Reproduced with permission of the publisher, Kluwer Law International, The Hague

• Dedication
• Preface
• Table of contents
• Case-law: Bibliography
• Abbreviations: Judicial and Arbitral Decisions
• Index

Chapter 1.

The 1980 Convention: A Brief Introduction

§1 On April 11, 1980, a diplomatic conference of sixty-two States unanimously approved a Convention providing uniform law for international sales of goods. By December 11, 1986, instruments of adherence (e.g., ratification or accession) had been deposited with the Secretary-General by eleven States: Argentina, China, Egypt, France, Hungary, Italy, Lesotho, Syrian Arab Republic, United States of America, Yugoslavia and Zambia. Under Article 99 the Convention went into force a year after the deposit of the tenth instrument of adherence; for the above eleven States the Convention entered into force January 1, 1988.

At publication, over 50 States, including States from each region and embracing a large majority of the world’s population, have adhered to the Convention. [Go to listing of] these States, with dates of adherence and entry into force, and any applicable reservation. Adherence patterns of other Conventions, with less initial momentum than CISG, indicate that this Convention is moving towards virtually unanimous acceptance.

§2 A. Primary Role of the Contract

The dominant theme of the Convention is the role of the contract construed in the light of commercial practice and usage—a theme of deeper significance than may be evident at first glance. In some countries protective rules inspired by the plight of consumers could be superseded by the uniform rules developed for international commerce. To avoid any collision with such protective legislation, consumer purchases are excluded from the Convention. (See the Commentary to Arts. 2(a) and 5, infra at §§ 50–55, 71.)

The Convention does not override domestic law that outlaws certain transactions or invalidates proscribed contracts and oppressive terms; outside this narrow area the Convention protects the contractual arrangements made by the parties. (See, e.g., Ch. 2, infra at §27). Moreover, the parties may exclude the Convention, and the terms of their contract will [page 3] prevail over any inconsistent provision of the uniform law. (See the Commentary to Art. 6, infra at §74.) In short, like most domestic sales rules applicable to commercial contracts, the Convention’s rules play a supporting role, supplying answers to problems that the parties have failed to solve by contract.

The Convention in two fundamental ways responds to the power of agreement. The Convention itself was produced by agreement. States from all parts of the world, through collaboration sustained for over a decade, reached consensus on a Convention of over a hundred articles. Then, as Contracting States, they agreed that in international sales they would substitute the Convention’s rules for their domestic laws. Although we can not know whether civilization grew from a social compact those who saw the development of the Convention can not doubt the power to move towards civilization by agreement.

Consistent with these origins, the Convention does not interfere with the freedom of sellers and buyers to shape the terms of their transactions. Nations can control their domestic commerce and can exclude or restrict the flow of trade. However, with the collapse of imperial and economic empires, commercial enterprises can not compel parties in other countries to trade with them and, with the development of international competition, can not dictate contract terms. Domestic trade may be subject to national management but international trade depends on agreement.

A highly respected legal scholar in a rhetorical flourish (later modified) announced the "Death of Contract". At least for international sales this report (as Mark Twain said of a report that he had died) is "grossly exaggerated".[1]

§3 B. Major Contours of the Convention

The Convention deals with the two basic aspects of the sales transaction. Part II governs the formation of the contract; Part III governs the obligations of the parties under the contract. States by specific declaration (Art. 92) may exclude either Part. (In the Commentary, see the Introduction to Part II of the Convention, infra at §131.) [page 4]

Part II on Formation (Arts. 14–24) includes rules on the definiteness required of offers, the effect of communications addressed to the general public ("public offers"), the power to revoke an offer, and the requisites for a binding acceptance. The "Sales" rules in Part III (Arts. 25–88) include Chapters on the seller’s obligations with respect to quality of the goods and freedom of the goods from third-party claims (Ch. II), the buyer’s obligations to pay for the goods (Ch. III), the allocation of risk of loss (Ch. IV), and the remedies available to both parties for breach (Ch. V).

A more precise view of the Convention can be obtained by examining the Detailed Table of Contents. Some may wish at this point to read the introductory passages that are interspersed throughout the Commentary; references to these introductions are given in a footnote.[2]

§4 C. Development of the Convention

Concern for the barriers resulting from legal diversity spans the centuries [3] but we must be content to start our account with the work launched in the 1930s when the International Institute for the Unification of Private Law (UNIDROIT) requested a distinguished group of European scholars to prepare a draft of a uniform law for the international sale of goods. A preliminary draft was issued in 1935. The work, suspended during the war, resumed soon after the end of hostilities. In 1951 a conference of 21 nations encouraged the continuation of the project, and in 1956 and 1963 revised drafts were sent to governments for comments. In the meantime, work was commenced on a uniform law for the formation of the contract; in 1958 a draft uniform law was circulated.

In April 1964 a Diplomatic Conference of 28 States met at the Hague to act on these two related drafts. After three intense weeks the Conference finalized two conventions: One set forth a Uniform Law for the International Sale of Goods (ULIS) and the other a Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF). In [page 5] 1972 both conventions went into effect following ratification by five States; adherents for the most part were European. [4]

The 1964 Hague Conventions were of fundamental value but it became evident that success on a worldwide scale called for worldwide participation and sponsorship. In 1966 a resolution by the General Assembly of the United Nations provided for the establishment of a worldwide representative body to promote "the progressive harmonization and unification of the law of international trade." This body, the United Nations Commission on International Trade Law (UNCITRAL), had its first session in 1968; in its first decade UNCITRAL made notable progress in preparing uniform international rules for arbitration, carriage of goods by sea, negotiable instruments and the sales of goods—progress that was analyzed in a symposium issue of the American Journal of Comparative Law. References to these and other aspects of the Commission’s work are given in a footnote. [5]

§6 (a) The Commission: Structure and Working Methods

UNCITRAL’s structure has two essential elements—the number of members is limited and the representation is worldwide. To facilitate efficiency in handling technical legal questions, the Commission’s membership is limited to 36 States, but that membership is allocated among the regions of the world. A formula in the Commission’s charter provides the following regional distribution: Africa, 9; Asia, 7; Eastern Europe, 5; Latin America, 6; Western Europe and Others, 9. This last "region" (the [page 6] industrial West) embraces Australia, New Zealand, Canada and the United States. [6]

The full Commission meets once a year for sessions of two to four weeks. At these sessions the Commission decides on topics for work and receives progress reports from its constituent bodies—principally Working Groups that, even with reduced size, are cross-sections of the Commission’s worldwide representation. When a Working Group has completed its work on a draft Convention, the full Commission gives detailed consideration to each provision. This legislative process will be seen in a specific context when we turn to the development of the Draft Convention on Sales (infra at §9).

§7 (b) The Representatives

The General Assembly resolution that established UNCITRAL provided that the Member States shall appoint representatives "in so far as possible from among persons of eminence in the field of international trade". In fact, UNCITRAL representatives proved to be a wholesome mix of academic specialists in commercial and comparative law, practicing lawyers, and members of government ministries with years of experience in international lawmaking.

The Commission faced a formidable task. The representatives responded with a flexible, international approach that embraced the premise that their national interests in having an effective uniform law would not be served by bargaining (in the spirit of tariff negotiations) for the use of the maximum number of scraps of national law. Examining the development of the Convention will expose the dangers inherent in using local legal idioms; the representatives minimized this problem by deciding what result was appropriate for a series of pivotal factual examples, and by repeated review of multilingual drafts designed to embody these decisions. Since each nation has both sellers and buyers, agreeing on a solution that was fair to both parties to the contract was only rarely complicated by issues of national interest. On a few points, it was suggested that the interests of industrial and developing countries called for different rules. These issues arose in surprisingly technical settings—the time within which notice must be given that goods were defective (Arts. 39 and 44, infra at §§254 et seq.), and the circumstances in which one party [page 7] may suspend performance because of possible failure of counterperformance (Art. 71, infra at §385). Happily, the delegates finally found acceptable solutions even for these problems.

Throughout the United Nations system, UNCITRAL became known as a businesslike and hard-working group. After a day of legislative sessions, representatives would give evenings and weekends to informal working-group sessions to resolve stubborn problems. The years of hard, successful work (and brief, notable periods of relaxation in pleasant surroundings) developed an esprit somewhat like that of a veteran regiment. The members jealously guarded their record of reaching decisions without a formal vote; in each case the legislative product was approved by consensus.[7]

§8 (c) The Secretariat

The Commission and its constituent bodies are served by a Secretariat consisting of the United Nations International Trade Law Branch. This writer cannot speak of the Secretariat with detachment. During the period (1969–1974) when he served as Chief of this Branch and as Secretary to the Commission he became deeply attached to this remarkable international team [8]

The role of the Secretariat was established by a few basic facts of time and space. The Commission meets once a year; during a two to four week session it considers the progress of programs in several complex and diverse legal fields. In the Working Groups, national representatives come together from all parts of the globe, from diverse legal and linguistic backgrounds, for annual sessions of two or three weeks. All of the representatives have primary, full-time responsibilities in their Universities or Ministries. For these reasons, progress at the legislative sessions has depended on preparatory materials provided by the Secretariat. These materials included studies analyzing the divergences among the existing legal rules; reports on commercial practices to assist in making a choice among alternative solutions to pivotal factual examples; draft statutory texts formulated, at crucial spots, with clearly labelled alternatives to facilitate debate and decision with a minimum of confusion or misunderstanding. A strong role for the U.N. Secretariat could touch sensitive political nerves [page 8] but at an early stage it was recognized that successful work depended on this help; the desire for success muted this and other divisive issues.

The replies laid the foundation for the Commission’s decisions at its second (1969) session. It became evident that the 1964 Conventions, despite the valuable work they reflected, would not receive adequate adherence. The basic difficulty stemmed from inadequate participation by representatives of different legal backgrounds in the preparation of the 1964 Conventions; despite efforts by UNIDROIT to encourage wider participation these Conventions were essentially the product of the legal scholarship of Western Europe.[9]

UNCITRAL thereupon established a Working Group of 14 States—a cross-section of UNCITRAL’s world-wide representation—and requested the Working Group to prepare a text that would facilitate "acceptance by countries of different legal, social and economic systems." Under the effective chairmanship of Professor Jorge Barrera Graf of Mexico the Working Group completed this task in nine annual sessions. In 1976 the Working Group completed its work based on the 1964 Hague [page 9] Sales Convention (ULIS); this was embodied in a Draft Convention on Sales—as contrasted with Formation. In 1978 the Working Group completed its work based on the 1964 Hague Formation Convention (ULF), and issued its Draft Convention on Formation. In June 1978 the full Commission completed its review of these two drafts, and combined them in a single Draft Convention that dealt both with the formation of the contract (Part II) and with the rights of the parties to the contract (Part III). This 1978 Draft Convention on Contracts for the International Sale of Goods received the Commission’s unanimous approval. The General Assembly of the United Nations promptly authorized the convening of a diplomatic conference to act on the UNCITRAL draft.[10]

In March 1980, representatives of 62 States and 8 international organizations met in Vienna to finalize the UNCITRAL Draft Convention. The diplomatic conference worked for five weeks within the forbidding walls of the Hofburg; the principal sessions were held in the ornate hall that had provided the setting for the Congress of Vienna and for SALT II—international arrangements of incomparably greater political portent but (unhappily) without such world-wide representation.[11]

Nearly all the provisions in the UNCITRAL Draft Convention of 1978 were approved in substance by the Conference. Significant changes are listed here in a footnote and are discussed in the Commentary.[12] The degree of approval of the UNCITRAL draft resulted from the fact that representatives from each region of the world had participated in preparing the draft. In addition, most delegates realized that the eighty-eight articles [page 10] of the uniform sales law (Parts I–III) were closely related to each other as parts of an integrated whole; major changes in individual articles could affect the integrity of the structure. As the Conference progressed with its article-by-article discussion it became evident that the time for review of the draft as a whole would be limited, as compared with the repeated reviews that had occurred during the decade of work in UNCITRAL. See §9, supra. Thus, proponents of amendments had a heavy burden: they needed to show not only that a change was needed but also that a proposed amendment was clearly drafted and would not lead to untoward consequences in relation to other provisions of the law.

Through overtime work and close cooperation between language specialists of the United Nations and members of the Drafting Committee, the Convention was finalized in six official languages—Arabic, Chinese, English, French, Russian and Spanish.[13]

Plenary sessions met only at the beginning and end of the Conference. The text of the Convention was substantially completed by two "committees." The "committees" resembled the Plenary since all States were represented but the committee concept permitted simultaneous work on different topics and also facilitated flexible procedures—a committee could take action by a simple majority while decisions in Plenary required a two-thirds vote.

The First Committee prepared the principal substantive provisions of the Convention (Parts I-III, Arts. 1–88) while the Second Committee prepared Part IV—Final Provisions (Arts. 89–101). These Final Provisions govern the steps necessary to bring the Convention into force and the content of permissible "declarations" (reservations) by adhering States.

The Second Committee, in response to authorization from the General Assembly, also prepared a Protocol to the 1974 Convention on the Limitation Period in the International Sale of Goods. This Protocol modified provisions of the 1974 Limitation Convention on its sphere of applicability to make the 1974 Convention conform to the 1980 Sales Convention.[14]

At the end of the Conference, the texts prepared by the First and Second [page 11] Committees were voted on in Plenary, article by article. Under the rules of the Conference, each article required approval by a two-thirds majority. In fact, of the 88 substantive articles (Parts I-III), 74 were approved unanimously and 8 additional articles received no more than 2 negative votes. All of the other articles were approved by large majorities but in two instances the majority fell short of two-thirds; on these articles, ad hoc working groups then brought in compromise versions that were approved without dissent. The Convention, as a whole, was then submitted to a roll-call vote and was approved without a dissenting vote. In short, the spirit of consensus that had developed in UNCITRAL was maintained to the end of the Diplomatic Conference.[page 12]

Chapter 2.

Salient Features of the 1980 Convention

§11 This chapter is designed to highlight some of the more significant features of the Convention. This is not a summary of the Convention; a more complete overview can be gained by examining the Detailed Table of Contents and by reading, seriatim, the brief introductions to the various parts of the Convention that appear in the Commentary, infra, at §§36, 131, 180 and 458. This chapter draws attention to aspects of the Convention that are of special significance: issues that underlie major parts of the Convention and challenging questions that will be discussed fully later. The most one can hope for here is an apéritif.

§12 A. Scope of the Convention

During the half-century of work that led to the present Convention there was general agreement that the uniform rules would apply only to international sales; the 1980 Convention governs contracts "between parties whose places of business are in different States." (See the Commentary on Art. 1, infra at §39.) Why is the Convention’s scope restricted in this manner? To many the answer will seem obvious but it may be useful to explore some of the reasons for this basic decision.

§13 (a) Reasons for Excluding Domestic Transactions

Although we cannot claim for law that universality of outlook that has been achieved in basic science, lawmakers have not remained so isolated that it has been necessary to await the separate invention of each legal wheel. The international use of legal ideas is illustrated by widespread acceptance of the French Code Civil; the borrowing of the work embodied in the German and Swiss codes; the adoption within Scandinavia of parallel law on various topics, including Sales; and the widespread acceptance of common law ideas, including those embodied in the (U.K.) Sale of Goods Act.[page 13]

§14 (b) The Convention as a Model for Improving Domestic Law

While the obligation to implement the rules of the convention is confined to the international sale, the opportunity to use the legal work embodied in the Convention is not so restricted. It is too early to come to conclusions concerning the Convention’s usefulness for domestic law reform; it must suffice to suggest that the question should not be overlooked.

This book includes references to domestic rules, and the Convention will surely stimulate comparative studies in this area. The Scandinavian States have drawn on the Convention in revising their sales law. The results of this experience will shed further light on the value of the Convention for the reform of domestic law.[1]

The Commentary to Article 7 at §92 discusses the significance of international case law and scholarship under the Convention and the procedures for making this material generally available. Domestic law based on the Convention can be enriched by this body of thought and experience, and students and practitioners can gain wider horizons by this contact with the world of international commerce.

The 1964 Sales Convention directed the tribunals of Contracting States to apply its rules to any international sale even though the transaction [page 14] and its parties had no contact with any Contracting State.[2] As we shall see in the Commentary to Article 1, the 1980 Convention rejects this "universalist" approach. Contracting States are obliged to apply the Convention only when the places of business of both the parties to the sale are in Contracting States (Art. 1(1)(a)) or when the rules of private international law lead to the application of the law of a Contracting State (Art. 1(1)(b)), and this latter ground may be excluded by reservation. (Commentary to Art. 1, infra at §47.) These provisions do not seem too modest in view of widespread adherence to the Convention and the opportunity of parties to agree on the applicability of the Convention. (See Commentary to Art. 6, infra at §78.)

§16 B. Interpretation of the Convention

The special problems of construing an international text are faced in Article 7, which lays down a series of principles for interpreting the Convention. The most basic principle is this: Interpretation shall respond to the Convention’s "international character and to the need to promote uniformity in its application." Ways to effectuate this principle, examined in the Commentary to Article 7, include the following: The effort, in drafting the Convention, to avoid legal idioms that have divergent local meanings and, instead, to speak in terms of physical events that occur in international trade; the use of the legislative history of the Convention as a means of escape from preconceptions derived from domestic laws; and the dissemination and use of international case law (jurisprudence) and [page 15] scholarly critique (doctrine). (Commentary to Art. 7, infra at §§87, 88, and 92.)

Laws that may readily be amended (e.g., income tax laws and regulations) may indulge in detail but this is not feasible for laws that must endure. Most of the domestic laws on obligations and on sales have stood almost for a century and many are even older. International legislative machinery is even harder to put into motion. The Sales Convention must be read and applied in a manner that permits it to grow and adapt to novel circumstances and changing times. The Convention provides for flexibility in various ways.

§19 (a) The Contract: Practices of the Parties; Usages

Perhaps the most important vehicle for flexibility is the role that the Convention gives to the contract. (See Overview, Ch. 1, supra at §2; Art. 6, infra at §75.) On points where the contract is silent, current practices and usage may apply. Under Article 9, the parties "are bound by any usage to which they have agreed and by any practices which they have established between themselves"; in addition, the parties are considered to "to have impliedly made applicable to their contract" any usage which "in international trade is widely known to, and regularly observed by..." such parties. Statutory norms grow old but applicable practices and usages change with changing times and respond to special circumstances and needs. (See the Commentary to Art. 9, infra at §112.)

§20 (b) "Good Faith"

Adaptation and development are also encouraged by the statement in Article 7 that one of the factors to be considered in interpreting the Convention is the need to promote "the observance of good faith in international trade." The Commentary to Article 7 (infra at §94) notes that using "good faith" only as a guide for interpretation is less sweeping than the general "good faith" requirements of some legal systems; nevertheless, in many situations interpretation in the light of the principle of "good faith" can avoid stultification or circumvention of specific provisions of the Convention.

§21 (c) Recourse to "General Principles" of the Convention

Many legal systems work from the premise that solutions to legal problems can and must be found within the four corners of the Code—a [page 16] premise that compels the extension by analogy of one or another of the Code’s provisions. Other legal systems take a more strict view of statutes. For example, statutes like the (U.K.) Sale of Goods Act may be regarded as islands in an ocean of uncodified common law; in this setting if the statute does not readily supply an answer the court may draw on general common-law ideas.

This leads to important questions: How can one establish the general principles on which the Convention is based? How diligently should a tribunal look for such principles before it turns, via rules of private international law, to a rule of domestic law? For this writer, these questions present the Convention’s most intriguing challenge; they are explored in the setting of Article 7, infra at §94.

§23 D. The Sale of Goods: Part III of the Convention

§ 25 (a) Obligations of the Parties.

The Convention’s contractual theme is announced in parallel provisions that open Chapter II (Obligations of the Seller) and Chapter III (Obligations of the Buyer): Each party must perform all of the obligations "required by the contract" (Arts. 30 and 53, infra at §206 and §309). This emphasis on the contract continues throughout the Convention and dominates the provisions dealing with the parties’ obligations concerning delivery, quality of the goods, and payment of the price. The significant point is not that the Convention mentions the contract; this is generally true of domestic sales law. What is significant is the fact that giving legal effect to the expectations of the parties (as shown by the language of the contract, the practices of the parties and applicable usages) is so consistently the theme of the Convention.[3]

§26 (b) Remedies

The tendency in some codified systems to distinguish between remedies for different categories of breach of contract found its way into the 1964 Hague Convention on Sales. ULIS divided [page 18] performance by the seller into five categories, and set up a separate remedial system for each category—an approach that produced length, complexity and ambiguity. For instance, separate remedies were provided for default as to the date of delivery and the place of delivery; this distinction was difficult to apply since goods that are still en route on the date for delivery can be regarded as either at the wrong place (en route) or delivered at the wrong time. Other artificial distinctions resulted from the fragmented approach to the seller’s obligations and to remedies for breach.[4]

The Convention’s unified contractual approach to the parties’ duties was implemented by a unified system of remedies for breach. Under Article 45 a single set of remedies applies when the seller "fails to perform any of his obligations"; similarly, Article 61 provides a single set of remedies when the buyer "fails to perform any of his obligations." The remedy does not depend on formal classifications of types of breach but on the seriousness of the breach. This approach reduced bulk and complexity.

This unified approach to obligations and remedies at one point touched an important issue of substance. Some legal systems have traditionally restricted the seller’s damage liability for defective goods to cases where the defect resulted from the seller’s fault; other legal systems base damages simply on breach of contract.[5]

Under the Convention, a party’s failure to perform the contract invokes the full range of remedies. For example, under Article 45 if the seller "fails to perform any of his obligations under the contract...the buyer may...claim damages...." And, contrary to the result in ULIS, the Convention’s excuse from damage liability when non-performance results from an impediment (cf. force majeure) does not extend to the delivery of defective goods.[6] [page 19]

We now face one of the thorniest problems in the law of contracts and sales: When will breach by one party free the other party of his obligation to perform? Students of comparative law do not credit any domestic legal system with a satisfactory approach to this problem; most of the traditional statutes dealing with the sale of goods tend to be casuistic and unresponsive to the interests at stake.[7]

In international sales the problem has special significance because of the cost of transporting goods to a distant buyer and the difficulty of disposing of rejected goods in a foreign country. These factors led to agreement on rules that can save the contract from destruction on technical and trivial grounds. One approach was a series of provisions that permit a party in breach to "cure" the deficiency in performance—Articles 34, 37 and 48. A second approach limits avoidance to breaches that are "fundamental" (Arts. 25, 49, 64). This limitation on the right of an aggrieved party to avoid the contract is subject to a powerful tool for clarifying the position of both parties: An aggrieved party who faces non-performance (failure to deliver goods or to pay the price) may fix a final, "additional period of time of reasonable length for performance"—the famous Nachfrist notice adapted from German law. Failure to perform in accordance with this notice is a ground for avoidance; the aggrieved party need not establish that the breach was "fundamental." Articles 47 and 49(1)(b) (avoidance by the buyer); Articles 63 and 64 (1)(b) (avoidance by the seller).[8]

The Sales part of the Convention devotes a separate chapter to risk of loss (Ch. IV, Arts. 66–70). These rules, applicable when the contract is [page 20] silent, are designed to place the risk of loss on the party who is in the better position to care for or insure the goods. The rules are not complicated by concepts such as "property" but are stated in terms of physical events. For example, risk passes when goods "are handed over to the first carrier" (Art. 67); when the contract does not involve carriage, risk passes when the buyer "takes over" the goods (Art. 69). These rules are, of course, subject to special provisions on the effect of breach of contract (Arts. 69, 70). A fuller description of the rules on risk appears in the introduction to Part III, Chapter IV, infra at §358, and in the Commentary on Articles 66–70, infra at §§360–383.

§30 E. An Invisible Gain: The Omission of "Awesome Relics"

Ernst Rabel, whose monumental study of the comparative law of sales provided the foundation for the early work towards a uniform sales law, said that one of the gains from the new law would be to avoid the "awesome relics of the dead past that populate in amazing multitude the older codifications of sales law."[9] This book notes some of the outdated legal [page 21] formulae that still complicate domestic sales law. One may delight in legal antiques and in the patina of ingenious circumlocutions that have had to substitute for fundamental reform but these aesthetic values may not be appreciated by a modern merchant and, more especially, by his trading partner from a different legal tradition.

The evolution of the 1980 Sales Convention was summarized in Overview, Chapter 1, supra at §4. Our concern now is with factors that have affected the texture and quality of the Convention and distinguish it from domestic law.

§33 (b) The Refining Processes of International Collaboration

The most powerful forces towards eliminating "awesome relics of the dead past" were intrinsic to the process of international collaboration. Proposals that embodied the idioms or traditions peculiar to a single system were subjected to polite but revealing analysis by puzzled representatives from other systems. Another powerful solvent was the process of translation; formulae that were vague or redolent of domestic legal tradition would set off alarms when they appeared in other languages. Unhappy experience with concepts in the 1964 Sales Convention that defied translation (délivrance; ipso facto avoidance) helped pave the way for UNCITRAL’s use of simpler, clearer language.[10]

One device used by the Secretariat in presenting issues to UNCITRAL seemed to facilitate agreement and, perhaps, a more direct mode of expression. At points where proposed legal texts might be read differently by delegates from different legal backgrounds the crucial issues were posed initially in terms of concrete factual examples. It proved to be easier to reach agreement on the results of concrete cases than to agree on legal drafts; and starting with agreement on the substance of the rule made it easier to draft a text that was direct and clear.[11]

The process was not always successful; on occasion, the discussion emphasized competing formulas of domestic law and [page 23] agreement was found only through a general rule based on the formula of wider applicability and an exception based on the competing formula. These compromises led to some of the less elegant provisions of the Convention but were the necessary (and less than outrageous) price for international agreement.[12] More often, the international deliberative process rejected the anachronisms that complicate domestic law and produced a statutory text that is relatively straightforward and uncluttered with technical detail. The value simply of eliminating technical rules that divert attention from the transaction and its commercial setting could easily be overlooked. (Who notices obstructions that have been removed from a highway?)[13] [page 24]

Part 1

Sphere of Application and General Provisions
(Articles 1–13)

§35 The balance of this work is a Commentary on the articles of the Convention. The uniform rules for sales transactions appear in Parts I-III of the Convention. Part I (Arts. 1–13) defines the Convention’s field of application and includes other general provisions. Part II (Arts. 14–24) governs formation of the contract. Part III (Arts. 25–88) governs the rights and obligations of the parties to the contract of sale.

§36 Introduction to Part I of the Convention

§37 A. The Convention’s Field of Application: Chapter I

§38 B. Interpretation and Related Questions: Chapter II

§39 The Overview (Ch. 2, supra at §12) drew attention to the limited applicability of the Convention. In brief, under Article 1 the Convention will apply only if two basic requirements are met: (1) The sale must be international,—i.e., the seller and the buyer must have their "places of business in different States," and (2) The sale must have a prescribed relationship with one or more States that have adhered to the Convention.

§40 A. Basic Rules on Applicability

The 1980 Convention lays down a single basic criterion of internationality: The seller and buyer must have their "places of business in different States." The 1964 Conventions used the same criterion but added further tests: Did the contract "involve" international shipment? Where did "the acts constituting the offer and acceptance" take place? The deliberations in UNCITRAL showed that these additional tests did not give predictable answers; the location of the parties’ places of business provided more solid footing.[2]

§41 (a) The Undisclosed Foreign Principal

Paragraph (2) of Article 1 addresses the following case:

The above transaction would not be governed by the Convention. Paragraph (2) of Article 1 is based on the premise that the facts that involve the Convention should be available to the parties at the time of the conclusion of the contract. This premise is also illustrated by Article 10(a), quoted infra at §42, which states that the choice between multiple places of business—a choice that is important in determining applicability of the Convention—shall be based on "circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract."

§42 (b) Multiple Places of Business

Article 10(a) works from the premise that a single party (such as a corporation) may have multiple places of business, and that a selection of the applicable place of business is based on its relationship to an individual sales contract. Consequently, the Convention does not invoke any of the rules for fixing a single location or "nationality" of a corporation, such as determinations based on the place of incorporation, "domicile", or "seat" ( siège, siège social or Sitz ). Article 10(a) must be construed and applied on the basis of its special role in determining the applicability of the Convention.[3]

In Example 1B, let us suppose that the making and performance of the contract are more closely related to State B than to State A. By virtue of Article 10(a), supra, Seller’s relevant place of business is in State B. Consequently, under Article 1(1), the parties’ relevant places of business are not "in different States"; the Convention does not apply.

Suppose that in Example 1B, a business in State B is incorporated in State B but is owned by a parent company incorporated in State A and the sales contract is executed between the company formed in State B and a party located in State B. Even if the corporate subsidiary in State B is closely controlled by the parent in State A the Convention would not apply to the contract. Under Article 1(1), applicability of the Convention is based on the location of the "parties" to the contract, and in this case the [page 31] parties are both in the same State. To avoid circumventing a State’s regulatory policies it may be necessary to "pierce the corporate veil" but it is difficult to imagine circumstances in which this doctrine would apply to free a corporate subsidiary from the domestic law of its place of incorporation. The effect of the active participation by a manufacturer or other supplier in a sale by a seller to a buyer is explored in connection with Article 4, §63 infra.

In Example 1B, suppose that the seller’s place of business in State B is not incorporated in State B but is a branch office of a company formed in State A and having its headquarters in State A. Determining which place of business, under Article 10(a), supra, "has the closest relationship to the contract and its performance" will call for weighing competing considerations. The factors in the scale are reduced by the rule of Article 10(a) that the relationship is to be determined on the basis of the circumstances known to or contemplated by both parties "before or at the conclusion of the contract"; supervision by the head office in State A that is known only to the seller is irrelevant; the same is true of facts learned by the buyer subsequent to the making of the contract.[4] The relative importance of the role of the two places of business in making and in performing the contract will be discussed infra at §43. However, where the balance seems close the parties would be well advised to settle the point by contract—by stating whether the Convention or specified domestic law is applicable.

The multiple places of business involved in consortia necessarily create difficult problems as to applicable law under traditional domestic law and the Convention. Usually such complex arrangements are governed by a detailed contract which should include an express provision on whether the Convention or a specified domestic legal system applies. See Kritzer Manual Ch. 27.

§43 (c) "Place of Business"; Sojourn During Negotiations

For reasons explained more fully in the Commentary to Article 10, infra at §124, the answer to both questions should be No. "Place of business", as used in Article 1, should be construed to mean a permanent and regular place for the transacting of general business, and would not include a temporary place of sojourn during ad hoc negotiations.[5] This interpretation is indicated by Article 10(a) which points to the relationship between the place of business and "the contract and its performance. " The procurement or production of goods to meet the buyer’s requirements is normally of much greater significance to both parties than the place where the contract is negotiated and signed. Moreover, references to "places of business" in other parts of the Convention show that this term excludes a temporary "place" like the hotel room in Example 1C. For example, Article 31(c) provides that where the contract does not "involve carriage of the goods" (para (a)) and the goods are not located at a place known by the parties (para (b)), the seller’s obligation to deliver consists in placing the goods at the buyer’s disposal "at the place where the seller has his place of business at the time of the conclusion of the contract" (para (c)). The meaning of "place of business" as a site of continuing business activity is similarly shown by provisions in Articles 24, 42(b) and 69(2).

In addition, the elusive and insubstantial nature of the place of contracting led UNCITRAL to delete provisions in Article 1(1) of ULIS that made aspects of the making of the contract relevant in determining whether a sale was international. This view is also supported by the emphasis on the place for performance in the 1980 EEC Convention on the Law Applicable to Contractual Obligations (Art. 4(2)).

Compare: (1) FR. CA Paris, J.D.24410, 24 April 1992, Fauba v. Fujitsu, affirmed, C. de Cass. (Sup. Ct), 4 January 1995. A French buyer (B) ordered electronic components from a German seller (S) through S’s liaison office in France. In a dispute over B’s rejection of a shipment, S argued that CISG did not apply on the ground that B (located in France) ordered the goods through the German seller’s office in France; thus, the parties to the transaction were not located in different States, as required by Article [page 33] 1(1). The court held that S’s liaison office was not an autonomous legal entity but, instead, was a French branch of the German seller. Consequently, the transaction was between parties in different States; the Convention applied. UNILEX D.1995-1; CLOUT 155. (2) Cf. ARB. ICC (Paris), 7531/1993 (1994). An Austrian buyer (B) and a Chinese seller (S) made a contract for the purchase from S of scaffold fittings. B conducted part of the negotiations in China, where S was located. Held: Negotiations in the same country did not bar application of Art.1(1)(a); the parties had their places of business in two different Contracting States. UNILEX D. 1994-31. Accord: Bonell/Ligouri ULR, 1996-1, 153 n.33. See: Schlechtriem, Com. (1998) 24.

§45 (a) Both Parties in Contracting States (Sub (1)(a))

The Convention’s function in enhancing certainty through uniform law needs to be emphasized, for in this setting one concern central to conflicts law, the proper allocation of regulatory power among competing sovereignties, has little significance. The "regulatory" aspects of the uniform rules are minimal, evidenced by the parties’ freedom to reject the Convention or modify its rules (Art. 6, §74, infra ) and by the Convention’s deference to the rules on validity under applicable domestic law (Art. 4(a), §64, infra ).

The Convention’s function in reducing the costs of legal uncertainty also supports the decision, made in Sub(1)(a), to apply the uniform rules when the parties have their places of business in different Contracting States even when important aspects of the transaction take place in a non-Contracting State. Uncertainty concerning the parties’ obligations generates planning costs that center in the parties’ places of business and affect the economic success of the enterprise. These enterprise costs are of concern to the parties and to the States where they have their places of business—rather than to States where aspects of the transaction occur.

There was prompt agreement on Sub(1)(a) or Article 1 but the second ground for applicability, Sub. (1)(b), was sharply contested on the ground that basing applicability on rules of private international law would undermine the legal certainty that was the Convention’s central goal. To meet this objection the Conference added Article 95 which permitted Contracting States to reject Sub (1)(b).[8] (The effect of an Article 95 reservation will be considered further in §47, infra. )

To sum up: The 1980 Convention rejected the "universalist" approach of the 1964 Conventions; Article 1(1) provides for applicability based on either of two types of connection between the sales transaction and a Contracting State: (1) In all Contracting States the Convention will apply when (Sub (1)(a)) the seller and the buyer have their places of business in different Contracting States. (2) The Convention will apply (Sub (1)(b)) when the rules of private international law point to a Contracting State, subject to a reservation by Contracting States that they "will not be bound" by this provision.[page 35]

§46 (b) Applicability Under Rules of Private International Law; Sub (1)(b): An Introduction

§46.1 (c) The Effect of Reservations

We shall meet this problem again (§§ 47.4–47.6 infra ) in connection with reservations under Article 95 to exclude applicability based on Article 1(1)(b).[page 37]

B. Alternative Approaches to Applicability

A proposal to delete subparagraph (1)(b) was defeated; as a compromise, the Convention’s Final Provisions (Part IV) included the following:[11]

The above declaration permitted under Article 95 has been made by the following States: China, Czech Republic, Singapore, Slovakia and U.S.A.

