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Reproduced with permission of 18 Journal of Law & Commerce (1999) 191-258

excerpt from

Transcript of a Workshop on the Sales Convention:
Leading CISG scholars discuss Contract Formation,
Validity, Excuse for Hardship, Avoidance, Nachfrist,
Contract Interpretation, Parol Evidence, Analogical
Application, and much more

Transcribed and edited by Harry M. Flechtner [*]

I. INTRODUCTION

On November 13, 1998, the Center for International Legal Education of the University of Pittsburgh School of Law and the Law Faculty of Meiji Gakuin University (Japan) sponsored a workshop and roundtable discussion on the United Nations Convention on Contracts for the International Sale of Goods ("CISG").[1] The workshop was held in the Rare Books Room of the Library of the University of Pennsylvania Law School, which provided generous support for the program. The purpose of the workshop was to bring together two groups of academics interested in the CISG scholars of substantive international sales law, and researchers in the field of computer artificial intelligence whose work focused on the CISG. Participants included leading CISG scholars from the United States, Japan and Europe, several of whom had been instrumental in the drafting and promulgation of the CISG, and pre-eminent scholars [page 191] of artificial intelligence and the law from Japan and the U.S.[2] Professor Hajime Yoshino of Meiji Gakuin University and Professor Harry Flechtner of the University of Pittsburgh co-moderated the program. The other participants in the workshop were Professor John O. Honnold of the University of Pennsylvania, Professor Kazuaki Sono of Tezukayana University (Japan), Professor Peter Schlechtriem of the University of Freiburg (Germany), Professor Curtis Reitz of the University of Pennsylvania, Professor Joseph Lookofsky of the University of Copenhagen (Denmark), Professor Shigeru Kagayama of Nagoya University (Japan), and Professor Kevin Ashley of the University of Pittsburgh.[page 192]

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Hypothetical Case by Professor Flechtner and Attorney Walter [9]

Volkshaus, a newly-organized German importer of home furnishings, became interested in the products of Downeast Pottery, a U.S. supplier of hand-made pottery. In July 1998 Volkshaus contacted Downeast by telephone. As neither party understood the language of the other, they employed a translation service provided by the telephone company. The parties agreed that Downeast would sell Volkshaus 10,000 pieces of pottery (bowls, mugs, plates, vases and the like) in a variety of styles at a total FOB price of US $50,000. Payment was due in two installments -- $40,000 in advance of shipment and $10,000 within 5 days after Volkshaus received the goods.

Volkshaus claims that, during the telephone conversation, it told Downeast that the pottery would have to be packaged individually in recyclable cardboard. This was important to the buyer because the German government had recently imposed additional tariffs on non-recyclable packing materials imported from countries outside the European Union.

Downeast told Volkshaus that it would prepare a written contract based upon the telephone conversation and would send it to Germany by express service to be signed by Volkshaus. Mr. Schoen, the owner of Volkshaus, replied that Downeast did not need to send the written contract to Germany because he would soon be on holiday in the U.S. -- specifically in Portland, Maine, where Downeast's headquarters were located -- and he could sign the contract in person. A week later Schoen visited Downeast's headquarters and signed, on behalf of Volkshaus, the written contract that Downeast had prepared using its standard form "Contract of Sale." At the time he signed, Schoen did not ask for, nor did Downeast offer, a German translation, or explanation of the written contract. A standard, pre-printed clause of the written contract stated that the pottery would be packaged "in the manner customary in the wholesale pottery trade." The written agreement did not contain a merger clause (i.e., there was no clause stating that the writing constituted the sole evidence of the parties' entire agreement). At the time he signed, Schoen gave Downeast a bank check for $40,000.

The goods were delivered to the designated ocean carrier and subsequently arrived in Germany. As is the common practice in the U.S. pottery industry, the goods were individually packaged in styrofoam in order to prevent breakage in shipment.[page 239]

The additional tariff imposed by the German government on the non-recyclable styrofoam packaging cost Volkshaus approximately $2,000. Volkshaus complained to Downeast about the packaging three weeks after being informed of the additional tariff by customs officials.

