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Reproduced with permission from 66 U. Cincinnati Law Review (1997) 258-281

International Negotiations Gone Sour: Precontractual Liability under the United Nations Sales Convention

Diane Madeline Goderre [*]

I.  Introduction

II. Legislative History of Good Faith under the Convention

A. Evolution of Article 7(1)
B. On the road to compromise: Draft Convention discussion on good faith as a Convention requirement
     1. Arguments supporting a duty of good faith
     2. Arguments against a duty of good faith
     3. Proposed alternatives to a good faith in negotiations provision

III. The Role of Good Faith and Fair Dealing in Precontractual Liability: Divergent Views

A. Culpa in contrahendo: the civil-law answer
B. Precontractual liability at common law: Sneaking in the back door
C. UNIDROIT Principles for International Commercial Contracts
     1. UNIDROIT Principles: Relevant background
     2. Good faith under the UNIDROIT Principles

IV. Precontractual Liability under the Convention

V.  Precontractual Liability under the Convention Absent a Duty of Good Faith

VI. The Future of Precontractual Liability under the Convention

I. Introduction

In the early 1930s, the International Institute for the Unification of Private Law (UNIDROIT) [1] organized a group of European scholars to draft a document to govern international transactions and, in so doing, set in motion the prospect of achieving a uniform set of laws for the international sale of goods.[2] Fifty years later, a diplomatic conference comprised of sixty-two countries unanimously approved [3] the United Nations Convention on the International Sale of Goods (Convention).[4] Also known as the CISG, the Convention was approved in 1980, but did not actually become effective until January 1, 1988.[5] The Convention [page 258] was designed to govern only commercial, not consumer, sales [6] and is intended to supply solutions to conflicts that the parties did not anticipate or provide for by contract.[7] The drafters of the Convention particularly sought to ameliorate international trade by eliminating inconsistent treatment of contractual obligations among differing nations.[8] Because countries had been deciding international contract cases according to their own laws, contracting parties experienced little certainty as to how exactly a contract would be interpreted if it became the subject of litigation.[9] The Convention sought to correct this problem by creating one uniform set of laws to which all countries could adhere.[10] Accordingly, the drafters of the Convention devoted many years to the preparation of the document, ultimately reaching a consensus on the 101 articles incorporated within it.[11]

The 1980 Convention was not the first attempt at creating a uniform set of laws for international transactions.[12] In 1964, twenty-eight countries approved two conventions, the Hague Conventions, which resulted in the Uniform Law on the International Sale of Goods (ULIS), and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF).[13] However, the Hague Conventions lacked global support, which led the United Nations Commission on International Trade Law (UNCITRAL) [14] to attempt a revision of the [page 259] uniform set of laws.[15] UNCITRAL was devoted to establishing a set of international trade laws that would be more acceptable to all nations. To accomplish this goal, the United Nations structured UNCITRAL to include thirty-six Member States from different regions of the world.[16] UNCITRAL determined that in order to gain adequate support by the world's nations, the Hague Conventions must be abandoned and UNCITRAL must form a new more globally acceptable document.[17] Hence, UNCITRAL established a working group representing fourteen countries to prepare a new text, focusing upon the needs of countries with varying legal, social, and economic systems.[18] During the formation of the Convention, United Nations language specialists helped to maintain cultural and legal diversity by eliminating the language barriers between the drafting committee members who represented fifteen countries.[19] UNCITRAL eventually combined the two parts of the Hague Conventions, ULIS and ULF, into a single Draft Convention, and the General Assembly of the United Nations sent it to a diplomatic conference for final approval.[20] The result was the 1980 Convention, a document that embodies legal traditions from all over the world and gives international lawyers in the ratifying Member States a uniform body of law upon which to rely in the creation of international contracts. However, with diversity came compromise and, [page 260] consequently, there are sections of the Convention that do not completely satisfy all parties.

This Comment addresses one of the most controversial compromises resulting during the formation of the Convention: the omission of a provision stipulating that parties must act in good faith during contract negotiation and performance, and the resulting agreement upon a more general provision requiring merely that, in interpreting the provisions of the Convention, courts and arbiters must regard the need of promoting the observance of good faith in international trade. This Comment focuses on the ramifications of this omission in the context of precontractual liability. Part II discusses the legislative history behind the good faith requirement of the Convention and analyzes the primary reasons for discord among delegates concerning the status of this provision. Part III examines the foundations of precontractual liability under civil-law systems, common-law systems, and under the UNIDROIT Principles. Part IV discusses the current differences between international courts in the application of the good faith provision embodied in Article 7 of the Convention. Part V continues with an analysis of other possible bases upon which courts may impose precontractual liability under the Convention. In conclusion, Part VI evaluates the ultimate effect of the compromise concerning good faith in relation to future claims of precontractual liability.

II. Legislative History of Good Faith under the Convention

A. Evolution of Article 7(1)

The phrase "good faith" generated considerable controversy during the drafting of the Convention. Throughout the drafting process, delegates disputed what type of good-faith provision, if any, should exist in the document.[21] One group of delegates fostered the view that parties must observe principles of fair dealing and act in good faith in the formation of contracts.[22] The opposing group objected to this restriction on the grounds that the terms "good faith" and "fair dealing" are subjective and, therefore, international judges would have no specific criteria to follow in deciding if a party had acted in accordance with this duty.[23] By the final draft of the Convention, the conflicting sides [page 261] managed to reach a compromise.[24] UNCITRAL modified Article 7(1) to require parties and decision makers to interpret the Convention in light of its international nature, the necessity of promoting its uniform application, and the observance of good faith in international trade.[25] Parties to international contracts under the Convention are under no explicit obligation to act in good faith either during the formation or the performance of the contract.[26]

This provision did not reach its final form until UNCITRAL made its final review of the Draft Convention in the late 1970s.[27] In fact, the working group had incorporated a very different good faith provision in the Draft Convention.[28] During the eighth meeting of the working group, one representative forwarded a provision requiring parties to act in good faith in the course of the formation of the contract.[29] The working group adopted the provision at their next meeting and submitted the Draft Convention to the full UNCITRAL group for consideration.[30] After much debate, however, UNCITRAL eventually omitted the working group's provision on good faith.[31] UNCITRAL decided that a good faith provision should not govern contract formation, but that good faith should be utilized as a principle for interpreting the provisions of the Convention as a whole.[32] Thus, Article 7 is intended to be used to assist national courts in interpreting the Convention itself, rather than contracts formed under it.[33][page 262]

B. On the Road to Compromise: Draft Convention Discussion on Good Faith as a Convention Requirement

1. Arguments Supporting a Duty of Good Faith

The drafting history indicates that there were numerous arguments both supporting and opposing a provision that would place a duty on the parties to act in good faith.[34] First, those delegates who supported the provision argued that good faith is a universally recognized principle because many national commercial codes contained similar good-faith obligations which had been instrumental in the development of trade rules.[35] In light of the number of countries represented, which generally adhere to and approve of an obligation of good faith in international transactions, the delegates argued that it would be appropriate to extend this duty of good faith to negotiations in the text of the Convention.[36] Additionally, the delegates observed that public international law recognizes the concept of good faith and the United Nations Charter specifically refers to it.[37] Therefore, some delegates feared that if the provision were deleted, UNCITRAL would be criticized as generally opposing good faith principles in international trade.[38] This fear merited special concern due to the increase in commercial trade involving developing countries.[39]

Second, delegates argued that the provision would actually create uniformity in the long run because national courts would be able to rely upon the body of case law that would develop in dealing with the questions of interpretation and scope and the consequences for failure to comply.[40] Supporters of the provision asserted that parties and courts would be reminded by the inclusion of the good faith provision that a high standard of behavior is expected in international transactions.[41] Accordingly, there would be no need for the establishment of sanctions within the Convention for a breach of the duty.[42][page 263]