We may now return to Example 1D (§46, supra ) in which State A, the place of business of the seller, was a Contracting State but State B, where the buyer was located, was not a Contracting State. Now let us assume that State A in ratifying the Convention made the declaration permitted by Article 95. State A will now apply the Convention only to the sales covered by Sub (1)(a)—transactions between parties in two Contracting States. Since Sub (1)(b) is excluded, State A’s rules of private international [page 38] law designating the law of State A now invoke its domestic law rather than the Convention.

The factors favoring and opposing the making of an Article 95 declaration will vary from State to State; only a few general considerations can be mentioned.[12] In brief, as Example 1D suggests, in most situations an Article 95 declaration narrows the applicability of the Convention and enlarges the applicability of the domestic law of the declaring State. A Contracting State whose domestic law is ill-suited for international transactions may well prefer the wider applicability of the Convention that results from Sub (1)(b), and will choose not to make an Article 95 declaration. On the other hand, States whose domestic law is modern and well-suited to international transactions may well conclude that the Convention’s greatest value is within the area defined by Sub (1)(a)—transactions between two Contracting States. Although (in the long run) under Sub(1)(a) in approximately half the cases the Convention will supplant the domestic law of the declaring State, in the other cases the Convention will supplant foreign law, which usually will be less accessible than the Convention and often will be archaic and ill-suited to international transactions. Moreover, this important objective—displacing foreign law with uniform international law—is not well served by Sub (1)(b). In most cases, conflict (PIL) rules will point to the State of either the seller or the buyer. (See the provisions of the 1955 and 1986 Hague PIL Conventions at §45.2, supra and §47.3, infra. ) As we have seen, when both the seller and buyer are in Contracting States Sub (1)(a) invokes the Convention. Thus, the relevant situation for analysis is that of Example 1D (§46, supra ): only one of the parties to the sale is in a Contracting State. The option offered by Article 95 must of course be considered from the point of view of Contracting States since only they can make an Article 95 declaration.

Does the Contracting State effectively displace foreign law by retaining Sub (1)(b)? No: Sub (1)(b) invokes the Convention only when conflicts (PIL) rules points to a Contracting State—and in the cases where Sub (1)(b) is relevant the trading partners of the Contracting States are in [page 39] non-Contracting States. (Non-Contracting States can scarcely reproach Contracting States for choosing to apply their domestic law in transactions with non-Contracting States: If these States are concerned about coping with foreign domestic law they can adhere to the Convention!)

As noted above, five States have made the reservation permitted by Article 95 " not to be bound" by paragraph (1)(b) of Article 1 ("Sub (1)(b)") which provides that the "Convention applies when the rules of private international law lead to the application of the law of a Contracting State". (For simplicity these will sometimes be referred to as "Reservation States" or States that have "rejected" Sub (1)(b). The significance of the latter expression is discussed at §47.5, infra. ) Most States have not exercised the Article 95 option and are bound by Sub (1)(b). Interesting questions arise from the interplay of these differing choices.

As we have seen, Sub (1)(b) is irrelevant when both the seller and buyer are in Contracting States. We now turn to this general situation: One party is in a Contracting State (State A) and the other party is in a non-Contracting State (State B). A dispute between these parties comes before a third State (State C), a Contracting State whose rules of private international law (PIL) point to State A, a Contracting State. The question will be: Does the Convention or the domestic law of State A apply to the transaction? The problem will be: What is the effect of various combinations of choices by States A and C to reject or retain Sub (1)(b).

These cases become interesting only when State A (the place of business of one of the parties) and State C (the forum ) have made different choices with respect to Sub(1)(b). We need to note in passing the following cases where there is no ground for dispute:

(1) When both State A and State C have retained Sub(1)(b), the Convention will apply.

(2) When both State A and State C have rejected Sub(1)(b) the Convention will not apply. Thus, if the forum decides that PIL points to State A the case will be governed by the domestic law of State A.

Now, at long last, we reach the interesting cases where the two Contracting States have taken different decisions about retaining Sub(1)(b). To simplify the discussion let us assume that decisions taken by the forum (State C) on private international law are the same as the decisions of other fora facing the same situation. We shall also assume, as usual, that the parties (unfortunately) have not solved the problem in their contract.[page 40]

§47.5 (a) The Party’s State has Retained and the Forum has Rejected Sub (1)(b)

The proper effect of an Article 95 reservation becomes clearer when we consider the reason why States requested and exercised this option to reject Sub (1)(b) and thereby confine applicability to Sub (1)(a). One State observed that it would make an Article 95 reservation to protect its traders from being deprived of their familiar domestic law without the countervailing gain of supplanting the foreign law of trading partners in non-Contracting States, e.g., State B in Example 1F.[page 41][13] Substituting uniform international law for such foreign law was regarded as one of the important advantages of becoming a Contracting State. Certainly Sub (1)(b) was not rejected because of difficulty or distaste with applying the Convention as a neutral forum like State C, for the Article 95 reservation is necessarily made by a Contracting State—a State that is friendly to and willing to apply the Convention.

In short, the proper approach for the forum in State C is to decide which State’s law is indicated by the rules of PIL. Then, when PIL points to the law of a State that retained Sub. (1)(b) (as in Example 1F) the forum should apply the Convention. As we have noted, this approach gives the same result in the fora of all States that have retained Sub (1)(b) and all non-Contracting States, and would eliminate the impossible problems (including forum -shopping) that would arise if fora in States like State C should improperly apply their Article 95 reservation when no party from an Article 95 reservation State is before the court.

Latent in the above solution is this question: By what authority does the forum in State C apply the Convention based on its conflicts (PIL) rules when State C has made an Article 95 reservation " not to be bound" by Sub (1)(b). Has it been wrong to state that an Article 95 reservation "rejects" Sub (1)(b)? When States make a reservation that they are "not bound" by Sub (1)(b) are its tribunals free to apply Sub (1)(b) if they choose? See Pelichet, 1986 PIL Convention 43.

In Example 1F on what ground should the tribunal in State C, a Reservation State, apply the Convention law of State A when State C’s conflicts (PIL) rules point to State A? Suppose that the dispute between the parties in Example 1F were taken to a tribunal in State N, a non -Contracting State, and the conflicts (PIL) rules of N (like those of State C) pointed to State A. The tribunal in State N surely should apply the Convention, since this is the law of State A that applies to this transaction (§47.3, supra ). Sub (1)(b) is irrelevant in State N, a non-Contracting State; State N would apply the Convention because this is the correct application of State N’s rules of private international law. This also is the reason why in Example 1F the tribunal in State C, although a Reservation State, should apply the Convention; here, too, Sub (1)(b) is irrelevant. Cf. Pelichet, 1986 PIL Convention 43.

The approach suggested above may be illustrated and tested by the following case: [page 42]

Example 1G. Seller is in State A, a Contracting State that (unlike State A in Example 1F) has made an Article 95 reservation that it is "not bound" by Sub (1)(b); Buyer is in State B, a non-Contracting State. The forum is in State A which, as was just noted, is a Reservation State. The conflicts (PIL) rules of State A point to State C, a Contracting State that has retained Sub (1)(b).

Should the forum in State A apply the Convention to this transaction? The first step is to recognize that Article 95 does not provide that a State that makes the reservation shall apply its own domestic law; it merely frees that State from Sub (1)(b). Thus, in the present example, if the conflicts (PIL) rules of State A pointed to Buyer’s State (State B), a non-Contracting State, the State A forum would apply the domestic (non -Convention) law of State B. This recourse to conflicts (PIL) is, of course, not in response to a command from Sub (1)(b) but simply in order to decide the case under the most appropriate system of law. This principle also applies if the answer to the conflicts (PIL) inquiry points to a Contracting State such as State C. In Example 1G the forum in State A should apply the Convention rather than the domestic law of State C.

This approach to Example 1G is also appropriate since it is applicable to various fora to which the dispute might be brought. For example, in this case the plaintiff (e.g. Seller) might choose to bring the action in Buyer’s State (State B), a non-Contracting State. State B’s conflicts (PIL) rules (particularly with the further succeeds of pending measures for unification) may resemble those of State A. In that event, the conflicts (PIL) inquiry by the forum in State B might well point to the law of State C,—or some other similar Contracting State where, for a transaction like this, the Convention is the applicable law.

Example 1H. The facts are the same as in Example 1G in that State A (the Seller’s State) made an Article 95 declaration that A "is not bound" by Sub (1)(b). However, in this case the forum is State C, a Contracting State that has retained Sub (1)(b). As in Example 1F, the conflicts, (PIL) rules of the forum point to State A.

The correct approach follows from the discussion of Example 1F. The forum in State C, having determined that PIL points to State A, should conclude that since State A has rejected Sub (1)(b) the law of State A for this transaction does not include the Convention; consequently the forum in State C should apply the domestic sales law of State A.

This approach respects State A’s option to reject applicability of the Convention under Sub (1)(b) when a party in that State contracts with a party in a non-Contracting State and the rules of PIL point to State A. (Reasons for exercising this option were noted at §47.1, supra. ) Moreover,[page 43] this approach would be like the approach of: (1) other States that have rejected Sub (1)(b) (like State A); (2) all non-Contracting States like State N in §47.5, supra.[14]

In short, the fact that States have responded differently to the option offered by Article 95 should present no serious difficulties once it is understood that the choice is exercised in the interest of parties in a State that makes this choice, and that fora of other States should respect that choice. In addition, as we have seen (§46.1, supra ), this result is consistent with the result of other reservations permitted by the Convention.

Two of the above examples, 1F and 1H, (perhaps unnecessarily) probed the effect of reservations excluding Article l(1)(b) in unusual situations—litigation brought in a State where neither the seller nor buyer has its place of business. ("The expense of spirit in a waste of shame." W.Sh.S#109.) In this rarified atmosphere, this writer’s views have met both support and criticism. See: On the obligations of States (whether or not Contracting) to respect Article 95 reservations excluding Sub 1(1)(b), see Schlechtriem, Comm. (1998) 27–28, §§43–44; idem., 1986 Commentary 27 n.56a; Bonell/Ligouri, ULR (1996-1) 153–154, n. 37–40, (1997-2) 391–393; Evans, M., Bianca-Bonell Commentary (1987) 656–657; Winship, P., 21 Cornell Int. L.J. 487–533 (1988); Gabor, F. A. 7 N.W.J. Int. L.& Bus. 696–726 (1986), 8 id. 538–569 (1988). But cf. Ferrari, F., Sphere of Application (CISG) 15–16, n. 201–206.

Happily, controversies involving the applicability of CISG under Article 1(1)(b), and the rare cases involving reservations to this provision, are diminishing as the number of adhering States increases. The future lies with Article 1(1)(a) and its clear-cut rule: The Convention applies when the places of business of the seller and buyer are in different Contracting States.[page 44]

§48 C. Other Problems of Applicability

The rules on applicability of the Convention do not refer to the nationality of the parties or to their civil or commercial character. Consequently, it was not necessary to add in paragraph (3) that these factors are not to be "taken into consideration in determining the application of this Convention."[15]

The specific rejection of a distinction between "the civil or commercial character of the parties or of the contract" should prevent any misapprehension by those who are accustomed to separate civil and commercial codes. The 1980 Convention is not of this character. True, the typical international transaction is commercial and, as we shall see, Articles 2(a) and 5 specifically exclude most consumer-type transactions. But the central point, emphasized by paragraph (3), is that the traditional classifications in some legal systems between "civil" and "commercial" parties and transactions are irrelevant in determining the applicability of the Convention.[16]

Article 1(1) provides that the Convention applies to the sale of "goods". The meaning of this term will be examined following the discussion of provisions of Articles 2 and 3 which shed light on this question. See §56 infra.[page 45]

Article 2. Exclusions from the Convention

§49 Article 2 excludes from the Convention six specific categories. The first three (paragraphs (a)-(c)) are based on the nature of the transaction; the remaining three (paragraphs (d)-(f)) are based on the nature of the goods.

§50 A. Specific Exclusions

Most consumers do their shopping at stores in their own community; all of these purchases fall outside the Convention because they are not international (Art. 1, supra at §39). However, consumers may occasionally shop on the other side of a nearby international border or during trips abroad, or may order from foreign mail-order houses. In some of these transactions the seller will know that the buyer is a foreigner so that the transaction would meet the Convention’s requirements of internationality. (See Art. 1(2), supra at §41).[page 46]

In UNCITRAL attention was drawn to the development of national legislation and case law designed to protect consumers; it was agreed that the Convention should not supersede these rules. Consideration was given to a provision that the Convention would not override any domestic rule that was "mandatory" or that implemented "public policy" (ordre public ) but it was found that these concepts carried different meanings in various legal systems; the clearest and safest solution was specifically to exclude consumer purchases from the Convention.[2]

The phrase "goods brought for personal, family or household use " refers to the purpose of the buyer at the time of the purchase. (A similar definition in (U.S.A.) UCC 9–109 applies when the goods "are used" by the buyer for the above purposes; in UNCITRAL "are used" was deleted so that applicability of the Convention would not depend on action taken by the buyer subsequent to the purchase.) The character of the goods is not decisive; the Convention applies to the international purchase of furniture for a business office even though this type of furniture is customarily bought by consumers.

The "unless" clause that concludes paragraph (a) may be illustrated as follows:

Example 2A. Seller, a dealer in photographic equipment in State A, accepted an order from Buyer, a resident of State B, for expensive and complex photographic equipment of the type normally used by professionals. In a controversy over the sale, when Seller invoked the Convention, Buyer offered evidence that he bought the equipment for his personal use as an amateur.

In this case, the seller should be able to show, under the "unless" clause of paragraph (a), that he "neither knew or ought to have known" of the buyer’s purpose; in this event, the Convention would govern the sale. As to burden of proof see O.R. 239, Docy Hist. 460.

Questions that turn on proof of what a person "knew" or "ought to have known" can hardly be free of doubt but advance planning can minimize the uncertainty. Sellers who distribute catalogues to international customers may wish to place on the catalogue’s order forms (and on similar contract forms) a statement such as the following: "International purchases of this equipment may be governed by the United Nations Convention on Contracts for the International Sale of Goods unless the goods are bought for personal, family or household use. If the goods are [page 47] bought for such use, please check the appropriate box below." A buyer who does not make the requested indication could scarcely contend that the seller "ought to have known" of the buyer’s purpose.

The structure of Article 2(a) and practical considerations applicable to the allocation of the burden of proof suggest that the buyer has the burden of proving that it bought the goods for personal, family or household use; the seller would have the burden of proving that it did not know (and had no means of knowing) the buyer’s purpose.

AUSTRIA, Ob (Sup. Ct.), 10 Ob 1506/95, 11 February 1997. B (Swiss) sued S (Austrian), an importer of Italian cars, for failure to deliver a Lamborghini Countrac. The Court held, pursuant to Art. 2(a), that CISG did not apply since B purchased the car for personal use. The opinion noted that CISG would have applied if the seller had proved that it "neither knew or ought to have known" that the car was purchased for personal use. CLOUT 190.

(Sales to consumers are included in "Principles of European Contract Law".)

The exclusion of sales "by auction" resulted from various considerations: Auction sales present unique problems with respect to formation of the contract. The seller will not know who the buyer is (and hence whether the Convention applies under Art. 1(1)) until after the sale is "knocked down" to the highest bidder. Local law often applies special regulations to auction sales.[3]

These considerations are useful in defining the scope of this exclusion. For example, when the buyer fails to pay for the goods the seller may be empowered to "avoid" the contract and resell the goods. Similar rights may be given to the buyer when the seller delivers seriously defective goods (Arts. 49, 64, 75, 81, 88). Such resales by a party to the contract, even though authorized by the Convention, are not excluded from the Convention as sales "(c) on execution or otherwise by authority of law." The same principles apply when a secured party on default by the debtor resells the collateral at a private sale rather than by auction.[4]

The exclusion of the intangible rights listed in Article 2(d) illustrates the fact, discussed more fully in §56, infra, that the sale of "goods" refers to moveable, corporeal things. In the 1964 Hague Conventions and in UNCITRAL there was general agreement that transactions in the types of assets listed in Article 2(d) should be excluded from the law covering "sales of goods. " The exclusion of "negotiable instruments" (Fr.: effets de commerce; Sp.: titulos o efectos de comercio ) refers to instruments calling for the payment of money; documents controlling the delivery of goods (e.g., warehouse receipts, bills of lading) are subject to the Convention when they are employed to effect the delivery of goods. See Arts. 30, 34, 58(1), infra. See: HUNG. Arb. AZVb 92205, 20 December 1993. CISG is not applicable to shares. UNILEX D. 1993-27. See: Schlechtriem, Com. (1998) 35.

The 1964 Hague Conventions excluded sales "of any ship, vessel or aircraft, which is or will be subject to registration." ULIS 5 (1)(b); ULF 1(6)(b). The reference to registration was designed to designate goods which, according to Prof. Tunc’s commentary, "are or will be subject to [page 49] a special system of rules which, moreover, frequently resembles that for immovables." In UNCITRAL it was found that national legislation included many varieties or regulations that might (or might not) be deemed to include "registration"; the concluding phrase was deleted. Consideration was given to excluding only vessels of a specified tonnage; this attempt also was abandoned.[5]

Does the exclusion of the sale of "ships, vessels" (Fr.: navires, bateaux; Sp.: buques, embarcaciones ) extend to small pleasure craft such as sailboats and rowboats? No such restriction seems feasible for the exclusion of "aircraft." UNCITRAL’s inability to find a workable basis for distinguishing between large and small craft and the difficulty that courts would encounter in developing such a distinction suggest that Article 2(d) must be read without qualification: Sales of small pleasure craft do not fall within the Convention. Article 7(1) provides: "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 ..." International uniformity in interpretation and application would be more readily achieved by an unqualified reading of Article 2(d) than by judicial attempts to narrow the scope of the provision.[6] See Nicholas, LQR (1989) 206. On the other hand, Professor Schlechtriem has suggested that this exception should not be extended to the sale of boats that under domestic law do not come under the special regulations of domestic law applicable to ships.[7] Discussion at the Diplomatic Conference is reported at O.R. 240–241, Docy Hist. 461–462.

Providing a ship with supplies (e.g., fuel) or with equipment necessary for the voyage, although within domestic maritime law would be subject to the Convention if other requirements of Article 1 are met. See McMahon, 21 J. of Mar. L. & C. 305, 306 (1990). On the sale of materials for ship construction see §56, infra. However, under Article 90 the Convention would yield to an "international agreement" governing the rights of the seller and buyer who "have their places of business in States parties to such agreement". See §§462–464, infra. HUNG. Sup. Ct. Gf.31-349/1992f9, 25 September 1992. Malev v. Pratt & Whitney. Aircraft engines [page 50] are subject to CISG. UNILEX, D. 1942-20. See: Winship, P., 50 J. Air L. & Comm. 1053–1066 (1985).

§56 B. "Sale of Goods"

It is clear that "goods" governed by the Convention must be tangible, corporeal things, and not intangible rights like those excluded by Article 2(d) above—stocks, shares, investment securities and instruments evidencing debts, obligations or the right to payment. As has been noted at §53, supra, the point is that these documents represent intangible rights —a claim for payment or for receiving dividends or other payments from an enterprise.[8] Article 3(2), §60 infra, takes a similar approach in excluding contracts in which the preponderant part of a party’s obligations "consists in the supply of labour or other services ". Possible dispute over whether electricity is tangible (a quantum) or intangible (a wave) was avoided by the exclusion of electricity. See Article 2(f). On the other hand, a sale (e.g.) of gas is within the Convention; a motion to exclude gas was defeated.[9] The classification of computer software has led to controversy; some software seems difficult to distinguish from an exceedingly compact book or phonograph record. Here, as in other borderline areas, it seems prudent to state in the contract whether the Convention applies. See Fakes, 3 Software L.J. 559 (1990).[page 51]

The conclusion that "goods" refers to tangible, corporeal things means that sales of patent rights, copyrights, trademarks and "know-how" are not governed by the Convention.[10] (As we shall see, under the Convention a buyer of goods has rights against the seller if the goods are subject to a "right or claim of a third party based on industrial property or other intellectual property." See Art. 42, §§267–270, infra. )

Many provisions of the Convention also make clear that the term "goods" (French: merchandises; Spanish: mercaderias ) refers to moveable tangible assets. A sale of land is excluded. Any possible doubt on this point is foreclosed by numerous provisions that are incompatible with transactions in land—e.g. quality and packaging (Art. 35), replacement or repair of defective parts (Art. 46), shipment and damage during transit (Arts. 67–69), delivery by installments (Art. 73), preservation and warehousing to prevent loss or deterioration (Arts. 85–88). It follows that a contract to construct a bridge, building or other permanent structure is not a contract for the sale of "goods". The building materials are goods but materials that the builder brings to the building site normally may be removed without breaking the contract with the land-owner; Cf. (U.S.A.) UCC 2-105(1). On the other hand, the Convention would apply to an international sale of a mobile building even though the buyer might decide to affix it permanently to his land.[11] See: ICC Arb. 1992:7153. Materials to be used in construction of building are "goods" subject to CISG. CLOUT 26, UNILEX D. 1992-1.

Questions can arise from contracts relating to things that at the making of the contract are a part of or attached to land (e.g. oil, ores, trees, buildings) but which will become moveable at a later stage. Contracts requiring the seller to extract or sever corporeal objects from land and make them available to the buyer seem to be covered by Article 3(1) (§57, infra ) as "Contracts for the supply of goods to be manufactured or produced.... " Legislative history (§56 n. 9, supra ) shows that the sale of gas is covered; there is no reason to suppose that a direct underground origin for the gas affects this result. On the other hand, a contract permitting a party to come on land and mine, drill or cut timber does not call for one party to deliver goods to the other; crucial provisions of the Convention on conformity of goods (Art. 35), delivery, shipment (Arts. 31–33) and risk of loss (Arts. 66–70) do not address the special circumstances [page 52] of contracts for mining or other extraction activities. Cf. (U.S.A.) UCC §2–107(1): sale of goods includes (minerals and the like only "if they are to be severed by the seller"); Ont. L. Ref. Sales, Vol. 3 p. 15 (Draft Act. §2.5(1)). But cf. Bridge, Sale 28–29. However, the parties by agreement may make the Convention applicable to these translations (§81, infra. ).

Some domestic sales laws exclude exchanges of goods. The (U.K.) Sale of Goods Act applies to transfers or property "for a money consideration"—a restriction that raises questions of interpretation when (e.g.) S delivers goods at a stated price to B with the understanding (as in a "trade-in" transaction) that goods that B delivers to S will reduce the price by a stated amount.[12]

The Convention does not state any restrictions as to the price. Article 53 states: "The buyer must pay the price for the goods...". Articles 55–59 speak in the same general terms. This, plus the parties’ freedom under the Convention to shape the transaction to meet their needs supports the view that exchanges of goods are not excluded unless the parties so choose (Art. 6 infra ).[13] On the other hand, some "counter-trade" arrangements, primarily concerned with the balance of payments, may not describe the goods or other obligations of the parties with sufficient definiteness to constitute a contract of sale. See §56.2 and Article 14, §133 infra. See UNCITRAL Legal Guide on Drawing up Contracts in International Countertrade Transactions (Ch. III of 1990 draft considers alternative approaches to contract. A/CN.9/332); Kritzer Manual Ch. 25; Loeber in Weidring Conf. (1986) 299–315.[page 53]

§ 56.2 (3) Framework Agreements for Future Orders and Deliveries; Franchise Agreements

This agreement, without more, does not constitute a "contract of sale" under Article 1 and is not governed by the Convention. (The definiteness required of offers is discussed under Article 14 at §§134–137, infra. ) However, if orders are thereafter made and accepted, the "framework" agreement can supply the detailed terms of the transaction to supplement or modify the provisions of the Convention. (See: GER Düsseldorf, 6 U 152/95, 11 July 1996. CISG is not applicable to framework agreement, but is applicable to individual contracts.) See Article 6, §§74–84. If the "framework" agreement was made before the date of the Convention’s entry into force, under Article 99 the Convention would govern orders and contracts made after that date but not before.

The arrangements and practices involved in franchise and dealership relationships are too varied for thorough treatment here. Dealers sometimes sue for losses incurred in preparing for a franchise arrangement that is expected on the basis of representations that fall short of promises. These claims present some of the problems presented by outlays during negotiations that fail to ripen into contract—the problem known in some legal systems as culpa in contrahendo. These problems arise from such diverse settings that they are dealt with or excluded by provisions of Part II on Formation of the Contract. Other problems arise out of termination clauses in franchise agreements that are challenged as so harsh as to violate standards of conscionability—problems of contract validity that Article 4(a) leaves to domestic law. See §§64–69 (validity) and §§4–95 (good faith). In addition, close examination of the facts may show that the issue does not arise out of a "contract of sale of goods" and therefore falls outside of the scope of the Convention.

These transactions are clearly "contracts of sale of goods" within Article 1 and no provision excludes them from the Convention.[14] Thus, failure to deliver goods of the agreed quality or quantity and failure to receive and pay for the goods and many related questions are governed by the Convention. The only substantial question is whether sales of quantities or shares in an identified bulk of fungible goods can satisfy the "identification" requirements of Articles 67(1) and 69(3) governing risk of loss. See §§371, 378, infra.

Computer "hardware" is clearly "goods" subject to CISG. See, e.g. GER OLG Koblenz, 2 U 1230/91, 17 September 1993: CISG is applicable to computer "chips". See also: Schlechtriem, Com. (1998) 23.

The issues are more subtle when the transaction involves "software"— e.g. the tiny silicon "chips" that can bring the "hardware" to life. These "chips", although minute, are tangible; when sold they are "goods" subject to sale. See: GER. LG München, 8 HKO 24667/93, 8 February 1995. CISG applies to "standard software". CLOUT 131, UNILEX D. 1995-3.1. See: Fakes, A., 3 Software L.J. 559-614 (1990); Primak, L.S., 11 Comp. L.J. 197-231 (1991); Bonell/Ligouri ULR (1996-1) 149, id. (1997-2) 388. Cf. License agreements: Lockhart & McKenna, 70 Mich. L. J. 646-655 (1991).

See: ARB: Hung. Ch. of Comm., Ct. of Arbn., AZVb 92205, 20 December 1993. Witz, Premières Applications 33; Ferrari, 15 JCL (1995) 67 n.448. [page 55]

Article 3. Goods to be Manufactured; Services

§ 57 Paragraph (1) of Article 3 deals with the Convention’s applicability to contracts for the supply of goods to be manufactured or produced; paragraph (2) deals with sales contracts that include the supply of labor or other services.

§58 A. Goods To Be Manufactured

By virtue of paragraph (1) of Article 3, this contract does not fall within the Convention. The same is true even if the contract states that [page 56] the goods are owned by Finisher during the processing and are thereafter sold to Owner for an agreed price. Regardless of the form of the contract, the "unless" clause of paragraph (1) is decisive: The party who ordered the goods undertook "to supply a substantial part of the materials necessary for" their manufacture or production.[2]

Questions of degree inevitably arise along the borders of the statute. Some of these question can be suggested by an example.

Example 3B. Purchaser contracted with Manufacturer for the supply of stainless steel and agreed to supply the chromium, a necessary ingredient; the value of the chromium supplied by Purchaser comprised 15% of the total value of the materials used in manufacturing the stainless steel.

The fact that the chromium was necessary for the production does not itself lead to the exclusion of this transaction; exclusion results only when the purchaser supplies "a substantial part of the materials necessary" for production. We may assume that the weight or volume of the chromium would not be "substantial" in relation to all of the necessary materials but this should not be decisive: The only commensurable relationship is one based on value. How big a proportion of the value of all the materials is "substantial?" Paragraph (2) refers to "the preponderant part"; a "substantial" part would be less than preponderant. It seems that a tribunal might well conclude that 15% is "substantial" but the evaluation of such questions of degree is difficult to predict. The parties to such an international transaction would be well advised to solve the question of the Convention’s applicability in their contract.[3]

Assume that Purchaser did not supply chromium or other materials but did supply valuable technical services and "know-how" that had "substantial" value in relation to the total value of the materials. No provision [page 57] of CISG excludes this transaction. Art. 3(2) excludes transactions only on the basis of services provided by the seller. At the Vienna Conference a proposal to exclude transactions on the basis of expert services supplied by the buyer was rejected. See O. R. 243–244; Docy. Hist. 464–465; Schlechtriem, 1998 Commentary 40.

(1) Decisions that apply the Convention, on the ground that B did not supply a "substantial" part of the materials, include: HUNG. Arb. Ch. of Comm. & Ind., VB/94131, 5 December 1995 (B supplied only 10% of goods needed for production); GER. OLG Frankfurt a M., 5 U 164/90 17 September 1991).

(2) CISG did not apply: AUS. OGH (Sup.Ct.) 27 October 1994, CLOUT 105, UNILEX D.1994-27. FR, CA Chambéry, 93-648, 25 May 1993, CLOUT 157, UNILEX D.1993-17. See also: Bonell/Ligouri, ULR (1996-1) 150–151.

§60 B. Contracts not Confined to the Supply of Goods

The above contract would not be excluded from the Convention by Article 3(2) since the "supply of labour and other services" did not comprise "the preponderant part of the obligations of the party who furnishes the good." The opposite answer would result if the contract called for services with value in excess of $1,000,000.[4] For example, Article 3(2) could exclude a contract to repair a complex machine if the cost of labor is greater than that of the replacement parts.

Does the Convention apply not only to the part of the contract dealing with the supply of goods but also to the part dealing with the supply of services? The answer should be Yes. Article 3(2) applies only when the parties deal with both goods and services in a single contract. When there are significant relationships between the two aspects of the contract the Convention should apply to the entire contract. If this is not the case, the [page 58] arrangement should be treated as two contracts and the Convention would apply only to the contract for goods. Because of the relationships between the supplying of goods and services it would be important for a single set of rules to apply to the entire contract. When a controversy arises, the most troublesome problems, not regulated by the contract, are likely to relate to remedies for breach—particularly the question whether the breach justifies avoidance of the entire contract. A unified approach to such problems may be necessary for the effective application of the Convention’s provisions to the transaction in goods; pursuant to Article 3(2) the value of goods would at least equal and in most cases would exceed the value of the services. Many of the provisions of the Convention are concerned with the physical aspects of goods—transport, damage, destruction, deterioration. Services do not generate these problems, but the irrelevance of these provisions of the Convention should not present difficulties. And the Convention’s general approach to interpretation and enforcement of the contract would be useful for the entire transaction. (The Convention’s unitary approach to the contract and its remedies was introduced in the Overview in Ch. 1 at §2 and Ch. 2 at §§24–27.)

Decisions that apply CISG since S’s services were not a "preponderant" part include: ICC Arb. (Paris), No.7153/1992, 26 August 1992; FR, Grenoble, RG 93/4897, 26 April 1995, Roque v. Le Sarl. CLOUT 152, UNILEX D.1995-14. Contra: Service was "predominant; CISG not applicable: GER. OLG Köln, 19 U 282/93, 26 August 1994 (contract for market research embodied in report). See: Bonell-Ligouri ULR 152, n. 28-31 (citing cases and articles).

§60.2 Severability. Professor Schlechtriem suggested that domestic law should decide whether a transaction involving both goods and services is one contract governed by the Convention or is two contracts with the service aspect governed by domestic law. 1986 Commentary 32. This conclusion is entitled to great weight. The present writer has held a different view but would now be inclined to agree with Schlechtriem if the approach of applicable domestic law to the question of "severability" is sufficiently flexible to give decisive weight to the question mentioned above: Will "severing" the contract prevent the effective application of the uniform international rules to the transaction in goods? If a Contracting State applies domestic rules on "severability" that ignore the effective application of the Convention to a transaction that combines goods and services that State would scarcely be honoring its obligation to give full effect to the rules governing international sales or to the mandate of Article 7(1) (§§85–86, infra ) that in interpreting the Convention "regard [page 59] is to be had to its international character and to the need to promote uniformity in its application. " See Khoo, B-B Commentary §3.1, p. 43. Article 3(2) is based on the premise that the Convention will apply to some transactions that embrace both goods and services; decisions as to which transactions will be covered can not properly be made solely on the basis of principles of domestic law.

In discussing Article 2 at §56, supra, we saw that construction of an immovable building was not a sale of "goods". Even when contracts for industrial works call for the buyer to supply the land and building, some of the equipment may become a permanent part of the building while other equipment may be free-standing and readily removable. "Turn-key" contracts may also include the supplying of "know-how" and services in placing the plant in operation.

Such complex contracts should (and often do) designate the applicable law. See Art. 6 at §75, infra. If the contract is silent, deciding whether the Convention governs any part of the transaction calls for applying by analogy the Convention’s provisions on mixed contracts in Article 3, supra, and also consideration of the parties’ implied intent (Art. 8, §§104–111, infra ) in the light of the (1) suitability of the Convention’s provisions to the contract as a whole and (2) the feasibility of "severing" the contract to make the Convention apply to only part (§60.2, supra).[5]

In some situations tribunals may find that provisions of the Convention are helpful in solving comparable problems that fall outside its scope. Such voluntary borrowing of solutions from specialized statutes has been useful within domestic legal systems. For example, in the United States the Uniform Sales Act (1906) and it successor, Article 2 of the Uniform Commercial Code (1954), state that they govern "sales" of [page 60] goods, language that literally would exclude the burgeoning field of supplying goods through leasing (hiring or rental) arrangements. However, courts faced with the question whether the user (lessee) of the goods was entitled to legal protection when the goods were defective found that the "sales" statutes dealt with a comparable problem and relied on these provisions; this approach was not in obedience to statutory command but in observance of the principle that similar problems called for similar solutions.[6] The extension of "sales" rules to "leases" of goods has necessarily been selective; for example, some of the "sales" rules dealing with remedies for breach are inappropriate to transactions in which the user’s investment is limited to rental payments.[7] Problems such as these led in 1987 to the addition to the Uniform Commercial Code (UCC) of a new Article 2A. Leases, immediately following Article 2. Sales.

"Lease" or "Sale": Form or Substance. Some transactions labelled "lease" in substance are sales—subject to a security interest. Whether the CISG applies to these transactions should depend on substance rather than form; "chameleon leases" may be subject to CISG if they satisfy the other requirements for applicability—e.g., Article 1. Penetrating such disguises in the setting of the UCC is discussed in White & Summers (1995) 21-3.