Volkshaus also claims that, because European consumers are highly sensitive to environmental concerns, Volkshaus had to purchase recyclable packaging from a German source and repackage all the pottery to make it marketable to its customers (retail home furnishing stores). Volkshaus claims that the re-packaging cost an additional $3,000, and that the resulting delay (including a four week wait for the new packaging to arrive) cost an additional $4,000 in warehouse charges and lost profits. Volkshaus did not inform Downcast that it had been forced to repackage the goods until the ensuing litigation began.

Finally, Volkshaus claims that, while repackaging the pottery, it discovered some $3,000 worth of the shipment had been broken during ocean transport from the U.S. because of defects in the styrofoam packaging. Volkshaus informed Downeast (by letter) of this breakage problem within a week after finishing the repackaging, which was some seven weeks after the pottery shipment had arrived in Germany.

Volkshaus refused to make the final payment of $10,000.

Downeast filed suit in an appropriate U.S. District Court for payment of the $10,000 plus interest. Downeast claims that, because of the non-payment, it was forced to take a short-term loan at 3 points above prime (a rate higher than that charged on long-term loans) in order to meet its operating costs. Volkshaus, on the other hand, argued that it properly withheld payment of the $10,000, and that Downeast, in fact, was liable for at least $2,000 in damages, plus interest.

FLECHTNER: One of the issues I would like to discuss with the group is the effect of the German purchaser signing a written contract that appears to contradict the understanding the parties reached on the telephone (as alleged by the buyer) concerning the packaging of the goods. Any thoughts on that?

REITZ: Is it your notion, Harry, that the once the telephone conversation ended, the contract had been formed?

FLECHTNER: I suppose that's the first issue we are going to have to deal with. It's very similar to the issue that came up in Professor Schlechtriem's hypothetical.

REITZ: It means the writing, has uncertain legal consequences. Was it a document that was intended to form a contract, or was it intended to be a confirmation of an earlier oral contract, or was it a modification, or [page 240] did it have some other significance? I would think that if this American company knew that the German representative of the buyer did not speak English, it would be very hard to make the case that this writing was intended to change an already formed contract. But it goes back, I think, to the question, when was this contract formed? There is no statute of frauds, I take it, operating in either country.

FLECHTNER: Would this be a much easier case if no contract was formed during the telephone conversation? If the parties, in fact, had understood that there wouldn't be a contract until there was a formal document signed?

LOOKOFSKY: I read this situation as involving one long contractual process. And I assumed that, at the time the requirement about the packaging was mentioned, the seller was willing to comply. So I saw this as a problem of proof only: is the buyer going to be able to prove that he, in fact, made the packaging requirement known to the seller. If so, he wins -- something, I don't know how much yet. If not, then he has a problem because we have a written term that says something else. I mean, you know my position on the parol evidence rule, and I guess the courts agree to some extent. That's not a problem.

FLECHTNER: This problem is modeled on a recent case that raised the issue of whether the parol evidence rule continues to apply under the CISG. My response to that question has always been, what do you mean by the parol evidence rule? If you mean the doctrine saying that, if the parties intend to express their entire agreement in a writing to supersede all that went before then that intention should be honored, I think that has survived under the Convention. But if by the parol evidence rule you mean the elaborate and rather non-understandable set of processes our courts have developed to answer the question of what the parties intended when they created a document -- well, no, I don't think they apply under the Convention. But I think ultimately the question is, how can we tell whether the parties in this case should be deemed to have intended this writing to be the complete operative statement of their agreement. We do not have a merger clause declaring such an intention. I wonder what difference a merger clause would make in this case? That is something else we can discuss.

SCHLECHTRIEM: Should I offer my analysis?

FLECHTNER: Please.

SCHLECHTRIEM: I would argue that a contract was concluded by telephone in July, and the content of the contract was fixed by this telephone agreement so that the seller was obliged to use cardboard packaging.[page 241] Then the seller proposed to change the contract reached on the telephone by means of the written document -- to give up the first contract and write down a new contract that had to be signed. This was within the ambit of party autonomy, if it was understood correctly by both parties. The new written contract thereby superseded the first oral contract. Now the question is whether, when he signed the contract, the German buyer thought that the content of the written contract with regard to the packaging was the same as the earlier oral contract and, if so, whether that mistake was the kind of error that would allow avoidance of the contract under domestic law. Of course questions of avoidance for mistake or error, except for mistakes about the quality of goods, are left to domestic law under Article 4(a) of the Convention. That would be how I would analyze the situation.

