by terminating that power as soon as practicable.

As to the second question, which deals with the offeree's power to withdraw an acceptance, the Convention departs from the common law by applying a receipt test. Under article 22:

"An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective."

And under Article 18(2):

"An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror."

This provision poses a minor problem when coupled with the dispatch rule applicable to the revocability of an offer. Suppose that an offeree who has received an offer by mail, [page 3-13] mails an acceptance which takes three days to reach the offeror. During those three days the offeror is powerless to revoke the offer, but the offeree can, by telephoning the offeror, withdraw his acceptance. During those three days the revocable offer has become, in a sense, an irrevocable one.

As to the third question, which deals with the risk of loss or delay, the Convention also departs from the common law rule.. This is the result of article 18(2) quoted earlier, and of article 23, which provides:

"A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention."

Thus if an acceptance is lost in the mail, there is no contract under the Convention while there would be a contract under the common law. Under the Convention it behooves the offeree to inquire if he receives no response to his acceptance. Under the common law, it behooves the offeror to inquire if he receives no response to his offer.[10]

    [4] The Problem of the Battle of Forms

In what has come to be called the "battle of the forms," the buyer typically sends his printed "purchase order" in response to the seller's catalog or price list. The seller responds by sending his printed "acknowledgment." The back of each form is commonly covered with printed terms. Since each party's form is designed to protect his own interests, it is unlikely that these terms will be identical -- the buyer's form may contain express warranties while the seller's may include a disclaimer of warranties. If the essential terms such as price and quantity agree, the parties are [page 3-14] unlikely to pay any attention to the discrepancies between terms. And in practice most of these transactions are carried out without incident, even though there is no contract.

Disputes arise in two types of situations. First, before there has been any performance, there is a change of circumstances, such as a rise or fall in market price, and one of the parties seizes upon the discrepancies in the forms as an excuse for not performing. Second, after shipment of the goods by the seller and their receipt by the buyer, a dispute arises over some aspect of performance, often the quality of the goods, and it becomes necessary to determine the contract terms that govern the dispute.

Both of these situations are traditionally dealt with in most legal systems by means of the mirror-image rule, which requires that the acceptance match the offer, without significant variation. This helps to eliminate disputes in the second type of situation, since if there is a contract its terms are easier to determine. But it provokes disputes in the first type of situation, for it makes it easier for both parties to find discrepancies that will justify reneging.

Uniform Commercial Code 2-207 makes a major change in the traditional approach, which has reduced the possibility of reneging in the first type of situation, at the cost of increasing the likelihood of disputes in the second type of situation. Its central provision is that an

"expression of acceptance ... operates as an acceptance even though it states terms. additional to or different from those offered ..., unless acceptance is expressly made conditional on assent to the additional or different terms."

In short, even if an offeree attempts to add or change terms, he may find himself bound to a contract on the offeror's terms. (A further provision for incorporation of the offeree's variant terms if the offeror does not object is of little practical importance since it applies only if the terms do not materially alter the offer.) The result has been a great [page 3-15] quantity of litigation over what are the terms of the resulting contract.

The drafters of the Convention declined to follow the Code solution and, indeed, made remarkably little change in the traditional mirror-image rule. Article 19(1) states that rule in this form:

"A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer."

Paragraph (2) states a very limited exception to that rule under which

"a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect."

In these circumstances, the offeror's failure to object results in a contract on the offeree's terms. Under the Code, the effect of the offeree's expression of acceptance is a contract on the offeror's terms. But the Convention's exception to the mirror-image rule will only rarely be applicable for it only applies if "the additional or different terms do not materially alter the terms of the offer." Paragraph (3) makes it clear that almost all variations would be material. It lists, as examples of additional or different terms that materially alter the term of the offer

"terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes ... ."

This would include warranty clauses, disclaimer clauses, force majeure clauses, limitation of remedies clauses, and arbitration clauses. It is difficult to imagine variations that would not be material. Perhaps a variation by the seller in the vessel designated for shipment under a c.i.f. contract or in the packaging of the goods might not be material. [page 3-16]

It seems clear, however, that the mirror-image rule stated in paragraph (1) will apply to virtually all cases and the exception in paragraph (2) to very few. One may ask if so many words were needed to produce this result. But, given the controversy and uncertainty provoked by the Code provision, the Convention solution may be a sound, if conservative, one. [page 3-17]

§ 3.05 Conclusions

Several conclusions can be drawn from the foregoing analysis. For one thing, as compared. to the Code, CISG tips the scale somewhat in favor of the offeree. CISG would make more offers irrevocable. It would also eliminate the Code's rule that binds the offeree to the offeror's terms even if the offeree's acceptance varies those terms. For another thing, as compared to the Code, CISG is less flexible. This can be seen in CISG's requirements with respect to specifications in the offer, notably specification of the price. It can also be seen in its adherence to the mirror-image rule.

