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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]

(...)

Discussion of "Case 8F"

FLECHTNER: Professor Yoshino are you now going to present the hypothetical case that you have prepared?

YOSHINO: Yes. Professor Kagayama will first present the problem, and then I will continue the discussion, and then Professor Sono will comment on the hypothetical.

KAGAYAMA: I will now outline our hypothetical case -- "Case 8F" -- a written version of which has been distributed to you: [The hypothetical appears in quotes, followed by Professor Kagayama's analysis at the end of each step.]

"1) On April 1, a New York manufacturer of agricultural machines, A (Anzai), dispatched to the Hamburg branch of a Japanese trading company, B (Bernard), a letter containing the following proposal: A will sell B a set of agricultural machines comprised of a tractor and a rake; the price of the tractor is $50,000; A will deliver the machinery to B by May 10; B must pay A the price of the machinery by May 20; the machinery will be transported by an American freight vessel." This description identifies the parties and the contents of the offer.

" 2) The proposal reached B's letter box on April 8." This represents the arrival of the offer at the offeree's offices.[page 197]

" 3) On April 9, B telephoned A and said, 'I accept your offer. However, I want the machinery transported by Japanese container ship.'" This describes a modified acceptance or counter-offer by the buyer under Article 19 of the CISG.

"4) A delivered the agricultural machinery to a Japanese container ship at the port of New York on May 1." This represents the seller's acceptance of the buyer's counter-offer under Article 18(3) of the CISG.

"5) The machinery was delivered to B's Hamburg branch on May 31." This constitutes the performance of the seller under the contract.

"6) B examined the machinery on June 5." This represents the buyer's examination of the goods pursuant to Article 38 of the CISG.

"7) B paid A $58,000 on May 20. (The market price of the rake was $8,000)." This depicts the performance of the buyer under the contract.

"8) On August 10, the machinery malfunctioned because of defective connecting gear." This describes a lack of conformity in the goods under Articles 35 and 36 of the CISG.

"9) B notified A of the malfunction immediately." This constitutes the buyer's notice of lack of conformity pursuant to Article 39 of the CISG.

"10) On September 1, B demanded that A repair the lack of conformity within one month." This is the buyer's demand for repair of the non-conformity pursuant to Articles 46(3) and 47 of the CISG.

"11) A did not repair the defect by October 1." This constitutes non-performance by the seller.

"12) On October 10, B declared the contract avoided." This constitutes a declaration of avoidance by the buyer under Article 49(1). Whether the declaration of is made pursuant to Article 49(1)(a) or Article 49(1)(b) is the question. Professor Yoshino will address this issue in more detail after my presentation.

"13) On December 10, B made restitution of the machine to A."

"14) On December 20, A made a restitution of the $58,000 price to B, plus interest, and gave compensation for damages B had suffered."[page 198]

[YOSHINO:] To open the discussion I would like to ask Professor Sono for his . . . comments on Case 8F.

[SONO:] When you look at Case 8F there are many further aspects of the facts that we would have to know in order to reach conclusion. Most of you have probably already thought of some examples of such facts. To begin with, may I first just mention just some of them? With respect to step 1), you would want to know the purpose of the parties and the relationship between them. You would also like to know the parties past transactional history. It affects our thinking about the situation. In step 3), we have to find out why the transport ship was changed, because it is rather unusual. It might offer some hint of the purpose for which the machinery was intended. Moreover, we may have to ask whether this was an FOB contract or a CIF contract. Depending upon whether it was a CIF or FOB, the change of the vessel could have different consequences. If it was a CIF contract, then the change in the proposal may be important enough to make the change in the condition material. I'm talking about the counter-offer issue. In step 4), an Article 18(2) or 18(3) issue may come up. In step 5), why did delivery take so long? Shipment occurred [page 200] much earlier. But we may be able to justify this under Article 8 by interpreting the parties' intent. They might have modified their contract by agreeing to a Japanese container ship because it was necessary. That might justify the delay in delivery. . . .[page 201]

(...)

SCHLECHTRIEM: Let me ask you a question, Professor Yoshino. In step 7) you mentioned that the price of the rake was $8,000 in the market. Why was this information included in your case?

YOSHINO: When we first wrote the problem this was not a part of the case. But as B pays the price in the problem, it must be the price of the whole system. In A's proposal the price of the tractor alone is specified as $50,000, so the price of the rake must be set. Therefore, I added this parenthetical fact concerning $8,000 being the price for the rake in the market. So when B would inquire what the price of the rake was, he would find that the price in the market was $8,000, and he would pay $8,000 for the rake, for a total of $58,000 for the entire system.