FLECHTNER: You would end up outside the Convention then?

SCHLECHTRIEM: In regard to avoidance of the contract because of mistake, yes.

LOOKOFSKY: A mistake? Would you specify again what the mistake consists of?

SCHLECHTRIEM: Yes -- this is a famous problem in Germany. If you sign a document that you don't understand, are you bound by every thing that's in the document? Or is it your understanding formed by prior negotiations -- in this case by an earlier oral contract -- that controls, so that you can argue that what you signed was something entirely different from what you wanted to communicate. We had cases involving foreign workers who signed a kind of settlement agreement with their employer providing that the employer would pay a sum of money and the employees would have no more claims against the employer. The written agreement was not understood by the Turkish workers. The court said that if the workers signed something they simply didn't understand, meaning that they agreed to everything, then they could not avoid the agreement for mistake. But if they signed thinking, incorrectly, that something specific was in the document, which they could not read because they did not know the language, then they could avoid for mistake.

LOOKOFSKY: You assume in your analysis, if I understand it, that what the buyer claims to have discussed on the telephone concerning the packaging is true, and you're assuming that the buyer can prove this.

SCHLECHTRIEM: Yes. I derive that from the facts. That would mean that when the buyer signed the written contract he was mistakenly under the belief that he was signing a document with a clause providing for cardboard packaging as previously discussed or agreed to orally.[page 242]

LOOKOFSKY: How would you feel about an analysis that said, this is all one contract with some oral terms and some written terms. On the particular issue of packaging, the oral term -- the actually negotiated term -- conflicts with the written standard term, and we should give precedence to the oral term.

SCHLECHTRIEM: That again is a matter of interpreting the facts. As I understand the case, when the seller told the buyer that he would prepare a written contract based upon the telephone conversation, this was an agreement that the parties would make a final written contract with the same content they had already agreed upon.

LOOKOFSKY: And, in fact, the writing was a standard form which did not do that.

FLECHTNER: Yes, the packaging provision in the written contract is a standard provision of the seller's form.

YOSHINO: I agree with Professor Schlechtriem's analysis, and I think the buyer's signing was based on a misunderstanding of the contents of the written contract. Thus, the written contract cannot derogate from the oral agreement between the parties concerning the seller's obligation to provide recyclable packaging. If the written contract had been valid, then it could derogate from the former oral contract. But, as the written contract is not effective, the earlier oral contract cannot be varied.

SONO: And the role of Article 4(a) of the Convention?

SCHLECHTRIEM: Article 4(a) merely brings into play the domestic law of avoidance for error.

SONO: So if domestic law can be brought in, the contract becomes void?

SCHLECHTRIEM: The written contract becomes void. The written contract was to supersede the oral contract, but now the written contract is void.

SONO: So the oral contract would remain valid?

SCHLECHTRIEM: Yes, it stays alive.

SONO: May I present my perspective? The written contract says that the goods must be packaged "in the manner customary in the wholesale pottery trade." Is it possible to bring in the principle underlying Article 42? The seller knew that goods were going to be sold in Germany. Therefore, if the goods must be packaged, they must be packaged in a manner that allows them to be saleable in Germany. Of course, this argument would be easier to make if it was not just a matter of additional tariffs, but of permission to import the goods.[page 243]

FLECHTNER: That would be similar to the case out of Germany involving mussels.

SCHLECHTRIEM: Yes. I would like to come back to that too, if there is time.

SONO: Under my approach, there is no need to discuss whether it is the oral contract or the written contract that prevails.

HONNOLD: Which part of Article 42 are you using in your analysis?

SONO: Article 42(1)(a) -- "if it was contemplated by the parties . . . that the goods would be resold or otherwise used in" a particular country. Article 42 deals with industrial property or intellectual property, which is not what is involved here, but this principle could be applied by analogy.

LOOKOFSKY: That's an interesting article.

SONO: The problem dealt with in this part of Article 42 is peculiar to international sales, where the parties are located in different countries.