Last, another less prominent reason was suggested for including the good faith provision; some delegates maintained that the obligation would serve as a way to include some of the principles of the new international economic order.[43] Such a result potentially would operate to reduce undesirable or discriminatory trade practices.[44]

2. Arguments Against a Duty of Good Faith

Ultimately, resistance to the provision as written prevailed. Some delegates disapproved of the provision because the term "good faith" is exclusively moral in nature and, therefore, does not belong in an international treaty.[45] Because the Convention will be interpreted by courts in nations all over the world, delegates feared that a moral and subjective concept such as good faith would result in a multitude of interpretations.[46] Reliance by courts upon their own legal and social understanding of the terms would result in non-uniform interpretation of the provision.[47] Opponents of the provision argued that the uncertainty which could result would be potentially injurious to international trade.[48] Conversely, other delegates who opposed the provision felt that the requirement of acting in good faith was implicit in all laws regulating business activity and they, therefore, perceived the provision to be superfluous.[49] The failure of the provision to specify sanctions for non-compliance also concerned some delegates because again, they foresaw the possibility of non-uniformity in application.[50] Remedies would fall to the national courts, inevitably resulting in inconsistent treatment.[51] Additionally, opponents argued that good faith [page 264] provisions, along with the appropriate sanctions for non-compliance, belong in a convention on the validity of contracts and not in a convention on formation.[52]

3. Proposed Alternatives to a Good Faith in Negotiations Provision

Much dissent existed concerning the incorporation of a provision to impose a duty of good faith upon the parties. Because the delegates to the Convention were so evenly divided on the issue, they believed that it would be unwise to either incorporate or entirely delete such a provision based upon such a slim majority.[53] Considering that the goals of the Convention focused upon representing the interests of all countries involved and formulating a document that a majority of them would enact, the delegates sought to find a middle ground upon which a majority of the delegates could agree.

In response, UNCITRAL established a second working group to prepare an alternative to the original good faith provision.[54] Several compromise positions were suggested and, although none appeared to entail the same difficulties as the original provision in terms of sanctions, most were nevertheless deemed inadequate.[55] One suggestion was to incorporate the provision as written into the preamble rather than to incorporate it as its own article.[56] The delegates did not favor this proposal because placing the provision in the preamble would have been essentially equivalent to deleting it, as it would have no binding effect upon the parties.[57] A second proposal was to incorporate the good faith requirement in the rules of interpretation of the statements and conduct of the parties.[58] However, this approach too was rejected by the delegates. The provision was intended to direct the conduct of the parties by laying down a particular standard to which they must adhere, not to address the intentions of the parties.[59] Therefore, delegates found this compromise inappropriate.[60] Ultimately, the compromise upon [page 265] which the delegates settled consisted of imposing a duty of good faith in the interpretation and application of the provisions of the Convention.[61] Some delegates objected to this proposal primarily because they believed it was inappropriate to place the duty upon the courts rather than upon the parties.[62] In spite of this discontent, delegates generally agreed that the new provision was a realistic compromise solution.[63]

III. The Role of Good Faith and Fair Dealing in Precontractual Liability: Divergent Views

The controversy surrounding the Convention's good faith provision resulted from disagreement among delegates representing countries with diverse legal systems. Traditionally, civil-law and common-law systems have placed a different emphasis upon the role of good faith in precontractual liability. The manner in which a system addresses the issue determines the degree to which liability is imposed upon a party who has broken off negotiations. However, whether a country chooses to impose liability based upon an implied or explicit duty to negotiate in good faith, or whether the liability is imposed based solely upon specific contract theories such as restitution,[64] misrepresentation,[65] or promissory estoppel,[66] most systems nevertheless tend to reach the same end result -- liability is imposed if a party has acted to the detriment of the other party, even if a contract has not been consummated.[67][page 266]

A. Culpa in Contrahendo: The Civil-Law Answer

Civil-law systems historically have recognized precontractual liability under a duty of good faith based upon both contract and tort principles.[68] The German doctrine of culpa in contrahendo has been particularly influential in many legal systems. Dating back to 1861, culpa in contrahendo means, literally, "fault in negotiation."[69] The theory is that contracting parties are under a duty to act in good faith during negotiations, so that a party who acts improperly in preventing the culmination of an agreement is liable to the injured party.[70] Culpa in contrahendo has its foundation in the Roman law of obligations that recognized specific cases where an injured party could recover even if the contract was void.[71] The doctrine originated as a solution to perceived weaknesses in the German common law.[72] The doctrine was intended to remedy situations in which a party, by "lack of diligence," had prevented contract formation, and yet was not held liable.[73] The result was a doctrine that holds the blameworthy party liable to the innocent party who suffered damages due to reliance on the validity of the contract.[74] This doctrine is classified as a contract theory, though it encompasses negligence which is considered a tort under a common-law system.[75] Liability is imposed either when the fault of one party has prevented the formation of a contract or where one contracting party has failed to inform the other party of circumstances that might have prevented the other party from entering into the contract.[76] For [page 267] example, liability arises in the former situation when a seller has promised to keep an offer open for a specific amount of time, but made himself unavailable, preventing the buyer from accepting.[77] The seller, who was either negligent or who did not act in good faith, prevented the formation of the contract. Therefore, the seller was liable to the buyer. Likewise, liability in the latter case exists if, for example, a buyer enters into a partnership agreement on the basis of misinformation provided by the other contracting party concerning the value of assets to be brought into the venture by the other party; the buyer is entitled to be put in the position he would be in had he received correct information.[78]

Although the doctrine of culpa in contrahendo is rooted in German contract law, it has influenced the majority of civil-law systems, including those in France, Switzerland, Austria, and even some socialist systems.[79] This doctrine has even laid its roots in the United States. Both the civil codes of Louisiana and Puerto Rico, a territory of the United States, have, in some form, adopted the doctrine of culpa in contrahendo.[80]

Louisiana courts recognize the doctrine of culpa in contrahendo [81] and its influence on Louisiana law is evidenced by the existence of the doctrine of detrimental reliance in the Louisiana civil code.[82] Puerto Rico's civil code also incorporates the concepts of good faith and culpa in contrahendo [page 268] and imposes liability when a party acts in a tortious or wrongful manner during preliminary negotiations.[83] Evidently, whether based squarely on contract law or tort theories, civil-law systems generally place a concrete duty of good faith and fair dealing on parties during negotiations.

B. Precontractual Liability at Common Law: Sneaking in the Back Door

Freedom of negotiation has traditionally been a cornerstone of contract law in common-law countries, including the United States.[84] Absent entering into an actual agreement, parties are free to negotiate, and to back out, without any risk of liability.[85] This traditional common-law view of precontractual liability is sometimes referred to as the "aleatory view" of negotiations.[86] According to this view, no protection against damages resulting from broken-off negotiations is afforded to a party who has entered into negotiations with the hope of achieving the potential gain that would result from ultimate agreement.[87] Therefore, under the traditional view, a party to negotiations who suffers a loss due to improper behavior of the other party has no remedy if a contract was never actually agreed upon.[88] In the United States, Article 2 of the Uniform Commercial Code (UCC) governs contracts for the sale of goods.[89] Although the UCC and the Restatement (Second) of Contracts both impose a duty of good faith and fair dealing on parties to a contract, there is no similar duty on parties to mere negotiations.[90] Perhaps the primary impetus for not imposing [page 269] a duty to negotiate in good faith is the fear that the lack of full freedom will discourage parties from entering into negotiations.[91] Additionally, common-law systems tend to place a strong emphasis upon the economic consequences of the contractual relationship.[92] As a result, common-law courts have stressed that stringent requirements must be met for a contract to be enforceable.[93] Moreover, this aleatory approach to negotiation prevents judicially-imposed contracts from being forced upon parties who could not come to an agreement.[94]