These differences are relatively minor, however, and in some instances, such as adherence to the mirror-image rule, are arguably justified. Neither they, nor the other more technical differences in the rules on formation, should impair CISG's acceptability to the American legal profession or to American business. [page 3-18]


FOOTNOTES

1. On the formation provisions generally, see J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention 159-207 (1982); Kelso, The United Nations Convention on Contracts for the International Sale of Goods: Contract Formation and the Battle of the Forms, 21 Colum. J. Trans. L. 529 (1983); Winship, Formation of International Sales Contracts under the 1980 Vienna Convention, 17 Intl. Lwyr. 1 (1983).

2. For a discussion of the history of the formation draft, together with citations to documents, see Farnsworth, Formation of International Sales Contracts: Three Attempts at Unification, 110 U. Pa. L. Rev. 305 (1962).

3. Belgium, Gambia, Federal Republic of Germany, Italy, Netherlands, San Marino, United Kingdom, all of which adopted the sales law as well. Israel, which adopted the sales law, did not adopt the formation law.

4. Compare Uniform Commercial Code 2-204(1) ("A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.").

5. Honnold, op. cit. supra note 1, at 163-164. Honnold also contends that "the added provision, that in such a case the parties are considered 'to have impliedly made reference' to the prices generally charged, precludes argument that failure to state the price produces a fatal gap in the contract that contravenes the provisions on definiteness in Article 14." This seems not to take sufficient account of the fact that the quoted language only applies "[w]here a contract has been validly concluded."

6. See Feltham, The United Nations Convention on Contracts for the International Sale of Goods, [1981] J. Bus. L. 346, 351 (questioning whether article 14 "is merely a statement of sufficient conditions ... or a statement of necessary conditions" and concluding that in the latter case article 55 "must be relevant only for States which ratify without adhering to Part II"); Kelso, supra note 1, at 537 ("Honnold's argument misinterprets the purpose of article 55 and does harm to the plain meaning of article 14"); Rowe, UN Convention on International Sales Law, Int'l. Fin. L. Rev. 20, 21 (July 1983) ("If there is no [reference to price], the proposal is not sufficiently definite to be considered an offer. If there is no offer, how can there be a contract?"); Winship, supra note 1, at 5-6 ("CISG differs from the common law and the Uniform Commercial Code, which are more receptive to the open-price contract"); Ziegel, The Vienna International Sales Convention, in New Dimensions in International Trade Law: A Canadian Perspective 38-42 (J. Ziegel & W. Graham, eds., 1982) ("An uneasy compromise was eventually reached, not by amending article 14 but by inserting a new article 55... .").

7. Under the Code, only a merchant can make a firm offer, but this is not an important difference because of the Convention's exclusion of consumer transactions from its scope. Under the Code, the period of irrevocability may not exceed three months, but in practice this is not a significant restriction in connection with the sale of goods. And under the Code, a firm offer provision on a form provided by the offeree must be separately signed by the offeree, but this protection is perhaps not of great importance for the relatively sophisticated parties that engage in international trade.

Under article 17, an irrevocable offer is terminated by a rejection. Restatement (Second) of Contracts §37 states a contrary rule, but the Convention's rule seems fairer for an offer made irrevocable by a mere statement as distinguished from a paid-for option contract.

8. For further discussion of this point, see Eörsi, A Propos the 1980 Vienna Convention on Contracts for the International Sale of Goods, 31 Am. J. Comp. L. 333, 354, 356 (1983); Peltham, supra note 6, at 352; Winship, supra note 1, at 7.

9. 51 Cal.2d 409, 333 P.2d 757 (1958).

10. Article 21 allows the offeror to elect whether to treat a late acceptance as an acceptance of his offer. The rule of Restatement (Second) of Contracts §70, which treats the late acceptance as at most a counter-offer, seems fairer because it does not allow the offeror to speculate at the offeree's expense.


Pace Law School Institute of International Commercial Law - Last updated December 9, 2004
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