SCHLECHTRIEM: I'm still not sure I know the importance of knowing the value of the rake at the precise stage.

YOSHINO: But if B paid the price, then his obligation to pay the money disappeared if the buyer paid everything. Therefore, I put in a definite price.

FLECHTNER: But, originally, the price specified in the proposal did not include any amount for the rake, is that correct?

YOSHINO: Yes, at the time of the acceptance the price of the rake had not been specified.

KAGAYAMA: That's a matter of Article 55 of the CISG.

FLECHTNER: And I suppose that raises the first issue that Professor Yoshino identified was the proposal made by the seller in this case sufficiently definite to be an offer under the CISG?

SONO: Before reaching that issue we may have to ask whether the parties were serious enough to be bound, whether they had a serious intent to form a contract, or to be bound. The definiteness issue would come up later, although, in fact, both issues may have to be combined. I think Professor Yoshino is assuming in this case that both parties were to find out what was the relationship between the two parties? Had they had prior dealings? If this was the first contact between parties, I doubt there was a serious offer.

YOSHINO: At the time of the proposal the price of the rake was not set -- it was not clear.

FLECHTNER: It does seem to raise a question -- even assuming a serious intent by the parties to form a contractual relationship -- whether we can have an offer under the standards of Article 14 if a portion of the price has not been specified. And I wonder whether anyone wants to weigh in on that question. How would you approach that issue? [page 202]

LOOKOFSKY: Wouldn't one assume that the parties had some kind of additional background information about this equipment? I mean, if someone is going to buy equipment at this price level, wouldn't you assume that the buyer is aware of what is being offered -- that it is a machine of a certain character -- perhaps because the parties had prior dealings, perhaps because the seller had put out a catalog, something like that. I think my instinct would be that an offer has been made because there was an acceptance. Maybe before there is an acceptance you might wonder whether anyone would accept an offer like this. But, I think once you have an acceptance, my inclination would be -- learning the value of the rake afterwards -- that we probably have a contract here. There is at least some basis for determining what the subject matter is.

SONO: I think in this case the tractor and rake constitute one set. In the agricultural business world, a tractor may require various kinds of rakes depending upon the purpose. That might require some special design or component. But again, it depends upon the application of Article 8 and Article 9.

HONNOLD: Didn't the conduct of the buyer in paying a total price that made $8,000 the price of the rake and a part of the deal clinch their mutual intent here?

SCHLECHTRIEM: Yes, and I would say that the $8,000 comes under Article 55.

HONNOLD: Yes.

LOOKOFSKY: Based on what Professor Sono is saying, you could also imagine a situation, I suppose, where there is a contract concluded but you then get a different kind of controversy where the buyer claims that it didn't get the rake that it needed. Then perhaps you would ask whether the seller shouldn't have asked the buyer, prior to delivery, about the kind of rake needed.

YOSHINO: At the time of the proposal in Case 8F, the full price is not definite. There is only the price of the tractor specified, and the price of the rake is not definite. So, therefore, the price of the entire system of machinery is not definite, and one can ask whether the proposal as a whole is definite enough to be an offer. In order to decide this, we can refer to the Malev case involving a transaction between an airline and an aircraft engine manufacturer.[4] That contract involved a system of engines composed of several parts. The main part was the engine itself, but there were other parts -- a housing that covered the engine and components that [page 203] assisted the engine. The Malev case said that the proposal in that case was not sufficiently definite because the price of there other parts was not clear and there was no market price for these parts. Case 8F is a little different than Malev because in Case 8F there is a market price for the rake. We can infer that, at the time of the proposal, a market price existed. If a market price for the rake existed, then we can apply the Malev case or, as Professor Schlechtriem said, Article 55 to conclude that the proposal in Case 8F is sufficiently definite.

REITZ: The situation we're dealing with raises for me what is a continuing problem with the structure of the Convention, and that is, how does Part II of the Convention [containing contract formation provisions] relate to later parts of the Convention. Article 55 by its terms only applies if a contract has been validity concluded. So it is not explicitly a way to fill gaps in the formation sections of Part II. The language in Article 14 that I think is relevant to the situation on April 1 is whether the price of the rake is "implicitly" fixed. Whether one can construe the Convention, as I would, to use Article 55 to give meaning to the phrase "implicitly fixes" in Article 14 is, I think, a fair question. Article 55 is not written in a way that helps you do that. It assumes that somehow you have gotten past all the formation problems, and we are now into construing the obligations of parties to a contract. But it makes sense to me that "implicitly" fixing a price could be done by reference to markets fairly easily, or by reference to some other standard that might be implied from the relationship of the parties, as you were talking about earlier, Professor Sono. But even if you say a price could be implicitly fixed by reference to a market price, there is still a question of what market. The market in the United States and the market in Germany might be quite different, and I think maybe this was part of your concern, Professor Sono, about how the shipment terms related to the price. The shipment costs might be quite significant relative to the price, or they might be insignificant.