Despite these historical motivations, U.S. courts have nevertheless come to recognize precontractual liability in certain situations.[95] Although precontractual liability still does not arise based upon a general obligation or duty of good faith during negotiations, U.S. courts have imposed liability under three primary theories.[96] The first theory is restitution, which involves the unjust enrichment of one party during the negotiation stage.[97] The second theory is misrepresentation, which involves misinformation given during negotiations concerning an intention to come to terms.[98] Promissory estoppel is the third theory upon which precontractual liability may be imposed and involves a promise made by one party, and relied upon to the detriment of the other, in order to induce the latter to negotiate.[99] Common-law courts, [page 270] in imposing precontractual liability in these situations, restrict the measure of recovery to either the restitution interest, which returns to the injured party whatever benefit the other party unjustly received, or the reliance interest, which puts the injured party back in the position it would have been in if it had not relied upon the promise or misrepresentation.[100] The expectation interest is understandably not used because it is reserved for parties who have actually reached a bargain; the lost expectations of the injured party clearly cannot be determined if it is not known what the actual agreement would have been.[101]

U.S. courts also have recognized liability when the parties have not actually consummated a contract, but have drawn up a series of preliminary agreements in anticipation of reaching final agreement on all points.[102] For example, a court will find that preliminary agreements are binding upon the parties when they have either reached complete agreement on all issues that require negotiation, or have expressed mutual commitment to the major terms of the agreement, even if other terms still are not agreed upon.[103] In the former case, the court will treat the preliminary agreements as a binding contract and injured parties will be entitled not only to their reliance interest, but also to their expectation interest and specific performance.[104] In the latter case, the court will not treat the provisions as a completed contract, but may impose a duty of good faith upon the parties to conclude negotiations.[105] In deciding whether to uphold a preliminary agreement, courts focus upon the intent of the parties as evidenced by the following five factors: the language of the preliminary agreement, the context of the [page 271] negotiations, the existence of open terms, partial performance, and express demands for a finalized contract.[106] Although courts look at the intent of the parties in determining whether preliminary agreements are binding, inconsistencies exist between the various states and courts have not formulated any bright-line test.[107] Because no concrete rules exist, and the cases tend to be very fact specific, courts have much discretion in asserting precontractual liability where preliminary agreements are involved; there is, consequently, a lack of predictability.[108]

C. UNIDROIT Principles for International Commercial Contracts

1. UNIDROIT Principles: Relevant Background

The UNIDROIT [109] Principles for International Commercial Contracts (UNIDROIT Principles) [110] are similar to a "restatement for international commercial transactions" in that they have no binding force and are intended only to be relied upon for their persuasive value.[111] Indeed, the UNIDROIT Principles are unlike any other legal text previously utilized on an international level.[112] The UNIDROIT [page 272] Principles were created in order to address deficiencies in modern international trade law.[113] Not unlike the 1980 Convention,[114] the UNIDROIT Principles were drafted to provide judges and arbitrators with international criteria and principles upon which to base their decisions.[115] The efforts of a special working group of UNIDROIT resulted in a document consisting of a Preamble and 119 articles.[116] The UNIDROIT Principles working group was formed in the same manner as the working group of the Convention; leading experts in the fields of contract law and international trade law representing the major legal and socio-economic systems comprised the membership.[117] Consistent with the goal of establishing a truly internationally-minded document, the framers paid special attention to the terminology of the UNIDROIT Principles.[118] Preference was given to terms that are frequently employed by all parties in international contract formation; those terms that are unique to a particular nation or legal system were avoided to prevent confusion.[119] Additionally, the UNIDROIT Principles, though originally drafted in English, have been made available in a variety of languages, including French, Italian, Spanish, German, Arabic, Chinese, and Russian.[120] Translations are also expected to be [page 273] completed in Dutch, Hungarian, Japanese, and Portuguese.[121] Circulation of the UNIDROIT Principles among such diverse nations, written in their own languages, was yet another step taken to promote worldwide use.[122] Accordingly, this document should prove to be an excellent reference for international courts when they are attempting to interpret international contracts that are governed by "general principles of law" or that include provisions which are not expressly dealt with or require interpretation under the Convention.[123]

2. Good Faith Under the UNIDROIT Principles

Article 1.7 of the UNIDROIT Principles adopts a type of civil-law approach to negotiations in that it mandates that parties "act in accordance with good faith and fair dealing in international trade."[124] Unlike the Convention,[125] the UCC,[126] or the Restatement (Second) of Contracts,[127] the UNIDROIT Principles require that parties act in good faith not only in the performance of the contract, but also during the negotiations process.[128] Article 2.15(2) of the UNIDROIT Principles, which places liability on a party who causes loss to another party by breaking off negotiations in bad faith, establishes this requirement.[129] Although no definition of good faith is provided in the document,[130] Article 2.15(3) specifically points to the act of entering into or continuing negotiations with the intention of not reaching an agreement with the other party as an example of what constitutes bad faith.[131][page 274]

IV. Precontractual Liability under the Convention

International courts have had little opportunity to address the issue of precontractual liability under the Convention. Because the Convention has been in existence for less than nine years, the body of case law that has developed under it is minimal. However, much discussion within the legal community exists as to how the international courts will eventually deal with issues of good faith and precontractual liability.[132] The essential problem is that although the goal of the Convention was to promote uniformity, no provision of the Convention expressly addresses the issue of precontractual liability and, potentially, differing rulings will result in various countries. If courts find that this area of law is unsettled or not addressed under the Convention, they are to base their decisions upon the general principles of the Convention or, in the absence of applicable general principles, may apply local law to supplement the existing Convention provisions.[133] However, the general principles of the Convention are not expressly stated.[134] As a result, several alternatives exist as to how a court can impose precontractual liability based upon the provisions of the Convention.

The good faith provision of Article 7(1) could provide a legitimate basis for imposing precontractual liability if courts interpret the provision as requiring parties to negotiate in good faith. Whether or not courts find that any duty of good faith is to be observed by parties to international transactions will depend largely on how they interpret this provision.[135] Three possible interpretations exist.[136]

Under the first interpretation, courts could read the text of Article 7(1) literally, finding that its mandate regards only the duty of the decision maker to take into account the need to promote the observance of good faith in international trade.[137] Courts interpreting the provision in this [page 275] literal manner would not utilize Article 7(1) to impose the duty of good faith upon the parties, nor to find that the duty of good faith exists in the general principles upon which the Convention is based.[138] This scenario would be most favorable to those delegates who preferred that no reference to good faith be included in the Convention.[139] Under this interpretation, courts would refer to private international law, such as conflicts laws and, ultimately, to the law of their own locality if necessary.[140] As a result, uniform treatment of good faith issues arising under the Convention would fail as each nation dealt with the issue in its own manner. No decisions governed by the Convention have articulated this interpretation of Article 7, though it is likely that courts have interpreted it in this manner without reducing it to writing.[141]

The second scenario also involves a literal reading of the Convention, but, in this case, courts could find under Article 7(2) that there is a gap in the text of the Convention concerning duties of good faith and could extract that duty of good faith from the general principles on which the Convention is based.[142] Because Article 7(1) includes a general provision of good-faith in interpreting the Convention, good faith may appear to be one of the "general principles" underlying the Convention as a whole and courts may, under this interpretation, hold parties to that duty.[143][page 276] Civil-law advocates who supported the inclusion of the Article [7] good-faith provision generally favor this interpretation.[144]

Although case law under the Convention has been slow to develop, some support exists to show that courts will be interpreting the Convention in this manner. In the Australian Court of Appeals case Renard Construction (ME) Ltd. v. Minister for Public Works,[145] the judge discussed the concept of good faith as it is applied in contract cases in both Europe and the United States.[146] In his discussion, he noted the existence of several factors that may cause Australia and, perhaps England, to recognize good faith as an implied duty in contracts.[147] One of the factors he listed was Article 7(1) of the Convention.[148] By citing to Article 7(1), the judge appeared to assume that good faith was not only to be used in interpreting the Convention, but also that a general duty of good faith was implied in contracts under the Convention.