Tribunals, of course, are under no international obligation to use the Convention’s provisions for transactions that lie outside its scope; such "borrowing" depends on principles of domestic jurisprudence and a decision whether rules designed for domestic transactions are as suited to international transactions as the Convention. In a larger sense, careful analogical extension of these and other international rules can make a measured, albeit modest, contribution to the reestablishment of an international law-merchant.[8] [page 61]

Measured analogical use of the Convention’s provisions can also relieve pressure for doubtful interpretations extending the Convention’s scope. In discussing Article 7(2), §§96–102, infra, we shall consider the Convention’s invitation to use "the general principles on which it is based" to govern questions which, although "not expressly settled" in the Convention, arise out of matters "governed by" the Convention. This provision calling for analogical extension of the Convention’s substantive rules to avoid "gaps" in the uniform rules transactions that fall within the Convention’s scope is profoundly different from principles for interpreting provisions (e.g., Articles 1–6) which govern the Convention’s outer boundaries.

As the language quoted from Article 7 shows, its call for a broad analogical approach to the Convention’s substantive provisions "governed by" the Convention does not apply to provisions such as Articles 1–6, which define the area that the Convention does not "govern". Nor does the Convention contain any provision authorizing analogical extension of its outer boundaries. Indeed, in framing the Convention such a proposal would have received short shrift and for good reason: Doubt about the Convention’s outer boundaries generates uncertainty as to nearly every substantive issue that can arise in an international sale.

These factors suggest that provisions defining the Convention’s outer boundaries should be interpreted to achieve maximum certainty. On the other hand, as we shall see, Article 7(2) (buttressed by Articles 8 and 9, §§104–122, infra ) calls for a more flexible approach in the development of rules to govern transactions that reside within the Convention’s domain.[page 62]

Article 4. Issues Covered and Excluded; Validity; Effect on Property Interests of Third Persons

§ 61 Articles 1–3 identify the transactions that are subject to the Convention while Article 4 defines the issues to which the Convention applies. Article 4 states that the Convention "governs only" the following: (1) "the formation of the contract" (Part II of the Convention) and (2) "the rights and obligations of the seller and the buyer arising from such a contract" (Part III of the Convention). As we shall see, paragraphs (a) and (b) specifically exclude two issues that lie on the fringes of the sales contract.

§62 A. Obligations "Arising From" the Contract

A subtle and important problem arises when a domestic law provides legal consequences for the very same operative facts that invoke the rules of the Convention, when the rule of domestic law bears a label other than [page 63] "contract." The question whether such a domestic rule remains in effect as an alternative to the provisions of the Convention is elusive, and can best be considered in a specific context. One example will be provided by domestic rules that bear a label such as "product liability." Article 5, infra at §71, which excludes from the Convention liability "for death or personal injury," will provide a concrete setting for examining the above question.

In recent decades some legal systems have established contractual rights for buyers against manufacturers for damage or loss caused by defects in goods which the buyer purchased from a retail dealer or other distributor. At the outset this development responded to the plight of consumers who suffer personal injury from dangerous products—an area that lies outside the Convention because of the general exclusion of consumer purchases (Art. 2(a)) and the further exclusion (Art. 5, §71, infra ) of the liability of "the seller for the death or personal injury caused by the goods to any person." However, in some legal systems this development has made manufacturers liable, without regard to negligence, for economic loss caused by defective products purchased from a dealer or other distributor.[2]

The first edition of this work concluded that this development under the Convention was barred by the language of Article 4 that the Convention "governs only the formation of the contract of sale and the obligations of the seller and the buyer arising from such a contract." See, e.g., B sued manufacturer (M) for defects in a machine B purchased from S. B’s suit was dismissed because B had not contracted with M. GER LG Düsseldorf, 31 O 231/94, 23 June 1994. UNILEX D. 1994-16. (For US domestic cases rejecting this approach, see, e.g., Reitz, 75 Wash.U.L.Rev. 357 at 361 (1997).)

Further reflection calls for reexamination in some commercial settings. For example, some manufacturers (and similar mass distributors such as importers) provide dealers with a written "guarantee" or "warranty" by the manufacturer and instruct dealers to give buyers the manufacturer’s "guarantee" in connection with the sale. One purpose is to encourage sales because of the confidence that prospective buyers have in a guarantee to them by a well-known manufacturer. A second, less evident,[page 64] purpose is to limit their responsibility (e.g.) to the replacement of defective parts for a specified limited period and thereby to bar claims for consequential damages caused by defects in the goods.

Such a "guarantee" by the manufacturer to the buyer clearly creates a contract between these parties in connection with the sale of goods. The difficult problem is whether the manufacturer is a "seller" within the language of Article 4 in view of the fact that the dealer executed the contract with the buyer, delivered the goods and received the price.

Some tribunals applying the Convention, like some tribunals applying domestic laws governing the "sale of goods", may be impressed by the fact that the delivery of a "guarantee" through a local dealer was part of a larger setting in which the manufacturer played a dominant role in the sale—by franchise agreements controlling aspects of the dealer’s performance and by mass-media advertising addressed to prospective buyers. Indeed, advertising appeals are typically designed to say or imply: "Go to our dealers and buy our product. If you do you will get a good product." This in substance is an offer of a unilateral contract: "If you will do X you will get Y."

Of course these facts alone do not make the manufacturer a "seller"—a contract of sale depends on the buyer’s completing a transaction with a dealer. But some tribunals may conclude that when such a transaction is completed the manufacturer, although not "the seller", has participated with the dealer in a "contract of sale" with the buyer.[3]

The supplier’s participation may be more evident—as when a representative of the manufacturer personally contacts the buyer and persuades him to purchase the manufacturer’s goods from a local dealer.[4] In many cases participation by the manufacturer is more tenuous, confined to advertising [5] and possibly control of aspects of the dealer’s business such as promotion methods, volume, stocking of repair parts, training of mechanics and, in some cases, the price to be charged.

When (as in the usual case) the buyer and dealer are in the same State the Convention would not apply to a claim against the dealer. Art. 1(1), §40, supra. Similarly, the Convention would not apply to a claim against even a foreign supplier if the supplier’s place of business applicable to this transaction (Art. 10(a)) is in the same State as the buyer. In any event,[page 65] when domestic law is favorable and the dealer is financially responsible it usually will be more convenient to confine one’s claim to a local action against the dealer. The same may be true even when the claim might jeopardize the dealer’s resources since the dealer may be able to bring in the manufacturer to defend the action and to satisfy any judgment. Thus, attempts to extend the Convention to foreign suppliers may be confined to special situations such as financial failure of the local dealer. Even here the rules on jurisdiction, private international law and domestic sales law in the buyer’s jurisdiction may meet the buyer’s needs.

In sum, it is unlikely that the Convention in the foreseeable future will play a large role in claims by buyers against manufacturers and similar remote suppliers. On the other hand, it seems hasty to conclude that the "buyer-seller" language of Article 4 will be an impassable barrier in cases where the supplier has participated substantially (although not formally) in the sale to the buyer. Domestic experience suggests that legal relations with foreign suppliers may be a field for gradual development.

§ 64 B. Issues Excluded from Convention

Paragraph (a) of Article 4 excludes issues with respect to "the validity of the contract or of any of its provisions or of any usage." One obvious example is a rule of domestic law that prohibits the sale of specified products, such as heroin, and invalidates contracts relating to such illegal sales.[6] There are other applications of paragraph (a) that call for discussion.

§ 65 (a) Remedies for Fraud

The Convention does not interfere with the special rights and remedies that domestic law gives to persons who have been induced to enter into a contract by fraud. (As will be suggested under Art. 35, infra at §238, a very different problem of the relationship between the Convention and domestic law is presented by an innocent misstatement as to the quality of the goods. Preserving domestic [page 66] protection against intentional fraud could be based on the general rule of Article 4 that the Convention "governs only" the obligations "arising from [the] contract"; the conduct that gives rise to a remedy for fraud may be distinct from the making of the contract. This result is reinforced by paragraph (a) which excludes issues of "validity." Even if domestic law characterizes a contract obtained by fraud as "voidable" rather than "invalid" and gives the innocent party a choice as whether to avoid the contract, these rights are not disturbed by the Convention. The crucial point is that the Convention does not address factual situations involving fraud and should not be construed as wiping out this important field of law by implication. (Compare the discussion at (b) infra, of the relation between the Convention and domestic rules on agency.)[7]

Fraud in action: GER OLG Köln 22U4/96, 21 May 1996. A car dealer (B) bought a used car from another car dealer (S); the contract excluded warranties. B resold the car to customer (C) who discovered that the license was post-dated and that the car had more mileage than on the odometer. B paid C for the loss, and sued S. CISG applied. S’s defense invoked Art. 34(3): B "knew or could not have been unaware of the lack of conformity". This defense was rejected: (1) Under the "good faith" obligation of Art. 7(1), S cannot rely on B’s ability to discover the defect if S knew of the defect; (2) Although CISG Art. 4(1) excludes issues of validity, German law, applicable to fill gaps, invalidates a contract obtained by fraud. B was awarded damages under CISG 74. CLOUT 168, UNILEX D. 1996-5.5.

Impact of domestic and EU unfair competition rules on individual sales: GER. BGH. ("Sup.Ct.") VIII ZR 134/96, 23 July 1997. An Italian manufacturer of fashion goods (S) granted B, a German company, the right to distribute S’s goods. B claimed that the framework agreement violated unfair competition rules. Held: validity of these agreements was not within CISG (Art. 4(a)) and did not affect S’s right to recover the proceeds of individual sales—an area governed by CISG. UNILEX D. 1997-13.

The fact that a domestic rule bears a label such as "validity" or "fraud" does not determine the question whether the rule is one of "validity" [page 67] within the meaning of Article 4(a) of the Convention. For reasons foreshadowed at the outset of this Article and to be developed in the Commentary to Article 5, the substance rather than the label or characterization of the competing rule of domestic law determines whether it is displaced by the Convention; the crucial question is whether the domestic rule is invoked by the same operative facts that invoke a rule of the Convention. For example, a domestic rule of "validity" provides that a problem raised by facts A + B has result X; the Convention also addresses the problem raised by facts A + B and gives result Y. Does Article 4 provide that the Convention "is not concerned" with this problem? See §72, infra. To illustrate the point further, suppose that domestic law gives a "contract" label to remedies for fraudulently inducing the buyer’s acceptance of goods after their return to the seller. If the Convention can not be construed to deal with these problems (see Art. 7(2), §§95–102, infra ), domestic remedies are not excluded merely because they are characterized as "contract" rather than "tort". In sum, access to domestic law is neither broadened or narrowed by its label or characterization.[8]

§66 (b) Competency; Authority of an Agent

The Convention does not displace domestic rules on the effect of insanity, infancy or other disability on a party’s capacity to make a contract. The Convention does not address any of these difficult questions.

In the setting of international sales, a more important issue is the legal power of one person to represent another. The Convention does not address the complex issues that underlie questions of agency and authority. A UNIDROIT draft dealing with this topic led to a Convention on Agency in the International Sale of Goods (Geneva 1983), 22 Int. Leg. Mat. 249. However until international rules enter into force questions of authority to act for another are left to applicable domestic law. Accordingly, references in the Convention to the acts of a party include persons for whose acts the party is responsible.[9]

§ 67 (c) Harsh, Unanticipated Applications

The foregoing discussion suggests that Article 4(a), in leaving "validity" to domestic law, does [page 68] not open a large door for escape from the uniform rules of Convention. Does this mean that the Convention requires the enforcement of contract provisions that produce harsh results when conditions arise that were not anticipated when the contract was prepared? The answer depends, in part, on the approach to the interpretation of the contract, an issue that will be considered in the Commentary to Article 8, infra at §107.1. Related questions arise with respect to the quality of the goods required under the contract and the effect of contract provisions that, broadly construed, would cut deeply into the buyer’s normal expectations. (See the Commentary to Art. 35, infra at §222.) Finally, reference should be made to Article 79, which exempts a party from liability for damages when an unanticipated impediment prevents him from performing. As these cross-references suggest, within this area the law is a seamless web.

Domestic rules on validity—such as requirements of "good faith", "Treu und Glauben", "conscionability", or rules controlling contract clauses restricting responsibility for defective goods—may become inapplicable when the contract is interpreted and applied in conformity with the above provisions of the Convention. In short, failure to turn first to rules of Article 8 on construction of the contract could lead to the application of domestic law to unreal, hypothetical cases, and would restrict the scope of uniform law in violation of the rule of Article 7(1) that the Convention shall be interpreted with regard "to the need to promote uniformity in its application..." See §§85–87, infra.

§69 (d) The Convention and Domestic Law: Cross-References

Other issues that might logically fit here have been deferred to Article 35 so that the discussion could take a wider view of the Convention’s rules on the obligations of the parties. Thus, under Article 35 consideration is given to the relationship between the Convention and domestic rules designed to preserve implied obligations as to quality of the goods (§230), rules on "unconscionability" (§235) and restrictions on the use of standard contract terms (§236).[10] [page 69]

Article 4 also provides that the Convention "is not concerned with:...(b) the effect which the contract may have on the property in the goods sold." This specific provision illustrates the general rule of Article 4 that the Convention is concerned only with the "rights and obligations of the seller and the buyer " arising from the sales contract. In addition, problems that under some domestic systems are decided by reference to the "property" concept are governed by specific provisions of the Convention. See Secretariat Commentary O.R. 17, Docy. Hist. 407 (para. 4). See also Ch. IV, Passing of Risk (Arts. 66–70) at §§359–383, infra.

In conformity with this principle, the Convention (Arts. 41 and 42) deals with the seller’s obligation to the buyer that the goods be free of third-party claims. Whether the sale to the buyer cuts off outstanding property interests of third persons is not dealt with by the Convention. Efforts to establish uniform international rules on the rights of good faith purchasers have not yet been successful; in the meantime, this question must be left to applicable domestic law.[11]

As we shall see, the Convention gives one party to the sales contract rights over goods held by the other party that, under domestic law, may affect the rights of third persons. For example, Article 46, §§279–286 infra, gives a buyer the right to require the seller to deliver goods that the seller wrongfully withholds; Article 81(2), §444 infra, gives a seller the right to claim restitution of goods for which the buyer fails to pay. Article 4 makes it clear that the Convention does not govern the effect of these remedial rights on the claims of third persons. However, domestic law must respect these rights as between the seller and buyer; if such rights between the parties prevail over the claims of creditors or other third parties under domestic law, domestic tribunals should give the same effect to rights established by the Convention. See infra at §444.[page 70]

Article 5: Exclusion of Liability for Death or Personal Injury; "Product Liability"

§71 A. Reasons for Exclusion

Article 2(a) excludes certain purchases from the Convention; Article 5 excludes a specified type of claim —liability for death or personal injury—even though other aspects of the transaction may be governed by the Convention. This exclusion is significant in the following two situations.

(1) Under Article 2(a), although goods are bought "for personal, family, or household use" the Convention may apply when the seller "neither knew nor ought to have known that the goods were bought for any such use." In these unusual cases, Article 5 provides that the claim of such a buyer or any third person "for death or personal injury" falls outside the Convention, and hence will be governed by applicable domestic law.

(2) Goods not bought "for personal, family, or household use" may give rise to a claim to recover for "death or personal injury." Suppose [page 71] that an industrial machine injures an employee of the purchaser—A claim by the purchaser to recover damages from the seller because of the injury to the employee is not governed by the Convention. (A claim by the employee against the seller would not be based on the "obligation of the seller and the buyer arising from" the contract of sale, and hence would be left domestic law by Art. 4.)

The exclusions under Articles 2(a) and 5 have special significance in relation to the notice requirement of Article 39: A buyer "loses the right to rely on a lack of conformity of the goods" unless he gives notice to the seller within a reasonable time and, in event, within two years after receipt of the goods.

In many countries another important feature of "product liability" is the opportunity to sue a manufacturer or distributor with whom the plaintiff had no direct contractual relationship. The Convention (Art. 4) governs "only...the rights and obligations of the seller and buyer arising from" the "contract of sale". Thus, except for unusual cases (§63 supra ), the Convention would not govern actions by a buyer against persons other than the seller and consequently would not interfere with domestic rules, such as product liability, that permit such actions. Moreover, as we have seen, Article 5 preserves domestic rules on liability for "death or personal injury caused to any person" even for actions by the buyer against the seller.

§72 B. Labels for Domestic Law and the Scope of the Convention

"Product liability" differs among the various countries, and even among the fifty states of the United States, where this development (or eruption) has been unusually active. No attempt will be made to catalogue the various species of "product liability." To analyze the relationship between the Convention and domestic law, it will suffice to consider one extreme application of this doctrine.[3]

Example 5A. Seller, in State A, sold Buyer, in State B, an industrial heater for use in Buyer’s factory. Seller was not negligent in manufacturing the heater, but there was a hidden flaw in the burner that led to an explosion that damaged the goods in Buyer’s factory. Domestic law of "product liability" would make Seller liable to Buyer for the damage. The operative facts that led to liability were these: (A) The defendant "supplied" the goods; (B) The goods were defective; (C) The goods caused damage to the user. Under such "product liability" Seller is liable to Buyer even if he establishes that he (or his supplier) exercised due care in making the heater. The buyer is not required to notify the seller of the defect in the goods. Local law classifies all such "product liability" under the heading of "tort" rather than "contract".[4]

Does the Convention displace such domestic rules of "product liability?" The answer should be Yes. Whether the Convention applies is, or course, governed by the provisions of the Convention. Under Article 1 this was a "contract of sale of goods" and the transaction was not excluded by Articles 2–5.

The facts that invoke the domestic rules of "product liability" are the same facts that invoke the Convention. In examining Article 4 we noted that the Convention does not displace domestic remedies for fraud, but [page 73] those remedies respond to facts that are different from the facts that invoke the Convention. Domestic rules that turn on substantially the same facts as the rules of the Convention must be displaced by the Convention; any other result would destroy the Convention’s basic function to establish uniform rules. (Art. 7(1).)[5]

A more difficult problem would be presented if, in a setting like problem 5A, Buyer offered to prove that the defect in the heater resulted from a lack of due care in Seller’s manufacturing operations and sought recovery under domestic tort law. At stake would be the applicability of the full range of the Convention’s rules—including the buyer’s obligation to notify the seller (Arts. 39, 40, 44), his right to avoid the contract (Art. 49) and the measurement of damages (Arts. 74–77).

In terms of the schematic presentation set forth at §72, supra, the buyer would argue that his claim under domestic tort law would not be based on the same facts as a claim under the Convention for breach of contract. Under the Convention, liability would be based on two elements—(A) failure of the goods to conform to the contract (Art. 35) and (B) damage resulting from this defect (Art. 74). The claim in tort would include a third element—(C) proof of lack of due care. However, it does not follow that this third element excludes the Convention.

As we shall see, the Convention embodies a deliberate choice that the question of negligence is irrelevant to the buyer’s right to recover from the seller for damage caused by nonconforming goods. One of the reasons for this choice is this: When the seller has produced defective goods (as in the present case) it is likely that the defect resulted from lack of due care in production methods. However, proof of lack of due care is expensive and the outcome of litigation is difficult to predict; to promote legal certainty, the Convention makes the seller legally responsible for defects in the goods that it sells. Thus, proof of the seller’s lack of due care does not change the essential character of the claim, and access to domestic law based on such proof would make it possible to circumvent the uniform international rules established by the Convention.

In examining articles 4 and 5 we met cases in two quite distinct categories: (1) An action to rescind the contract for fraud (e.g., false statements by the seller concerning his production capability or false financial statements supplied by the buyer) (§65) and (2) Claims for damages [page 74] caused by defective goods based on domestic rules as to "product liability" or tort (§73). Between these two poles there may well arise situations where the claim under domestic law depends on facts that differ, in varying degrees, from the facts necessary to establish a claim under the Convention. However, if it is clearly determined that claims like those in category (2), above, may not invoke domestic law, the cases that fall between these two categories should not seriously interfere with the application of the Convention.

Professor Schlechtriem concludes that the Convention supersedes domestic tort rules in actions to recover "for the inferior value of nonconforming goods". This type of action protects an "economic interest" which is "the essence of contractual interests". On the other hand the Convention does not supersede actions based on "property" interests that exist "independently of contractual obligations".[6]

From these premises Schlechtriem concludes that actions may be based on domestic law when defective goods "non-conforming to the contract or not" cause "property damage". Domestic law may be invoked even though "damage is recoverable under CISG, Article 74" since this action is "outside the principal domain of interests created by contracts".[7] Domestic tort rules would also apply "even if the goods themselves were destroyed by a defect giving rise to a tort action based on strict liability".[8]

These views are intriguing and merit the most careful consideration. One question that calls for attention is the justification for displacing inconsistent domestic law within only part of the Convention’s area of applicability. Displacing inconsistent domestic law is of the essence of establishing uniform law. In areas where appeals for domestic law were [page 75] persuasive to the international legislative body the Convention carved out exceptions— e.g., by excluding sales to consumers (Art. 2(a)), claims based on death or personal injury (Art. 5), and validity of the contract, any of its provisions, or usage (Art. 4(a)). Adding exceptions to the area of uniformity seems inconsistent with the compromises on scope and substance that led to international agreement.

One might suppose that nothing more than generosity results from permitting claimants to choose more favorable domestic law: This alternative merely adds to the claimant’s protection; if domestic law is not more favorable than the Convention claimants will invoke the Convention. However, the Convention was devised to provide a fair balance between buyers and sellers, claimants and defendants.

A less basic point: Permitting recourse to domestic law can be unfair since not all domestic systems permit choice between contract law ("non-cumul"); under German law parties to contracts may choose ("Anspruchskonkurrenz").[9] More important, however, is the difficulty of maintaining uniformity of the international rules once a breach has been opened in the line set by the Convention’s own rules on its sphere of applicability. The appeal of familiar domestic law to domestic judges is strong and should not be given further encouragement.[page 76]

Article 6. The Contract and the Convention

§74 The dominant theme of the Convention is the primacy of the contract. See, e.g., Overview, Ch. 1 at §2, Overview, Ch. 2 at §§19, 24, Art. 4 at §61, Art. 31 at §207, Art. 35 at §222. Of the many provisions that develop this theme, Article 6 is the most important.

The most significant statement in Article 6 is that the parties may "vary the effect" of any of the Convention’s provisions. This rule applies to the formation of the contract (Part II) and supplements the basic principles that the offeror is the master of its offer (Arts. 14–17) and the offeree the master of its acceptance (Art. 18(1)); in addition, the parties by agreement may set rules for the making of their future contracts. Moreover, the Convention’s gamut of provisions on the obligations of seller and buyer and the remedies for breach (Part III) may be reshaped by the agreement. The breadth of the parties’ freedom to modify the Convention’s rules is emphasized by the one exception stated in Article 6—the privilege of an adhering State under Articles 12 and 96 to preserve its domestic rules that require a writing. (See the Commentary to Art. 12, infra at §128.)

This degree of freedom for the parties was made possible by excluding certain transactions and issues from the Convention. The Convention does not apply to consumer purchases (Art. 2(a)) or to liability for death or personal injury (Art. 5). Nor does the Convention displace domestic rules with respect to the validity of the contract or prejudice the rights of third persons (Art. 4).[page 77]

§75 A. Exclusion or Modification

In the preparation of both ULIS and the present Convention, it was suggested that an agreement excluding the Convention should be effective only if the agreement also designates the applicable domestic law. This suggesting was not accepted; if the parties merely agree that the Convention does not apply, rules of private international law would determine the applicable domestic law.[2]

ULIS (Art. 3) provided that total or partial exclusion of the application of the Law "may be express or implied." In UNCITRAL the reference to "implied" exclusion was deleted on the ground that this language might lead tribunals to exclude the Convention on inadequate grounds; on the other hand, UNCITRAL declined to provide that exclusion must be "express." As a consequence, normal rules of construction of the contract apply to the question of exclusion or modification of the Convention.[3]

A reference in a contract to trade terms, like ICC’s Incoterms, should not be taken as an exclusion of the Convention, any more than such a reference would exclude rules of national law. Such trade terms articulate the parties’ obligations as to loading the goods, risk of loss and related matters, and are similar to contract provisions stating the parties’ duties. But such trade terms ordinarily do not set forth the legal consequences of breach. The Convention (like domestic rules of law) and trade terms are complementary; each performs a function that cannot be well served by the other.[4] [page 78]

Even detailed standard contracts or general conditions usually recognize the need for a back-up legal system to supply answers for unanticipated problems. In some cases parties may wish to provide for the settlement of disputes by an arbitral tribunal acting as amiable compositeur or ex aequo et bono. See the UNCITRAL Arbitration Rules, Art. 33–2. However in the absence of such a provision it is unlikely that the parties chose to divorce their contract from all systems of law.

The law designated by the private international law ("PIL" or "conflicts") rules of the various possible fora may be unclear or in conflict. However, let us assume that the PIL rules may point to State C, a non-Contracting State.[5]

Would the above rules of private international law exclude the Convention? Article 1 of the Convention tells us that the answer is No. Subs (1)(a) and (1)(b) of Article 1 provide alternative grounds for applicability. A conclusion that private international law pointing to the law of a non-Contracting State bars applicability of the Convention, even though [page 79] the places of business of both parties are in Contracting States, would nullify Sub (1)(a) of the Convention—the primary and universally accepted basis for the Convention’s applicability. (As we have seen at §47 supra, Article 95 authorizes a reservation excluding applicability under Sub (1)(b); some States have exercised this option.)

If rules of private international law alone will not undermine applicability based on Sub (1)(a), it appears that the only basis for excluding the Convention in the above example is an agreement by the parties under Article 6. The legislative history of Article 6 outlined above (§76 at n.3) shows that although an agreement to exclude the Convention need not be "express" the agreement may only be implied from facts pointing to real —as opposed to theoretical or fictitious—agreement.[6]

This view is supported by the 1986 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods. This Convention gives unqualified effect to an express agreement choosing applicable law, but is more cautious about implied agreements. Article 7 provides:

Similar requirements are set forth in the EEC Convention on the Law Applicable to Contractual Obligations (Rome, 19 June 1980). Article 3 provides:

It is not feasible to comment on the significance of the various facts that adequately evidence an implied agreement to exclude the Convention, except to suggest doubt about the significance of an agreement on the venue for arbitration. In an international transaction a single arbitrator or the chairman of a panel of three is likely to be selected from a "neutral" State having no connection with the transaction. The choice of the place where the arbitrators meet is likely to reflect practical considerations with respect to transport, meeting and translation facilities rather [page 80] than a choice of applicable law. See the UNCITRAL Arbitration Rules (1976), Art. 16 (place of arbitration) and Art. 33 (applicable law).[8]

In sum: When the places of business of the seller and buyer are in different Contracting States, the applicability of the Convention mandated by Article 1(1)(a) is not undercut when rules of private international law point to a non-Contracting State. The Convention may be excluded by the parties, but only by an express agreement or an agreement that is clearly implied in fact.

A majority of tribunals have concluded that the parties intended to invoke CISG: E.g., ARB, ICC Paris, 6653/1993 (German B and Syrian S; the contract referred to French law); CISG was applied. UNILEX, D. 1993-1; NETH. Arr.-Rechtbank Gravenhage, 94/0670, 7 June 1995 (contract called for Dutch law; CISG was applied). See: Schlechtriem, Com. (1998) 55–56.

A few decisions have held that the parties chose non-CISG internal sales law. In some of these cases the contract included language that, without being explicit, suggested an intent to derogate from CISG. E.g. IT. Arb. Florence, 19 April 1994. "Contract to be governed exclusively by Italian law"; domestic Italian law applied; one dissent. CLOUT 96, UNILEX, D. 1994-9.

See Bonell/Liguori, ULR (1995-1) 155–157 n. 46–57, (1997-2) 392–393 n. 49–54 (citing many cases); Ferrari, 15 JLC 90, n.628 (German cases); Karollus, Cornell (Kluwer 1995) 59 (nuanced approach to parties’ intent); Witz, Premières App’ns (1995) 44, n.87–90 (French).[page 81]

The present writer, although an advocate for CISG, ventures a surmise that the outlook of some decisions reflects patterns developed during the years when ULIS (1964) was in force in some countries of Europe; in other regions caution about the intent of the parties may be advisable. Special caution seems advisable when the parties invoke the law of one region of a contracting State: e.g. an agreement to apply the law of New York. True, the U.S. Constitution provides that a treaty is the "law of the land" in all 50 states. However, a reference to only one of the fifty states may suggest that the parties were not thinking of the Convention.

§78 B. Agreements to Apply the Convention; Effectiveness

In 1970, UNCITRAL’s Working Group on Sales deleted Article 4 of ULIS and added the following provision to Article 1: "2. The present Law shall also apply where it has been chosen as the law of the contract by the parties." The Working Group noted that ULIS, in authorizing the parties to apply the Convention (Art. 4, just quoted), added that this agreement would not affect the application of any "mandatory" provision. The Working Group recognized that some such exception was necessary but noted that the term "mandatory" was subject to varying interpretations, some of which embraced a large portion of domestic law. A final decision was deferred until further consideration could be given to this question.[9]

The Commission, in reviewing the Working Group draft, deleted the above provision that gave unqualified effect to the agreement because of concern lest contracts might apply the Convention to consumer transactions and thereby nullify domestic regulations designed to protect such purchasers. It was then proposed to return to Article 4 of ULIS, but limited to contracts between parties in different States when one of those States is a Contracting State. This proposal was rejected on the ground that it would unduly restrict parties who wished to apply the Convention. Article 4, as it stood in ULIS, was also rejected because (as the Working Group had concluded) the term "mandatory" was too vague. The upshot was a decision to omit any provision on the effect of agreements extending the applicability of the Convention. This decision by UNCITRAL’s Committee of the Whole was summarized as follows:

§80 (a) Significance of the Legislative History

The above legislative history shows that UNCITRAL’S deletion of Article 4 of ULIS was not designed to nullify agreements extending the applicability of the Convention. The actions and discussion in UNCITRAL were based on the premise that, in most situations, agreements to [page 83] apply the Convention would be effective. A provision regulating the effect of agreements to apply the Convention was not included because of the drafting problem posed by divergent domestic approaches to what rules were "mandatory". In short, courts facing this issue will not be subject to a binding rule of the Convention. Instead, the point of reference will be domestic rules on the contractual freedom of the parties, derived from domestic law and applicable international conventions.[11]

International consensus favoring party autonomy is evidenced by the 1986 Hague Convention on the Law Applicable to Contracts for the International Sale of Goods. This Convention, finalized by over fifty States, many of them members of UNCITRAL, provides in Article 7(1): "A contract of sale is governed by the law chosen by the parties." The Explanatory Report authorized by the Conference states (para. 4): "No delegation objected to this general proposition." See also, id., para. 102.[12]

Since domestic rules vary on the basic issue of the freedom of the parties to choose applicable law, it would be presumptuous to suggest final solutions to problems in this area. The most that is feasible here is to suggest aspects of the Convention that may be relevant in applying these rules of domestic law. The problem can arise in different settings; the following observations will be related to the three types of situations mentioned at §78, supra.

§82 (b) Parties Located in Same State

The discussions in UNCITRAL recognized that a sales transaction could have significant international dimensions and still not meet the Convention’s strict test of internationality. For example, a contract between a seller and a buyer whose places of business are in the same State may require the seller to procure the goods by an international transaction or the buyer may contemplate reselling the goods in an international transaction; unity with respect to obligations in such "chain" transactions may be important for all parties. Early ULIS drafts that embraced such "chain" transactions were abandoned because it was impossible clearly to define this extended area. No problem of clarity arises when the parties have agreed to apply the Convention to their contract.[13]

§83 (c) International Transactions That Lack the Prescribed Contact With a Contracting State

The Convention’s rules on the relationship between the transaction and a Contracting State (Art. 1(1)(a) and (b)) are strict—particularly for States that make a declaration under Article 95 rejecting sub-paragraph (1)(b). (See the Commentary to Art. 1.) As we have seen, the Hague Sales Conventions of 1964 applied to international transactions even though the parties and the transaction had no contact with a Contracting State—an approach that was subject to objection on the ground that the Contracting States were forcing their law on parties in other States. This objection does not apply when the parties to an international sale elect to be bound by the Convention. The relevant issues may be illustrated by the following case: [page 85]

The above example is, to say the least, quite different from classroom examples of agreements that seek to invoke the law of a single, remote State. In Example 6B, the parties have referred to a set of rules approved, without dissent, by an international legislative body representing each region of the world; moreover, these rules were approved, again without dissent, by a diplomatic conference attended by all significant trading nations and are now in force in each continent and region of the world. The rules are readily available in the six official languages of the United Nations and are the subject of substantial international commentary. The burden on the tribunal that would result from applicability of the Convention would be much less than that involved in most cases where rules of private international law call for the application of foreign domestic law. In addition, international sales have special needs for uniform law that emphasize the need for effective party autonomy when they agree on the applicability of a uniform international rule.[14]

Suppose that a contract in an international sale provides: "This contract shall be governed by the 1980 Convention on Contracts for the International Sale of Goods." One writer suggests that this contract provision may not be effective since it does not invoke the law of the Convention as adopted by a specified State: the rule favoring party autonomy assumes that the law chosen is "that of a particular State".[15]

The reasons for this conclusion are not entirely clear. Invoking the Convention law of a designated State could avoid ambiguity over whether the parties intended to have the benefit of a reservation that a few of the Contracting States have made. In the unlikely event that the applicability of a reservation becomes relevant the problem can be solved by deciding whether conflicts (PIL) rules applicable to the transaction invoke the law of a State that has made the reservation. (Tribunals are [page 86] accustomed to resolving contract ambiguities more serious than this.) In other cases, when the parties make a general reference to the provisions of the Convention it seems reasonable to conclude that they desire the full application of the Convention. In short, there seems no adequate reason to frustrate the parties’ wish to have their contract governed by a uniform law for international sales approved and implemented by countries in each region of the world.

§ 84 (d) "Mandatory" Rules

Rules of domestic law that are "mandatory" are not disturbed when the Convention becomes applicable by virtue of an agreement by the parties. When the Convention is applicable by the action of Contracting States, the terms of the Convention control the extent to which the Convention displaces domestic law; questions may arise as to whether the Convention addresses and displaces a rule of domestic law that in some States would be classified as "mandatory" (See supra at §79.) These questions cannot arise when the applicability of the Convention is based solely on the parties’ contract unsupported buy the action of Contracting States; in such cases the legal situation might be analogized to an agreement incorporating a standard contract whose terms duplicate the provisions of the Convention.[page 87]

CHAPTER II.

GENERAL PROVISIONS
(Articles 7–13)

Article 7. Interpretation of the Convention

§ 85 Article 7 responds to the fact that a Convention establishing uniform international law performs a unique and difficult function. Paragraph (1) emphasizes that this law must be interpreted with sensitive regard for its special character and purpose; paragraph (2) is designed to help the law adapt and grow in the light of new circumstances.