But when I get into a Part II problem, a formation problem, in the Convention, I usually end up becoming very unhappy with the Convention. The kind of commercial flexibility that I find in Parts III and beyond I don't find in Part II.

SONO: Yes, I think Professor Reitz has focused on the real core of the issue under Article 14(1). Some say that Article 55 is relevant only for those countries that have excluded the application of Part II of the Convention. But I see an unfortunate implication in that logic particularly around the second sentence of Article 14(1). Many scholars lightly read [page 204] the second sentence as giving a definition of an offer, even though the second sentence does not really so provide. It merely states that "[a] proposal is sufficiently definite if . . ." The second sentence of Article 14(1) only shows an example of a proposal that may become an offer. On the other hand, the requirements for a proposal to become an offer are in the first sentence of Article 14(1).

FLECHTNER: So something that falls short of meeting the requirements of the second sentence of Article 14(1) could still be sufficiently definite?

SONO: Yes. The first sentence of Article 14(1) states that a proposal is an offer if it is sufficiently definite and indicates the serious intention of the offeror to be bound. For an offer we need a serious intent to be bound, and definiteness so that a court can enforce it if it becomes necessary. Many people say that if the price is missing, it is not an offer. But how can we say it's not an offer if the party making the proposal seriously intends to be bound? And, if the other party also appears to be serious to be bound, and if something else can come in to fill any gaps in their agreement, why should we say it's not an offer? What we have to honor is the parties' intention. If they seriously intend to be bound, we can look to Article 55 regardless of whether Part II has been excluded. The point I wanted to make was that the second sentence of Article 14(1) does not provide a definition at all; it's an illustrative and educational provision only. After all, the serious intent of the parties should be honored, provided that the court can find the means to enforce the agreement -- for instance, by reference to Article 55.

HONNOLD: Can our discussion assume that we should take the facts of the case as a whole? If we take the facts of this case as a whole, there was a shipment and receipt of goods, and payment for the goods which was made and received. I think it is clear that there has been a transaction between these parties, and that a court would want not to undo it.

REITZ: That certainly is right, John, but what I understand Professor Yoshino and his colleagues want to do, in addition to taking all the facts as a whole, is to take the transaction step-by-step, and at each point evaluate the legal situation without knowing what is going to happen later.

HONNOLD: I understand. I'm just trying to emphasize the difference between taking a little bit of the case and looking at it as a whole.

REITZ: There certainly is a major difference. [Page 205]

FLECHTNER: I wonder whether we should talk a little bit about the change that the buyer suggested after seeing the seller's proposal, and its effect on the contract formation process. The original proposal by the seller had specified an American cargo ship. The buyer comes back and suggests a Japanese container ship. Would that prevent a contract from arising at that point in time under the rules of the CISG?

SONO: As I indicated before, if it was an FOB contract, the indication of an American freight vessel was only informational. If the buyer preferred a Japanese container ship, the cost would fall only on the buyer, because freight is not part of the price. But if it was a CIF contract, the change would materially alter the offer, so it's a counter-offer. That was the point that I was trying to make in differentiating between a FOB and a CIF contract.

FLECHTNER: I guess there is no disagreement about that. If the buyer's response was a counter-offer, then comes a part that I am interested in: Was there an acceptance of the counter-offer and, if so, precisely when did it occur? There would have been no contract formed at the point at which the buyer responded to the offer; then the seller goes ahead and ships the goods. I assume that can be looked at as an acceptance. What I'm interested in is, when does the acceptance occur, and when does it become effective, if the seller ships the goods in a situation like this?

HONNOLD: I am assuming the buyer has received the goods.

FLECHTNER: The buyer did receive the goods here.

HONNOLD: Who would have any doubt that there had been a transaction in this case?

FLECHTNER: But John, what would happen then if the container ship should sink on the way to the buyer?

SONO: There would be no acceptance.

FLECHTNER: No, acceptance?

SONO: Because information concerning the fact of acceptance has not reached the other party. But, he would usually inform the buyer by fax, telegram, or e-mail of the shipment, which corresponds to a notice of acceptance of the counter-offer. If the ship sinks afterwards, we then move on to FOB or CIF issues.

SCHLECHTRIEM: Doesn't it fall under 18(3)?