The French case SARL Bri Production "Bonaventure" v. Societe Pan African Export [149] also indicates that national courts are reading a general provision of good faith into the Convention. In that case, a buyer from the United States sued a French seller in a French court of appeals for breach of contract.[150] The parties had agreed that the products would be resold to a South American distributor but, in fact, the buyer began to resell to a distributor in Spain.[151] The buyer later misrepresented this fact to the seller.[152] When the seller discovered that some of the goods had been sold in Spain, he refused to deliver the final installments.[153] The buyer sued for breach of contract and the seller counter-sued.[154] The court held that the case was governed by the Convention.[155] In making its decision in favor of the seller, the court relied on Article [page 277] 7(1).[156] The court found that the buyer's actions were inconsistent with the principle of good faith (bonne foi) in international commerce as decreed by Article 7(1) of the Convention.[157] This case once again indicates that international courts are interpreting good faith under Article 7 to be one of the general principles of the Convention.

Arbitral decisions may also indicate that decision makers are interpreting Article 7(1) to include good faith as a general principle of the Convention. One 1994 arbitral decision specifically pointed to good faith as one of the principles upon which the Convention is based.[158] Although arbitral decisions would not be used as precedent for other courts, the decision is still notable in that it shows that Article 7(1) is being interpreted by some decision makers to include good faith as a general principle of the Convention.

Courts may be further inclined to find that good faith is a general principle of the Convention due to the increasing influence of the UNIDROIT Principles. The UNIDROIT Principles were designed specifically to address the situation in which an international uniform law instrument, such as the Convention, lacks specific guidelines on a particular issue.[159] Reliance upon the UNIDROIT Principles could aid decision makers in making internationally acceptable determinations.[160] Although under Article 7(2), gaps in the Convention are to be resolved on the basis of the general principles of the Convention itself,[161] the UNIDROIT Principles nevertheless have the potential to be instructive in determining what those general principles are. Because the UNIDROIT Principles expressly adopt the theory that parties to negotiations are to be held liable for breaking off negotiations in bad faith, courts may determine that this should be taken into account when considering the general principles upon which the Convention is based.

Finally, courts may choose not to interpret the language of Article 7(1) literally, but may read the phrase mandating the observance of good faith in international trade as imposing the good faith duty directly upon [page 278] the parties.[162] Commentators have favored this view [163] and, though it is not possible to determine from the opinion, the court in Societe Pan African Export may have taken this approach.

Simply acknowledging that some current decisions have interpreted Article 7(1) as placing at least a limited good-faith duty upon the parties is not sufficient to determine whether that type of interpretation will be expansively adhered to in the future. First, the decisions cited above come primarily from civil-law jurisdictions.[164] As discussed previously, civil-law systems are more apt to place an implied duty of good faith upon the parties,[165] so it is not surprising that those decisions were decided in that manner. Second, case law under the Convention is developing slowly and few cases directly address the good faith issue. It cannot be determined from such a small number of cases whether or not courts will consistently incorporate a duty to act in good faith upon contracting parties. However, the case law established thus far may indicate the tendency of judges and arbiters to rely on the interpretation of Article 7, which supports both their country's preference in the drafting of Article 7 and their established legal traditions.[166] If this is the trend, then the goal of creating uniformity will be completely frustrated with respect to good faith issues.

The extent to which courts may potentially find that there is a good faith duty upon the parties will particularly determine how the issue of precontractual liability in international trade will be affected. Precontractual liability only will become an issue if courts impose a duty to act in good faith not only during the performance of a contract, but during the negotiations process as well. Although case law under the Convention has touched upon the good faith issue,[167] no court has discussed a duty to negotiate in good faith. The duty to act in good faith during the performance of a contract is a duty commonly acknowledged in both civil-and common-law systems.[168] Therefore, it is more likely that this type of duty will be globally implied in the Convention than a duty to negotiate in good faith. Thus, even if good faith is later [page 279] considered to be a general principle of the Convention, unless that duty extends to negotiations, the issue of precontractual liability in international sales may remain unsettled.

V. Precontractual Liability under the Convention Absent a Duty of Good Faith

Regardless of the apparent obstacles concerning the good-faith provision of Article 7, precontractual liability can nonetheless be imposed under the Convention. Common-law-type remedies exist as a means upon which courts may impose liability. Similar to the treatment of precontractual liability in the United States, courts deciding cases under the Convention may base liability upon the intent of the parties or upon the theories of detrimental reliance or restitution.

When parties have utilized preliminary agreements, courts may impose precontractual liability based upon the intent provision of Article 8 of the Convention.[169] Article 8(3) states that "[i]n determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."[170] Because U.S. courts have imposed precontractual liability in similar circumstances based upon the same factors, international courts, relying upon Article 8, could likewise impose liability.[171] Preliminary agreements have become valuable tools in international trade.[172] Parties are often unfamiliar with the ethical rules and legal ramifications of the negotiating process in other countries and, therefore, parties are likely to write out their goals at an early stage of the negotiation.[173] It is quite probable that, as case law continues to develop under the Convention, international courts will depend upon Article 8 in finding precontractual liability when preliminary agreements are utilized.[page 280]

The theory of detrimental reliance creates another possibility for imposing liability when a contract has not been consummated. Article 16(2) of the Convention indicates that an offer cannot be revoked if the offeree has reasonably relied on the offer and has acted in reliance on the offer.[174] As under the UCC, detrimental reliance could be utilized as a means of establishing precontractual liability under the Convention in the future.

Restitution is additionally mentioned in the text of the Convention [175] and could potentially be relied upon where a contract implied-in-law has been created. When parties have conferred a benefit upon another, they may be able to receive the value of that benefit conferred under Article 81 of the Convention.[176] Although Article 81 anticipates that a contract has been fully concluded and partially performed in order to receive restitution, parties could argue that the contract was implied-in-law and, therefore, within the scope of Article 81. No case law under the Convention indicates that parties have attempted to argue that Article 81 applies in this type of situation but, again, in the future courts may be addressing this issue.

VI. The Future of Precontractual Liability under the Convention

The Convention was created to establish uniformity in international sales law; yet the potential exists for inconsistencies to abound. Particularly in the context of precontractual liability in which Article 7 is subject to diverse interpretations and courts are influenced by their own understandings of the phrase "good faith," lack of uniformity is almost inevitable. Although good faith is a subjective term, the drafters may have had a better chance of creating uniformity had they actually imposed an unquestionable duty of good faith upon parties under the Convention. If the drafters had adopted an explicit duty of good faith, case law would develop upon which other courts could rely in making their decisions and, in turn, a more uniform body of law. As it stands, because the Convention has not adequately addressed this issue, courts must look to the general principles upon which the Convention is based [page 281] or to private international law, which will open the door for further uncertainty concerning the good faith issue.[177] Ultimately, however, it is likely that common-law theories will step into the place of the civil-law doctrine of good faith and precontractual liability will nevertheless exist under the Convention. The extent to which it will be uniformly applied however, is yet to be seen.