SCHLECHTRIEM: Wouldn't the rule more closely applicable to our case be Article 35(2)(b)? The seller knew what the goods were intended for -- resale in Germany.

SONO: I would invoke both Article 35 and Article 42. Both provisions are directed toward protecting the buyer's expectations, therefore usually the goods must be usable in the buyer's country.

FLECHTNER: The question concerning the extent to which you are bound by what you sign may be one of those issues that is particularly susceptible to different approaches in different legal cultures. For example, U.S. courts have traditionally at least paid lip service to the idea that you are bound by what you sign whether or not you understand, or even read it. The idea that you are bound by signed documents, even if they are in a language you don't understand, was recently emphasized by one of our federal courts of appeals in the MCC-Marble [10] case upon which the hypothetical under discussion was, in part, based. Our courts have difficulty moving away from that principle. They have a sense of the nature of contractual relationships that I think is based upon a kind of horse-trading model, where one party is trying to get the better of the other and you really have to protect yourself. As a comparative matter, I think that's the sense in U.S. legal culture of how the contracting process occurs, and it's the contractual model that U.S. courts have adopted. In contrast, I get the sense that there is a quite different perception of what [page 244] the contractual relationship is about, a more cooperative vision, in other jurisdictions. In the case upon which this particular aspect of the problem was based, the court dropped a footnote in which it said it was outrageous that a business person would sign a document in a language he or she didn't understand -- that this just wasn't proper modern business practice -- and it indicated that in most cases the signer would suffer the consequences no matter how far the written contract may have deviated from his or her understanding going in.

LOOKOFSKY: So what is your solution then, Harry? I suspect the author of the problem may have taken a different route. We all seem to be reaching, the same result -- none of us seems willing to ignore the fact that the conversation took place. The question is, how do you do that? Perhaps you might bring in domestic law to get rid of a standard term that would be very unfair to enforce in these circumstances.

SCHLECHTRIEM: If the term was slipped in, certainly the German rules on standard form contracts would apply, and would make such a surprising term, slipped into the written contract, void. Of course matters of voidness are subject to domestic law under Article 4(a) of the Convention.

FLECHTNER: Yes, as a question of validity. In fact, my own analysis of the controversy in the problem was that it really came down to a question of validity governed by domestic law in the end. Under the Convention you might have to accept the written contract, but then you could undo that by invoking domestic law on validity and invalidating the written contract. For example, this would be a situation in which, under U.S. law, reformation doctrine might apply, and a court could actually amend the written agreement on that basis to reflect the telephone conversation.

SONO: When we say that we can invalidate the written contract, it assumes that the written contract was the contract concluded after negotiations. It does not presume any former contract -- unless we call the written contract a revision of a prior contract. In your analysis, Harry, when the written contract is annulled, do the previous oral negotiations become the contract?

FLECHTNER: I think there are two alternative analyses possible here. If you said the parties had formed a prior oral contract, and then you invalidated the "packaging" provision of the written contract, then I think you would revert to the prior oral agreement. But if the parties did not intend to enter into a contract until there was a written agreement, I still think that -- at least in a U.S. court -- the written agreement could be [page 245] reformed to coincide with the actual intent of the parties. The question of reforming the writing to reflect the parties' true intentions would not, as far as I can see, be governed by the Convention.

HONNOLD: Are you assuming that both parties had the same intention?

FLECHTNER: That they both understood the buyer's need for recyclable packaging? Yes, I am assuming that.

HONNOLD: So the party who prepared the written contract knew that he was cheating? He knew that was committing a fraud?

FLECHTNER: I suppose that's a possibility.

REITZ: Harry softened that slightly by providing in the problem that the written provision at issue was a standard form term, not one inserted into the writing for this particular transaction. It happened to be there already, I think, on the seller's printed form. So it might have been a mistake or oversight on the part of the seller to have it in there.

SCHLECHTRIEM: Wouldn't there be a remedy for someone who signed a written contract that previously had been explained to have a certain content or effect, but that, without any fault of the party preparing the document, contains deviating provisions? Wouldn't that be cause for avoiding the contract even without an intent to defraud the other party? If including the deviating clause was just a slip up -- the seller didn't remember that he had packaging provisions in his standard form, and he thought that the standard form represented the oral contract accurately -- wouldn't that be a ground for the buyer to avoid for error?