§86 A. International Character; Uniformity

We have reason to envy those who work in the physical sciences on phenomena that can be photographed and measured, while we must cope with disembodied concepts that have been shaped by diverse historical, economic and cultural conditions, and include concepts that have similar names but different meanings— des faux amis.[2]

The careful international draftsman tries to avoid abstract, disembodied concepts. For example, in the 1980 Sales Convention risk of loss passes to the buyer "when the goods are handed over to the first carrier" or (if the contract does not involve carriage) when the buyer " takes over the goods" (Arts. 67(1), 69(1))—more stable materials than ideas such as "property" or "title." The ideal is to use plain language that refers to things and events for which there are words of common content in the various languages. But this ideal is difficult to realize, and the principles of interpretation in Article 7(1) run counter to reflexes that have been deeply implanted by our education and professional life—the reading of a legal text in the light of the concepts of our domestic legal system, an approach that would violate the requirement that the Convention be interpreted with regard "to its international character."

If we are deprived of our most familiar tools, what resources remain for interpreting the Convention? This question was the subject of sixteen national reports, a general report and animated discussion at the Twelfth International Congress of Comparative Law (Australia, 1986); material developed at this Congress with respect to national and international practices will be cited frequently in this work.[3]

To read the words of the Convention with regard for their "international character" requires that they be projected against an international background. With time, a body of international experience will develop through [page 89] international case law and scholarly writing. (This prospect will be explored infra at §92.) In the meantime, the only international setting for the Convention’s words is its legislative history—its genetic background.

The family history of the Convention is rich and revealing. In preparing the Convention, UNCITRAL built on the work, spanning three decades, that produced the Hague Conventions of 1964 (ULIS and ULF). The deliberations in UNCITRAL would commence with an analysis of the handling of the problem in the 1964 Conventions. As we shall see, in many instances the Hague solution was retained; the discussions shed light on the common understanding of the Hague solution and the reasons for its retention. When the Hague approach was modified or rejected, the reasons for the change shed a revealing sidelight on the new provision. As the UNCITRAL draft developed, proposals to delete or amend were made and decided; the views that prevailed in making these decisions add depth to the international understandings that underlie the Convention’s words.

To introduce this background material, the steps in the legislative process in UNCITRAL and at the Diplomatic Conference were summarized in the Overview, Ch. 1, at §§9, 10. The Bibliographic Notes . . . introduced the legislative materials. And, in this Commentary, legislative history will be brought to bear on specific problems of interpretation.

The documents that embody this legislative history are reproduced (together with materials on other topics) in Volumes I-X of the UNCITRAL Yearbooks and in the Official Records of the 1980 Diplomatic Conference. As is common in an extended legislative process, the article-numbers of the drafts under discussion kept changing as provisions were added and deleted and as the draft’s structure was reorganized. This repeated renumbering of the articles makes it very difficult to trace the development of a provision even when all the documents are at hand. Difficulties the present writer encountered in coping with these problems made it necessary to prepare a Documentary History that reproduces and introduces the relevant documents and provides references in the documents’ margins to the final articles of the Convention for which the legislative deliberations were relevant.[4] [page 90]

§89 (a) Domestic Law

In domestic law we face a conflict over the legitimacy of legislative history. In many civil law countries the use of legislative history has long been accepted.[5] Courts in the United States also freely invoke the legislative history osf domestic statutes and international Conventions. For example, a 1985 decision of the United States Supreme Court interpreting the Warsaw Convention on International Transportation by Air relied on the travaux préparatoires of the Convention and also "the weight of precedent in foreign and American courts"[6] (We shall return to the use of foreign precedent at §92, infra .)

Other legal systems—primarily those following judicial patterns established in England—have traditionally disavowed the use of such materials in statutory contraction: the meaning of legislation must be deduced solely from the words of the statue.[7] However, the "plain meaning" rule has not been applied with the rigor that the traditional formulae might suggest. English courts have long interpreted legislation in the light of "the defect or evil" which the statute was intended to remedy, and have considered reports of special commissions to identify the purpose of legislation that resulted from the commissions’ work. And a growing body of opinion holds that the "plain meaning" doctrine stultifies the handling of statutory material and should be modified or abandoned.[8]

Controversy has centered on the interpretation of domestic legislation; our concern is with the interpretation of an international convention. In this setting, a slow process of development in English law took a large and decisive step in the 1980 House of Lords decision in Fothergill v. [page 91] Monarch Airlines —a case that called for the interpretation of an Act of Parliament that gave effect to the Warsaw Convention on the liability of air carriers.[9] Under that Convention, notice must be given within seven days of "damage" (avarie) but no notice need be given as to "loss" with respect to baggage. A passenger failed to give this notice of the loss of part of the contents of a bag. Kerr, J., and the Court of Appeal rejected the airline’s contention that the notice requirement applied to this claim. The House of Lords reversed. All five opinions conceded that "damage" would not normally refer to loss of part of the contents of baggage, but ruled that in this setting the word should be given a wider meaning. In reaching this conclusion, all of the opinions examined basic questions concerning the interpretation of statutes that implement international conventions; four of the five opinions concluded that consideration should be given to travaux préparatoires, and also to foreign case law and scholarly writing interpreting the Convention.[10] These opinions stressed that they could not lay down rules to govern all future problems. One question that may still be subject to further development is this: What materials may a court consider in deciding whether the language of a convention is ambiguous? In any event, it seems clear from the decision that in construing a convention, like the 1980 Sales Convention, that is finalized in several languages, the question of "clear meaning" would not be determined solely from the English text. In addition, a majority of the opinions drew attention to the rules on interpretation in the Vienna Convention on the Law of Treaties (1969).[11] [page 92]

Under Article 31 of the 1969 Vienna Convention:

Article 32 adds:

Under Article 32, supplementary aids, including travaux préparatoires, may be used when the terms of the treaty are "ambiguous or obscure" or when the language "leads to a result which is manifestly absurd or unreasonable" and also "to confirm" the meaning derived from the terms of the treaty. The opinions of Lords Diplock and Scarman indicated that, apart from the rules of the Vienna Treaty, interpretative aids could be used when there was a conflict between the literal meaning of the words and the purpose of the Convention.

In view of this development, it seems unlikely that even courts influenced by English judicial tradition will hastily decide that the words of a provision of the Convention are so clear that it is improper to look at the legislative history to ascertain the purpose of the provision. Indeed, the plausibility of the "plain meaning" approach depends upon its use within the confines of a system with established patterns for the use of language, strengthened by a symbiotic relationship between the approach to drafting and to interpretation. This essential feature of the "plain meaning" tradition was stressed by Lord Diplock, who added: [page 93]

We shall consider, infra at §103, the difference between interpreting conventions in the field of public international law—the issue at the forefront of the 1969 Vienna Convention on the Law of Treaties—and the interpretation of rules regulating the relationship between sellers and buyers. In any event, the rule on interpretation in Article 7 of the 1980 Sales Convention avoids the vestige of the "plain meaning" rule of Article 31(1) of the 1969 Vienna Convention, just quoted, and in addition stresses the special role of the Sales Convention "to promote uniformity." Although the Warsaw Convention did not articulate this objective as a rule of interpretation, in the Fothergill case Lord Scarman made this powerful statement on interpreting a Convention to unify private law:

§91 (b) Standards for Use.

Legislative history (like vintage wine) calls for discretion. One who offers legislative materials as a guide to interpretation should show that they reveal the prevailing understanding of the delegates.[12] Cf. the Preamble §475, infra.

Of course, a statement by one delegate does not establish a prevailing viewpoint and silence following a statement does not establish assent. A response may require consultation with ministries that is not feasible during debate on this issue; objections are often withheld because further discussion seems unproductive and time consuming.

The Fothergill decision illustrated the caution that may be needed in approaching legislative history. At the Hague conference on air carrier liability, two delegates offered an amendment that would have removed the ambiguity that led to the litigation, but withdrew their amendment stating (as the minutes showed) that this was on the understanding that the existing text had the meaning expressed in their amendment. Lord Diplock’s opinion considered this legislative background "for what it [page 94] was worth" but noted that, based on his experience in such international conferences, he did "not attach any great significance" to this statement and added, "Machiavellism is not extinct at international conferences". On the other hand, most courts in the United States give great (and sometimes uncritical) weight to legislative history—an enthusiasm that, in the interest of uniformity in construing interpretation conventions, might well take into account the greater caution observed by courts in other countries.[13] In evaluating legislative history, consideration must also be given to the resistance to change that develops as the long processes of deliberation near the end. Thus, an amendment offered to clarify the text may not be accepted because some delegates believe the meaning was already adequately expressed; others would be glad for the clarification but fear that the new language would create drafting problems that could not be solved in the brief time that remains. In short, the legislators placed great stress on the words of the Convention. The only legitimate role of legislative history is to shed light on the meaning of the final text. But it would be hasty to refuse to look at the legislative history on the ground that the "meaning" of the text is "clear"; the setting in which language is used in an essential aspect of its meaning.

Decisions on Legislative History. Inter alia: GER, OLG Frankfurt a. M., 13 U 51/92, 20 April 1994 (required quality of goods), UNILEX D. 1993-21; LG Aachen, 41 O 111/95, 20 July 1995. See: Schlechtriem, Com. (1998) 63-64.

National reporters to the 1986 International Congress on Comparative Law (§88, supra ) reported substantial reliance on foreign decisions interpreting uniform laws and international conventions.[14] Use of foreign judicial decisions in the past has been inhibited by difficulties in obtaining and evaluating this material, which may be in a language unknown to counsel and the court. Special measures to meet this problem will be discussed in §93, infra . In addition, substantial aid should be provided by international scholarly writing reporting and analyzing case-law (jurisprudence) under the Convention. The widespread interest in the Convention has already generated an extensive body of international literature; scholarly writing will be stimulated further by decisions applying this uniform law.

A majority of the opinions in the Fothergill case concluded that consideration should be given to the judicial decisions (jurisprudence) in other Contracting States. The opinions suggest that a preponderant body of binding precedent in other Contracting States would be given great weight; otherwise, foreign decisions would be considered for the persuasive force of their reasoning. Lord Diplock’s opinion drew attention to the fact that in some countries the decisions of even appellate courts were not "binding." The opinions did not consider whether attention should be given to the probability that other courts would follow such decisions—a view that would conform to Oliver Wendell Holmes’s famous dictum: "The prophesies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law."[15] Indeed, since the dramatic break with tradition of 1966, the House of Lords no longer regards that it is "bound" by its own decisions; the significant point is that the likelihood of an explicit overruling is exceedingly remote. It is true that, for historical reasons, many civil law systems hold to the theory that courts are not "bound" by precedent but students of these legal systems report that court decisions—and especially a body of case law—have predictive value that is not significantly different from that in some common-law systems. For example, Ernst Rabel has remarked that, in practice, "one [page 96] must look for the difference between the German...and American systems of precedent with a magnifying glass."[16] Lord Scarman’s opinion included this strong general conclusion: "Our courts will have to develop their jurisprudence in company with the courts of other countries from case to case, a course of action by no means unfamiliar to common law judges.’"[17]

Scholarly Writing. Courts on the Continent of Europe and in the United States (inter alia) give weight to scholarly writing (doctrine) . This receptivity, at least in the United States, has responded to the wide range of materials, in addition to statutes and past decisions, that have become relevant to judicial development of the law. Although English judges have been reluctant to use scholarly writing,[18] the need for uniformity in interpreting international conventions led to a more liberal approach. In the Fothergill case all of the opinions gave careful attention (but varying weight) to scholarly writing on the Warsaw Convention. Lord Diplock’s approach was perhaps the most cautious:

On the other hand, the statement by Lord Scarman, quoted supra at §90, looks towards the development of a more unified international approach to the process of interpreting international conventions.[page 97]

UNIDROIT has performed a service to the international legal community by publishing case law interpreting important conventions that unify rules of private law.[20] At its 1988 session, UNCITRAL established procedures for gathering and disseminating decisions applying the Sales Convention and other uniform laws prepared by the Commission. Each State that is a party to the Convention is requested to designate a "national correspondent" to obtain and send to the UNCITRAL Secretariat the full text of the decisions in their original languages; the Secretariat will make these decisions accessible to any interested person.[21] (The Secretariat, on request, will send copies of the decisions on payment of the cost of this service.)

The Commission observed that the cost of translating and publishing the full texts of decisions in the six official languages of the United Nations would exceed available resources, and noted that it would be desirable for publishers in the various countries to publish the original decisions in full regardless of whether they were in one of the official languages of the United Nations. (Publishers, individually or in cooperation, may also find it practicable to publish translations of the decisions in one or more languages.)

The Commission also provided for U.N. dissemination of information about the decisions. The "national correspondents" are requested to prepare abstracts of decisions emanating from their country. These abstracts, prepared in one of the U.N. official languages, are translated by the U.N. into the other official languages and are published as part of the regular documentation of the Commission. (The volume of decisions may well call for semi-annual or quarterly interim reports; presumably arrangements can be made to transmit these reports to interested persons.) [22] [page 98]

§94 B. Interpretation of the Convention to Promote Good Faith in International Trade

The first important step towards a "good faith" provision was taken by the Working Group in preparing a separate Draft Convention on Formation of the Contract. Article 5 of the Draft included the following: "In the course of the formation of the contract the parties must observe the principles of fair dealing and act in good faith." In 1978 the Commission, in its final review of the draft Convention, decided that a "good faith" provision should not be confined to formation of the contract; at the same time, the Commission decided that an obligation of "good faith" should not be imposed loosely and at large, but should be restricted to a principle for interpreting the provisions of the Convention. This compromise was generally accepted and was embodied in the concluding words of Article 7(1).[23]

National legislation has imposed requirements of "good faith" that are broader than the principle of interpretation stated in Article 7(1). The (U.S.A.) Uniform Commercial Code states: "Every contract or duty within this Act imposes a duty of good faith in its performance or enforcement."[24 ] [page 99]

This general requirements of "good faith" is not typical of common-law statutory drafting; the UCC at this point reveals the unstated influence of some of the civil law codes. The German Civil Code (§242) states: "The debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage." (Other examples are cited in a footnote.) And common-law jurisdictions may be increasingly receptive to such legal ideas. The Ontario Law Reform Commission, on the basis of a comparative study, concluded that a revision of the Sale of Goods Act should include a general good faith requirement.[25] As we have just seen, the Convention rejects "good faith" as a general requirement and uses "good faith" solely as a principle for interpreting the provisions of the Convention. What content should be given to "good faith" as an aid to interpretation? The Convention’s goal "to promote uniformity" should bar the use of purely local definitions and concepts in construing the international text. (See supra at §87). But this objection does not apply to "good faith" principles that reflect a consensus—a "common core" of meaning—in domestic law. One may hope that the scholarship in this area will be developed further with special reference to the application of "good faith" principles to issues that arise in international trade.[26]

For reasons that will be developed later, "good faith" probably would be promoted by a liberal application of provisions like Articles 19(2) and 21(2), which require a party to inform another who is known to be subject to a misapprehension. (See infra at §100) One who demands performance within an additional period (Arts. 47 & 63) may not, in good faith,[page 100] refuse to accept the performance that he requested. (See the Commentary to Art 47, infra at §291.) Delay in compelling specific performance or avoiding a contract after a market change or construing ambiguous acts as acceptance—situations that could permit a party to speculate at the other’s expense—may well be inconsistent with the Convention’s provisions governing these remedies when they are construed in the light of the principle of good faith. (See the discussion of the time for acceptance, infra at §144 and Art. 46, infra at §285.)[27] These illustrations, of course, are incomplete and tentative.

Professor Schlechtriem has suggested that "good faith in international trade" should be construed in the light of the Convention’s many references to standards of reasonableness—a standard that is so pervasive as to establish this as one of "the general principles on which [the Convention] was based".[28] What is "reasonable" can appropriately be determined by ascertaining what is normal and acceptable in the relevant trade. This approach is analogous to and is supported by Article 9, which provides that contractual obligations include "practices established by the parties and usages...in the particular trade". A similar linkage among "good faith", reasonableness and trade usage is found in (U.S.) UCC 2–103(1)(b): " ‘good faith’ in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."

Decisions on the Obligation of "Good Faith" (Art. 7(1): ARB. Hung. C. of C., VB/94124, 17 November 1995 (expired bank g[ua]rantee was a violation of good faith). UNILEX D.1995–28.2. Cf. AUSTRALIA, CA. N.S. Wales, Renard C. v. MPW, 12 March 1992 (influence of "good faith" (CISG 7(1)) on domestic law) UNILEX D. 1992.7. See also: Klein, J., Good Faith in Int. Tr., 15 Liverpool L.R. 114–141 (1993); Schlechtriem, Com. (1998) 66–68.[page 101]

§96 C. Gap-filling: "General Principles" v. Domestic Law

This provision reflects the approach established for civil law codes which were designed to displace the entire body of pre-existing law. To discourage the revival of outmoded and non-uniform rules of the ancien régime, solutions must be anchored in an article of the code—an approach that led to creative extension by analogy of the code’s provisions to meet the myriad of new problems that arose during the following centuries.[29] In common law systems abrupt legal change has usually come through narrow, specific statutes that resemble islands surrounded by an ocean of case-law. On the other hand, case-law has developed in a manner that resembles the analogic development of the civil codes: the principles on which the older cases were based are enlarged or reshaped in the course of applying them to new situations.

Even ambitious legislation like the (U.S.A.) Uniform Commercial Code is not a self-contained body of law. At the outset (§1–103) this "code" states that, unless displaced by its "particular provisions", the "principles of law and equity [a phrase understood to refer to the general body of case-law]...shall supplement its provisions". The vital role of these supplemental principles in the development of the "Code" has been documented in an impressive study of over a thousand pages.[30]It is not surprising that the "general principles" provision of ULIS 17 encountered criticism in UNCITRAL. Nor were all of the critics from common law systems; delegates from some countries with codes stemming [page 102] from civil law roots had also developed traditions that emphasized legislative detail and strict construction.

In the UNCITRAL Working Group, objections to ULIS 17 that had been voiced (unsuccessfully) at the Hague Conference were pressed with added vigor: The "general principles" on which the law was based had never been articulated; ULIS 17 injected an unacceptable degree of uncertainty. Supporters of ULIS 17 replied that filling "gaps" by turning to domestic law would involve even greater uncertainty. The rules of private international law were neither clear nor uniform; hence there would be doubt and dispute over which law was applicable. In addition, the domestic law would be foreign to one of the parties, and in most cases would be unsuited to the problems of international trade. Finally, referring gap-filling to the diverse rules of domestic law would never lead to a uniform solution, whereas recourse to the general principles of the Convention in international case law would develop common answers for the questions that arise within the scope of the law.[31] In 1970 the Working Group recommended that Article 17 of ULIS be replaced by a provision that the law shall be interpreted with regard "to its international character and the need to promote uniformity" (See Art. 7(1) supra at §85). This position was maintained throughout the balance of the proceedings in UNCITRAL. The Commission rejected further proposals to include modified versions of ULIS 17 and also rejected the counter-proposals that problems resulting from "gaps" should be decided under domestic law indicated by the rules of private international law.[32] The 1980 Conference developed a compromise that became paragraph (2) of Article 7. In response to those who feared that courts might turn too quickly to national law, the first part of paragraph (2) reproduced the "general principles" rule of ULIS 17. On the other hand, in response to those who doubted that general principles of the Convention could always be found, paragraph (2) added that "in the absence of such principles" open questions are to be settled "in conformity with the law applicable by virtue of the rules of private international law."[33] [page 103]

The Overview (Ch. 2, §18) drew attention to the inability of any statute to address and solve all the circumstances and problems that will arise. This is especially true for the 1980 Convention since it cannot be revised frequently and must embrace the gamut of transactions and conditions that will arise in a diverse and developing international economy.

Draftsmen of national codes have recognized this problem. Portalis in his preliminary discourse on the French Civil Code observed that the legislator must take "a large view of the matter" by "principles rich in implication" rather than details. "We shall leave some gaps, and they will be filled in due course by experience. National codes are created in time; indeed, people do not really create them at all."[34] This development occurred under the French Civil Code, unaided by explicit authorization to fill gaps. Other statutes have expressly granted this authority. For example, the Uniform Commercial Code states (§1–102(1)) that it is to be "liberally construed and applied to promote its underlying purposes and policies. " Under the Austrian General Civil Code "Where a case cannot be decided either according to the literal text or the plain meaning of a statute, regard shall be had to the statutory provisions concerning similar cases and to the principles which underlie other laws regarding similar matters."[35] On the other hand, in 1978 this approach was rebuffed by the House of Lords in Buchanan & Co. v. Babco Forwarding and Shipping.[36] In the Court of Appeal, Lord Denning, in construing an act of Parliament that implemented an international convention, had concluded that the legislation was subject to a "gap," and that English courts should follow the approach of courts on the Continent, including the EEC Court of Justice, and fill the gap so as [page 104] to carry out the purpose of the legislation. A majority of the House of Lords, in affirming the decision of the Court of Appeal, commented adversely on the "gap-filling" approach. The legislation in question did not contain a provision on interpretation; a court construing the Sales Convention should be led by Article 7(2), supra, to take a broader view of the process of interpretation.

Article 7(2) provides for the use of general principles of the Convention only with respect to unsolved questions "concerning matters governed by this Convention." In examining Article 4 (supra at §64), we saw that the Convention governs only some of the issues that may arise in an international sale. Thus, the Convention specifically excludes issues concerning the validity of the contract (Art. 4(a)) and the effect of the contract on the property in the goods (Art. 4(b)). Nor does the Convention govern rights based on fraud or the capacity of an agent to bind the principal—vital but complex bodies of law which this Convention could neither supplant nor restate; unification in these areas must await the completion of separate conventions. (See Art. 4, supra at §65–66.) Since these areas are not "governed" by the Convention they are beyond the reach of "gap-filling" under Article 7(2).[37]

§100 (b) Communications

A theme that underlies numerous articles of the Convention is the duty to communicate information needed by the other party—a recognition that the consummation of a sales transaction involves interrelated steps that depend on cooperation. Article 19(2) requires an offeror to draw the offeree’s attention to modifications in an offeree’s acceptance to which the offeror objects. Article 21(2) requires an offeror to inform an offeree of a delay in the transmission of an acceptance if the offeror concludes that the acceptance arrived too late. Article 26 provides that avoidance of a contract must be notified to the other party. Article 39(1) requires the buyer to notify the seller of defects in the goods so the seller can test the goods to ascertain whether they are defective and take steps to cure the defects. Under Article 48(2) the buyer must respond to an inquiry as to whether he will accept late performance. Article 65 requires a buyer to respond to a request for missing specifications for the goods. When the parties make a contract covering goods that are then in transit, under Article 68 the seller is obliged to disclose transit damage that has occurred. Communication of needed information is required if a party suspends performance because of impending failure of counterperformance (Arts. 71(3) & 72(2) or because of excuse arising from a supervening impediment (Art. 79(4)). And under Article 88(1), a party intending to resell goods of which the other party has failed to take possession must give reasonable notice of this intent.

Although numerous specific situations are covered by the above articles, it would have been difficult to anticipate and specify all of the circumstances in which communications are needed. These provisions may well evince a general principle calling for communication of information that is obviously needed by a trading partner in situations that are closely [page 107] analogous to those specified in the Convention.[38] (Provisions evincing a duty to cooperate are listed at §§323 and 342 (n.2).)

§101 (c) Mitigation

The Convention also includes several specific provisions that respond to the principle that one party should take steps to avoid deterioration of goods and thus avoid unnecessary hardship on the other party, even when that party has sent defective goods or otherwise has failed to perform the contract. Article 77 lays down the general rule that a party who relies on a breach of contract must take reasonable measures to mitigate the loss resulting from the breach. This general principle for the reduction of waste is applied in specific situations: The seller must take reasonable steps to preserve goods when the buyer is late in taking delivery (Art. 85), and the buyer has a similar duty to preserve non-conforming goods which he intends to reject (Art. 86). Situations may well arise that call for the application of the general principle that underlies these specific provisions.[39]

§102 (d) General Approach: Boldness v. Restraint

The above examples (§§99–101) illustrate an approach that was designed to reconcile the two competing values embodied in Article 7(2): (1) That the Convention should be developed in the light of its "general principles" and (2) that this development would be subject to limits. This approach responds to the reference in Article 7(2) to the principles on which the Convention "is based" by requiring that general principles to deal with new situations be moored to premises that underlie specific provisions of the Convention. Thus, like the inductive approach employed in case law development, the first step is the examination of instances regulated by specific provisions of the Convention. The second step is to choose between these two conclusions: (a) The Convention deliberately rejected the extension of these specific provisions; (b) The lack of a specific provision to govern the case at hand results from a failure to anticipate and resolve this issue. If the latter alternative applies, the third step is to consider whether [page 108] the cases governed by the specific provisions of the Convention and the case at hand are so analogous that a lawmaker would not have deliberately chosen discordant results for the group of similar situations. In this event, it seems appropriate to conclude that the general principle embracing these situations is authorized by Article 7(2). In sum, the approach involves the analogical application of specific provisions of the Convention.[40]

The language of Article 7(2) reflects the decision to narrow the scope of ULIS 17 (§96, supra ) which authorized tribunals to find (or create) general principles to settle every problem that is not governed expressly by the Convention. More important, the approach illustrated above calls for the development of the Convention subject to the discipline imposed by analyzing the provision of the Convention and by examining the closeness of the analogy between the cases governed by those provisions and the case at hand.

Article 7(2) presents a delicate balance between (1) developing the Convention’s general principles and (2) recourse to domestic law—a choice that inevitably will be influenced by the traditions and mindset of the tribunal. As we have seen (§96), civil law practice is generally hospitable to the first alternative and common law to the second. Which is more compatible with the objectives of the Convention?

This writer, although nurtured in the common law, has come to believe that international unification calls for us to reexamine our traditional approach. Invoking domestic law under the Convention has more serious consequences than invoking common law principles to solve problems under a statute in a common law jurisdiction. Even in dealing with a statute designed to unify law among the states of a common-law country, references to general common-law principles do not seriously undermine the statute’s objective to achieve uniformity for the common law principles stem from common roots. Within the Commonwealth, respect for decisions in England and in other Commonwealth jurisdictions limits the degree of disharmony; in the United States a strong unifying influence is exerted by the periodic Restatements of the law.[41] This degree of unity is [page 109] not found among the domestic laws of the many States of diverse legal systems that have adopted the Convention. Nor will references to domestic law contribute to a body of international case-law under the Convention. Thus, a generous response to the invitation of Article 7(2) to develop the Convention through the "general principles on which it is based" is necessary to achieve the mandate of Article 7(1) to interpret the Convention with regard to "the need to promote uniformity in its application ."

In cases of doubt, a proposed application of a general principle may be tested against applicable trade usages (Art. 9, infra, at §112) and against contract practices and modern rules of law specially designed for international transactions. Later in this book, examples of modern contract practices serve to illustrate the Convention’s general rules on risk of loss (Art. 67) and on exemption from damages when performance is prevented by an impediment (Art. 79). In addition, the rules of interpretation of Article 7(1), supra, call for guidance based on the experience of other Contracting States.

In sum, a response to the Convention’s invitation to consider its "general principles" before turning to domestic law can minimize the confusion inherent in conflicts rules and avoid the uncritical and wooden application of scraps of domestic law that were developed without regard for the special needs of international trade. The "general principles" alternative offered by Article 7(2) can help the Convention, through international case law and scholarly writing to live as uniform law that responds to changing circumstances.[42] Other examples of this approach are given infra at §§148–151, 156 (n. 5), 177, 342 (n. 2).

Decisions on General Principles (Art. 7(2)): (1) GER. OLG Düsseldorf, 17 U 73/93, 2 July 1993 (CISG 57(1)(a): basis for principle on place for paying) UNILEX 1993–21.  (2) FR. CA Grenoble, 23 October 1996, SCEA v. Soc. Teso; general principle deduced from Art. 57 when facts were the converse of Art. 57(1)(a) (Seller rather than buyer required to pay; see Art. 57 infra), UNILEX 1996-10.  (3) SWITZ. HG Zürich, U.HG93, 9 September 1993 (B has burden to prove lack of conformity) UNILEX D. 1993-22;  (4) ARB, Austria, Wien, SCH-4318, 15 June 1994 (estoppel- venire contra factum proprium: S’s conduct led B to believe S would not rely on B’s delay in giving notice of defects (UNILEX D. 1994-13.  (5) ARB. ICC, [page 110] Paris, 8/28/1995 (general principle on interest rate, based on UNIDROIT Principles, Art. 7.4.9.).

See also: Hellner, J., Gap-filling by Analogy, in Ramberg (ed.) Festschrift: Hjerner (Stockholm, 1990) at 219-233; Rosenberg M.N., Australia Bus. L.R. 442 (1992); Callaghan, J.J., Gap-filling: Two French Decisions, 14 JLC 183–208 (1995); Koneru, P. 6 Minn. J. Global Tr. 105–152 (1997); Volken P., Dubrovnik Lectures, 19–53; See: Schlechtriem, Com. (1998) 66–68; in general (Art. 7) id., 59–68 (Huber).

§103 D. Special Role of the Sales Convention

Students of public international law may wonder why this discussion of the interpretation of the Sales Convention has not given more attention to the 1969 Vienna Convention on the Law of Treaties and its important rules on the interpretation of treaties.[43] To what extent are these rules applicable to the Sales Convention?

The question calls for distinctions between different types of Conventions and, more precisely, between different parts of the same Convention. The 1969 Vienna Convention is concerned with the obligations of Contracting States to each other. The 1980 Sales Convention, of course, creates such obligations among the Contracting States—primarily to give legal effect to the rules on international sales that are set forth in Part I–III of the Convention (Arts. 1–88).

The obligations of the Contracting States to each other are centered in Part IV—Final Provisions. These include: procedures for adherence; rules on reservations whereby a Contracting State may limit its obligations under the Convention; rules governing denunciation of the Convention. All of these provisions of the 1980 Sales Convention should be construed in the light of the 1969 Vienna Convention.

Most of the provisions of the Sales Convention (Arts. 1–88; Parts I–III) deal with a very different matter—the obligations not of States [page 111] but of the parties to a contract for the sale of goods. With respect to these provisions the Sales Convention states its own rules of interpretation (Art. 7, supra). Not surprisingly, these rules call for a more flexible approach than would be acceptable for rules defining the obligations of States. This flexibility is epitomized by the fact that virtually all of the provisions of Parts I–III (Arts. 1–88) yield to the contract made by the seller and buyer; in short, the heart of the Sales Convention is the contract of sale. Moreover, as we shall see, the Sales Convention provides that (unless the parties agree otherwise) contracts between sellers and buyers may be made orally (Art. 11) and are to be interpreted against a wide range of circumstances, including negotiations, past practices and trade usages (Arts. 8(3), 9(2)). In contrast, the 1969 Vienna Treaty provides that a "treaty" must be "in written form" (Art. 2–1(a)) and lays down elaborate rules on the authority to represent a State (Arts. 7–8) and on how a State may express its consent to be bound (Arts. 11–17). Consistent with this level of formality, the rules on the interpretation of treaties (Arts. 31–33) reflect the magnitude and complexity that are associated with the obligations of States. These rules are not appropriate for sales contracts and are quite different from the rules of interpretation in Article 7 of the Sales Convention.

In sum, rules of interpretation in the 1969 Vienna Treaty are pertinent to the obligations under the 1980 Sales Convention that the Contracting States undertake to each other, but are not pertinent to the rules relating to the mutual obligations of the parties to the contract of sale.[44]

Some of the more "sharp-edged" provisions deal with the Convention’s sphere of application: E.g. Articles 1(1)(a), 2 and 5 (supra §§45, 47, 49–55, 71–73). In this area precise drafting and strict construction are useful: doubt about the applicability of the Convention produces uncertainty as to all of the problems governed by the Convention. Comparable precision, for the same reason, characterizes Part IV, Final Provisions (Arts. 89–101) on the date of entry into force, reservations, and the like.

Most of the rest of the Convention has a very different scope and texture. The substantive sales provisions (Parts I–III, Arts. 14–88), in nine printed pages (O.R. 179–188) state principles for resolving the wide range of problems that may arise in the making and performance of sales contracts. The Contracting States vary widely, and their international trade includes transactions of almost infinite variety:—as to types of goods (ranging from raw materials to computers), arrangement for transport, payment, documentation and compliance with government requirements at point of origin and receipt, single-delivery and long-term transactions, and so on...

This does not suggest that the international sales law could or should have been drafted with greater detail; detailed rules for some situations would have created problems of classification and of doubt about the applicability of the Convention’s general principles. See §26, supra . In addition, during the life of the Convention the problems resulting from excessive detail will increase with the development of new commodities and commercial arrangements. Such a general code has a long life expectancy. Preparing the present uniform law required over a decade; substantial world-wide adoption has required a further decade. If serious problems should develop UNCITRAL could prepare a protocol of amendment [page 113] but most, if not all, of the provisions of the present uniform law probably must serve for several decades in a world of accelerating change.

Consistent with this basic obligation of fidelity, the Convention’s general rules for a diverse, complex and developing field should not be applied narrowly but should be given full effect to achieve their underlying purpose as shown by the structure of the Convention and its legislative history.[45] At this point several of Article 7’s rules of interpretation converge: (1) Regard for the Convention’s "international character" requires sensitive response to the purposes of the Convention in the light of its legislative history rather than the preconceptions of domestic law (§88, supra); (2) Response to "the need to promote uniformity in... application ", which (together with point (1), supra ) calls for consideration of interpretations developed in other countries through adjudication (jurisprudence) and scholarly writing (doctrine) (§93 supra); (3) Regard for "the observance of good faith in international trade", a principle that in conjunction with point (1), supra and point (4), infra, can resist stultification and circumvention of the Convention’s rules (§§94–95, supra); and (4) Questions not expressly settled by the Convention should be answered, when possible, "in conformity with the general principles on which it is based", an approach that reinforces regard for both the Convention’s " international character" (point (1), supra) and "the need to promote uniformity in application (point (2), supra) by minimizing recourse to divergent rules of domestic law (§102, supra).[page 114]

Article 8. Interpretation of Statements or Other Conduct of a Party

§104 Article 7 dealt with interpretation of the Convention; the present Article deals with the interpretation of the statements and conduct of the parties.