* Associate Member, 1996-97 University of Cincinnati Law Review

1. International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization whose purpose is to examine ways of harmonizing and coordinating the private laws of various countries and to prepare for the adoption of uniform rules of private laws by those countries. For in depth information on this organization, visit the University of Tromsø, Norway web site located on the world wide web at http://ra.irv.uit.no/trade_ law/nav/unidroit.html.

2. See John Honnold, Uniform Law for International Sales under the 1980 United Nations Convention 49 (1991).

3. See id. at 47, 55. The United Nations Convention on the International Sale of Goods (Convention) was approved on April 11, 1980. See id. The countries approving the Convention were those that had significant commercial interests. See id.

4. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 19 I.L.M. 668 (1980) [hereinafter CISG]. Article 1(1) of the Convention sets out the types of international transactions to which it will apply. See id. art. 1. It states: "This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States; or (b) when the rules of private international law lead to the application of the law of a Contracting State." Id. The Convention does not govern the validity of the contract, its provisions, or its usage, which is important to note for the purposes of this Comment. See id. art. 4. The implication of this provision is that the issues of duress, illegality, fraud, unconscionability, and mistake will not be governed by the Convention. See Jeffrey S. Sutton, Measuring Damages Under the United Nations Convention on the International Sale of Goods, 50 Ohio St. L.J. 737, 739-40 (1989). See also Honnold, supra note 2, at 48, 114-15.

5. See Honnold, supra note 2, at 47. Article 99, paragraph 1, of the Convention states: "This Convention enters into force . . . on the first day of the month following the expiration of twelve months after the date of deposits of the tenth instrument of ratification, acceptance, approval or accession . . . ." CISG, supra note 4, art. 99. By December 11, 1986, the following eleven Member States had deposited instruments of adherence with the Secretary General: Argentina, China, Egypt, France, Hungary, Italy, Lesotho, the Syrian Arab Republic, the United States, Yugoslavia, and Zambia. See Honnold, supra note 2, at 47. Therefore, for these Member States, the Convention became effective on January 1, 1988. See id. Article 99, paragraph two indicates that the Convention became effective for any other Member State on the first day of the month following the expiration of twelve months after that Member State has deposited its instrument of ratification. See CISG, supra note 4, art. 99. Although the Convention became effective in 1988, it is commonly referred to as the 1980 Convention. See Honnold, supra note 2, at 56, 67.

6. See CISG, supra note 4, art. 2. Article 2 states: "This Convention does not apply to sales: (a) of goods bought for personal, family or household use . . . ." Id. The primary reason for excluding consumer purchases from the scope of the Convention was to avoid conflicts which may arise when the Convention supersedes legislation of some countries designed to protect consumers from powerful merchants. See Honnold, supra note 2, at 47.

7. See Honnold, supra note 2, at 48. The Convention plays a role similar to that of other domestic sales rules for commercial contracts, such as the Uniform Commercial Code (UCC). See id.

8. See John Klein & Carla Bachechi, Precontractual Liability and the Duty of Good Faith Negotiation in International Transactions, 17 Hous. J. Int'l L. 1, 3 (1994).

9. See id.

10. See id.

11. See Honnold, supra note 2, at 48.

12. See id. at 49-50; See also Franco Ferrari, Uniform Interpretation of the 1980 Uniform Sales Law, 24 Ga. J. Int'l & Comp. L. 183, 190-92 (1994).

13. See Ferrari, supra note 12, at 190-91. Unexpectedly, the Uniform Law on the International Sale of Goods (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) were not very successful. See id. at 191. Only nine Member States gave force to these laws, which was only one-third of the countries that participated at the Hague Conference. See id. This lack of support is said to be a result of the minimal input by socialist and third world countries that refused to adhere to a set of laws which they considered to be modeled on the needs of industrialized nations. See id. at 191-92.

14. See Honnold, supra note 2, at 50. The United Nations Commission on International Trade Law (UNCITRAL) was established by the United Nations in 1966. See id. In forming this group, the United Nations sought to promote "the progressive harmonization and unification of the law of international trade" by promoting wider participation in existing international conventions and wider acceptance of existing model and uniform laws. Id.

15. See id.

16. See id. at 51. UNCITRAL's regional distribution consists of nine members from Africa, seven members from Asia, five members from Eastern Europe, six members from Latin America, and nine members from the "industrial West": Western Europe, Australia, Canada, and the United States. See id. The number of members is limited to only thirty-six in order to maintain efficiency. See id.

17. See id. at 53. UNCITRAL distributed the text of the two Hague Conventions to various governments in order to determine whether the Hague Conventions could be revised so that a majority of Member States would adhere to it. See id. The responses indicated that the Hague Conventions would never receive enough support due to the highly Western European influence of the documents. See id.

18. See id. at 54. Working groups of UNCITRAL are small cross-sections of the group's global representation. See id. These working groups create drafts of Conventions that are eventually approved by the full UNCITRAL group, which meets in full only once a year for sessions of two to four weeks. See id. This working group, which developed the Draft Convention on Sales and the Draft Convention on Formation, was chaired by Professor Jorge Barrera Braf of Mexico and originally consisted of representatives from Brazil, France, Ghana, Hungary, India, Iran, Japan, Kenya, Mexico, Norway, Tunisia, the Union of Soviet Socialist Republics, the United Kingdom, and the United States. See id. The group was later expanded to include Austria, Czechoslovakia, the Philippines, and Sierra Leone. See id. The group was able to create a draft in nine annual sessions. See id. at 51-54.

19. See id. at 55. The Drafting Committee consisted of representatives from Brazil, Chile, China, Czechoslovakia, Ecuador, Egypt, Finland, France, Libya, Republic of Korea, Singapore, the Union of Soviet Socialist Republics, the United Kingdom, the United States, and Zaire. See id. Because of the diversity of nations involved, the Convention has been translated into six official versions: English, French, Spanish, Russian, Arabic, and Chinese. See Ferrari, supra note 12, at 194 n.64.

20. See Honnold, supra note 2, at 55.

21. See id. at 146.

22. See id.

23. See id.

24. See id.

25. See id. See also CISG, supra note 4, art. 7(1). Article 7(1) states in full: "In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade." Id.

26. See Peter Winship, Commentary on Professor Kastely's Rhetorical Analysis, 8 N.W. J. Int'l. L. & B. 623, 631 (1988).

27. See Honnold, supra note 2, at 146.

28. See id.

29. See Winship, supra note 26, at 631. The representative was from Hungary. See id. The provision was originally Article 5, and it stated: "In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith." John Honnold, Documentary History of the Uniform Law for International Sales 369 (1989).

30. See Winship, supra note 26, at 631. Interestingly, only one representative at this time expressed reservations concerning this provision. See id.

31. See id. at 631-32. The working group's report was circulated and discussed by the various governments. See id. Based upon those comments, during its annual meeting in 1978, UNCITRAL further debated the inclusion of the provision and, coming to no consensus, delegated to a smaller group the task of formulating a new provision that would be more acceptable to the majority of delegates. See id. This small group drafted what is now Article 7(1). See id.

32. See id.; Honnold, supra note 29, at 369-70. UNCITRAL considered the good faith provision at its 190th meeting (May 31, 1978), at its 191st meeting (June 1, 1978), and at its 201st meeting (June 8, 1978). See id. Summary records of these meetings can be found in A/C N.9/SR.190, 191 and 201. See id.

33. See Klein & Bachechi, supra note 8, at 21; Honnold, supra note 2, at 147.

34. See Honnold, supra note 29, at 369.

35. See id.; Winship, supra note 26, at 631.

36. See Klein & Bachechi, supra note 8, at 20. "It was considered that the extension of this provision into an instrument regulating an aspect of international trade was a valuable extension of a widely recognized norm of conduct." Honnold, supra note 29, at 369.