REITZ: Under United States law, yes.

SCHLECHTRIEM: Yes, in Germany too.

REITZ: We talk about fraud, accident or mistake as reasons for undoing something that's in a writing and would otherwise have legal consequences. This document looks to me more like a confirmation document than a contract document -- a confirmation that does not conform to the agreement. I don't know whether in international trade, or in Convention terms there is such a thing as a confirmation document.

SCHLECHTRIEM: Confirmations were very much disputed in connection with the CISG because in the predecessor Hague Conventions, letters of confirmation were covered.[11] Letters of confirmation are very common in Germany, and the members of the German delegation at the Hague were very proud that they had pushed through the German approach [page 246] under which a letter of confirmation that was not answered became part of the contract. This view, however, was expressly rejected in the preparation of the Vienna Convention. The other delegations said that they didn't want this German usage of letters of confirmation changing the contents of contracts. So this is certainly out of the Convention.

FLECHTNER: There's nothing in the Convention dealing with confirmations.

SCHLECHTRIEM: Yes, and the omission has a negative connotation that you can derive from the materials.

REITZ: From the legislative history?

SCHLECHTRIEM: Yes.

HONNOLD: That's correct.

REITZ: So a confirmation document that changes or adds to the contract would be ineffective under the Convention.

SCHLECHTRIEM: Yes, but it's a different situation if the exchange or the sending of letters of confirmation is a usage under Article 9(2). That provision applies to "a 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." Under these very narrow requirements, a letter of confirmation may take effect as a usage. There's a very interesting Austrian/Swiss case on this issue. The Swiss party sent a letter of confirmation and the Austrian party did not respond. Under Swiss usages on letters of confirmation, the silence amounted to acceptance. The Swiss court said that it was sufficient to establish that the usage was international under Article 9(2) if the same usage could be found in Austrian law. It then proceeded to find the usage in Austrian law. It was wrong on both points. About ten years earlier the Supreme Court in Austria had thrown out the existing rules on letters of confirmation. Before then, the Austrians had followed the German rule. One very important scholar in Vienna had written many articles against the German rule, and finally the Austrian Supreme Court followed him, so Austria, in fact, no longer has the same rule as Switzerland and Germany. And the second mistake the Swiss court made, I think, is that it is not enough that there are parallel usages in both countries. The usages must apply to the parties in this particular trade, and must be observed by them.

HONNOLD: No. Article 9(2) refers to "contracts of the type involved in the particular trade."[page 247]

SCHLECHTRIEM: Yes, that's right. Although that's a bit wider than the formulation I gave, still it's not sufficient that a usage is just known generally in two countries.

KAGAYAMA: Would it be possible to interpret the written contract so as to conform with the prior oral understanding between the parties, particularly if the prior oral understanding corresponded to international practice?

FLECHTNER: If it is, in fact, standard in the international pottery trade that you use recyclable packaging material, that adds another fact to the case. All we are told in the hypothetical is that it is standard within the U.S. pottery industry to use non-recyclable styrofoam for packaging. The domestic U.S. practice may be all that this particular seller is familiar with, but it may, in fact, be standard in international trade to use recyclable material.

YOSHINO: It may be the common practice in Germany to use recyclable packaging, whereas, in the United States, it may be standard usage to use non-recyclable packaging. If so, there is a difference of culture between the two countries. This case is very interesting because it deals with differences of custom and differences of culture between two States. In Germany, recyclability is very common now, and in the United States, I suspect, it is less so. Thus, according to German culture, recyclability may be standard, whereas, according to the culture of the United States, recyclability may not be standard. If the packaging clause in the written contract is interpreted from the background of German culture, it may appear that the packaging must be recyclable. But if it is interpreted in the United States, then, according to the written contract, it may not be necessary that the packaging be recyclable. So this case raises the problem of differences in the culture and background of the parties. The case was co-written by Mark Walter, who has learnt some Japanese customs while working for me. I think he has become sensitive to this question of differing cultures while working in Japan, and now he has incorporated this interesting discussion point into the problem that he is sending out to representatives of the rest of the world. That process also reflects Japanese custom -- importing something into Japan, improving it, then exporting it. [Laughter.]