§ 105 A. The Function and Scope of Article 8

In discussing Article 7 (§103.1, supra), attention was drawn to the need to apply rules for statutory construction with close attention to the [page 115] character of the statute and the texture of the statutory provision in question. This principle applies with even greater force to Article 8’s rules for the interpretation of contracts. Article 7 on interpretation of the Convention was drafted by the body that drafted the language of the Convention to which Article 7 applies; the provisions of Article 8 on the interpretation of contracts apply to language used by others—private parties acting in a remarkably wide variety of situations. The settings range from brief telephone or telex communications for small or routine purchases to detailed contracts negotiated for large and complex transactions. The provisions of Article 8 apply and are relevant to these various types arrangements but have special significance for agreements that have not resulted from detailed negotiations; even detailed agreements are often modified by informal communications.[2] Article 8 is also applicable to questions of interpretation that arise under the contract when the contract is made by an exchange of communications and also when the parties join in executing a single instrument.[3] And, since Article 8 is broadly applicable to "statements made by and other conduct of a party," it reaches post-contract communications and actions, many of which have legal effect and may raise significant problems of interpretation.[4] [page 116]

§106 B. Basic Approaches to Interpretation: Subjective Intent v. Objective Meaning

In preparing the present article, UNCITRAL had to face and reconcile conflicting theories about the fundamental nature of the process of contracting. According to one early theory, a person should be bound by contract only when he subjects his "will" to the terms of the contract. In some legal systems this contributed to the view that one’s obligation was defined by his "intent" or "consent," or that making a contract required a "meeting of the minds."[5]

The image of a meeting of two minds is attractive but it raises practical difficulties. When a dispute arises over the "meaning" of a contract, the contending parties are scarcely reliable witnesses as to what was in their minds when they made the contract. Moreover, language is such an imprecise medium that shades of differences of understanding are latent in many of the agreements on which commerce depends; a purely "subjective" approach could undermine protection for reasonable reliance on expectations created by another.

These difficulties led many jurists and legal systems to reject "intent" as a basis for the contract. This view was vigorously expressed by Oliver Wendel Holmes: "The law has nothing to do with the actual state of the parties’ minds. In contract, as elsewhere, it must go by externals, and judge parties by their conduct."[6] Some legal systems, while clinging to the "subjective" or "mutual intent" theory, have limited this approach to prescribed categories, and have devised remedies to protect a "speaker" when the "hearer" knew or should have known of the ambiguity.[7] However, for the most part, current references to "will" as the basis for contract resemble the echoes of distant thunder from a storm that has passed.[page 117]

FR. CA Grenoble, RG/3275, 22 February 1995. SARL Bri. "Bonaventure" v. SPAE. S "could not have been unaware" of B’s intent to resell in France; consequently, S was bound to follow French standards. CLOUT 154, UNILEX D. 1995–7. See: Schlechtriem, Com. (1998) 71–72.

§107.1 (a) Article 8(2) and Protective Legislation

Article 8(2) places the burden on one who prepares a communication or who drafts a contract to communicate clearly to a reasonable person in the same position as the other party. This provision has roots in the classic rule that doubts are to be resolved against the drafter (contra proferentem), but the application of this principle has special significance in international sales. When the parties are based in different language and legal settings, the party who makes a proposal must avoid using expressions that are obscure, or, even worse, are "false friends" (des faux amis) with one "clear" meaning to the one who writes and a different "clear" meaning to the one who reads. These problems, intrinsic to language, rise to a higher power in our area through the use of legal terms with different meanings in different legal cultures ( e.g., "warranty", "condition", "disclaimer", "trust") and mercantile terms with divergent meanings in different areas or settings. CISG 8(2) does not, of course, give binding effect to what the listener or reader (Party B) personally understood but, instead, to the understanding of "a reasonable person of the same kind " as the "other party"—a principle that responds to the fact that only the one who communicates has an opportunity to consider and choose among alternative modes of expression and also takes account of a drafter’s opportunity to hide an unpleasant meaning through "the intellectual superiority of the legal virtuoso".[8] [page 118]

Article 8(2) has interesting points of contrast and similarity in relation to various types of domestic protective laws. Some of these laws apply only to sales to consumer as defined in Article 2(a), §50, supra, and consequently are outside the scope of the Convention. However, some protective legislation may overlap with CISG. See §§232, 236, infra. Hence a preliminary analysis of these laws in relation to Article 8(2) can provide helpful background for problems that we shall meet later.

One type of domestic legislation denies effect to contract terms on the ground that they impose excessively harsh consequences even though these contract terms were (or should have been) understood by the other party.[9] Article 8(2) is quite different for it is concerned only with the interpretation of the contract. A second type of domestic law denies full effect to standard terms and form contracts prepared by one party on the ground that the other party may not grasp their full import; this type is closely related to Article 8(2). A third type restricts the effect of standard terms or forms on the ground that their use is so widespread that they deny contractual freedom to the other party. Other laws are difficult to classify for they may reflect concern for both clarity and fairness, or the basis for the law may be unclear.[10]

Determining the basis and impact of these laws is important in deciding whether they are displaced by the Convention. The first and third types, above, do not invade the area of interpretation occupied by Article 8 and are preserved by Article 4 which states that the Convention "is not concerned with: (a) the validity of the contract or of any of its provisions..."[11] The relationship between the second type of domestic law and the Convention will be explored in more detail in discussing Article 35 on conformity of goods to the contract (§§230–234, infra ).

The above suggestion that under Article 8(2) ambiguity in a statement [page 119] is to be resolved against the party who formulated this statement has considerable significance in view of the wide disparities between the modes of expression and expectations in the different areas and types of enterprises that may meet in international trade. Although this interpretation of Article 8(2) may be disputed,[12] it will at least be prudent for a party in formulating a proposal or other statement to take care that it not be given a different understanding by (Art. 8(2)) "a reasonable person of the same kind as the other party".

Following are decisions applying Art. 8(2):  (1) GER. LG Hamburg, 5 O 543/88, 25 September 1990: B claimed not obligated to pay S, on the ground that B was acting on behalf of a third party, X. The court rejected this defense: There was no reason for S to understand that B was acting for X. CLOUT 5; UNILEX D. 1990–6. Cf. GER. OLG Karlsruhe, 15 U 29/92, 20 November 1992; GER. LG Oldenburg, 12 O 2943/94, 28 February 1996. UNILEX D. 1996–3.2.0.  (2) GER. OLG Hamm, 11 U 206/93, 8 February 1992 (application of trade usages under Art. 8(2) & (3)).  See: Rider, C., Who Bears the Cost of Misunderstanding? 61 NY State Bar. J. (Oct. ’89) 56–61. Cf.: General provisions on trade usages in Art. 9, infra.

§109 D. Interpretation in the Light of Surrounding Circumstances

Paragraph (3) (unlike Paragraph (2)) states rules of interpretation that, inter alia, apply to statements embodied in an agreement formulated by both parties. (See §105, n. 3, supra. ) Article 8(3) cuts through technical rules that might bar access to relevant materials: "Due consideration" is to be given to " all relevant circumstances of the case," including (a) negotiations, (b) practices established between the parties (Art. 9(1)), (c) usages (Art. 9(2)) and (d) the parties’ subsequent conduct.

Let us suppose that one party contends that the agreement, although not expressing result "X," should be construed to reach this result. May a tribunal consider evidence that this party proposed that the contract state result "X" but that this proposal was rejected? Under Article 8(3), such negotiations are "relevant" to the interpretation of the agreement and should be given "due consideration"; of course, they are not conclusive.

Party’s Standard Terms: AUSTRIA, [page 120] ObG (Sup. Ct.), 10 Ob 578/95, 6 February 1996. A German buyer (B) ordered goods from an Austrian seller (S). S refused to deliver; B sued for loss of profit (Art. 74, infra). S claimed that there was no valid contract since a clause in S’s standard terms required contracts to be in writing. S’s claim was rejected: there was no express or implied agreement concerning the clause in S’s standard terms. UNILEX D.1996–3.1. See Bonell/Ligouri, ULR (1997–3) 583, n. 66.

Jurists familiar with the common law will be intrigued by the relationship between Article 8(3) and the "parol evidence rule." This so-called "rule" (as aptly named as the Holy Roman Empire) has been used to bar the consideration of any agreement (whether or not "parol") that contradicts a contemporary or subsequent writing "intended by the parties as a final expression of their agreement"; the rule also bars a prior agreement in relation to a writing which was intended "as a complete and exclusive statement of the terms of the agreement." (The quoted phrases are taken from the relatively mild version of the "parol evidence rule" of (U.S.A.) UCC 2–202.)[13]

Article 8 does not directly address the "parol evidence rule"; references to this and other technical domestic rules would have cluttered the draft and would have mystified jurists from legal systems that have no such rule. But the language of Article 8(3) that "due consideration is to be given to all relevant circumstances of the case" seems adequate to override any domestic rule that would bar a tribunal from considering the relevance of other agreements. Jurists interpreting agreements subject to the Convention can be expected to continue to give special and, in most cases, controlling effect to detailed written agreements. And contract terms (often called "integration clauses") that any contemporaneous or prior agreement shall be without effect would be supported by Article 6, which gives effect to the contract. But Article 8(3) relieves tribunals from domestic rules that might bar them from "considering" any evidence between the parties that is relevant. This added flexibility for interpretation is consistent with a growing body of opinion that the "parol evidence rule" has been an embarrassment for the administration of modern transactions.[14] [page 121]

A lawyer preparing for trial at common law may note that the parol evidence rule has its greatest significance in restricting the role of juries in the field of contract interpretation. The Convention, of course, does not interfere with domestic rules on the allocation of authority between the judge and jury, and would not interfere with the decision to exclude from a jury evidence of prior or contemporaneous agreements if (in the apparently circular language of UCC 2–202) "the court finds" (after giving due consideration to all relevant circumstances) that the writing was "intended also as a complete and exclusive statement of the terms of the agreement."[15]

"Parol evidence rule", decisions: (1) U.S. Court of Appeals (11th Cir. 29 June 1998) 47–4250; MCC-Marble Ceramics (US; B) v. Ceramica Nova...(Ital.; S). In October 1990, following an oral agreement by S and B on terms, at S’s request B signed one of S’s standard order forms, on which the agreements, noted above, were entered. The front of the form, in Italian, stated that the buyer "is aware of the sales conditions stated on the reverse and approves them". B did not understand Italian. In February 1991 S and B agreed on a requirements contract; B signed a number of S’s standard order forms for deliveries under this agreement. B sued S for breach of the 1991 contract; S counter-claimed on the ground, inter alia, that B had defaulted on payment for prior shipments. The District (lower) Court, relying in part on the printed provisions in S’s standard forms, entered summary judgment (i.e. without further examination of facts offered by B) in favor of S.

On review by the Court of Appeal, one issue was whether B was bound by certain provisions on S’s standard forms signed by B. The crucial question was whether the lower court erred in entering summary judgment for S without considering B’s claim that these standard provisions were inconsistent with provisions on which the parties had agreed orally before signing the standard forms. In support of the decision, S invoked the domestic "parol evidence rule" denying effect to such oral agreements. (See §110, above.)

The Court of Appeals ruled that the domestic "parol evidence rule" was inconsistent with the CISG, Article 8(3) of which provided that, in [page 122] determining an intent or understainding, "due consideration" must be given to "all relevant circumstances...including negotiations..." (See the full text of Article 8, supra.) In this decision, the court relied on the approach of the present author (§110, supra) and the conclusions of other writers, including: Del Duca, Lookofsky, Flechtner, Murray and Winship (op. cited supra, I. OVERVIEW at 2(b). See also: U.S. Dist. Ct. (S.D.N.Y. 6 April 1998) 96 Civ. 3253, C. Claudia v. Olivieri F., Dicta: Contracts under CISG are free from the parol evidence rule (1998 U.S. Dist. LEXIS 4586); U.S. Filanto S. v. Chilewich I. Corp., 789 F. Supp. 1229 (S.D.N.Y. 1992), id. at 1238 n. 7. CLOUT 23, UNILEX D. 1992–9.

Parol Evidence Rule: Law or Procedure. In MCC-Marble Ceramics (29 June 1998), supra, S argued that the parol evidence rule was a rule of procedure (i.e., like exclusion of hearsay) rather than of law, and therefore was not governed by legal rules under CISG. The Court of Appeals rejected this argument, citing Farnsworth on Contracts, §7.2 at 194 & 196 n. 16, citing cases (1990).

Article 8(3) authorizes "due consideration" for conduct subsequent to the agreement since this may shed light on the intentions and expectations of the parties. Under UCC 2–207(3) "conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale...." And UCC 2–208(1) states that under some circumstances a "course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement." On the other hand, English case law has been hostile to evidence of subsequent conduct—an approach that has met resistance and criticism.[16] [page 123]

Article 9. Usages and Practices Applicable to Contract

§ 112 A. The Role of Usages and Practices

For these reasons, one of the most important features of the Convention is the legal effect it gives to commercial usages and practices.[1]

§ 113 B. Usages and Practices under the 1980 Convention

Article 9 deals with three situations: (1) Usages to which the parties have agreed (Article 9(1)); (2) Practices that the two parties have established between themselves (Art. 9(1)); and (3) Usages that become part of the contract based on the criteria stated in Article 9(2).

ULIS (Art. 9(1)) provided that the parties "shall be bound by any usage they have expressly or impliedly made applicable to their contract." Article 9(1) of the Convention omitted the phrase "expressly or impliedly," and thereby avoided any inference that abnormal rules are applicable to the construction of the contract. A provision in the contract that trade terms (F.O.B., C.I.F., and the like) are governed by ICC’s "Incoterms" would be a clear and common illustration of an agreement expressly making a specified usage applicable to the contract. References that are less explicit might well invoke usages if the court concludes that such was the intent of the parties, in accordance with the Convention’s rules of interpretation in Article 8, supra at §109.[3]

(b) Agreement on Trade Terms

When a contract uses a technical term drawn from chemistry tribunals scarcely need statutory authorization to consult standard works that give the generally understood meaning of the term. The same approach is appropriate for the technical terms of commerce. The basic definition of a trade term in a standard work like Incoterms is a better guide to international understanding than language in a domestic judicial opinion. Giving weight to the basic provisions of widely-accepted commercial definitions could be supported simply as an intelligent approach to interpretation of the contract without invoking the rules on "usage" in Article 9.

However, some "definitions" of trade terms include details regarding the performance of the parties that may not be "widely known to, and [page 125] regularly observed by, parties to contracts of the type involved in the particular trade concerned." Art. 9(2). These details become binding under Art. 9(1) by express incorporation (e.g. "sale C.I.F. Buyersport, INCOTERMS 1990") or in trades where the parties regularly use and rely on this set of trade definitions (Art. 9(2)). On the other hand, proposals to give effect to trade definitions that did not meet the above standard set forth in Article 9(2) were rejected. See §118, infra.

"Practices" are established by a course of conduct that creates an expectation that this conduct will be continued. Article 8(2) (§104 supra) provides that the "conduct of a party" (Party A) is to be "interpreted according to the understanding that a reasonable person of the same kind as the other party (Party B) would have had in the same circumstances." Under Article 9(1) a course of conduct by A in past transactions may create an expectation by B that will bind A in a future contract. Of course A will not be bound if he notifies B of a change before B enters into a new contract; further reliance by B may also become unreasonable when circumstances change. In short, the reference in Article 9(1) to practices established by the parties is one example of many situations in which binding expectations may be based on conduct. See Articles 19(2), 21(2), 35(2)(b), 47(2), 73(2).

(1) FR. CA Grenoble, 48992, 13 September 1995, R. Caiato v. S.F.F. Practices of parties created an obligation by S to follow labelling in B’s country. CLOUT 152, UNILEX D. 1995-24.  (2) ARB. ICC (Paris) 8611/HV/HK, 23 January 1997. Although CISG did not apply to contract of distributorship, after cancellation by S, usage of parties (Art. 9(1)) bound S to continue to supply spare parts. UNILEX D. 1997-3.  (3) AUSTRIA, CA Graz, 6 R 194/95, 9 November 1995. Seller (Italian) customarily sold Italian marble in Austria. S, in sale to B in Austria, was obliged to consider usage in B’s country. CLOUT 175.

"Usage" and similar legal ideas have been used in settings that are fundamentally different from the [page 126] trade usages to which Article 9 refers. "Custom" or "customary law" has sometimes been invoked as a source of law without regard to the intent of the parties. In those settings, "custom" is strictly confined; to bind "a plurality of persons" the custom must be "long established," or even "ancient."[4]

Even more remote from our current problem is "custom" as a source of public international law that binds States. Governments have sometimes viewed such "custom" as inconsistent with their sovereignty and with principles on which their regimes were based. Echoes of these fears were heard in UNCITRAL in early discussions of trade usage but it became evident that construing sales contracts in the light of the expectations current in international trade does not impair the sovereignty of States.

§ 118 (b) Trade Term Definitions and Usage Standards

As has been mentioned (§115, supra), definitions of trade terms (e.g., INCOTERMS) may be (and often are) made binding by express agreement (Art. 9(1)). One of the issues that was discussed repeatedly in framing Article 9 was the applicability of such definitions as international trade usage. ULIS (1964) had provisions on practices and usage similar to CISG 9 but added the following (ULIS 9(3), ULF 13(2)):

Proposals were made in UNCITRAL and at the Diplomatic Conference to include a similar provision; these proposals were resisted on the ground that phrases like "meaning usually given" might subject parties in some areas to practices with which they were not familiar. Article 9(2) had responded to these concerns since usages bound only those "which the parties knew or ought to have known " in addition to the requirement that the usage be "widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned. " These cumulative requirements did not appear in the proposals for a third paragraph, based on ULIS 9(3), designed to give special effect to trade terms and contract forms. Opposition to these proposals included concern for the problems of parties in developing countries; details embodied in definitions of trade terms and in forms of contract accepted and appropriate in developed, industrialized regions might not be known or appropriate [page 127] in other parts of the world.[5]

In sum, definitions of trade terms can bind the parties even though they have not been incorporated into the agreement under Article 9(1), but only when their regularity of observance meets the standards of Article 9(2). World-wide legal effect from some details in definitions of trade terms and forms of contract must await the wider homogenization of international practice than has yet been achieved.

§ 119 (c) Trade Usage Under the Convention

As we have seen, Article 9(2) applies only to a trade usage "of which the parties knew or ought to have known" and which "in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned." This language invokes a pattern of conduct only if it is so "widely known" and "regularly observed" that it can be assumed to be a part of the expectations of the parties.

§ 120 (d) Usage of Trade in Domestic Law

Similar principles of contract interpretation have been widely accepted in domestic law.[6] The approach of modern case law has been articulated in the (U.S.A.) Uniform Commercial Code (§1–205(2)), which defines "usage of trade" as "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question." Such usages (like established practices, supra at §116) "give particular meaning to and supplement or qualify" terms of the agreement. Tribunals construe general provisions of the contract in the light of applicable usage since words commonly used in commerce ("draft," "order," "bill," "average") carry a [page 128] heavy and complex burden of meaning based on the practices with which these words have been associated.[7] A contract provision (like a fish out of water) loses its life when it is removed from its setting.

§ 120.1 (e) Standards for Usage: Time and Place

As we have seen, the Convention gives effect to a usage only if, on an objective basis, it constitutes a part of the contractual expectations of the parties. This premise sheds light on several important questions.

Must the usage be "international"? This question can lead to confusion but the Convention clarifies the issue. Under Article 9(2) the usage must be one which "in international trade is widely known to, and regularly observed by, parties to "such transactions. A usage that is of local origin (the local practices for packing copra or jute, or the delivery dates imposed by arctic climate) may be applicable if it is "widely known to, and regularly observed by" parties to international transactions involving these situations.[8]

Requirement of Internationality (1) GER. OLG Frankfurt a M., 9 U 81/94, 05 July 1995; German usage (France contra) held that a letter of confirmation was binding if the recipient did not object. This usage could not be given effect since the usage was not international. UNILEX D. 1995-17.4. (2) Cf. AUSTRIA, OGH (Sup.Ct.), 10 Ob 518/95, 6 February 1996; usage in natural gas trade to quote approximate amounts—enforced. (3) AUSTRIA, OLG Graz, 6 R 194/95, 9 November 1995 (national or local usage applicable), CLOUT 175; UNILEX D. 1995-28.1.3. See: Schlechtriem, Com. (1998) 78–79.

Trade Usage Applied. NETH. GH Hertogenbosch, 456/95, 24 April 1996; standard terms of Assn of Yarn Traders binding although not included in contract; both the seller (German) and the buyer (Netherlands) were familiar with the above Association practices. UNILEX D. 1996-5.2.

See, supplementing early articles in footnotes: Audit, B., in Carbonneau, T., ed., Lex Mercatoria and Arbitration (T.J. 1990) at 139–160; [page 129]Bainbridge, S., 24 Va J. Int. L. 619–663 (1985). On standard forms and trade terms, see: Drobnig, U., Hague-Zagreb Essays (1983) 117–134 (German, Dutch & CISG); Farnsworth, E.A., 21 Cornell Int. L. J. 439–447 (1988).

As we have seen, Article 9 gives effect to the fact that the parties’ established practices and usages of the trade constitute an important part of the parties’ expectations. The parties by contract can negate these expectations. See Art. 6 at §74, supra. However, when the parties do not clearly address and negate implicit expectations based on practices and trade usages the relationship between these implicit expectations and the terms of the contract present delicate problems of interpretation.

Answers to this question must be consistent with the rule of Article 8(3) that in interpreting statements of the parties (including contract provisions) due consideration is to be given to "all relevant circumstances of the case including...any practices which the parties have established between themselves, usages and any subsequent conduct of the parties". This provision reflects the fact that established practices and usages often create expectations that are so basic that they "go without saying" in making a contract—as is true of a buyer’s expectation that the goods will be free of unusual defects (Art. 35(2)(a)) and that he will own the goods (Art. 41). One may not readily conclude that contract provisions were understood to negate such basic expectations.[9]

Relation between Usage and Contract: GER. OLG Saarbrücken, 1 U 69/92, 13 January 1993; contract provision, specifying limited period for notification, prevailed over usage. UNILEX D. 1993-2.1.

Suppose that a usage specifies a time or place for delivery or a time for the transfer of risk that differs from the rules of Articles 31, 33 or 67.[page 130] Which is applicable? Under Article 6 (supra at §74), "The parties may...derogate from or vary the effect" of the provisions of the Convention. An applicable practice or usage has the same effect as a contract. Under Article 9(1) practices established by the parties become part of the contract and under Article 9(2) the parties "are considered, unless otherwise agreed, to have impliedly made applicable to their contract " those usages that meet the specified criteria. There is one limitation: A practice or usage is invalid if a contract term to the same effect would be invalid under applicable domestic law. Article 4 states that the Convention "is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage." (See the Commentary to Art. 4, supra at §61.) This provision, of course, does not give effect to domestic rules on the circumstances that make a usage applicable; this question is governed by Article 9 of the Convention.

Occasionally domestic legislation or case-law jurisprudence declares that a commercial usage is so firmly established that it has the force of law and is binding on the parties without proof that the usage meets the standards of Article 9(2). If such a rule is inconsistent with a provision of the Convention does it, like customs established in accordance with Article 9(2), prevail over the Convention?[10] The answer must be No. CISG 9(2) governs the circumstances in which a usage may be part of the contract and thereby prevail over provisions of the Convention; the crucial point is that factual compliance with these international standards must be established for each case. Many of the rules of domestic law may be thought to be supported by commercial usage;[11] giving effect to domestic law on this ground would be inconsistent with the standards established by Article 9(2) and would undermine the Convention’s central goal to establish uniform law for international trade. See, generally, Schlechtriem, Com. (1998) 75–80 (Junge).[page 131]

Article 10. Definition of "Place of business"

§ 123 A. Multiple "Places of Business"

The Convention refers to a party’s "place of business" in several Articles: 1, 12, 20(2), 24, 31(c), 42(1)(b), 57(1)(a), 69(2) and 96. A commercial enterprise may maintain a central office and various branch offices; in applying the above provisions of the Convention it may be necessary to choose among multiple places of business. For example, the Convention is applicable only if the seller and the buyer have their places of business "in different States." (See the Commentary to Art. 1, supra at §42.) In that setting, paragraph (a) of Article 10 was quoted and discussed; the discussion need not be repeated here.

During the preparation of the Convention, some delegates were concerned lest "place of business" be construed to extend to a hotel room or other temporary place where a travelling agent might conduct negotiations.[1] Referring to a "permanent" place of business presented drafting difficulties, and most delegates concluded that temporary sojourns would not establish a "place of business". The term that corresponds to "place of business" in the official French text is établissement and in the official Spanish text is establecimiento —words that seem to be inconsistent with a temporary stopping place.[2] Moreover, as was noted under Article 1 ( supra at §43), Article 10(a) points to the place of business "which has the closest relationship to the contract and its performance"; the Convention’s use of "place of business" in the context of Articles 24, 31(c), 42(b) and 69(2) shows that this term refers to a place for the continuing conduct of business. See §43, supra; Schlechtriem, Com. (1998) 81–83 (Herber).[page 132]

§ 125 B. No "Place of Business"

Parties to international sales transactions will usually have a "place of business"; paragraph (b) was included to avoid a gap in the law when this is not the case.[page 133]

Article 11. Inapplicability of Domestic Requirement that Contract be in Writing

§ 126 A. Domestic Rules: "Statutes of Frauds"

In recent decades the tide has been running against such formal requirements. In 1954 Britain repealed this part of the Sale of Goods Act—a step that has been followed by many of the other countries that had adopted this Act.[1]

Many civil codes imposed formal requirements for the making of contracts, but these requirements were usually made inapplicable to commercial transactions.[2]

These formal requirements cannot be relied upon to bar enforcement of an international contract, particularly in litigation before a foreign tribunal. Conflict rules are particularly diverse on this point. One approach, of diminishing vitality, considers statutes of frauds as "evidentiary" and "procedural"—a view that tends to invoke the law of the forum. Modern authorities, even in common-law areas, regard these rules as "substantive" but in international transactions there will often be doubt as to which law applies.[3] [page 134]

§ 127 B. The Convention

In the UNCITRAL proceedings this question arose: Would Article 11 nullify regulations that required certain contracts to be in writing in order to assist in the enforcement of exchange controls and other regulatory programs? This question is answered by the scope of the Convention as defined in Article 4: the Convention "governs only...the rights and obligations of the seller and the buyer arising from" the sales contract. (See the Commentary to Art. 4, supra at §61). Consequently, the Convention would not interfere with the imposition of sanctions for evasion or violation of a regulatory program; Article 11 merely removes any impediment to enforcement between the parties based on any domestic "requirement as to form."[5]

Article 11 does not bar the parties from imposing formal requirements. An offeror may require that an acceptance must be in writing; an oral "acceptance" is not an "assent" to the offer. (See Arts. 18 and 19, infra at §§157, 165.) Such requirements are often contained in offers and are included in some of the General Conditions of Sale prepared by the Economic Commission for Europe.[6] In addition, pursuant to Article 29 (infra at §200), the parties by a contract in writing may require "any modification or termination by agreement" to be in writing.[page 135]

A Contracting State, by a "declaration" (reservation") under Article 96, may protect its formal requirements from Article 11. See Art. 12 which follows.

Government procurement. Contracts for the purchase of supplies for a government present special problems of administration, such as the authority of government employees to create financial obligations for the public, and the possibility of favoritism, waste and fraudulent claims to public funds. As a consequence, legislation may impose special requirements for the approval, manner of execution and form for procurement contracts made by governmental units.[7] Sales of government property, such as agricultural commodities acquired under a price support program, often pose fewer governmental problems and may be subject to fewer or no special regulations; the same may be true of contracts made by publicly owned corporations that perform functions such as the supply of electricity or transport.[8]

A procurement contract made with a seller in the same State (the most common setting) would not meet the requirement of internationality of Article 1 (§§40–43, supra). When these requirements are met, the fact that the Convention does not deal with problems of authority of an agent or other representative to bind the principal (§§65–66, 98, supra) will avoid conflict with many laws on government procurement.[9] A more difficult problem is posed by a procurement contract that would bind the government except for the requirement that it be in written form.

Article 4(a) (§§61–64, supra) states that the "Convention is not concerned with: (a) the validity of the contract". The fact that a law states a formal requirement in terms of "validity" does not necessarily preserve the requirement from being overridden by Article 11; in this and many other settings achieving the Convention’s central goal of uniform application (Art. 7, §§85–87, cf. 72–73, supra) requires that the relationship between the Convention and domestic law be decided on the basis of the substance of the domestic rule rather than its form. Thus, it would be necessary to consider whether the law in question was addressed to a special problem posed by government procurement; if so, the law probably [page 136] should not be affected by Article 11. Formal requirements that are applicable only to government procurement or that are more strict than for comparable private contracts probably should be unaffected by Article 11. This conclusion would also be supported by applicability of the government’s regulations to procurement contracts made and performed abroad, and circumstances showing special needs for formal requirements in government contracting.[10]

§127.1 C. Rejection of Part II, Formation of Contract: A Problem?

Happily, this query appears to be a non-problem. The present writer has been advised that the above four States do not require a writing or other formality for commercial sales of goods. On this assumption, the laws of these States are not in conflict with Article 11—a view bustressed by the fact that none of these States exercised the right, provided by Article 96, to reject Article 11. For a decision consistent with the above conclusion, see GER. OLG München, 7 U 5460/94 8 March 1995. CLOUT 34, UNILEX D. 1995-8. See discussion: Bonell/Ligouri ULR (1997–3) 588–589, n. 85–87 (citing cases).[page 137]

Article 12. Declaration by Contracting State Preserving Its Domestic Requirements as to Form

§ 128 A. The Conflict

Laws of the U.S.S.R. imposed strict formal requirements for the making of foreign trade contracts. In the UNCITRAL proceedings representatives of the U.S.S.R. indicated that preserving these requirements was of great importance to protect established patterns for the making of foreign trade contracts. Most delegates, however, felt strongly that formal requirements were inconsistent with modern commercial practice—particularly in view of the speed and informality that characterized many transactions in a market economy.[1]

§ 129 B. The Resolution: A Reservation Under Article 96

The final text, above, followed rejection of a proposal that the formalities of one "declaring" State (including matters such as registration, etc.) would govern both parties to the contract. This proposal was rejected on the ground that it would extend formal requirements beyond prevailing law, which depended on agreement of the parties, or conflicts (PIL) rules of the forum.

The crucial language of the compromise (which admittedly is difficult to parse) provides that any provision of Articles 11, 29 or Part II of the Convention that allows a transaction "in a form other than in writing does not apply where any party has his place of business in a Contracting State which has made a declaration under article 96 of this Convention".

The following States have made declarations under Articles 12 and 96: Argentina, Belarus, Chile, China, Estonia, Hungary, Russian Federation and Ukraine. The language of Articles 12 and 96 has led to uncertainty; perhaps concrete examples will help:

Example 12A. Seller (S), in State S, claims that S and Buyer (B), in State B agreed on a sale of a tractor by S to B. The agreement was not embodied in a writing. State B requires a signed writing, and has made a declaration under Articles 12 and 96 rejecting Article 11, supra, that dispenses with such formalities. State S does not require a writing or other formalities. The above basic, but incomplete, facts need to be considered in different situations.

Case A. Seller (S) shipped the tractor to B, whose place of business was in State B, a "reservation" State requiring a written agreement. B refused to receive or accept the tractor or to pay, on the ground that the alleged agreement was not in writing. S sued B in State B; witnesses testified that S and B had agreed on the sale. In the absence of further facts (e.g.: a request by B for shipment, or B’s acceptance of delivery of the tractor that would create an estoppel) it seems that the tribunal in B would dismiss S’s suit. This is the typical case envisaged by Articles 12 and 96.

Case B. The facts are the same as in Case A, except that S sued B in State S, which does not require contracts to be in writing. As in Case A, there are no further facts (e.g.: a request for shipment or acceptance of the tractor that would create an estoppel). Even though conflicts rules point to State S, which does not require a writing, this writer now (contrary to his earlier opinion) suggests that State S should dismiss S’s [page 139] suit—the same result as in Case A. This about-face results from this combination: (1) "any party" could refer to the application of Article 12 to both parties to the transaction, and (2) the acceptance by the Convention of the need, felt by some States, for protection against claims unsupported by a written agreement. Compare alleged oral modification (Arts. 12 & 29): BELG. Rechtbank v. Kh. A.R. 1894/94, Vital Verry . . . v. Dira-Frost, 2 May 1995. B refused to open a letter of credit, claiming an oral agreement for reduction of the price. S’s country (Chile) had made an Art. 12—96 reservation. Held: The alleged oral agreement was not effective. UNILEX D. 1995-15:1.2.

Case C. A deviation from the facts of Example 12A, above: State S (unlike State S in the above example) enforces agreements only if they have been reduced to writing; State S has made no declaration under Articles 12 and 96. State B has made an Article 12–96 declaration. In addition, the law of State B requires not only a written agreement but also additional formalities such as registration in a specified public office in State B. Should State S refuse to enforce a written agreement because it has not been filed in a public office in State B? This added formality is not protected under Articles 12 and 96 which require only an agreement "in writing". In this setting, it may be necessary to depend on the conflicts (PIL) rules of the forum. (This approach seems also necessary in agreements between States that, in addition to requiring a written agreement, have additional but different formal requirements.)

Are the above views consistent with the following decision?

An agreement was concluded, by telephone, by a German seller (S) and a Hungarian buyer (B). The goods were delivered to B, who refused to pay. In an action brought in a Hungarian court, B argued that, under Hungarian law, sales contracts must be evidenced by a writing, and that Hungary had made a declaration under Article 96 preserving Hungary’s formal requirements. The court rejected this view. In this case, under Hungarian conflicts (PIL) rules, German law was applicable. German domestic law did not require a writing; judgment for the price was awarded to the German seller. HUNG. Met. Ct.: Budapest, AZ12.G.41.471/1991, 24 March 1992. UNILEX D. 1992-8. See Witz, p. 74; Schlechtriem, Com. (1998) 92–93.

Note that the result in this decision differs from that suggested above in Case B. Queries: (1) Is the writer wrong about the solution to Case B? Or: (2) Is the Hungarian tribunal’s decision applying German law supported by the fact that the goods had been delivered to the Hungarian buyer? Note the qualification in Case B that rules on formalities may be affected by conduct demonstrating that a contract had been made. (In some jurisdiction this would be called an estoppel.)[page 140]

Article 13. Telegram and Telex as a "Writing"

§ 130 The Convention imposes no formal requirements with respect to the notices, requests or declarations to which it refers.[1] All such communications may be made orally (face-to-face or by telephone) or by other means.

The Convention refers to "writing" in Article 21(2) ("letter or other writing containing a late acceptance") and in Article 29(2) (contract in writing that requires written modification or agreement).[2] These provisions are supplemented by the following definition:

The Convention’s few references to a "writing" do not require a signature or other validating mark or sign. Hence, no problem regarding signatures arises in connection with communication by telegram or telex.

Article 13 was drafted prior to substantial commercial use of electronic transmission of facsimiles (FAX) or the making of contracts by electronic data exchange (EDI). The implications of EDI for contract formation will be considered in Part II, Formation of the Contract. See, e.g., §§132.1, 162 at note 7 and §170.4). Stating that "writing" includes telegram and telex does not fix the outer limits of this term as used in Articles 21(2) and 29(2) of the Convention; electronic developments such as FAX and EDI do not present more serious problems of verification than "telegram and telex" and should be assimilated to the definition of "writing" in Article 13.