37. See Honnold, supra note 29, at 369.

38. See id.

39. See id.

40. See id. This would also allow courts to deal with sanctions in a flexible manner, giving appropriate weight to the facts of each case. See id.

41. See id.

42. See id.; Winship, supra note 26, at 631-32.

43. See Honnold, supra note 29, at 369.

44. See id.

45. See Klein & Bachechi, supra note 8, at 19; Honnold, supra note 29, at 369.

46. See Honnold, supra note 29, at 369. For similar reasons, many of the representatives were also opposed to the phrase "must observe the principles of fair dealing." See id. Fair dealing could be interpreted to refer to the current standards of international business practice which many developing countries would not view as fair. See id. The phrase "fair dealing," therefore, was deleted due to the risk of elevating current standards of business practice into norms of conduct recognized and upheld by an international convention. See id.

47. See id. U.S. courts have had difficulties themselves in uniformly interpreting the good faith provision of the UCC. For a concise overview of three common interpretations of good faith within U.S. courts, see E. Allan Farnsworth, Duties of Good Faith and Fair Dealing Under the UNIDROIT Principles, Relevant International Conventions, and National Laws, 3 Tul. J. Int'l & Comp. L. 47, 59-61 (1995).

48. See Honnold, supra note 29, at 369.

49. See id.

50. See id.

51. See id. The drafting history pointed to an illustration of this type of problem presented during the discussions. See id. In order to establish uniformity in application, the UNIDROIT draft text on validity included, in great detail, the consequences of fraud and threats which were obviously violations of good faith. See id. The point was made that it would be conceivably much more difficult to achieve uniformity in dealing with the consequences of less obvious violations of good faith. See id.

52. See id.

53. See id. at 369-70.

54. See id. This working group consisted of representatives of Finland, Hungary, Mexico, Singapore, Uganda, and the United Kingdom of Great Britain and Northern Ireland. See id. at 370.

55. See id.

56. See id.

57. See id.

58. See id.

59. See id.

60. See id.

61. See id. This hard-won compromise was further deliberated by the full UNCITRAL group and was strongly supported. See id. at 476-79. Representatives from Brazil, Chile, the German Democratic Republic, Kenya, Romania, Sweden, the United Kingdom, and the United States all expressed that they preferred the compromise as written over any proposed amendment. See id.

62. See id. at 370. Under one view, the Convention should not contain a provision on interpretation because, according to the constitutions of some countries, it was not possible for a legal text to instruct the courts on the manner in which it should be interpreted. It was also stated that the requirement to promote uniformity should be imposed on States and not upon courts and arbitral tribunals, since this requirement was contained in a public international law convention. Id.

63. See id. "Although several representatives still preferred the original version of article [7], while other representatives still favoured deletion of all reference to the need to observe the principles of good faith, the proposal was generally supported as containing a realistic compromise solution." Id.

64. See infra note 97 and accompanying text.

65. See infra note 98 and accompanying text.

66. See infra notes 99-100 and accompanying text.

67. See infra notes 70-105 and accompanying text.

68. See Klein & Bachechi, supra note 8, at 16.

69. See Friedrich Kessler & Edith Fine, Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1964). Culpa in contrahendo was originally advanced in the famous article by Jhering entitled Culpa in contrahendo, oder Schadensersatz bei nichtigen oder nicht zur Perfektion gelangten Verträgen, originally printed in Jahrbücher für die Dogmatik des heutigen römischen und deutschen Privatsrechts I (1861). See id. The title of Jhering's article translates to mean "culpa in contrahendo, or damages in the case of void and not fully completed contracts."

70. See id. at 401.

71. See Heinz Schwenk, Culpa in Contrahendo in German, French and Louisiana Law, 15 Tul. L. Rev. 87, 88 (1940). The Roman law recognized two cases: a vendor of a res extra commercium, or the seller of a nonexistent inheritance, could be sued for damages despite a void contract. See id.

72. See Kessler & Fine, supra note 69, at 402. Jhering believed that the German common law, Gemeines Recht, did not pay sufficient attention to the needs of commerce in that it did not correct the "will theory" or the meeting of the minds requirement. See id.

73. See id. Examples include erroneous transmissions of an offer or acceptance and unilateral mistakes as to either the identity of the other party, or the subject matter of the contract. See id.

74. See id.

75. See id. at 403-06.

76. See Schwenk, supra note 71, at 91. Jhering initially applied the doctrine in cases in which a party was incapable of forming a contract, the subject of the contract was impossible, or the will was defective (i.e., when its manifestation was defective, a message was incorrectly transmitted, or the offeror died before the acceptance of the offer). See id. at 89.

77. See id. at 92.

78. See Kessler & Fine, supra note 69, at 405.

79. See id. at 406-07.

80. Louisiana incorporates the doctrine in Articles 1878 and 1967 of the Louisiana Civil Code. Article 1878 deals with unjust enrichment, and states: "If a contract is dissolved because of a fortuitous event that occurred after an obliger has performed in part, the obligee is bound but only to the extent that he was enriched by the obligor's partial performance." La. Civ. Code Ann. art. 1878 (West 1987). Article 1967 addresses detrimental reliance and, in relevant part, provides: "A party may be obligated by a promise when he knew or should have known that the promise would induce the other party to rely on it to his detriment and the other party was reasonable in so relying." La. Civ. Code Ann. art. 1967 (West 1987). Puerto Rico has incorporated the doctrine in Article 1802 of its civil code as follows: "A person who by an act or omission causes damage to another through fault or negligence shall be obliged to repair the damage so done. Concurrent imprudence of the party so aggrieved does not exempt from liability, but entails a reduction of the indemnity." P.R. Laws Ann. tit. 31, [j0] 5141 (1992).

81. See, e.g., Morris v. People's Bank & Trust Co. of Natchitoches, 580 So. 2d 1029, 1033 (3rd Cir. 1991) (noting that Louisiana courts recognize culpa in contrahendo as a doctrine that allows recovery by a plaintiff for damages which resulted "from his change of position caused by reliance upon an unenforceable contract"); West Baton Rouge Parish School Board v. T.R. Ray, Inc., 367 So. 2d 332, 335 (La. 1979) (acknowledging that although the contract at hand was unenforceable, the plaintiff may be able to recover under the theory of unjustified enrichment or under the doctrine of culpa in contrahendo). But See Morris v. Friedman, 663 So. 2d 19, 24 n.8 (La. 1995) (noting that although culpa in contrahendo has been given considerable attention in law review articles, few Louisiana court decisions actually mention the doctrine, and none have based recovery exclusively upon the doctrine).

82. See La. Civ. Code Ann. art. 1967 (West 1987); See Friedman, 663 So. 2d at 24. The doctrine of detrimental reliance existed as a cause of action in Louisiana even prior to its codification in 1985. See id.

83. See Whirlpool Corp. v. U.M.C.O. Int'l Corp., 748 F. Supp. 1557, 1562 (S.D. Fla. 1990). The court cites to Produciones Tommy Muniz, Inc. v. Comite Organizador de los VIII Juegos Panamericos (COPAN), 113 D.P.R. 517, 529, 13 Official Translations 666, 679 (1982) (emphasizing that a duty of good faith during negotiations imposes liability for damages caused by an unjustified withdrawal from negotiations). See id.

84. See E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217, 221 (1987).

85. See id.

86. See id. Professor Farnsworth coined this phrase, which has been referred to by other authors as well. See Klein & Bachechi, supra note 8, at 4. Interestingly, the term "aleatory" is defined as "depending on an uncertain event or contingency as to both profit and loss." Webster's Third New International Dictionary 57 (G. & C. Merriam Company 1981).