SCHLECHTRIEM: The Convention has something to say about the issue of interpreting the phrase "in the manner customary in the wholesale pottery trade" from the packaging clause of the American Company's standard form agreement. If we ask whether this requires styrofoam packaging under American standards or recyclable cardboard [page 248] packaging under German standards, I think Article 8 should be decisive. Article 8(2) provides that, if the subjective intentions of the parties do not coincide, then "statements made by and other conduct of a 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." So it is a person standing in the shoes of the German buyer whose objective understanding, reasonable understanding, is controlling. And taking into account the first oral agreement, Article 8(3) should be helpful: it provides that "in determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations . . . ." Thus, if there was an earlier oral contract, this certainly would be a circumstance to be considered in arriving at the objective understanding that a person in the shoes of the buyer would have. That would very strongly point to the understanding of the German buyer as controlling.

YOSHINO: That's true.

LOOKOFSKY: So we don't necessarily need to leave the Convention to reach this resolution?

SCHLECHTRIEM: That's right. We can do it within the Convention.

FLECHTNER: Suppose the German buyer had said something less specific during the negotiations -- had said to the American seller, for example, "of course the pottery should be packaged as appropriate" or something like that. Then, I take it, we would have to look to the understanding that the American seller would have had of that particular phrase, correct?

SCHLECHTRIEM: That's interesting because it brings us back again to the inadequacy of the offer and acceptance scheme of contract formation under the Convention. If the communication of the German party was the offer, then it was to be understood according to the reasonable understanding of the American offerree. On the other hand, if the statement of the German party was just an invitation for an offer and the next formative communication came from the American side, then the German understanding would be controlling. That approach is ridiculous. That can't be the result. It can't be the accidental sequence of an exchange of communications that is controlling.

FLECHTNER: But under the interpretation rule of Article 8, we give the advantage to the one who hasn't said something, who hasn't affirmatively [page 249] brought up a term, because if the other side said it, then you get your own understanding.

SCHLECHTRIEM: Yes, unless the party making the statement makes it clear what he meant.

HONNOLD: Yes, I think that's the point of Article 8(2).

SCHLECHTRIEM: It's your obligation to make clear what you mean, your real intention. If you don't, then the objective meaning from the view point of the person to whom the statement was addressed will be controlling. I think that's a general rule you will find in many jurisdictions concerning the interpretation of declarations of intention.

REITZ: In this country, the conventional wisdom on contract formation in written form -- what most American lawyers will tell you -- is always to be the author rather than the recipient of a document.

FLECHTNER: But that is a little bit of a two-edged sword.

REITZ: It is usually said that the better position is to be the person who is preparing the document rather than reacting to somebody else's document. But that goes counter to the point you were suggesting, Harry, that you get the benefit of ambiguity if you're the recipient rather than the author.[page 250]

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Go to entire text of Transcript of Workshop


FOOTNOTES

* Professor of Law, University of Pittsburgh School of Law. J.D. 1981 Harvard Law School; M.A. 1975 Harvard University; A.B. 1973 Harvard College.

1. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S. Treaty Doc. No. 98-9 (1983), 19 I.L.M. 668 (1980) [hereinafter "CISG" or "Convention"] (entered into force on Jan. 1, 1988), available in 15 U.S.C.A. app. at 49 (West Supp. 1996), 52 Fed. Reg. 6262-80, 7737 (1987), U.N. Doc. A/Conf. 97/18 (1980).

2. For further information on the participants, please see "About the Participants in the CISG Workshop" at pages 194-95.

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9. J.D. 1998, University of Pittsburgh School of Law.

10. MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D'Agostino, 144 F.3d 1384 (11th Cir. 1998).

11. ULF, supra note 6; Convention Relating to a Uniform Law on the International Sale of Goods, done at the Hague July 1, 1964, 834 U.N.T.S. 107, 3 I.L.M. 855 (entered into force Aug. 18, 1972) [hereinafter "ULIS" or "Hague Convention"].

(...)


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