Questions can arise as to whether communications such as EDI can satisfy the requirements of a "signature" under domestic statutes of [page 141] frauds.[4] However, this question does not arise under the Convention since references to "writing" in Articles 21(2) and 29(2) do not require a "signature". Whether electronic communications satisfy domestic formal requirements preserved by a declaration (reservation) under Article 96 (see Art. 12 at §§128–129, supra) depends on the domestic law preserved by the reservation. As we have seen (§129, supra), domestic formalities in States that have not made an Article 96 reservation (e.g., the U.S.A.) may be applicable in transactions with parties in States that have made a reservation under Article 96.[page 142]

Part II.

Formation of the Contract
(Articles 14–24)

Introduction to Part II of the Convention

§131 A. Relation Between Part II and Other Parts of the Convention

Part II of the Convention, Formation of the Contract, is subject to the rules of Part I (Arts. 1–13) on the scope and interpretation of the Convention, but is independent of Part III (Arts. 25–88) which deals with the obligations of the parties to the contract. Article 92 (Part IV) permits a Contracting State to declare that it will not be bound either by Part II or by Part III. This reflects aspects of the Convention’s history that were described in the Overview (Ch. 1, supra at §4)—the completion in 1964 of two Conventions, one on Formation (ULF) and one on Sales (ULIS), and UNCITRAL’s decision to prepare a single Convention, subject to an option to adhere to only Part II on Formation or Part III on Sales.[1]

At the conclusion of Article 11, supra, attention was drawn to the declaration, under Article 92, by Scandinavian States, not to be bound by Part II on Formation of Contract. Under this declaration these States are "not to be considered as Contracting States" with respect to matters governed by Part II. Formation of the Contract. These States also made a declaration under Article 94 which applies to "Two or more Contracting States which have the same or closely related rules on matters governed by this Convention". This declaration was applied when both parties have their places of business in Denmark, Finland, Sweden, Iceland or Norway.

The text of Article 94 made it clear that the reservation applied only to transactions among these "parties"; contracts with other States would be governed by the Convention.[page 143]

For example: ARB. ICC (Paris), 7585/1992 (1992): A contract between an Italian seller and a buyer in Finland was governed by CISG. UNILEX D.1992-32. For a fuller discussion, see Bonell & Ligouri, ULR (1997), pp. 588-590 and n. 90.

§132 B. Structure of Part II

However, serious problems arise if one assumes that contracts can be made only if they fit this two-step formula. For example, a typical export sale may be instituted by an exchange of letters (including a pro-forma invoice), none of which may be an "offer" or "acceptance". Thereafter, correspondence will discuss descriptions and prices of the goods, the expected dates and methods of shipment and the methods of payment—normally by the buyer’s arrangement for the issuance of a letter of credit and its confirmation by a bank near the seller; a contract may not be closed before the letter of credit is confirmed and in some cases only when the seller ships the goods and presents the necessary documents [page 144] (invoice, bill of lading, insurance policy and draft) to the confirming bank.[2] In short, in many transactions it is difficult or impossible to isolate an "offer" and "acceptance".[3]

The Convention does not compel the stretching or amputation of a living understanding to fit the Procrustean bed of "offer" and "acceptance". Under Article 18(3) a contract may be concluded "by performing an act, such as one relating to the dispatch of the goods or payment of the price...", §§163–164, infra. In addition, Article 8(3) gives effect to "understanding" that is derived from "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."[4] In short, the Convention accommodates both the simple exchange of two communications and also the development of a contract when it is impossible to isolate an "offer" and "acceptance".[5]

This flexibility is becoming increasingly important with the development and expanding use of programmed systems for making commercial arrangements by "Electronic Data Interchange (EDI)". To help commerce cope with these problems, UNCITRAL established a Working Group on Electronic Data Exchange. On June 2, 1996, UNCITRAL adopted the Model Law on Electronic Commerce, and a Guide to enactment of the Model Law (A/51/17). The Commission also authorized work on related issues, including digital signatures and means to certify such signatures.

Systems for the rapid exchange of pre-programmed electronic signals arranging for the purchase of goods place strain on traditional concepts [page 145] of "offer" and "acceptance". Some of the implications of these current developments are noted infra: see §162 note 7 (Article 18 and error or delay in transmitting an "acceptance"); §170.4 (Article 19 and the "Battle of the Forms")

Contract Formation: Regional Perspectives: Logan T.N., P.R. China and Formation (CISG), 5 China L. Rep. (Chicago) 53-74 (1988); Reiley, E.H. & Hu Run Fu, Chinese Contract Law and CISG, 25-94 (1989); Ng’ong’ola. C., CISG: South African Legal Environment; Formation of Contract, (London) 4 African J. Int. & Comp. L. 835-853 (1992).[page 146]

Article 14. Criteria for an Offer

§133 The basic criterion for an offer, under prevailing law and the Convention, is whether one party has indicated to another "the intention...to be bound in case of acceptance." In applying this standard, two subsidiary factors need to be taken into account—the number of people addressed and the definiteness of the proposal. These standards are set forth in this opening article of Part II:

§ 134 A. Indication of Intent to be Bound

When one party is in doubt over whether the other intends to be bound or merely to open negotiations the question can usually be resolved quickly by phone or wire.[2] Moreover, doubts suggested by the bare text of the parties’ statements will often be dissipated when (as Art. 8 requires) those statements are interpreted in their full context, including "the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties." In short, the parties’ understanding is a question of fact that is individual to [page 147] each transaction; the general guides in Article 14 for interpreting the parties’ intent, to which we now turn, play subordinate and supporting roles.

Article 14 incorporates the generally accepted premise that a party may make an offer to as large a group as it wishes.[3] However, a communication addressed to a large group, if construed as an offer, can involve practical difficulties and hazards. For example, sellers often give wide distribution to catalogues describing a line of goods and indicating prices. Some months may be required for the preparation, printing, and distribution of the catalogue. During this period some of the goods may become unavailable because of heavy demand, shortage of materials, or other production difficulties, and cost increases may call for readjustment of prices. If supply or production difficulties are widespread, or if the general price level rises sharply, the seller may face a flood of orders. If these orders should be "acceptances" of an "offer," the result could be ruin for the seller and a windfall for the buyers. In these settings a "reasonable person" (Art. 8(2)) would not think that the catalogue "indicates an intention...to be bound" (Art. 14(1)) and courts have been reluctant to construe communications to create such hazards.[4]

These practical considerations are reflected in Article 14(2): If a proposal is not "addressed to one or more specific persons," it is not an offer "unless the contrary is clearly indicated by the person making the proposal."[5]

§136 (a) "Specific Persons"

Even if a proposal is addressed to "one or more specific persons" it is not an offer unless under the basic test of paragraph (1) it "indicates the intention of the offeror to be bound in case of acceptance." This test may be decisive when the line between paragraph (1) and paragraph (2) is difficult to draw.[page 148]

To take a common case: Supplier mails a catalogue to 500 prospective buyers; each envelope is addressed to a specific person. Is this a proposal "addressed to one or more specific persons" and therefore governed by paragraph (1)? The answer should be No. The purpose underlying the dividing line between paragraphs (1) and (2) is to avoid the hazards latent in widespread communications mentioned at §135. To this end, the phrase "addressed to one or more specific persons" should refer to communications that are restricted to the addressees; a seller who mails out a catalogue normally intends as wide a distribution as possible and would be glad for the addressee to pass the catalogue on to others. Thus, such a mailing to named addressees should be governed by paragraph (2): the intent "to be bound in case of acceptance" must be "clearly indicated."[6]

§137 B. Definiteness of an Offer and the Scope of Party Autonomy

§ 137.1 (a) The Role of Article 14: Defining an Offer v. Validity of Contract

The provisions on definiteness in Article 14(1) are drafted in terms of the question whether a "proposal" constitutes an "offer". We turn first to the question whether a communication should be construed as an offer (§§137.2–.4). Later (§137.5) we shall consider whether these provisions control the validity of agreements.

As we have seen (§§134–36 supra), the "public offer" provisions of Article 14 are concerned only with the question whether a communication should be interpreted as an offer: Under Article 14(2) a clear intent to make a public offer is given full effect. What is the purport of the other provisions of Article 14?

§137.2 (b) Description of the Goods: Specifications made by the Seller

Article 14(1) states that "a proposal is sufficiently definite if it indicates the goods". Does a proposal "indicate the goods" if it states [page 149] that the buyer will later "specify the form, measurement, or other features of the goods"? This does not make a contract too indefinite: Article 65 (§357, infra) states that if the buyer fails to make the specification "the seller may...make the specification himself in accordance with the requirements of the buyer that may be known to him".

§137.3 (c) Quantity: Requirement and Output Contracts

Under Article 14(1) a proposal is sufficiently definite if (inter alia) it "expressly or implicitly fixes or makes provision for determining the quantity...". Long-term contracts often call for the supply of a buyer’s requirements or for the delivery of a seller’s output; Article 14(1) should not be construed to nullify these important transactions on the ground that the quantity will not be fixed until the buyer’s requirements or the seller’s output become known.

Under the Convention, as under domestic law, problems can arise if the quantity can be controlled freely by one party—by artificially increasing output when costs (or prices) drop, or by artificially increasing "requirements" when costs (or prices) rise.[7] Tools to cope with these problems are provided by the flexible principles of Article 8 governing contract interpretation (§§104–111 supra) and by the direction in Article 7(1) to interpret the Convention to promote "the observance of good faith in international trade".

§137.4 (a) Scope of the Problem

In UNCITRAL and at the 1980 Vienna Conference this question arose: Do the parties have the power to make a binding sales contract that does not (Art. 14) "expressly or implicitly" fix or make "provision for determining" the price? As we shall see, the answer calls for close attention to both Articles 14 and 55 (§§137.5–.6, 325–325.3 infra).

Usually sales contracts specify the price; long-term contracts may make elaborate provision for adjusting the initial price on the basis of changes in cost. See Kritzer Manual Ch. 4. Smaller transactions may make no specific reference to price but the least likely possibility is that the parties have no understanding concerning the price. A common situation in which the price is not expressly stated but (Art. 14) is "implicitly [page 150] fixed" in the course of a series of communications may be illustrated as follows:

Example 14A. Seller distributed catalogues describing various types of goods and listing prices. Buyer sent Seller a telex requesting Seller to ship goods, designated by a model number in Seller’s catalogue, to which the telex referred. Buyer’s telex did not specify the price.

Buyer’s order in response to Seller’s catalogue did not close a binding contract. Under Article 14(1) Seller’s catalogue was not addressed to "specific persons" and is not to be construed as an offer but as an invitation to submit offers. See §§135–136, supra. (The catalogue will probably state that the listed prices are subject to change; even in the absence of such a statement Seller may modify the price since the catalogue did not make a binding offer.) Buyer’s order was, however, an offer that implicitly referred to the price stated in the catalogue.

Seller will usually respond to Buyer’s order by an "Order Acknowledgement form" that will state the price.[8] If the price is the same as that stated in Seller’s catalogue a contract will be closed. If Seller’s prices have changed Seller may phone or telex Buyer informing Buyer of a modification in the catalogue price and asking for confirmation of the order at the new price. If Buyer confirms the order, the price has then been fixed and the Order Acknowledgement closes a contract.

If Seller’s catalogue prices have not changed Seller may immediately ship the goods and notify Buyer of the shipment by an invoice that states the catalogue price. Under Article 18(3) Seller’s shipping, followed by appropriate notification, accepted Buyer’s offer "by performing an act, such as one relating to the dispatch of the goods". See §§163–164, infra. (Buyer’s offer (Art. 14(2)) had "implicitly fixed" the price as that stated in the catalogue to which Buyer referred in its order.)

Let us suppose that Seller had announced higher prices than those in the catalogue to which Buyer referred but, in haste or carelessness, shipped without securing Buyer’s agreement to the new prices. This placed Seller at risk. If Buyer accepts the goods without knowledge of Seller’s price change the parties are bound by contract at the lower price in Seller’s catalogue: Buyer had reason to expect this price, and Seller’s shipment without notification would reasonably be understood by Buyer as accepting Buyer’s offer at the catalogue’s price. Art. 8(2), §108, Example 8B, supra. If Seller notified Buyer of the price change before Buyer accepted the goods Buyer could either (1) reject the goods or (2) [page 151] accept the goods at the modified price. If Buyer objects to the higher price he would normally phone or telex Seller and an agreement would be reached on the price. (Seller may find it difficult to redispose of the goods in Buyer’s country and may be amenable to a compromise.)

Because of the importance of price to economic success, only rarely will the parties enter into a binding contract without at least (Art. 14(1)) an "implicit" understanding on the price or a means "for determining" the price. Situations that approach the edge involve emergency orders for the manufacture of minor replacement parts or requests to rush a shipment of goods for which the seller has not listed a price. Even here, as the examples suggest, the buyer will seldom accept the goods before he receives an invoice or other notification of the seller’s price. In other cases a method for determining the price will be established by trade usage or by a practice the parties have established (Art. 9, §§112–122, supra). Hence, rarely will it be necessary to face the question whether the Convention bars the parties from making a contract that neither "expressly" nor "implicitly fixes or makes provision for determining...the price". However, this question has generated discussion and raises intriguing questions of statutory interpretation and legal theory. It deserves our attention.

§137.5 (b) The Power of the Parties to Contract without Providing for the Price

The contested issue of theory can be exposed and tested in the setting of the following improbable case. (Improbable conduct is more useful to legal theory than to commerce.)

In the Introduction to Part II (§132.1 supra), we noted that the Convention’s definitions of "offer" and "acceptance" are useful and necessary for deciding whether a contract was made by an exchange of communications. We found, however, that the Convention recognizes that contracts can be made without following the two-step offer-acceptance pattern: Article 18(3) provides that a contract may be concluded "by performing an act", and Article 8(3) provides that statements (including terms of agreements) are to be interpreted to include trade usages and the parties’ practices and also are to be construed in the light of "any subsequent conduct of the parties".

In the life of commerce, as in the above example, there is often no question as to whether a single communication should be construed as an "offer"; the parties’ understanding will be disclosed by a series of communications, by their conduct (e.g. by delivering and accepting goods) or by executing a contract of sale.

Does Article 14 deal not only with whether a communication should be construed as an "offer" but also with the validity of a "Contract of Sale" that does not determine the price? This reading of Article 14 is difficult to sustain in the face of Article 4 which states that "except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions...". Deference to the parties’ agreement is also shown by Article 6: the parties may "derogate from or vary the effect of any of [the Convention’s] provisions."[9] In any event, further light is shed by the legislative history of Article 55, infra.[page 153]

§137.6 (c) Article 55 and the Two-Point Compromise

The question whether Article 14 denies validity to the parties’ clearly expressed intent to be bound is important for all States that adopt the Convention without excluding Part II on Formation.[10] As we shall see in discussing Article 55 (§§324–325.3 infra), in developing this provision UNCITRAL in 1977 and the Diplomatic Conference in 1980 developed a two-part compromise between delegates that were opposed to and those that supported open-price contracts.

The Working Group draft that led to Article 55 provided: (1) "When a contract has been concluded" but does not make provision for the price, (2) the buyer must pay "the price generally charged by the seller" when the contract was concluded.[11]

(1) In reviewing the above draft UNCITRAL in 1977 changed the opening clause, quoted at (1), to read "If a contract has been validly concluded...". The formal statement of the decision by the Commission (sitting as a Committee of the Whole) stated (VIII YB 49 para. 340, Docy. Hist. 342): "The Committee decided to introduce an express statement into the article to make it clear that it only applied to agreements which were considered valid by the applicable law". The discussion that led to this decision made clear that "applicable law" meant (para. 328) "the applicable national law". Indeed, discussion related to the Convention used the phrase "applicable law" to refer to domestic law "applicable by virtue of the rules of private international law" (Art. 7(2)), in contrast to the uniform international rules set forth in the Convention.

(2) The second part of the compromise was made in 1980 at the Diplomatic Conference. Some delegates objected that the reference to the price charged by the seller gave an unfair advantage to the seller; to meet this objection the reference to the seller’s price was replaced by "the price generally charged at the time of the conclusion of the contract". (These compromises are discussed further under Article 55, §§324–325.3, infra.)

As a result of these two compromises, in the formal final votes by the Plenary of the Conference, Article 14 (then draft article 12) was adopted by 41 votes to none with 5 abstensions and Article 55 (then draft article [page 154] 51) was adopted by 40 votes to 3 with 5 abstentions. O.R. 205, 211, Docy. Hist. 740, 746.

In view of this over-all compromise, including the concession to the domestic law of those States that make provision for the price an element of contract validity, it is quite impossible to conclude that Article 14 imposed such a rule of invalidity on all States that adopt Part II of the Convention.

§137.8 (a) Conclusion

  Article 14(1) provides that a communication that does not state or make provision for the price is not an "offer" so that a reply "I accept" does not close a contract. However, Article 14(1) does not bar the parties from concluding a contract by express agreement or by conduct (e.g., by shipping, receiving and using goods) that shows their "intention...to be bound" (Art. 14(1)). The only rule of "validity" with respect to agreement on price results from the opening phrase of Article 55 which defers to applicable domestic law.[12] [page 155]

(a) Prior to Delivery and Acceptance

Questions concerning the existence of a contract arise most frequently prior to shipment and receipt of the goods. For example:

(1) ARB: Russian Fed.; Trib. of Int. Comml. Arb., Ch of Comm., 309/1993, 3 March 1995. Negotiations between Ukranian S and Austrian B were completed except for S’s statement that the price would be agreed "ten days prior to the new year". B agreed to this provision but the agreement on price did not occur. S refused to ship; B sued for damages. The tribunal rejected B’s claim, invoking CISG Articles 14 and 55. Article 55 (price generally charged at conclusion of contract) was not applicable since the agreement contemplated that the parties would agree on the price. CLOUT 139, UNILEX D. 1995-7.2.

(2) HUNG. Sup. Ct., Gf.I.31 349/1992/9; 25 September 1992. S made B alternative offers for B’s purchase of aircraft engines, indicating the price for only some types of engines. B agreed to this proposal, but later rejected the contract. No engines were delivered; S sued for damages. Held, reversing the lower court, that the offer was not sufficiently definite: there were "no market prices" for aircraft engines. CLOUT 53, UNILEX D. 1992-20.

(3) GER. OLG Frankfurt a M., 10 U 80/93, 4 March 1994. B invited S to make an offer for lists of screws. S sent lists and prices; B disagreed as to prices for some items. S did not ship. B sued for either delivery or damages. B’s claims were rejected: there was neither delivery nor contract.. CLOUT 21, UNILEX D. 1994-7.1.

(4) ARB. ICC (Paris) 8324/1995. In sale of manganese, parties agreed on a provisional price (which B paid), subject to revision based on the price B received on resale. In view of prior usage of the parties, B was required to pay an additional sum. (French CISG law was applied.) UNILEX D. 1995-35.

(5) SWITZ. Handelsgericht K. Aargau, OR. 96 0001 3, 26 September 1997.  B (Swiss) ordered cutlery from S (Ger.). S shipped the cutlery to B. B rejected the goods. The parties had not agreed on the price. The court awarded damages to S: the contract was sufficiently definite. CLOUT 217.

See also: Murray, D.E., Open Price in World-Wide Setting, 89 Comp. L.J. 491-500; Bonell/Ligouri, ULR (1996-1) 158-160 (citing cases).[page 156]

(b) Goods Received; Buyer Obliged to Pay

The following decisions illustrate the view that, in spite of failure to agree on the price, buyers are bound to pay for goods they have accepted.

(1) AUSTRIA, OG (Sup. Ct.), 2 Ob 547/93, 10 November 1994. Furs, of a range of prices based on quality, were received and resold by B. B was bound to pay; the decision stressed B’s conduct following delivery. CLOUT 106, UNILEX D. 1994-29.

(2) FR. CA Grenoble, Veyron v. Ambrosio, RG 93/1613, 26 April 1995. Goods delivered to B, without prior agreement on price, were considered accepted at the price stated by S—a "reasonable understanding" under Art. 8(2) & (3).  See also: FR. C. de Cass. (Sup. Ct.), Fauba v. Fujitsu, 4 January 1995 (on appeal from C.A. Paris, 22 April 1992). Arrangement that the price was to be "modified by market trends" did not bar contract. CLOUT 155, UNILEX D. 1995-1. See also F. Ferrari, 15 JLC 15, n.79 (1995) (references to numerous studies on contract formation).

Queries re Analysis and Organization. Should cases in which B receives and accepts goods not be considered here under Part II. Formation of the Contract? Surely, the receipt and acceptance of goods shows that a commercial transaction (neither gift nor theft) has occurred. In this setting, the relevant issues center on questions such as defects in the goods, non-payment or damages—matters governed by Part III (Articles 25–88). In that setting we shall return to Article 55, which governs cases where a contract has been concluded, but does not "make provision for determining the price."[page 157]

Article 15. When Offer Becomes Effective; Prior Withdrawal

§138 The special and narrow role of Article 15 may be illustrated by the following example:

In the above example, on June 6, the offer had not yet reached the offeree, and therefore was not yet "effective." The statement that the offer could not be revoked until July 1 would have become binding (Art. 16(2), infra at §139) when it reached the offeree. But the offer never became "effective" because of the withdrawal that reached the offeree in advance of the offer.

The reason supporting Article 15 is that the enforcement of contracts is designed to protect expectations; none arose in this case before the offeror withdrew the offer. Article 18(2), infra at §157, provides a parallel rule with respect to an acceptance: the offeree may withdraw the acceptance if the withdrawal "reaches the offeror before or at the same time as the acceptance would have become effective" (Art. 22).[2] [page 158]

Article 16. Revocability of Offer

§139 As we have seen, Article 15 empowers the offeror to "withdraw" an offer before it reaches the offeree. The present article deals with the power of the offeror to "revoke" an offer after it has reached the offeree and thereby has become "effective."

This article must be viewed as a whole for the rule of revocability in paragraph (1) is deeply eroded by paragraph (2).

§ 140 A. Revocability Until Acceptance

If Article 16 consisted only of paragraph (1) it would resemble the traditional common-law view that an offer may be revoked until it is accepted. Even if the offeror promises that the offeree will have a specified period for acceptance, under the traditional common-law approach this promise is not binding unless it is supported by "consideration"—a payment or some other act or thing given by the offeree in exchange for the promise to hold the offer open.[2] But the common law found a way slightly to curtail this broad power to revoke—the famous "post-box" rule. If the offeror has impliedly authorized the offeree to reply by mail,[page 159] the acceptance occurs and, more to the point, the offeror’s power to revoke is cut off when the offeree posts his acceptance.[3] This common-law feature appears in the general rule of revocability of Article 16(1)—the revocation must reach the offeree "before he has dispatched an acceptance." In addition, as we shall see, the effectiveness of an offer ends if it is not duly accepted. See Art. 18(2), §161, infra.

§ 141 B. Restriction on Revocability: Paragraph (2)

This result reflects the approach of various civil law systems.[4] In addition, under the (U.S.A.) Uniform Commercial Code an offer to sell goods may, under stated circumstances, be irrevocable.[page 160]

The UCC’s common-law background helps to explain the limitations on irrevocability in Section 2–205. Limiting the provision to an "offer by a merchant" is not substantially different from the scope of Article 16 in view of the mercantile nature of most international sales and the Convention’s exclusion of consumer transactions (Arts. 2(a) and 5, supra at §§49, 71). More significant are the requirements of a "signed writing" (separately signed if the "assurance" is on a form supplied by the offeree) and the three-month limitation on the effectiveness of a promise not to revoke.[5] On the other hand, official recommendations in other common law jurisdictions to revise the rules on the revocability of offers propose minimal formal requirements and are similar to Article 16(2) of the Convention.[6]

§ 143 (b) Implied "Indication" that Offer is Irrevocable

We turn to offers that do not state that they will be held open. Does the making of an offer, without more, assure the offeree of a period within which it may respond so that the offeror may not revoke the offer during that period?

Attempts to answer this question have had a troubled history. The Draft on Formation that was presented to the 1964 Hague Conference stated: "An offer...may not be revoked unless the offeror has reserved to himself the right of revocation in the offer."[7] This proposal was a center of controversy at the 1964 Convention. The upshot was a compromise [page 161] (ULF 5) that made revocability turn, in part, on "good faith" and "fair dealing"—concepts that many UNCITRAL delegates concluded were too vague to be useful in this context. The revision of these rules on revocability was one of the more difficult tasks that UNCITRAL encountered in its work on formation of the sales contract.[8]

The most delicate issue was this: When the offer states a period within which the offeree must reply does it follow that the offer is irrevocable during this period? Support for an affirmative answer was based on civil code provisions that were interpreted to mean that if the offer must be accepted within a certain period it is irrevocable until the end of the specified period.[9] In accordance with this view, the 1964 Hague Formation Convention (ULF 5(2)) provided that an offer may not be revoked if "the offer states a fixed time for acceptance or otherwise indicates that it is firm or irrevocable."

§143.1 (c) Effect of "Fixed Time for Acceptance"

Some delegates urged that UNCITRAL should retain the above language of ULF 5(2) and contended that stating "a fixed time for acceptance" would be understood as a promise to hold the offer open. Others agreed that in some settings the words would be understood as setting a time limit beyond which an acceptance would be too late—the issue addressed in Article 18(2) by the provision that an "acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed" (§161, infra) rather than the issue (Article 16(2)) of whether the offeror promised to hold the offer open for a prescribed time. Those holding the latter view proposed that the rule on irrevocability be formed in general terms: Does the offer "indicate that it is irrevocable", without specifying the expression that would communicate this meaning.

The UNCITRAL Working Group, however, approved this language: "...an offer cannot be revoked:...(b) If the offer states a fixed time for acceptance"—a formulation that seemed to give decisive effect to a [page 162] specified form of expression.[10] UNCITRAL in its 1978 review of the draft provisions on formation revised the Working Group draft to provide that an offer can not be revoked: "(a) If it indicates, whether by stating that a fixed time for acceptance or otherwise, that it is irrevocable". Some, but not all, delegates stated that this revision reflected the view that the ultimate test was the interpretation of the offer rather than the use of a specified expression.[11] At the Vienna Conference the "fixed time" and "general rule" proponents were unable to modify the language to clearly express their positions; the 1978 UNCITRAL draft became Article 16(2)(a) of the Convention.[12]

It is not easy to assess the outcome of this dispute, which may well appear to be a tempest in a teapot. It seems necessary to give effect to two decisions: (1) The 1978 UNCITRAL retreat from the Working Group draft and (2) The retention of the reference to a "fixed time for acceptance". Both decisions can be accommodated by concluding that (1) the reference in an offer to a "fixed time for acceptance" creates a presumption of irrevocability until the stated date, but (2) the presumption can rebutted by showing that the offer in its full setting (Art. 8(3)) would be understood to refer to the automatic expiration of the offer (Art. 18(2)) rather than a promise not to revoke.[13] (The mandate of Article 8(3) for interpretation of statements in their full setting is discussed at §§109–111, supra.)

An offeror who wishes to set a date for expiration of the offer and also to reserve the power to withdraw the offer should make this meaning clear. The Convention, of course, respects the basic principle that the offeror is "master of its offer". See Article 6; Kritzer Manual Ch. 22.

§143.2 (d) The Meaning of Specified Words: International Drafting Technique

To this writer (who did not take part in the controversy over Article 16), the most interesting question is not the area of irrevocability but a general question about statutory drafting: Should a statute attempt to state the meaning of specified words or expressions used in private contracts? Statutory drafters may define the words they use but should not try to state the meaning of words and expressions used by others, especially in contracts made by private persons in a virtually infinite variety of settings.[page 163]

Attempts in domestic statutes to define the expressions used in contracts have led to difficulties;[14] the problems are multiplied in an international statute prepared for enactment and use in numerous different languages and commercial settings. The only vessel in which one can hope to carry a uniform rule across multi-lingual terrain is by the description of a thought or an idea—not by a specified expression in a contract to which the statute attributes a particular meaning.

In the above example, it was "reasonable for the offeree [Builder] to rely on the offer as being irrevocable" since Supplier knew that Builder would use the offer in compiling its bid. In addition, Builder "acted in reliance on the offer" in submitting a bid that led to a contract binding it to construct the building at an agreed price. Both requirements of paragraph (2)(b) are satisfied, and Supplier’s attempt to revoke his offer is ineffective.[15] [page 164]

This approach has support in domestic law. As we have seen, some civil law legal systems hold offers to be irrevocable for the period needed for a response; other legal systems do not go so far but hold that reasonable reliance on the offer bars revocation or (in some cases) makes the offeror responsible in tort for damages.[16] In the United States the prevailing view is consistent with the Convention in barring revocation in cases like Example 16B.[17]

Example 16B provides only one illustration of situations where revocation of an offer may be ineffective because the offeree has reasonably relied on the offer. However, the legal effect of Article 16(2) is subject to an important limitation imposed by the Convention’s rules on the time for acceptance. Regardless of the offeree’s reliance, under Article 18(1), infra at §157, the making of a contract requires a "statement...or other conduct...indicating assent." And, under Article 18(2) there is no contract if the offeree’s "indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time..." (See Art. 18, infra at §164).

This limit on the time for acceptance imposed by Article 18(2) is especially significant in situations in which Article 16(2) does not limit the period of irrevocability—as in paragraph (2)(a) when an offer states that it is irrevocable "without stating a fixed time for acceptance" and in paragraph (2)(b) when "the offeree has acted in reliance on the offer".

This time limit is important to prevent the offeree from speculating at the offeror’s expense. Some acts of reliance that create irrevocability under paragraph (2)(b), like seller’s shipment of goods in response to an order (§164, infra), create little danger of abuse; the acts that led to irrevocability clearly commit the actor to performance. Other acts may be ambiguous, such as the purchase or assembly of goods or supplies that the seller might (or might not) need to fill the buyer’s order. In these cases, later events that make the contract more (or less) attractive may tempt the seller to claim that these steps were (or were not) taken in reliance on the buyer’s order.

The mandate of Article 7(1) to interpret the Convention "to promote the observance of good faith in international trade" indicates the usefulness of two safeguards: (1) caution in basing irrevocability on ambiguous [page 165] conduct and (2) enforcement of the time limits for acceptance established by Article 18(2) §164, infra. There are other similar situations calling for construction to prevent abuse and promote good faith; see, e.g., Art. 7 at §95 supra and Art. 46 at §285 infra..[18]

§145 C. Responsibility in Tort for Reliance on Offer

In some legal systems, if an offeror induces the offeree to incur expense in reliance on an offer and then withdraws the offer, the offeror may be liable in tort even though the withdrawal prevents the conclusion of a contract and thereby excludes the full battery of remedies for breach of contract.[19] Will such rules of domestic law apply, alongside the Convention, when the offeree suffers loss by reliance on an offer? One cannot envisage all of the circumstances in which this question may arise; hence, there will be no attempt to give a general answer but the question does deserve attention because of its relationship to basic issues concerning the scope of the Convention.

In the Commentary to Article 4 we examined some of the implications of the statement that the Convention "governs only the formation of the contract" of sale and the rights and obligations of the seller and the buyer arising from such a contract." This question arose: Do domestic rules of "product liability," applicable when defective goods are supplied under a sales contract, co-exist with the Convention’s rules that regulate breach of contract? In that context it was suggested that when the very facts that invoke rules of "product liability" invoke rules of the Convention, the domestic rules are supplanted by the Convention. In short, it would be wrong to bypass the uniform international rules by pinning a non-contract label to the very facts that are regulated by the Convention. (See Art. 5, supra at §71.) Are there situations in which this line of thought would bar recourse to domestic law that awards damages for wrongful revocation of an offer?[page 166]

§147 (a) Operative Facts That Reach Beyond Contract

Domestic law would not be excluded whenever the offeror harms the offeree by wrongful conduct other than the making and revocation of the offer. For example, domestic remedies for fraudulent inducement to make a contract are not affected by the Convention. (See Art. 4, supra at §65 and Art. 7, supra at §97.)

§ 149 (a) Applicability of the Convention

Has Seller a claim under the Convention? In Example 16C Buyer purported to revoke an offer that, under Article 16(2), "cannot be revoked". However, the only remedy explicitly stated in Part II of the Convention is to hold the offer open so that the offeree can accept and thereby complete a contract (Arts. 18 and 23). Examination of the remedies specified in Part III of the Convention indicates that they are applicable to breach of contract.[20] In Example 16C the offeror’s (Buyer’s) wrongful revocation made it impractical to conclude a contract since a decision as to acceptance would require further expenditures and it would be hazardous and uneconomical to invest added funds that could be recouped only by a lawsuit.[page 167]

§ 150 (b) Gap-filling

The above discussion suggests that a situation can arise where the Convention bars revocation but fails to provide an effective remedy. This invites our attention to Article 7(2), which provides that "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..." Does this authorize tribunals to develop a remedy under the Convention for the offeror’s wrongful revocation?

The Convention—and only the Convention—controls the question whether the revocation of the offer is rightful. The Convention provides one remedy for wrongful revocation—the offeree can accept the offer in spite of the revocation. But when special circumstances (as in Example 16C) make this remedy ineffective it would be reasonable for a tribunal to close the gap that is revealed by the above example. The need for a remedy addressed directly to the damages caused by a wrongful revocation is supported by domestic law and by recent studies directed to the reform of domestic law.[21] Responding to this need by filling a gap in the Convention could promote the declared goal of uniformity since solutions applying the Convention would be taken into account by other tribunals and a common jurisprudence would develop. (See the Commentary to Art. 7, supra at §96.) [22]

§ 151 (c) Remedy Supplied by Domestic Law

Let us now assume that, contrary to the above suggestion, a tribunal declines to develop a remedy under Article 7(2) of the Convention. In this event, the tribunal should at least work from the premise that, by command of the Convention, the revocation of the offer was wrongful and draw on applicable domestic law for the remedy that is appropriate for this type of wrong.[page 168]

§152 The role of this brief article (quoted below) can be illustrated as follows:

§153 A. Explicit Rejection

In the above example, Buyer’s rejection of May 7 "terminated" the offer even though it would otherwise have been binding until June 1; there was no contract. In such cases, Article 17 avoids doubt that might arise from the rule of Article 16 that the offer was "irrevocable."[2] In addition, the rule that a rejection terminates an offer is supported by practical considerations. When an offer is rejected the offeror has no reason to expect that the offeree will change its mind; Article 17 enables the offeror to make plans promptly and make maximum use of its resources.[page 169]

The approach of Article 17 is widely supported in civil law systems, and probably in most common-law jurisdictions.[3] Decisions in the United States have held that one who has purchased an option for a specified term does not destroy the "option" by a rejection. However, most of these cases involve situations, like the rental of premises with an option to purchase, where substantial value has been given for the option and forfeiture or substantial loss would result from termination of the option. There is ground for skepticism that courts would extend this approach to an offer to sell or buy goods which becomes irrevocable merely on the basis of a statement that the offer is "firm." (See UCC 2–205 quoted under Art. 16, supra at §141.) [4] In contrast to these doubts, Article 17 is clear.