87. See Farnsworth, supra note 84, at 221.

88. See id.

89. See generally U.C.C. art. 2 Sales (West 1989).

90. See id. art. 1 General Provisions § § 1-201(19), 1-203, 2 103(1)(b). Section 1-201 defines good faith as "honesty in fact in the conduct or transaction concerned"; section 1-203 states that "[e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement"; section 2-103 defines good faith for a merchant in the context of transactions in goods as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." id. See Restatement (Second) of Contracts § 205 (ALI 1981). The Restatement states that "[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." Id.

91. See Farnsworth, supra note 84, at 221.

92. See Klein & Bachechi, supra note 8, at 17-18.

93. See id.

94. See id. at 6.

95. See Farnsworth, supra note 84, at 222.

96. See id.

97. See id. Restitution generally is imposed when there is a contract implied by law, a quasi-contract, and one party has been unjustly enriched. See, e.g., Callano v. Oakwood Park Homes Corp., 219 A.2d 332 (N.J. Super. Ct. App. Div. 1966); Hill v. Waxberg, 237 F.2d 936 (9th Cir. 1956).

98. See Farnsworth, supra note 84, at 222; See Guilbert v. Phillips Petroleum Co., 503 F.2d 587 (6th Cir. 1974).

99. See Farnsworth, supra note 84, at 221-241. An excellent case addressing this issue is Hoffman v. Red Owl Stores, Inc., 133 N.W. 2d 267(Wis. 1965). In Hoffman, the court awarded damages to the plaintiff who, to his detriment, relied and acted upon a number of promises made by the defendant. See id. at 275. The defendant, Red Owl, promised the plaintiff, Hoffman, that Red Owl would establish Hoffman in a Red Owl grocery chain for $18,000. See id. at 269. In reliance upon this, Hoffman sold his business, including inventory and fixtures, purchased a building site for the new Red Owl store, and relocated his family. See id. at 269-70. The defendant later changed the figure to $26,000, causing the plaintiff to be unable to go through with the deal. See id. at 270. The court, though not finding grounds for breach of contract, granted damages based on the policy decision that the injustice incurred by Hoffman could only be avoided by enforcement of Red Owl's promise. See id. at 275. The Restatement addresses promissory estoppel in section 90 as follows: "[a] promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promiSee and which does induce such action of forbearance is binding if injustice can be avoided only by enforcement of the promise." Restatement, supra note 90, § 90. Other cases granting relief on the basis of promissory estoppel include Drennan v. Star Paving Co., 333 P.2d 757 (Cal. 1958); Chrysler Corp. v. Quimby, 144 A.2d 123 (Del. 1958), modified and reh'g denied, 144 A.2d 855 (Del. 1958); Feinberg v. Pfeiffer Co., 322 S.W.2d 163 (Mo. App. 1959); and Schafer v. Fraser, 290 P.2d 190 (Or.1955).

100. See Farnsworth, supra note 84, at 222.

101. See id.

102. See Klein & Bachechi, supra note 8, at 9. See also Teachers Ins. &Annuity Ass'n v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987). In Teachers, the court held that a commitment letter obligated the parties "to conclude a final loan agreement upon the agreed terms by negotiating in good faith to resolve such additional terms as are customary in such agreements." Id. at 499. The court additionally found that the defendant breached by refusing to negotiate unless the plaintiff agreed to modify the original agreement by accepting a new condition. See id. at 507-08.

103. See Klein & Bachechi, supra note 8, at 9.

104. See id.

105. See id. at 10. The duty imposed upon the parties is not an absolute guarantee that the contract will in fact be perfected. See id. The parties will be prevented, though, from refusing to negotiate or from offering only unreasonable proposals. See id. See also Teachers Ins., 670 F. Supp. at 498; Teachers Ins. & Annuity Ass'n v. Butler, 626 F. Supp. 1229 (S.D.N.Y. 1986); Sommer v. Hilton Hotels Corp., 376 F. Supp. 297 (S.D.N.Y. 1974).

106. See Klein & Bachechi, supra note 8, at 9. See, e.g., Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 261 (2nd Cir. 1984) (explaining that intent determines whether a document constitutes a binding agreement); Teachers Insurance, 670 F. Supp. at 499 ("In seeking to determine whether such a preliminary commitment should be considered binding, a court's task is . . . to determine the intentions of the parties at the time of their entry into the understanding, as well as their manifestations to one another by which the understanding was reached."). If the language of the preliminary agreement is precatory or vague, courts may find that the parties did not intend a binding agreement. Compare Beck v. American Health Group Int'l, 260 Cal. Rptr. 237 (Cal. Ct. App. 1989) with Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Text App. 1987). In determining intent, courts also consider the complexity and scope of the agreement, the course of performance or dealing between the parties, and whether the relevant business community would find a particular document to be binding. See, e.g., Teachers Insurance, 670 F. Supp. at 500; Reprosystem, 727 F.2d at 257; Banking & Trading Corp. v. Floete, 257 F.2d 765 (2d Cir.1958). Open terms can also indicate an intent not to be bound, though court interpretations have varied. See Teachers Insurance, 670 F. Supp. at 502. Partial performance of an obligation can evidence intent. See Dawson v. General Motors Corp., 977 F.2d 369, 374 (7th Cir. 1992). Finally, express disclaimers show intent that the parties only wished to be bound to a finalized document, though these disclaimers are not controlling, and courts may look to other factors as well. See Texaco, 729 S.W.2d at 790 (binding parties to preliminary agreement when express language indicated that the parties would be bound only to a final contract).

107. See Klein & Bachechi, supra note 8, at 10.

108. See id. at 15.

109. See supra note 1.

110. International Institute for the Unification of Private Law, Principles of International Commercial Contracts/UNIDROIT, International Institute for the Unification of Private Law (Rome 1994) [hereinafter UNIDROIT Principles].

111. See Joseph M. Perillo, UNIDROIT Principles of International Commercial Contracts: The Black Letter Text and a Review, 63 Fordham L. Rev. 281, 283 (1994).

112. See Michael J. Bonell, The UNIDROIT Principles of International Commercial Contracts: Why? What? How?, 69 Tul. L. Rev. 1121, 1122 (1995). The Principles do not fall into any of the traditional categories of international legal instruments such as model clauses, contract forms, international conventions, or uniform laws. See id.

113. See id. at 1123. Particularly, the Principles were designed to deal with common conflict of laws problems and the problems associated with the absence of internationally uniform legal terminology resulting from the coexistence of different domestic laws governing international transactions, and to deal with potential gaps in international conventions. See id.

114. See CISG, supra note 4.

115. See Alejandro M. Garro, The Gap-Filling Role of the UNIDROIT Principles in International Sales Law: Some Comments on the Interplay Between the Principles and the CISG, 69 Tul. L. Rev. 1149, 1151 (1995).

116. See Bonell, supra note 112, at 1126-27. The articles are divided into the following seven chapters: General Provisions, Formation, Validity, Interpretation, Content, Performance, and Non-Performance. See UNIDROIT Principles, supra note 110. The UNIDROIT Principles were drafted in a similar manner to European codes, and each article includes comments and examples where appropriate. See Bonell, supra note 112, at 1128.

117. See Bonell, supra note 112, at 1126. Members varied from academics and high ranking judges to civil servants. See id. Included were Michael Joachim Bonell, chairman, E. Allan Farnsworth of Columbia University School of Law, and Alejandro Garro of Columbia University School of Law. See id. at 1126 n.8. The group additionally obtained guidance from the more than one hundred correspondents of the Institute and from the UNIDROIT Governing Council. See id. at 1126-27, 1147.