§155 B. "Acceptance" that Modifies an Offer Followed by Unqualified Acceptance

§ 156 C. Rejection Overtaken by Acceptance

Article 17 states that an offer is terminated when a rejection "reaches" the offeror. Similarly, under Article 18(2), infra at §161, an acceptance becomes effective when the indication of assent "reaches" the offeror. In Example 17C the acceptance reached the offeror before the rejection, and a contract was concluded.[5] [page 171]

Article 18. Acceptance: Time and Manner for Assent

§157 The first four articles of Part II deal with the offer; we turn now to the acceptance. This initial article sets forth the criteria and also the time and manner for an acceptance.

§ 158 A. Criteria for Acceptance

Under paragraph (1), an acceptance is effected by a statement or other conduct of the offeree "indicating assent." The words "indicating" and "assent" epitomize the two major problems of contract formation: (1) communication and (2) agreement. The present article concentrates on problems of communication; Article 19, infra at §165, addresses questions concerning assent.[page 172]

Paragraph (2) of Article 18 governs the time when an acceptance becomes "effective"—a concept that paragraph (2) uses in stating rules on whether an acceptance is too late to form a contract. The time when an acceptance becomes "effective" is also employed to decide whether an offeree may withdraw an "acceptance" after transmission (Article 22, infra at §177) and to specify the time when a contract is concluded (Article 23, infra at §178).

§159 B. Indication of Assent; Communication

In connection with assent the Convention uses a delicate term—"indicating." A stronger word such as "stating" would not have been appropriate since assent may be shown not only by a "statement" but also by "other conduct." The mode of expression is unrestricted but communication of assent in some form is essential. This is suggested by the statement in paragraph (1) that "silence or inactivity" does not in itself amount to acceptance and, more clearly, by the rule in paragraph (2) that the indication of assent must "reach" the offeror. (At §161, infra, we shall consider whether paragraph (3) deviates from this principle by providing that, in some circumstances, the offeree "may indicate assent by performing an act.")

Principles of fair dealing do not permit an offeror to impose on the offeree the duty to reply. Such is the predominant rule of domestic law.[2] The Convention’s approach, embodied in Article 18(1), may be illustrated as follows:

Example 18A. On June 1 Seller sent Buyer an offer to sell a specified type and quantity of goods at a stated price, and added: "This is such an attractive offer that I shall assume that you accept unless I hear from you by June 15." Buyer did not reply. Seller shipped the goods on June 16.[page 173]

By virtue of Article 18(1), no contract was formed and Buyer may reject the goods. This provision states that silence or inactivity does not "in itself" amount to acceptance, and thus indicates that in special circumstances silence may constitute acceptance. This possibility may be explored in the following setting:

Example 18B. On June 1 Buyer delivered the following to Seller: "Please rush price quotation for the following goods [specifying quantity and quality]. If you do not hear from me within three days after I receive your quotation, consider your offer as accepted." Seller delivered the quotation to Buyer on June 3; Buyer did not respond until June 10, when he objected to the prices that Seller had quoted.

In this case, Buyer’s silence was an acceptance of Seller’s offer. Unlike Example 18A, where the offeror tried to force the offeree to respond, the duty to respond was here assumed by the offeree—the one who failed to respond. The provision regarding silence in Article 18(1) is no barrier: Article 6 permits the parties to "derogate from or vary the effect" of any of the provisions of the Convention.[3] Buyer proposed that if Seller sent a quotation Buyer would be bound if he failed to reply within three days, and Seller sent the quotation with this understanding. (If Seller had shipped the goods before Buyer objected to Seller’s price quotation, the problem could have been solved under paragraph (3), which provides for acceptance by performing an act. See infra at §163.)

Under Article 9 the parties are also contractually bound "by any usage to which they have agreed and by any practices which they have established between themselves." (Art. 9, supra at §114.) In Example 18A, an applicable usage or practice that no response was required could provide a basis for the making of a contract without an explicit response to the offer. Intriguing questions are presented by domestic rules on the effect of silence after receiving a letter "confirming" the terms of an "agreement" that had not been finalized. These domestic rules vary and present distinct problems of relationship to the Convention. To the extent that these rules create rebuttable presumptions regarding the actual practices of the parties or usages of the trade, questions of incompatibility with Article 18(1) are avoided by Article 9 which gives contractual effect to such practices and usages. However, more serious problems are presented by [page 174] rules that reach beyond Article 9 since they may invade and conflict with the Convention’s rules on formation of the contract. Assume, for example, that in a transaction between parties in States A and B, only State B has a rule of law giving effect to silence after receipt of a letter of confirmation. In this setting application of the domestic rules of State B raises serious questions of conflict with Article 18 and the Convention’s basic goal (Art. 7) to achieve uniformity in application.[4]

Decisions on silence and duty to reply:  (1) USA, U.S.D.Ct. S.D.N.Y., Filanto v. Chilewich, 789 F. Supp. 1229, 984 F.2d 58 (1993): B’s offer, including a master agreement for arbitration in Russia, was not promptly answered by S. Course of dealing (Art. 8(3)) gave S a duty to respond promptly; S was bound by the above agreement. CLOUT 23, UNILEX D.1992-9. See Brand & Flechtner, 12 JLC 239 (1993). (2) Cf. GER. OLG Köln, 22 U 202/93, 22 February 1994: S offered to terminate a contract with B; B did not reply. Under Art. 18(1) silence alone is not effective, but here conduct of the parties was binding. CLOUT 120, UNILEX D. 1994-6.  (3) SWITZ. HG K Zürich, HG 940513, 10 July 1996. After agreement on the price for printed chips, S (Ger.) notified B (Switz.) of an increase in price because of higher production costs; B did not reply. S sued B to recover the price, including the price increase notified by S. The court rejected S’s claim for the increase in price; under CISG 18(1) & (3) B’s silence (absent other conduct) did not give consent. CLOUT 193. (For the court’s decision on interest see Art. 78.) See: Schlechtriem, Com. (1998) 129-130.

Domestic rules on Letters of Confirmation: BELG. Rechtbank v. Koop., Hasselt, A.R. 2532/93, 24 January 1995. Wilvorst...v. Erarts. One issue: Did CISG apply? The seller (S) was located in Germany, a party to CISG; the buyer (B) was located in Belgium, not then a party to CISG. The conflict (PIL) rules of the Belgian forum pointed to Germany; pursuant to CISG Art. 1(1)(b) the Convention would apply. However, the German seller (S) argued that CISG was excluded by a clause in S’s standard terms, which S had sent B after the conclusion of the contract, and that B had not objected to this provision. The Belgian court applied German domestic law on letters of confirmation, and held that this standard term was binding to exclude the Convention. UNILEX D. 1995-1.0. (Query: When, as in the above case, the law of a Contracting State is applicable, should a forum apply that State’s domestic law or the law of the Convention? Under the latter view, the rules applicable to the seller’s standard term would, e.g., be CISG Article 9(1) on usages and practices [page 175] of the parties and Article 9(2) on international usages. On letters of confirmation, see Bonell/Ligouri, ULR (1997-3) 587-588, n.79-84, and fn. 4, supra.); Schlechtriem, Com. (1998) 99-101, 127-128, 138-139.

§ 161 C. Time Limits for Acceptance

Paragraph (2) states that an "oral" offer (when the parties speak face-to-face or over the telephone) "must be accepted immediately unless the circumstances indicate otherwise." (The most normal and decisive "circumstances" that indicates "otherwise" would be the offeror’s consent to a later reply.[5]) In other cases, if the offeror has not fixed a time, the reply must be received within "a reasonable time" in the light of all the circumstances.[6] As has been suggested at §144, a delay that permits the offeree to speculate at the offeror’s expense may not be "reasonable," particularly in the light of Art. 7(2) ("good faith" at §95).

We have met the "dispatch" theory in connection with attempts by the offeror to revoke his offer. (Art. 16 supra at §140.) In that setting the rule that an acceptance is effective when it is dispatched has been useful to limit the offeror’s power to revoke an offer—a power that has been given wide latitude (even when the offeror promised not to revoke) by the common-law doctrine of "consideration." Article 16(2), as we have seen, gives effect to the offeror’s promise not to revoke. Once this specific problem was solved, it was possible to consider whether the "dispatch" or "receipt" approach is more appropriate for the problem presented by [page 176] the delay or loss of a communication sent by the offeree. This problem can be illustrated as follows:

Example 18C. On June 1 Seller mailed to Buyer the following letter: "I offer you, for your prompt acceptance, the following goods: (details as to quantity, price, etc.)." The mails between Seller and Buyer normally require a week for delivery and Seller’s offer reached Buyer in due course on June 8. On June 9 Buyer mailed a letter to Seller accepting the offer. The letter was properly addressed and stamped but it was lost in the mails; Seller learned of the letter a month later when Buyer complained that the goods had not arrived.

Article 18(2) provides that an acceptance "is not effective if the indication of assent does not "reach" the offeror within the time he has fixed." (In Example 18C the offeror asked for "prompt acceptance.") Article 18(2) puts the risk of transmission on the offeree—the one who sent the message; in Example 18C, the acceptance was not "effective" within the time limit fixed by the offer. (The result would be the same if the offeree’s reply, after a month’s delay in the mails, had reached the offeror. However, under Art. 21(2), the offeror must notify the offeree that the offer has lapsed when the late acceptance shows that the period of transmission has been abnormal. See the Commentary to Art. 21, infra at §176.)

Should the hazards of communicating an acceptance fall on the sender (the offeree) or on the addressee (the offeror)? The balance of interests is about even but the following considerations may tip the scale. When the transaction reaches the point of acceptance, delays or mishaps in communication become crucial, for acceptance creates a duty of performance, and failure to perform leads to disappointment and legal liability. The "receipt" principle calls for special care by the sender, and the sender has a greater opportunity to know whether the medium he uses is then subject to hazards or delays. At any rate, the "receipt" approach is widely followed in the civil law world, and the reasons that contributed to the common-law "dispatch" or "post-box" approach have been met by the Convention’s rules (Art. 16) restricting revocation by the offeror.

§163 D. Assent by Performing an Act

Under the Convention it seems clear that a contract was formed and the Buyer is liable to Seller for breach of contract. Buyer’s instruction "rush shipment" would invoke Article 18(3): "by virtue of the offer...the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods."[7]

In addition, as we shall see infra at §164, the same result follows from the rules on revocability in Article 16(2)(b). In view of the request for prompt shipment, "it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer" by shipping the goods. Thus Article 16(2)(b) and 18(3) respond to the same interest; the protection of one who changes position in reliance on a request contained in an offer.

This conclusion is consistent with the theme that runs throughout Article 18—that an acceptance calls for communication; Paragraphs (1), (2) and (3) all state that the offeree must "indicate assent."[8] The indication of assent can be communicated via the act itself—by the prompt arrival of the goods or by a notice that the act has been performed. The statement in paragraph (3) that the offeree "may indicate assent by performing an act...without notice to the offeror means that if an act (arrival of goods), or a communication that the act has been performed, gives the offeror the information he needs within the time he needs it, the offeree has made a contract without a separate communication that he promises to ship and thereby "assents" to the offer of a contract. Article 18(3) thus preserves the substance of the Convention’s theme that acceptance calls for communication. What the Convention does is to relax the form of the communication sufficiently to permit the offeree safely to take prompt action in response to an offeror’s request.[9]

Does interpreting Article 18 to require timely communication create danger for an offeree (either seller or buyer) who takes action invited by an offer before he communicates acceptance? The danger in this setting would come from the offeror’s revocation of the offer. As was noted at §163, supra, this problem is met by Article 16(2): "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". For discussion of this provision see §144, supra.

Let us examine the combined effect of Articles 16(2)(b) and 18(2) & (3) if the Buyer-offeror in Examples 18D and 18E attempted to revoke [page 180] the offer. In Example 18D, on June 1 Buyer said "Please rush shipment" and Seller shipped the goods on June 2. Article 16(2)(b) would bar Buyer’s attempt to revoke his offer on June 3, even though Seller had not yet telexed notice of the shipment. On the other hand, in Examples 18D and 18E suppose that Seller promptly shipped the goods but Buyer received no notice of acceptance or shipment, from either Seller or the carrier, until after the expiry of a time for acceptance prescribed by Article 18(2). In this setting the combined effect of Articles 16 and 18 leads to the conclusion that Buyer is not bound by contract and may reject the goods. (Suppose Buyer attempts to revoke his offer before the Article 18(2) period for acceptance has expired. In this setting Seller, if he has not already done so, can then give notice of the shipment and of his acceptance of Buyer’s order.)

Revocation of an offer after the goods have been dispatched to a distant point can place the seller in an awkward position with respect to the disposition of the goods. However, a seller can (and normally will) avoid this difficulty by giving the buyer prompt notice that the goods will be, or have been, shipped.[10] [page 181]

Article 19. Acceptance With Modifications

§165 A. The Commercial Setting

These additional terms on the back of forms prepared by sellers include provisions that limit responsibility if supply or production difficulties are encountered, and limit liability for defects in the goods—particularly liability for consequential damages. The forms prepared by buyers tend, of course, to emphasize different points. In routine transactions, these forms are exchanged and the goods are supplied without attention to the divergent provisions on the back of the forms. A businessman who responded to a survey about the use of such forms added the wry comment that business would come to a halt if sellers and buyers should "read the back-sides of the other’s forms."[1]

It is vital to focus on the precise and full situation from which each problem arises. Needless to say, no problem arises when O sends an offer to R whose reply rejects the offer. Difficulty arises only when R’s reply is subject to ambiguity: The reply "purports to be an acceptance" but adds one or more terms that add to or differ from the offer. To complete the picture we need to know what, if anything, happens next. If O, without undue delay, objects to the modifications in R’s reply the answer [page 182] should be clear: There is no contract and will be none unless the parties agree on the disputed terms.

As we have seen, difficulty results from the routine exchange of Order and Acknowledgment forms without attention or objection to discrepancies between the terms printed on their forms.

In this setting the transaction usually moves ahead without controversy. Orders for standard goods are likely to be filled promptly before either party has reason to regret the transaction. When the transaction calls for delay in delivery, as in an order for the production of goods to the buyer’s specifications, changes in costs or price levels occasionally may lead one of the parties to claim that it is not bound by contract.

Most problems, however, develop after delivery of the goods when the buyer claims that defects in goods lead to dissatisfaction or claims by subpurchasers, or defects in production materials or machinery cause shut-down costs or other consequential damages. In this setting the problem is not "Was there a contract?" but "What were its terms?" A common source of difficulty is a provision in the seller’s form limiting its responsibility to replacement or repair of defects; controversy has also developed from a clause in one of the forms that disputes shall be resolved by arbitration.

It is fortunate that problems arising out of the "battle of the forms" do not arise more frequently for legal science has not yet found a satisfactory way to decide what the parties have "agreed" when they have consummated a transaction on the basis of the routine exchange of inconsistent forms.

§ 166 B. The Convention

Paragraph (1) of Article 19 states the traditional and widely accepted rule that a reply which purports to accept an offer but which contains modifications "is a rejection of the offer and constitutes a counter-offer." Paragraphs (2) and (3) state exceptions from the traditional rule. We shall need to consider the article as a whole.[3]

The approach of Article 19 is probably inconsistent with traditional doctrine in many legal systems. However, there is evidence that tribunals have found ways to defeat attempts to escape from contracts because of immaterial deviations between the offer and "acceptance"—by finding that the alleged deviation was not really inconsistent with the offer in the light of commercial practice or good faith, or was a request for modification of an agreement, or had been waived by the proposer or accepted in silence by the other party.[4]

Moreover, legislative measures in a few countries have responded to this problem. Particularly significant is legislation adopted in the Scandinavian countries, since this was the basis of a provision that was added during the course of the 1964 Hague Conference and (after redrafting) became Article 19 of the 1980 Convention.

Answer Deviates from Offer; Material?   (1) GER. LG Baden-Baden, 4 O 113, 14 August 1991. Modification in "acceptance" by offeree (S): B must give notice of defects within 30 days; S’s modification was not material. UNILEX D. 1991–7.  (2) FR. CA Paris, Fauba v. Fujitsu, 22 April 1992, sustained, C. de Cass. (Sup. Ct.), 4 January 1995; Modification in acceptance, stating terms for revision of price in response to market trends, was not a material alteration. UNILEX D. 1995–1.3.  (3) AUSTRIA, ObB ("Sup. Ct."), 2 Ob 58/97m, 20 March 1997. B (Russ. Fed.) ordered from S (Austria) 10,000 tons of chemicals (MAP), giving chemical specifications. S’s reply "accepted" the offer but set forth different specifications. The issue: Did S’s reply materially alter the offer? (CISG Art. 19(2) & (3)) The Court directed the lower court to ascertain whether S’s reply altered B’s offer in a way that favored B; if so, a contract was concluded. CLOUT 189; UNILEX D. 1997–6. See: Schlechtriem, Com. (1998) 140–141.[page 185]

Battle of the Forms; Comments: Gabriel, H.D., 49 Bus. Lawyer 1053–1064 (1994); Moccia C., 34 Ford. Int.L. J. 649–677 (1989–90); Kenji Nakata, G., Transn. Lawyer 141–163 (1994); Vergne, F., 33 Am. J. Comp. L. 223–285 (1985); Bonell/Ligouri, ULR (1996–1) 162–163, (1997–3) 584–586.

§ 169 (a) What Modifications are "Material"?

The Convention provides a definition of "material". Under paragraph (3) the modifications that are considered to be "material" cover most of the aspects of the contract. As a result, most cases will probably fall under the traditional rule, stated in paragraph (1), that a reply with modifications "is a rejection of the offer and constitutes a counter-offer."[5] [page 186]

In some settings, an obligation to reply to a purported "acceptance" with even "material" alterations might be based on usage or on the practices the parties have established between themselves. (See Art. 9, supra at §112.) But the issue needs to be sharpened: The question is whether applicable usages and practices, in point of fact rather than legal theory, include the scrutiny of the clauses on the back of an acceptance form in a transaction like the one in question. Such a usage or practice would be more readily established where the transaction is large and does not call for rapid and routine handling. And even for a modest and routine order one might find that objection would be expected if the acceptance form was transmitted by a letter that stated: "We call your attention to the provision, on the back of the enclosed from, that provides for arbitration." If the recipient of such a letter proceeded with the transaction a tribunal might well conclude that he had agreed to the arbitration clause—but not to the other provisions of the form. See §100 and §160, Example 18B, supra, and Articles 39(1) and 48(2) on the duty to communicate needed information to the other party.

A term may be rendered immaterial by the fact that it states an obligation that would be an implied term of the contract because of practices established by the parties or by trade usage (Art. 9, §§112–122, supra).[6] Suppose that the parties’ practices or trade usage imply an obligation to arbitrate disputes. Article 19(3) states that terms relating to "settlement of disputes" are considered "material". However, an arbitration clause that reflects the parties’ practices or an applicable trade usage should not make a material modifications in an offer that does not deal with dispute settlement. Thus, such a reply could close a contact if the offeror fails to object to this added term.[7] [page 187]

C. Contract Formation Based on Acts of Performance

The Introduction to Part II of the Convention (§132.1, supra) discussed the special and restricted scope of the Convention’s provisions on whether a contract is formed when all that has happened is a communication by one party ("O") and a reply by the second party ("R"). As we have seen, these rules are necessary and useful in dealing with situations limited to an exchange of communications. In this setting we have met these problems: Is O’s communication "sufficiently definite" and does it sufficiently indicate O’s "intention to be bound" so that a contract is made if R replies "I accept"? (Art. 14, supra at §§134–137.) Does O have the right to withdraw or revoke an offer communicated to R? (Arts. 15 and 16, supra at §§138–143.) Who bears the risk of the delay or loss in the transmission of R’s reply to O? (Art. 18, supra at §162.)

Under Article 19 we meet this problem: On receipt of an offer from O, a reply from R, although purporting to be an acceptance, deviates from the offer. In this setting the rules of Article 19 are strict: R’s reply to O’s offer will not close a contract if it contains a "material" deviation from the offer; an "immaterial" deviation will be fatal if O objects without undue delay. This strict approach is appropriate. Within the period between R’s reply and the time allowed for O’s objection substantial reliance interests rarely develop.[8] If a dispute develops at this threshold stage of a transaction the terms of an agreement can be settled more effectively by the parties than by the law. Thus, it would be fair to say that Article 19 follows a "traditional" approach. However, the important question is whether this approach is confined, as its terms suggest, to the effect of an "offer" and a "reply to an offer" or whether it extends to transactions where agreement is shown by the parties’ conduct.

Serious problems do develop if the "offer"—"reply" provisions of Article 19 are extended more widely. Fortunately, the Convention does not deny commercial reality by suggesting that contracts can develop only from the exchange of communications. Under Article 18(3) an offeree "may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the price..." By Article 18(3), and by several other provisions noted below, the Convention gives legal [page 188] effect to the fact that in sales transactions (as in other human affairs) actions can speak more loudly than words.[9]

Contract Based on Conduct. FR. CA Grenoble, Veyron v. Ambrosio, RG 93/1613, 26 April 1995. B’s acceptance of goods bound B to S’s proposed price. CLOUT 151, UNILEX D. 1995–15.  To similar effect: GER. OLG Frankfurt a M., 5 U 209/94, 23 May 1995. UNILEX D. 1995–15.3.

The introduction to Article 19 (supra at §165) stressed the importance of facing the full setting of the transaction. As a step towards analyzing more complex problems we may consider the following example.

Example 19C. On June 1 Buyer delivered to Seller a Purchase Order that offered to purchase specified production machinery. The Order, in addition to identifying the machinery, stated the price at $20,000, to be paid one month after receipt of the machinery, and called for shipment by August 1. The reverse side of the Order set forth the following terms: Clause #1: Seller will be responsible for damages resulting from defects in the machinery; Clause #2: Any dispute will be settled by arbitration.

On June 15 Seller delivered to Buyer an Order Acknowledgment stating that Seller would ship the machine ordered by Buyer by August 1 and that the price was $20,000 to be paid one month after receipt, as has been set forth in Buyer’s Order. The reverse side of Seller’s form included the following terms: Clause #1: Seller will replace or repair any defective part of the machinery but will not be responsible for shut down costs or other consequential damages; Clause #2: An arbitration clause like the one in Buyer’s Order.

Neither party mentioned the terms on the reverse of the other’s forms. Seller shipped the goods on July 15 and they were received and put into use on August 1. However, Buyer failed to pay for the goods.[page 189]

In response to Seller’s demand for payment Buyer claimed: Seller’s Acknowledgment included a provision (Clause #1, above) on the "extent of one party’s liability to the other"; under Article 19(3) this was a "material alternation" of Clause #1 in Buyer’s Order. Consequently, under Article 19(1), Seller’s purported acceptance was a rejection of the offer and a "counter-offer". Since Buyer did not accept Seller’s counter-offer there was no contract on which Seller could base an action for the price.

How would a tribunal react to Buyer’s objections? In practice one could not avoid seeing the transaction in its full context: The exchange of Purchase and Acknowledgment forms followed by shipment and acceptance of the goods show that Seller and Buyer made a contract. The Order and Acknowledgment forms showed agreement on these basic terms: the description of the goods, the price, the time for shipment, and payment and the procedures for resolving disputes. As we have seen, this examination of the transaction as a whole is required by the Convention in Articles 18(1) and (3), 16(2), 8(1), 8(2), 9(1) and 29(2), quoted above at note 10.

One approach seeks a way to choose between the terms of the two conflicting communications. One application of this approach gives effect to the last form in the sequence on the ground that further performance indicates agreement to its terms.[10] (This is often called the "Last Shot" approach, invoking the metaphor that the parties have been engaged in a "Battle of the Forms" and the aphorism that battles are won by the side that "fires the last shot".)

Let us examine the "last shot" theory in the setting of Example 19D, §170.2, supra. One will recall that under Article 19 Seller’s reply purported to accept Buyer’s offer but contained a material modification and therefore was "a rejection of the offer" and constituted a "counter-offer". Seller then shipped the goods to Buyer. Since no contract was formed, Buyer would have been free to reject the goods but, instead, accepted them. Acceptance of the goods was an acceptance of Seller’s "counter-offer"; Buyer is bound by the provision in Seller’s Sales Order that limited liability to repair or replacement of the defective goods.

Again, the precise facts become important. Suppose the Seller had sent its Order Acknowledgment with a covering letter that drew attention to Clause #1 on the back of the form and asked Buyer to reply before the agreed time for shipment.[11] In this setting Buyer’s silence could be construed as assent. However, when there is merely an exchange of forms with a conflict between clauses on the reverse side, it is difficult to conclude that the Buyer gave (or was bound to give) closer attention to the Seller’s form than the Seller apparently gave to Buyer’s form.

It is especially troubling to place this burden on one who received a reply that purported to be an acceptance and thereby created an ambiguity between the purported acceptance on the front of the Acknowledgment and one of the form clauses on the back. When both parties proceed with performance in the face of this ambiguity, if it were necessary to choose between competing forms, Article 8(2) would be relevant: statements or conduct of one party "are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances"—the generally accepted principle that doubt is to be resolved against the party who created the ambiguity. This [page 191] approach also might discourage ambiguity by denying benefit to the party who created the ambiguity by sending an ambiguous "acceptance".[12] However, even this approach for choosing between conflicting forms seems artificial. (There may be a better way. See part (5), §170.4, infra.)

We can test the reality (as well as the practicality and fairness) of the "last shot" approach by the following case: Suppose that after arrival of the goods Buyer rejected the shipment. The "last shot" theory that there was no contract until buyer accepted the goods would support Buyer’s rejection. It is difficult to conclude that such a rejection, in view of the transportation and redisposal costs typical in international sales, would be consistent with commercial expectations or with standards of good faith and fair dealing.[13]

"Last shot" theories have been rightly criticized as casuistic and unfair.[14] They do not reflect international consensus that justifies importing them into the Convention.

If these conclusions are sound we are dealing with the commonest problem in commercial law: a contract fails to solve a problem that leads to dispute. Indeed, providing solutions to gaps left in contracts is the most basic function of laws applicable to commercial sales. For the gap in the contract in Example 19D, the Convention, of course, supplies an answer—a body of rules on remedies for breach (Arts. 45–52, 61–65) and especially the general rule on measurement of damages in Article 74.[15] The rule of Article 74 (and of many domestic systems) that a party in breach is liable for foreseeable consequential damages is not popular with sellers. Under Article 6 the parties can exclude or modify this and other provisions of the Convention but this must be done by agreement; fictitious theories for finding agreement should not suffice.[page 192]

Article 20. Interpretation of Offeror’s Time-Limits for Acceptance

§171 Article 18(2) (supra at §161) provides that an acceptance is not effective "if the indication of assent does not reach the offeror within the tine he had fixed...." The offeror’s statement fixing the time for acceptance may be ambiguous if it states a period of time (e.g., 15 days) for acceptance and does not specify when the period starts to run or does not deal with the effect of holidays.

Article 20 is merely a guide to interpreting the offeror’s statements. Under Article 18(2) the offeror may "fix" the time for acceptance: A statement such as "You may accept this offer within ten days after this offer reaches you" would override the interpretive rule of Article 20(1). The offeror’s intention could be shown by less explicit language. Suppose that on June 1 Seller mails an offer to Buyer and states, "You will have five days to consider this offer." The mails between Seller and [page 193] Buyer normally take four or five days for delivery. It would be inconsistent with the expressed intention of the offer to start the five-day period on June 1. Article 20 thus plays the modest role of answering questions concerning the meaning of the offer when no answer is provided by the usual rules for interpreting the statements of a party. See Art. 8, supra at §§106–111. [page 194]

Article 21. Late Acceptances: Response by Offeror

§172 The present article, like Article 20, extends and elaborates the basic rule of Article 18(2) that an acceptance "is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time...." Under this rule the following two questions can arise. (1) The offeree’s reply indicating assent "does not reach the offeror within the time he has fixed": When a late reply reaches the offeror can he make it "effective" by notifying the offeree? (2) A reply that normally would have arrived on time is subject to delays in transmission: Must the offeror notify the offeree that the offer has lapsed?

§173 A. Notice Giving Effectiveness to Late Acceptance

Although Buyer immediately objects to the closing of the contract, and even if the Buyer had dispatched a letter on June 30 withdrawing the acceptance, both parties are bound by contract. True, the market level or other conditions affecting Buyer’s interest in the contract may have changed during the five-day period between June 29 and July 4 while Buyer’s acceptance was in the mails. Nevertheless, Buyer bears the burden of such changes. Buyer chose a medium of communication that required five days for arrival, and failed to make use of this opportunity under Article 22, infra at §177, to overtake his letter by a withdrawal communicated by phone or wire.[1]

Article 18(2) states that an acceptance "is not effective if the indication of assent does not reach the offeror" within the prescribed time limit. In that setting we noted (Art. 18 at §162) that this provision places transmission risks on the offeree. This proposition might suggest that in Example 21B the offeree bore the risk of the offeror’s action. But the risk that Article 18(2) places on the offeree is the risk of failing to close a contract. A different and grave risk would result if, after a substantial change of circumstances, an offeror could elect to take up an "acceptance" that had lapsed because of delay in transmission. The period of such a delay could be indefinitely long; the period within which an acceptance must be received under Article 18(2) would be more circumscribed. And if an offeree fails to close a contract because of a delay in transmission (Art. 18(2)), the results do not lead to an unfair advantage to either party: there is no contract regardless of whether this favors the offeror or the offeree. But if the offeror is given a free choice to approve or disapprove an "acceptance" that has been delayed in transmission while conditions radically change, the offeror will notify the offeree that the offer has lapsed if the change in conditions has made the transaction less attractive (Art. 21(2)) and will notify the offeree that he treats the reply as an acceptance if the change in conditions makes the transaction more favorable to him—an opportunity to speculate at the expense of the other party.[2] See also §§95, 144, and 285.

This opportunity will be avoided in such extreme cases by construing Article 21(1) in relation to the basic rule of Article 18(1) that a statement is an acceptance only if it indicates "assent" to the offer in the light of the objective facts available to both parties when (Art. 18(2)) the reply [page 197] "reaches the offeror." This result would also respond to the rule of Article 7(1) that "in the interpretation of this Convention, regard is to be had...to the need to promote...the observance of good faith in international trade." (See the discussion of Art. 7, supra at §94.)

§ 176 B. Obligation to Notify Offeree of Apparent Delay in Transmission of Acceptance

In common-law systems there has been no occasion to deal with this question since the "dispatch" (or "post-box") rule makes the acceptance effective when it is sent. See Art. 18, supra at §162. Many civil law codes, with "receipt" rules like Art. 18(2), have legislative provisions similar to Article 21(2) of the Convention."[3] [page 198]

Article 22. Withdrawal of Acceptance

§177 Under Article 15(2), an offer, even if it is irrevocable, may be withdrawn "if the withdrawal reaches the offeree before or at the same time as the offer." The present article applies this approach to the acceptance:

The time when acceptance becomes "effective", as specified in Article 18(2), is "the moment the indication of assent reaches the offeror".

The discussion of Article 15 (supra at §138) applies to Article 22. Indeed, these articles may constitute specific applications of a general principle that a party may withdraw or modify a communication by a second communication that overtakes the first. (See the Commentary to Article 7, supra at §96.) Schlechtriem, Com. (1998) 157–158.[page 199]

Article 23. Effect of Acceptance; Time of Conclusion of Contract

§178 Article 18(2) (supra at §161) in stating when an acceptance becomes "effective" implies that a contract is concluded at that time. This implication is made explicit by the present article.

Several articles of the Convention refer to conditions existing at the time of the conclusion of the contract. (See Arts. 42(1), 55, 68, 74, 79(1), 100(2)). Only rarely will it be important to determine the precise "moment" when the contract was concluded. One exception may be Article 68, infra, which provides that risk of loss of goods sold during transit passes to the buyer "from the time of the conclusion of the contract." It has been suggested that the time of the conclusion of the sales contract may be important in the application of domestic fiscal or regulatory laws; this, of course, is a question to be decided in the light of the language and purpose of the domestic legislation.[2] [page 200]

Article 24. When Communication "Reaches" the Addressee

§ 179 Part II of the Convention provides, in various settings, that a communication becomes effective when it "reaches" the other party. See Article 15(1) (offer), Article 15(2) (withdrawal of offer), Article 16(1) (revocation of offer), Article 17 (rejection), Article 18(2) (acceptance), Article 20(1) (period for acceptance fixed by telephone, telex or other means of instantaneous communication), Article 22 (withdrawal of acceptance).

Under Article 24, the communication "reaches" the addressee when it is delivered "to his place of business or mailing address." This, of course, requires "delivery" to an appropriate "place"—i.e., within the mail-box or mail slot, or by a transfer of possession to an authorized person in the addressee’s employ. Leaving a letter or telegram on the door-step or in some other unattended place would not constitute "delivery" to the addressee’s "place of business"; one relying on such a communication would need to show that the letter or telegram reached the addressee or an authorized employee. The usefulness of Article 24 is indicated by the widespread use of the same approach.[2] [page 201]

Article 27 (infra at §188) states a general rule, applicable to Part III of the Convention, that notices and other communications are effective when they are properly dispatched. However, for reasons discussed at §§189–190, this rule is subject to exceptions in Articles 47(2), 48(4), 63(2), 56(1) & (2), and 79(4)—provisions which make certain communications effective only when they are received. The definition in Article 24, supra, of when a communication "reaches" the addressee applies only to Part II, but there is no indication of a legislative intent to reject the approach of Article 24 in construing the above references to the "receipt" of communications. Indeed, the normal meaning of "receipt" is close to that expressed in Article 24; the widespread use of the approach of Article 24, indicated in note 2, seems to justify the use of this article by analogy.

See, for intensive treatment, Schlechtriem, Com. (1998) 161–171.[page 202]

Part III.

SALE OF GOODS
(Articles 25–88)

Introduction to Part III of the Convention

§180 Part II of the Convention (Arts. 14–24, supra) addresses this question: Is there a contract? When the answer is Yes, Part III governs the rights and obligations of the seller and buyer.

§181 A. Introduction

The breach of a sales contract by one party gives the other party a right to recover damages, but we are here concerned with more specialized remedies—the buyer’s right to reject goods and the seller’s right to refuse to deliver. In domestic law these remedies may be called "rejection," "revocation of acceptance," "avoidance," "termination" or "cancellation." In the Convention (Arts. 49 & 64) a party’s privilege not to perform the contract because of the other party’s breach is called "avoidance of the contract."

In the Convention, as in domestic legal systems, "avoidance" is not available for every breach. As we shall see in examining Articles 49(1)(a) and 64(a)(a), infra at §§304, 354, a party may avoid the contract when the other party commits a "fundamental breach"—a term that is defined in the present article.