118. See id. at 1128.

119. See id. For example, the term "hardship" was used in the place of "impracticability," "frustration of purpose," "imprecision," "Wegfall der Geschäftsgrundlage," and '"' eccessiva onerosit'a sopravvenuta." See id. The drafters chose hardship over the other terms because it is acknowledged in many legal systems and is widely known in international trade practice. See id. Additionally, the drafters often created new terminology such as ""non-performance," to overcome varying connotations of more common terms such as "breach." See id.

120. See id. at 1127.

121. See id.

122. See id.

123. See Perillo, supra note 111, at 283. See also Garro, supra note 115, at 1152. The gap-filling role of the UNIDROIT Principles will enable judges and arbitrators to reach an internationally acceptable result, as opposed to a predominately domesticated result, when "international uniform law instruments" such as the Convention lack specific guidelines. Id.

124. See UNIDROIT Principles, supra note 110, art. 1.7. See also Perillo, supra note 111, at 287; Bonell, supra note 112, at 1138.

125. See supra note 25.

126. See supra note 90.

127. See id.

128. See UNIDROIT Principles, supra note 110, arts. 1.7, 2.15.

129. See id. art. 2.15(2); Farnsworth, supra note 47, at 58. Article 2.15(2) provides: "However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party." UNIDROIT Principles, supra note 110, art. 2.15.

130. See UNIDROIT Principles, supra note 110; Bonell, supra note 112, at1138.

131. See UNIDROIT Principles, supra note 110, art. 2.15(3). The text states: "It is bad faith, in particular, for a party to enter into or continue negotiations intending not to reach an agreement with the other party." Id. See also, Farnsworth, supra note 47, at 49.

132. See generally Klein & Bachechi, supra note 8; Farnsworth, supra note 47; Amy H. Kastely, Unification and Community: A Rhetorical Analysis of the United Nations Sales Convention, 8 Nw. J. Int'l. L. & Bus. 574 (1988); Garro, supra note 115; Ferrari, supra note 12; Winship, supra note 26.

133. See CISG, supra note 4, art. 7(2). Article 7(2) states: Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. Id.

134. See generally id.

135. See Farnsworth, supra note 47, at 56.

136. See id.

137. See id. The delegates involved with the drafting of the Convention were aware of this possibility. During the drafting of the Convention, a working group revised Article 7(1) in an attempt to find a compromise to an issue that had sharply divided the delegates. See Honnold, supra note 29, at 369. The working group's proposed Article 7, which was eventually adopted, was intended to require courts and arbitral tribunals to promote uniformity of interpretation of the Convention, and to direct the attention of the courts in resolving disputes to the fact that the acts and omissions of the parties must be interpreted in the light of the principle that they observe good faith in international trade. See id. It was noted during discussions of Article 7(1) that the text did not make it clear that the need to observe good faith in international trade was also directed to the parties themselves. See id.

138. See Farnsworth, supra note 47, at 56.

139. See id. This scenario is favored by Professor Farnsworth because he believes that a general principle of good faith should not be recognized by the courts due to the fact that it was explicitly rejected by the framers of the Convention. See id.

140. See id.

141. A case does exist under the Convention in which one court bases a portion of its decision on the principle of good faith, though no duty was imposed upon either of the parties. See OLG [Provincial Court of Appeal] Feb. 8, 1995, [F.R.G.], abstract reprinted in UNILEX: International Caselaw & Bibliography on the U.N. Convention on Contracts for the International Sale of Goods (Michael J. Bonell et al. eds., 1996) [hereinafter UNILEX]. This case governed by the Convention involved a contract for the sale of automobiles between a German seller and an Italian buyer. See id. No specific delivery date was established between the parties, and the buyer refused to accept delivery when the seller informed the buyer that the goods were ready to be picked up. See id. The buyer then claimed, inter alia, that the seller's failure to deliver the cars when the buyer wished was a breach giving the buyer the right to avoid the contract. See id. In this case, the court found that to allow the buyer, over two years later, to declare the contract avoided, would violate the principle of good faith embodied in Article 7(1) of the Convention. See id. The full German text of this case is available on the Internet at the address < http://www.jura.uni-freiburg.de/iprl/cisg>.

142. See Farnsworth, supra note 47, at 56.

143. See id. at 56-57.

144. See id. Michael Joachim Bonell of Italy favors this interpretation, and has argued that references to good faith within the Convention have constituted a certain application of the principle which has confirmed that it is a general principle which underlies the Convention as a whole. See id.

145. Renard Constr. (ME) Ltd. v. Minister for Public Works (1992) 26 N.S.W.L.R. 234, 234-83 (Austl.) reprinted in UNILEX, supra note 141, at 1995.

146. See id.

147. See id.

148. See id. Judge Priestly found that good faith is widely recognized in contract law and supported this contention by referring to "the ratification by a great many countries of the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 11 April 1980), art. 7(1) of which requires regard to be had to the observance of good faith in international trade in the interpretation of the convention." Id.

149. CA Grenoble, February 22, 1995, reprinted in UNILEX, D.1995-7, (1995).

150. See id.

151. See id.

152. See id.

153. See id.

154. See id.

155. See id. The court cited to Article 1(1). See id. Article 1(1) addresses which contracts are governed by the Convention and is quoted supra, note 3.

156. See id.

157. See id. The pertinent part of the decision reads as follows: "[P]our procedure abusive et injustifiee . . . contraire au principe de bonne foi dans le commerce international, edicte par l'article 7 de la convention de Vienne. . . ." Id.

158. See Hides (Yugo. v. Italy), Int'l Comm. Arb. 7331 (1994). This case can be found on the Internet at http://www.cisg.law.pace.edu. The tribunal decided to apply the Convention and stated: "[G]eneral principles of international commercial practice, including the principle of good faith, should govern the dispute." Id.

159. See Garro, supra note 115, at 1152.

160. See id.

161. See CISG, supra note 4, art 7(2).

162. See Farnsworth, supra note 47, at 56.

163. See id.

164. See supra notes 146, 154.

165. See supra notes 72-87 and accompanying text.

166. The only country involved with any of the cases cited in supra notes 142, 146, or 154 that also spoke out on the good faith provision issue during the drafting of Article 7 was Italy. See Honnold, supra note 29, at 476-79. Italy advocated making the good faith provision specifically relevant to the interpretation of the contract and not to the interpretation of the Convention. See id.

167. See supra notes 142-154 and accompanying text.

168. See generally Friedrich K. Juenger, Listening to Law Professors Talk About Good Faith: Some Afterthoughts, 69 Tul. L. Rev. 1253 (1995); Klein & Bachechi, supra note 8; Farnsworth, supra note 84.

169. See Klein & Bachechi, supra note 8, at 22.

170. CISG, supra note 4, art. 8(3).

171. See Klein & Bachechi, supra note 8, at 19-22.

172. See id. at 7-8. Preliminary agreements may be referred to as letters of intent, commitment letters, binders, agreements in principle, and memoranda of understanding. See id. at 8.

173. See id. at 9. Preliminary agreements in international transactions are particularly likely to be used when parties participate in acquisition and disposition agreements, construction contracts, long-term supply contracts, and technical assistance agreements because of the complexity of the negotiation stages which can last years. See id. These preliminary agreements are often used to obtain documentation for third parties for financing, insurance, and other purposes. See id.

174. See CISG, supra note 4, art. 16. Article 16(2) states: "However, an offer cannot be revoked: . . . (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer." Id.

175. See id. arts. 81, 82, 84.

176. See id. art. 81. Article 81(2) states: "A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract." Id.

177. See id. art. 7(2).

PACE CISG DATABASEPace Law School Institute of International Commercial Law - Last updated April 17, 2001

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