As we shall see (§186, infra), the Convention uses the term "fundamental breach" in various settings but it plays its most important roles in Articles 49(1)(a) and 64(1)(a) which state grounds on which the buyer or seller may "avoid" the contract and thereby become free from further contractual obligations—e.g., to receive and pay for the goods or to deliver them.

The diverse approaches to this problem in domestic law will be discussed more fully (§301) in connection with Article 49, which governs the circumstances in which the buyer may refuse to accept the goods when the seller’s delivery is delayed or when the goods fail in some respect to conform to the contract. The correlative right of the seller to avoid the contract when the buyer fails to perform one or more of his contractual obligations is set forth in Article 64 and is discussed at §§353–356, infra.

"Avoidance" of the contract must be distinguished from a party’s right to suspend performance under Article 71 (§§385–394, infra); avoidance terminates the right and duty of both parties to proceed further with performance, subject to a claim for damages for breach of contract. See Articles 45(1)(b), 61(1)(b) and especially Article 81(1): "Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due". Thus, in determining the grounds for "avoidance" the issue is not whether a party whose performance is defective [page 205] in some minor respect will escape liability. Every breach, no matter how trivial, calls for compensation in damages (Art. 74, §§403–408, infra). Thus, a remedy by damages has a quality of justice lacking in avoidance since the cost to the one who pays and the benefit to the one who receives correspond to the harm caused by the breach.[2] In framing the scope of (e.g.) the buyer’s right to avoid the contract the relevant questions are these: Which party is normally in the better position to redispose of goods? Will the buyer’s retention of the goods jeopardize effective compensation for damages? Is there justification for reversing the contract’s allocation between the parties of rises or declines in market price?

In developing the Convention there was no significant support for extending avoidance to include insubstantial deviations from the contract. Stricter avoidance (or "rejection") rules in some domestic laws failed to take account of the special circumstances of international trade, such as the fact that claims that the goods are defective often are made only after expensive transport to the buyer’s place of business when avoidance for immaterial defects might needlessly lead to wasteful reshipment or redisposition of the goods in a foreign country. Moreover, the power to avoid the contract for immaterial defects in performance may tempt the seller (after a price rise) or the buyer (after a price decline) to avoid the contract and thus reverse the allocation of the effect of price changes which the contract contemplated.

Of course, these factors will not always be present and in many cases only avoidance will adequately protect the aggrieved party. In transactions where a party is concerned that Article 25 is too lax or too strict or that a tribunal might improperly apply the law, the contract can provide stricter (or looser) grounds for avoidance (Article 6).

These pragmatic considerations are mentioned because the definition of "fundamental breach" in Article 25 had to be drafted in general terms and could not specify all the circumstances that may be relevant in determining whether a breach will "substantially" deprive a party "of what [page 206] he is entitled to expect under the contract...". Some of these circumstances will be illustrated by concrete examples.

This definition approached the question of the materiality of the breach by a hypothetical question put to the party in breach at the time of the conclusion of the contract: Would the party in breach have predicted that the other party would have "entered into the contract if he had foreseen the breach and its effects." Analysis of this provision in UNCITRAL made it clear that "fundamental breach" must be redefined in terms of the materiality of the breach.[3]

In UNCITRAL and at the 1980 Conference some delegates proposed that this second element be amended to restrict consideration to those circumstances that the party in breach (F) could have foreseen when the contract was made. Both legislative bodies considered the issue and decided that this restriction should not be imposed. Extracts from this legislative history appear in a footnote.[4] [page 208]

To return to Example 25A, we may conclude that the information the seller received subsequent to the contract but before shipment gave the seller reason to foresee that the breach of contract would "substantially" deprive the buyer of what he was entitled to expect under the contract, and that the buyer’s avoidance was justified under Articles 25 and 49(1)(a). However, information that a party receives too late to affect performance seems outside the scope of Article 25, since the foreseeability principle presumably is designed to give F an opportunity to give special attention to minor details of performance the importance of which he could not otherwise have anticipated.[5]

Burden of proof. The second element in Article 25, as analyzed above, has generated discussion of yet another refinement: Who has the burden of providing whether the detriment to the aggrieved party, A, was or was not foreseen or foreseeable by the other party, F? Any doubt from the text of the statute (or from practical considerations of allocating burdens of proof) is removed by the legislative history: In UNCITRAL’s 1977 review of the Working Group "Sales" draft, attention was drawn to the following language: "A breach...is fundamental..." if it results in substantial detriment and the party in breach foresaw or had reason to foresee such a result. The view was suggested that under this language "the burden of proof would be on the innocent party and this could not be the proper solution". To meet this objection the Commission, without objection, replaced the above language by the "unless..." clause that appears in Article 25.[6] [page 209]

§184 B. "Fundamental Breach" in Specific Situations

To help preserve transactions from technical mishaps, the Convention includes important provisions permitting the seller to "cure" a non-conforming delivery by replacing or repairing defective goods. See Art. 37 (cure until date for delivery—§244) and Art. 48 (cure after the date for delivery—§292). The relationship between these provisions and "fundamental breach" can be illustrated as follows.

Example 25B. On June 1, the date for delivery specified in the contract, Seller delivered to Buyer a large and expensive machine. On June 15, when Buyer put the machine into operation, one essential part of the machine did not function with the result that the machine did not operate. Buyer notified Seller who offered immediately to replace the defective part. Although the brief period required for making this replacement did not interfere with Buyer’s plans for using the machine, Buyer did not permit Seller to replace the defective part. Claiming that a defect that prevented the machine from operating was a "fundamental breach" under Article 25, Buyer declared that the contract was avoided (Art. 49(1)(a)) and stated that the seller must remove the machine and refund the price (Art. 81).

Buyer was correct in stating that, without the replacement of the defective part, the seller’s breach was clearly "fundamental" and that avoidance would be justified. On the other hand, a rapid replacement of the defective part, even after the agreed date of delivery, would prevent any "substantial" detriment to the buyer; on this assumption, the breach would not be "fundamental" and the contract could not be avoided. As we shall see, Article 48 authorized Seller to replace the defective part under the circumstances described in Example 25B. The question whether the breach was "fundamental" for the purpose of avoidance must be answered in the light of the effect of a rightful offer to cure, for otherwise Seller’s exercise of this right would be futile. When the applicable provisions (Arts. 25, 48, 49) are construed together, Buyer’s attempt to avoid the contract should be ineffective.[7] [page 210]

Cure. FR. CA Grenoble, RG 93/4879, 26 April 1995. M. Roque v. HMR. S repaired damage to warehouse delivered to B; because of S’s cure, avoidance of contract was denied. UNILEX D. 1995-14, CLOUT 152.

These examples suggest that the question of how "substantially" a party has been deprived of "what he is entitled to expect under the contract" (Art. 25) cannot be answered simply by looking at the goods. In Example 25C, buyer has been deprived of very little; the tender of the goods accompanied by the price adjustment would probably not constitute a "fundamental breach." In Example 25D, the tender of the same goods, without the price adjustment, should constitute a "fundamental breach." Recovery of money paid for the defective goods, at the very least, would involve the delays, expenses and uncertainties of pressing a claim. If Seller is far from Buyer and is of questionable financial responsibility, the test of "fundamental breach" in Article 25 is even more clearly established. The relevance of this approach is recognized by Article 48(1), infra at §293, by providing that the seller may not remedy (e.g., repair) a failure of performance if there is "uncertainty of reimbursement by the seller of expenses advanced by the buyer."[8] [page 211]

There are other significant applications of Article 25 but these can be best be explored in connection with the articles that use "fundamental breach" as a basis for avoidance of the contract—Article 49 (avoidance by buyer) and Article 64) avoidance by the seller). (Avoidance under the Convention is compared with the approach of various systems of domestic law in the Commentary to Art. 49, infra at §301.) "Fundamental breach" is also used to deal with avoidance in special situations: in Art. 51(2) on avoidance of an entire contract based on defective performance of a part of the contract, in Art. 72 on anticipatory breach, and in Art. 73 on deliveries by installments. This concept is also used in Article 46(2) to limit the remedy of specific performance: the buyer "may require delivery" of goods to substitute for nonconforming goods "only if the lack of conformity constitutes a fundamental breach of contract." Avoidance for fundamental breach can also affect risk of loss—e.g. the responsibility for casualty during transit. See Art. 70, §§379–383, infra. Applications of Article 25 are illustrated by the following decisions.

Strict Standards for Avoidance:  (1) GER. BGH (Sup.Ct.), VIII ZR 51/95, 3 April 1996: Avoidance a "last resort", breach must "substantially deprive party of what he was entitled to expect"; B could use defective goods or resell; avoidance denied. (S to be reimbursed by damages. See Arts. 45(1)(b) and 74, infra.) CLOUT 171, UNILEX D.1996.4.  (2) GER. OLG Frankfurt a. M. 5 U 15/93, 18 January 1994; goods must be unfit for use, B could readily resell, though at a discount. Avoidance denied. CLOUT 79, UNILEX D.4.  (3) SWITZ, HG Zürich, 920670, 26 April 1995; B could repair leaky tank. UNILEX D. 1995-15.1.

Avoidance Granted:  (1) AUSTRALIA, Fed. Ct. S.Aus. 57 FCR 216, 28 April 1995. Financial failure—B could not pay. For right to recover goods see CISG 81(2). Here, S’s claim to recover goods was supported by Romalpa clause in contract. UNILEX D.1995-15.1.1.  (2) IT. Pr. di Parma, 77/89, 24 November 1989; S’s delay in shipping supported avoidance. CLOUT 90, UNILEX D. 1989–7.

Violation of resale restrictions:  (1) GER. OLG Frankfurt a. M., 5 U 164/90, 17 September 1991 (wrongful use of S’s trade-mark), CLOUT 2, UNILEX D. 1991–9.  (2) FR. CA Grenoble, RG 3275, 22 February 1995 (sale in area prohibited by contract), CLOUT 154, UNILEX D. 1995–7.  (3) But cf. GER. OLG München, 7 U 4419/93, 2 March 1994. UNILEX D. 1994–7.

Comments: Bonnell/Ligouri, ULR (1996–2) 364–370 (includes cases of avoidance under CISG 49(1)(a) & 64(1)(a), infra); Schlechtriem, Com. (1998) 173–185.[page 212]

Article 26. Notice of Avoidance

§ 187 The discussion of Article 25 referred to the right of either party to avoid the contract in the circumstances defined in Articles 49, 51, 64, 72, and 73. Article 26, applicable to all of the provisions on avoidance, marks one of the significant advances of the 1980 Convention over the 1964 Hague Convention.

§ 187.1 A. Departure from ULIS; Need for Notification

At the 1964 Hague Conference attempts were made to eliminate ipso facto avoidance but this concept was such an integral part of the structure of the draft that the necessary changes were not feasible.[2]

In the UNCITRAL proceedings, it was possible to remove the complex and elusive doctrine of ipso facto avoidance; the result was the above simple rule of Article 26.[3] Requiring that notice be given of a remedy as drastic as avoidance is strongly supported by domestic law. See (U.S.A.) UCC 2-602(1) (notice of rejection), 2-608(2) (notice of revocation of acceptance); Treitel, Remedies (Int. Enc.) §148 (requirement in [page 213] French law of a formal notice—sommation—even when the contract states that it shall terminate by operation of law).

A careful student of the 1964 Sales Convention has noted that ipso facto avoidance was useful to prevent a party from claiming specific performance after a price rise and thereby speculate at the other party’s expense.[4] Such conduct is clearly intolerable, but ipso facto avoidance proved to be an awkward and overbroad remedy; resources in the 1980 Convention for dealing with the problem of taking advantage of market changes after a delay are explored elsewhere in this Commentary. See Art. 7, supra at §95, Art. 28, infra at §193, Art. 46, infra at §285, Art. 77, infra at §416.

§187.2 B. The Notice: Content, Transmission

What must a notice say to constitute an effective "declaration of avoidance" under Article 26? As we shall see, under Article 39(1), §§254–259, a buyer who wishes "to rely on a lack of conformity of the goods" must "give notice to the seller specifying the lack of conformity". A notice specifying a "lack of conformity" in accordance with Article 39 would not, without more, constitute a "declaration of avoidance" under Article 26. A buyer who specifies nonconformity (Art. 39) may, and often does, choose to retain the goods and claim a reduction in the price or other damages to compensate for the deficiency. Avoidance of the contract is a different and much more drastic remedy. In the setting of the tender or delivery of defective goods "avoidance of the contract" by the buyer means that the buyer will not accept or keep the goods, and that the seller has the responsibility to take over their disposition.[5] A buyer’s declaration of avoidance, to be effective under Article 26, must inform the seller that the buyer will not accept or keep the goods.[6] Conversely, a seller’s declaration of avoidance must inform the buyer that the seller will not deliver the goods or, if the goods have been delivered, that [page 214] the seller demands their return. See Article 81(2) and 84, §§439–444, 450–452, infra.

The notice required by Article 26 is effective if it is properly "dispatched" pursuant to Article 27. As we shall see, the principle underlying this rule and its exceptions is that transmission risks should fall on the party in breach rather than on an aggrieved party who, in this setting, is exercising a right to avoid the contract.[7]

Notice Adequate:  (1) ARB. ICC (Paris), 8128/1995. S did not deliver an installment of goods within the time specified in contract. B, in writing, demanded that S specify when S would deliver; if S failed to do so the contract would be avoided. S did not give the assurance requested. B’s communication, above, was an effective avoidance of the contract. (Other issues in this case, e.g., interest under Art. 78, are noted infra.) UNILEX D. 1995–34.  (2) See also GER. LG Berlin 52 S 247/94, 15 September 1994. UNILEX 1994–22.1.

Notice Not Adequate:  (1) GER. AG Zweibrücken, 1 C 216/92, 14 October 1992. B’s notice in the alternative was not effective. UNILEX D. 1992–23.  (2) GER. LG Frankfurt a.M., 3/11 O 3/91, 16 September 1991. CLOUT 6, UNILEX 1991-8. See: Schlechtriem, Com. (1998) 188–192.

Article 26 does not require that the notice be given in writing but to avoid dispute a prompt written confirmation of an oral declaration seems advisable.[8]

Requirement of Writing. Eight States, including China, made declarations under Article 96 rejecting provisions of CISG that allowed effective notification in form other than writing—e.g. Articles 11, 12, 96. (See lists of adherences and reservations in Appendix.) Note, on Chinese rules, Tanner, 16 JLC 166 & n.65 (1996).[page 215]

Article 27. Delay or Error in Communications

§ 188 Under Article 26, supra, avoidance of a contract is effected "by notice" and in other settings communications have important consequences. E.g., Arts. 39(1) (notice of lack of conformity) and 43 (notice of right or claim of third party). The present article addresses the problems that arise when a notice is sent but, because of a mishap in transmission, is delayed, garbled or lost.

§189 A. Reasons for the "Dispatch" Principle

In examining the Convention’s rules in Part II (Formation of the Contract) we saw that an offeree’s acceptance was not effective unless it "reached" the offeror within the specified time; this rule placed the risks of transmission on the sender. See Art. 18, supra at §161. The examination of the rules on acceptance in Article 18 indicated that it was a close question whether acceptance should be effective on "dispatch" or on "receipt." Article 27, with which we are now concerned, applies only to the communication of notices made in accordance with Part III since they present problems that are different from communications involved in contract formation (Part II). For instance, a mishap transmitting a buyer’s notice that the goods were defective (Art. 39) could, under the "receipt" approach, deprive the innocent party of "the right to rely" on the lack of conformity,[page 216] and the buyer must pay the seller the full price for defective goods. In this and in similar situations it seemed advisable to provide that the appropriate dispatch of a communication satisfied the notice requirement.

As Professor Schlechtriem has noted (1986 Commentary 61), ULIS 14 and ULF 12(2) provided that communications shall be made "by the means usual in the circumstances", while Article 27 substitutes "appropriate" for "usual"—a change that gives the sender a somewhat wider choice of media. On the effect of an unintelligable oral communication (e.g., by telephone), see id. 62. See: Schlechtriem, Com. (1998) 191–197.

This general rule making notices effective on dispatch is subject to specific exceptions in Articles 47(2), 48(4), 63(2), 65(1) & (2) and 79(4). Nearly all of these provisions involve a communication by a party who is in breach of contract; the "receipt" principle was used so that a mishap in transmission would not add to the burdens of the aggrieved party.[2]

Domestic rules on the effect of a mishap in communication are not uniform and often are unclear, but there is support for the approach of Article 27 of the Convention.[3] [page 217]

Article 28. Requiring Performance and the Rules of the Forum

§191 A. Introduction

The scope of the remedy "requiring" (specific) performance was one of the most stubborn issues encountered in the preparation of the uniform rules. Article 28—a compromise that was developed in 1964 at the Hague—relaxes general rules on coerced performance that appear later in the Convention; before examining the compromise we need to look quickly at the general rules which Article 28 modifies. (Art. 28 is quoted infra at §194.)[page 218]

§ 192 B. The Convention’s Basic Rules on Requiring Performance

In framing the Convention, Article 28 was accepted as a legacy from 1964 Hague Sales Convention (Art. VII(1), ULIS 16). In preparing the 1964 Convention, without discussing the extent and means whereby various civil law procedural systems coerced performance, deference to procedural rules of the forum was usually regarded as a concession to the special procedural approach of legal systems based on English law.[1] However, comparative law studies have shown that on this point the supposed contrast between common law and civil law and the homogeneity of "civil law" procedures are not as great as had been supposed.

It is true that systems that stem from English law have special restrictions and procedures that other systems do not share. Competition between the "common-law" courts and the separate Courts of Chancery (or [page 219] "Equity") led to a compromise whereby the "Equity" courts would not intervene unless the remedy "at law" was not adequate.[2] The "Equity" courts, drawing on their ecclesiastical background, issued their decisions in the form of "decrees" ordering a defendant to do (or to refrain from doing) specified acts; to enforce these decrees the court could commit a recalcitrant defendant to prison for "contempt of court" until he obeyed the court’s decree.

Other legal systems did not inherit these procedures for enforcement or the restrictions on "requiring" (specific) performance. However, comparative studies show that there are significant differences among civil law approaches to enforcing contractual promises. Thus, in some civil law systems "requiring" performance in some situations means that substitute performance will be purchased at the expense of the debtor—a remedy that to common-law eyes resembles an action concretely to fix the defendant’s damages.[3]

As we shall see, the divergent domestic approaches to requiring performance raise important questions concerning the application of Article 28 of the Convention.

Article 46(1), in providing that the buyer "may require performance by the seller of his obligations," immediately provides exceptions from this general rule: When goods have been delivered that do not conform with the contract, the buyer "may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract" (Art. 46(2)), and may require the seller to repair the goods "unless this is unreasonable, having regard to all the circumstances" (Art. 46(3)).[page 220] On the other hand, the rule of Article 62 that the seller may "require" the buyer to perform his obligations does not include any exceptions; it is unclear that the seller’s right (Art. 62) to "require the buyer to pay the price" calls for remedial measures that are different from the enforcement of money judgments such as the right "to claim damages" (Arts. 45(1)(b), 61(1)(b)). See the discussion of Article 62, §345 infra. The relationship between Article 28 and the specific rules on requiring performance in Articles 46(2) and (3) is discussed at §285.1, infra.

Exceptions applicable to both parties do result indirectly from rules in Articles 85, 86, and 88 that, in some circumstances, place the burden of disposing of unwanted goods on the party who is in a better position to perform this function—even when this lightens the duties of a party in breach. For example, when "the buyer is in delay in taking delivery" the seller may be required not only to take steps "to preserve" the goods (Art. 85) but also, if the goods "are subject to rapid deterioration or their preservation would involve unreasonable expense," the seller "must take reasonable measures to sell them" (Art. 88(2)). In practical effect, these provisions limit the power of the seller under Article 62 to "require the buyer to pay the price" for the significant feature of the remedy of price recovery (as contrasted with damages) is to force the buyer to take possession of the goods.

The power to compel performance may also be curtailed by Article 77 which states that "a party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss...." In examining this provision, infra at §416, we shall need to consider questions such as these: If a buyer notifies the seller that he cannot use the goods he has ordered may the seller thereafter lay out labor and materials in manufacturing goods to the buyer’s specifications or incur heavy expenses by shipping the goods to the buyer? If not, the seller’s remedy must be damages rather than an action for the full price.

Finally, if a party may choose to compel performance after a change in the market he may be in a position to speculate at the defendant’s expense. This abuse may be controlled by application of the above requirement of mitigation, construed (as Article 7(1) requires) in order to promote the "observance of good faith in international trade"[4] or by concluding that the action to "require performance" was not taken with the required promptness. See Arts. 49(2), 64(2) §§306–307, 355, infra.[page 221]

As we shall note (§199, infra), Seller’s reaction seems abnormal. Seller, the manufacturer, is regularly engaged in selling this item in large quantities and can resell the item more efficiently than Buyer. Moreover, continuing with the transaction requires substantial costs in shipping the goods to an area where they are not wanted. Unnecessary waste may also result from forcing the consummation of a transaction (as contrasted with payment of damages) when a seller encounters production difficulties that fall short of exemption under Art. 79, §§423–435, infra, cf. force majeure. In this and similar situations the substantial transportation costs common in international sales can augment the waste involved in forcing the completion of an unwanted transaction.[page 222]

§ 194 C. General Concession to the Domestic Law: Article 28

Questions that fall outside the scope of the Convention normally would be governed by the domestic rules of the jurisdiction that is selected by principles of private international law. See, e.g., Arts. 4 and 7(2), supra at §§61 and 85. However, Article 28 refers the court to "its own law in respect of similar contracts of sale not governed by this Convention." Does this language invoke the domestic law of the forum on requiring performance or does it call for the rules applicable under rules of private international law?[7]

The question may be illustrated as follows: When a domestic sale in State A is litigated in State F, assume that the forum in State F would consider [page 223] that a request for specific performance was a matter of "substance" to be decided in accordance with the proper law of the contract—the law of State A. Bearing in mind this rule of State F, suppose that State F provides the forum for an international sale between parties in States A and F, both of which have adhered to the Convention. If the plaintiff demands specific performance, does Article 28 refer to the whole law of State F, including its rules of private international law that might invoke the rules on specific performance of State A? The diplomatic conference of 1980 did not focus its attention on the question but an answer can be found in the legislative history of the comparable provision in the 1964 Hague Convention.[8]

Article 28 of the 1980 Convention was based on substantially identical provisions in the 1964 Sales Convention. The 1964 Convention was clearly understood to invoke the rules on specific performance of the forum. The 1956 Draft, on which this action at the 1964 Conference was based, provided (Art. 27) that the buyer’s right to specific performance depended on whether this was "possible and permitted by the municipal law of the Court in which the action is brought." Article 72 used similar language with respect to price recovery by the seller. The Special Commission that prepared this draft, in responding to comments by governments, emphasized that the draft referred to lex fori—the rules in force in the country "where performance is sought." The virtual identity on this point of the 1964 and 1980 Conventions indicates that the reference in Article 28 to what the court "would do...under it’s own law" refers, as indeed the language suggests, to the domestic rules of the forum.[9]

Article 28 states that a court "is not bound to enter a judgment for specific performance unless the court would do so under its own law." The phrase "is not bound" indicates that a court that would not "require" performance under its own law is free either to "require" performance or to apply other remedies provided by the Convention such as awarding damages under Article 74, §§403–408, infra. Professor Kastely suggests (n. 5, supra, 639–640) that such a court may "require performance" to effectuate [page 224] the reasonable expectations of the foreign party (Arts. 6, 8) or to promote uniformity in the application of the Convention. (Cf. §233 supra). Response to these suggestions, although not required by the Convention, would be consistent with the view that domestic law should be sensitive to the special needs of international transactions. See C. Schmitthoff, Selected Essays on International Trade Law 25–29, and passim (1988).

As we shall see more fully in connection with Art. 46, infra, Article 28 permits deviation only from rules of the Convention that "require performance of any obligation of the other party" and does not affect the Convention’s restrictions on specific performance. See §193 supra, and §§282–285, infra.

§ 197 (a) Common Law and the UCC

Buyer’s Action to Compel Delivery of Goods. The (U.K.) Sale of Goods Act (1893), widely followed in the common law world, provides that a court "if it thinks fit" may enter a judgment or decree for the specific performance of contracts "to deliver specific or ascertained goods." It is difficult to conclude that goods are "specific or ascertained" when a seller promises to manufacture or procure (or set aside) generic goods and fails to do so. The Ontario Law Reform Commission found this rule inadequate and proposed that these technical restrictions be removed, but that specific performance remain discretionary.[10]

Seller’s Action to Recover the Price. When the buyer has not received and accepted the goods, giving the seller the right to recover the full price (as contrasted with damages) provides, in substance, for the specific performance of the contract. The provisions of the (U.K.) Sale of Goods Act on recovery of the price are complicated by the "property" concept and [page 225] in other respects are technical and inadequate; the Ontario Law Reform Commission proposed substantial revision.[11]

Buyer’s Action to Compel Delivery. The UCC (unlike the SGA, supra) does not restrict specific performance to contracts that call for "specific or ascertained" goods. UCC 2-716 addresses two remedies for the recovery of goods: (1) Specific performance, which may lead to a coercive decree enforcible by punishment for contempt and (2) Replevin (in some jurisdictions called "detinue" or "claim and delivery") which authorizes a sheriff to seize the goods and deliver them to the plaintiff:

Neither remedy is automatically available for breach of contract but the right to decree specific performance in "proper circumstances" is sufficiently flexible to permit courts to grant this remedy in cases of need. Whether specific performance should be available as a matter of course recently has become a subject for debate. The most significant argument for limiting the remedy is that this permits a party who is in breach of contract to escape from overly-rigid advance planning and to reallocate resources for maximum productivity.[12]

Seller’s Action to Recover the Price. As has been mentioned, seller’s recovery of the full price for goods the buyer has not received, in effect, compels full performance of the contract. The UCC (§2-709) of course calls for the recovery of the full price when the buyer has "accepted" the goods. However, the Code’s restrained approach to this remedy is illustrated by the provision of UCC 2-709(1)(b) that the seller may recover [page 226] the price "of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing."[13]

UCC 2-716 and 2-709 will be applicable when a party to a sale governed by the Convention sues in court in the United States to compel delivery of the goods or to recover the full price for goods the buyer has not received.

§ 199 (b) Civil Law Systems

Articles 46 and 62 of the Convention provide that each party may "require performance" by the other. These broad rules reflected the delegates’ understanding of the remedies provided by some civil law systems.[14] It is not feasible to probe the extent to which these general rules accurately reflect the actual operation of those systems; it must suffice to refer to studies that suggest that the concession to the common law provided by Article 28 of the Convention may also permit civil law tribunals to continue a nuanced and realistic approach of their domestic law on the extent to which courts will "require performance" of contracts.[15]

In view of the uncertainties inherent in this delicate compromise, it is fortunate that attempts to compel performance play a minor role in the life of commerce. Legal action to coerce performance takes time even when the breach is admitted. But the defendant often will be able to present evidence and argument to justify non-performance by alleging a breach by the plaintiff or impediments that provide an excuse. (See Art. 79, infra.) During the protracted course of litigation the buyer’s commercial needs for the goods are not met; and a seller who insists on compelling acceptance of goods must hold the goods until the buyer can be [page 227] compelled to pay the full price. Usually it is more efficient for an aggrieved buyer promptly to purchase substitute goods or for an aggrieved seller to resell rejected goods; in this manner productive activity can continue while an aggrieved party pursues a claim for damages. In both the common law and civil law worlds, the parties are more interested in efficiency than in legal theory. In civil law settings (as at common law) remedies to coerce performance are seldom employed even in domestic commerce.

One might be tempted to dismiss this area as a non-problem except for the (possibly remote) possibility that in a setting of commercial ill-will a party might be tempted to demand a remedy that is wasteful to the other party as a negotiating weapon to exact a settlement out of proportion to the loss resulting from the breach. See Art. 7(1) ("good faith") §§94–95, supra.

Article 28, properly understood in the setting of domestic procedural systems, can mitigate the appearance of rigidity of the Convention’s general rules on "requiring performance". Certainly it would be wrong to assume that there are only two rules: (1) Rigid rules of the civil law world, embodied in Articles 46(1) and 62, that call for coerced performance; (2) A more flexible approach under Article 28 applicable only to actions before "common-law" courts. The flexibility permitted under Article 28 is not confined to the procedural approach of one legal system. As Professor Treitel has shown, remedial law in many legal systems is less rigid than the "require performance" rule of the Convention.[16] In sum, domestic rules mitigating the harshness and the dangers of abuse from demands for coerced performance are available in any forum where the Convention is in force.[page 228]

Article 29. Modification of Contract; Requirement of a Writing

§ 200 Agreements of Modification

Article 29 addresses questions that arise when the parties agree to modify their contract. Will the agreement be effective although nothing additional is given to satisfy common law requirements with respect to "consideration?" Some contracts provide that modifications must be in writing: Will these agreements nullify modifications that are made orally?

§ 201 A. Modification or Termination by "Mere Agreement"

Paragraph (1) is addressed to a problem presented by the traditional common-law doctrine of "consideration." When an agreement to modify a contract merely increases or reduces the obligations of one of the parties, the agreement may be ineffective since it is not supported by "consideration"—i.e., by an act or promise given in exchange for the new promise. This restriction on the parties’ ability to adapt their transaction [page 229] to new circumstances has generated pressure for modifications of the traditional rule.[2]

The (U.S.A.) Uniform Commercial Code swept aside this common-law rule by this brief statement (§2–209(1)): "An agreement modifying a contract within this Article needs no consideration to be binding." Article 29(1) of the Convention achieves the same result by stating that a contract may be modified or terminated "by the mere agreement" of the parties.[3] "Agreement" need not be explicit but may be based on conduct (Art. 18(3), §§163–164, supra), or on practices established by the parties or usage of trade (Art. 9, §§112–122, supra).

§202 B. Contract Restrictions on Modification

The fact that the sales contract is in writing does not bar oral modification. Arts. 11, 29(2). However, contracts sometimes provide that they may be modified only in writing. Article 29(2) gives effect to these private "statutes of frauds." What is the effect of a contract term that requires formalities for modification other than a "writing?" Suppose the initial contract permits modification only by a writing "signed by the parties" or requires the "approval in writing by the managing director."[4]

Under Article 6, the parties may "vary the effect of any " of the Convention’s provisions; the parties, by a written agreement, may broaden the scope of Article 29.[5]

Because of the contract provision, under Article 29(2) the oral agreement to the change in specifications, by itself, was ineffective to modify the contract. However, Buyer’s oral agreement could be held to constitute "conduct" that would preclude him from invoking the contract clause "to the extent that the other party has relied on that conduct"; Seller’s production of the 2,000 units in accordance with the oral agreement could constitute such reliance. However, Buyer is precluded only "to the extent" of the reliance; he should be able to insist on the original specifications for further production.[6]

Under this view, Article 29(2) reliance may be based on "conduct" such as a statement by one party that it would accept a shipment made a week later than the date specified in the contract followed by a shipment made in accordance with this assurance.

It may be argued that a "no oral modification" clause means: "This contract may be modified only by written agreement, and may not be modified by an oral agreement or other conduct regardless of reliance thereon". This construction of a "no oral modification clause", or an express contract provision in terms just quoted, raises a difficult question on the relationship between Article 29(2) (last sentence) and Article 6 (§§74–77, supra). Article 6 states: "The parties may...derogate from or vary the effect of any of [the Convention’s] provisions". Under one view Article 6 would authorize the parties to override the "reliance" provision of Article 29(2). However, the "reliance" provision addresses a specific problem of abuse of a "no-modification" clause rather than the general effectiveness of the clause. Consequently, it may be suggested that Article 6 should not be construed to authorize contracting to nullify the narrow protection [page 231] against abuse of contracting in Article 29(2). In further support is the mandate of Article 7(1) that, in interpreting the Convention, "regard is to be had to...the need to promote... the observance of good faith in international trade". See: Schlechtriem, Com. (1998) 214-216.

If, contrary to this suggestion, the protective rule of Article 29(2) may be nullified by contract, the party prejudiced by such a contract term may invoke applicable domestic rules on "unconscionability", "good faith" or other rules invalidating such a contract provisions. As we have seen, domestic rules on the validity of contract terms are preserved by Article 4(a). See §§64–67, supra.[7]

Conduct Modifying Writing: Decisions.   (1) GER. LG Hamburg, 5 O 543 26 September 1990. Agreed payment date extended by accepting bill of exchange. CLOUT 5, UNILEX D.1990–6.  (2) GER. OLG Köln, 22 U 202/93, 22 February 1994. S’s offer to terminate was made effective by B’s silence and conduct. CLOUT 120, UNILEX D.1994–16.

Agreement Requiring Writing Enforced. USA S. Dist. NY, 22 September 1994. Graves v. Chilewich, 1994 Westlaw 5/9996. Written agreement requiring writing was enforced. CLOUT 86, UNILEX D.1994–23. See: Hillman, R., 21 Cornell Int. L.J. 449–466 (1988).

Reservations under Articles 12 & 96: Oral Modification of Agreements: See discussion, supra, at Article 12, §129, including BELGIUM Rechtbank van Koephandel, A.R. 1849/94, 2 May 1995. UNILEX D. 1995-15.1.2.

§204.1 C. The Convention and Common-law "Consideration"

Lawyers who have never met a problem of "consideration" in practice will still recall that at classical common law a promise might not be enforceable unless the promisee gave something in exchange: a promise or an act—possibly only a peppercorn. Perhaps the doctrine’s principal significance has been to deny enforcement to promises to make a gift—a type of open-handedness that does not plague commercial practice. However, as we have seen, problems of "consideration" can arise when an offeror, without receiving anything in exchange, promises not to revoke the offer (§140 supra ). However, Article 16(2) of the Convention provides that such an offer "cannot be revoked" (§§139–142 supra ).

Our clever student, however, may exclaim: "Haven’t you overlooked Article 4 which states that the Convention ‘is not concerned with (a) the validity of the contract’? Our contract law states that consideration is necessary for validity. Hence our rules on consideration are in force in spite of the Convention." This question raises a basic issue of construing the Convention that can occur in an untold number of contexts—and deserves an answer.

First, a few self-evident but essential points: Article 4 defines the scope of the uniform law of the Convention; interpreting the words in Article 4 is an interpretation of the Convention and not of domestic law. Thus, the statement that the Convention "is not concerned with...the validity of the contract" must be read in relation to other provisions that show the issues with which the Convention is concerned. One of the issues with which the Convention is concerned is the revocability of offers. Indeed this is one of the important provisions of Part II on formation of the contract; there was never any question but that, subject to permitted reservations [10], this and the other rules of the Convention were uniform rules displacing domestic law, regardless of their label.

None of the other provisions of Part II on Formation seems to collide with domestic rules on consideration. If such a problem should arise the answer should be developed in conformity with the principles suggested above.[page 233]