FLECHTNER: Does it fall under 18(3)? When Article 18(3) applies, acceptance would occur when the act of acceptance was performed, which in our case would be the moment of shipping, even before notice of acceptance reached the offeree. But Article 18(3) seems to me to be [page 206] limited. It only applies "if by virtue of the offer or as a result of practices which the parties have established between themselves or of usage" you can perform the act without notice to the offeror. My question is, what does that require? Would it be met on facts like ours? I have some question about that.

SONO: I don't think Article 18(3) applies here. When we look at Article 18(1) we see that any statement made by or conduct of the offeree indicating assent -- I emphasize "any conduct," which would include shipping the goods -- constitutes acceptance. Article 18(1) is the basic rule that covers the present situation. And, under 18(2), the acceptance becomes effective when that intention reaches the offeror. In my view, situations to which Article 18(3) would apply would be very rare. If you send something in response to an order, you must have the freedom to retract the shipment, or stop the transit until you informed the other party of the fact of acceptance or shipment. Article 18(3) does not provide that once the conduct is done -- once the goods have been shipped, for instance -- then there is no way to avert.

In my view, Article 18(3) applies to such situations as unilateral contracts under American law. In a unilateral contract, the promisor incurs an obligation only if the other side does something specified, but whether the other side performs or not is for him to decide. Only if the offeree does something specified, does the promisor's promise become binding. The offer contains a unilateral promise conditioned upon a certain conduct to be done by the other party. Article 18(3) is confined to that situation. We call it a unilateral contract but it's not contract at all. Other ordinary situations are covered by the first line of Article 18(1).

SCHLECHTRIEM: We need lawyers on both sides of the case, and I would like to take the other side. We don't have an original offer and acceptance situation here. We have a counter-offer. The original offeree said, yes, I am willing to buy, but I want the Japanese container ship. According to Article 8, shouldn't we interpret this counter-offer as meaning, I accept, but I want to have a Japanese container ship, and if I don't hear from you, I will assume you agree by shipping the goods? In such a case there is already a relation between the parties. That seems to be a different situation from your case where there is just an offer and then the offeree ships the goods. Then the offeree must be free to retract before his acceptance, expressed by sending the goods, reaches the offeror. But in Case 8F, a contract had almost been established -- it's only this point about the container ship -- and I think in that situation you [page 207] could interpret the counter-offer a bit more liberally so that it would fall under Article 18(3).

SONO: And if you ship by Japanese container ship the contract is complete at that time?

SCHLECHTRIEM: Yes.

SONO: You cannot take it back once you hand over the tractor to the shipper?

SCHLECHTRIEM: Why should you be allowed to take back your acceptance when all your wishes were fulfilled?

SONO: But the acceptance becomes effective when it is known by the other party under Article 18(2).

SCHLECHTRIEM: Unless under Article 18(3) you dispense with the requirement that the other party receive the answer in such a situation. I'm arguing this as a lawyer here.

FLECHTNER: I suppose there is a practice point here, and it is, I think, exactly the point you were making Professor Sono. In the seller's position, it is much safer to give notice that you have shipped. Otherwise you may, in effect, end up bearing risk of loss depending upon how a court analyzes the contract formation situation. Should the ship sink, some courts might say no contract was ever formed. In that case, the seller is not going to get the price, and the seller would effectively bear risk of loss no matter what the contract terms would have been with respect to risk a loss.

SONO: According to Professor Schlechtriem, since loading the tractor on the Japanese container ship is acceptance, the risk could be on the buyer, right? If it is an FOB contract. But I still cannot understand why the seller, who accepted the other side's condition concerning the container ship, cannot change his mind once he places the tractor on board the ship, even before the ship has started. Can't you inform the captain, I'm going to take the goods off the ship because I've changed my mind?

LOOKOFSKY: The seller might want to do so because he has another buyer, and now he would like to send it there. But if the ship sinks, then he's going to say to the first buyer, oh, it was intended for you. I'm not sure at this point whether you get the same answer under the Convention and under domestic law, but I think that we in Scandinavia, under Scandinavian law, would require a notification of the buyer at least for the risk of loss to pass. That doesn't necessarily mean the contract has not been concluded before notice is given. But if we are talking [page 208] about whether the seller has fulfilled his performance obligations, then we would require a notification to have a passing of risk.

SCHLECHTRIEM: That is a risk of loss question.

LOOKOFSKY: Yes, but it seems to be on the table now.

SCHLECHTRIEM: Addressing the situation as a lawyer, again, let's assume that no notification of shipment was given to the buyer. The question is whether a contract was formed under Article 18(3) or not.

LOOKOFSKY: I agree with that.

SCHLECHTRIEM: Then let's assume for a minute that the seller finds another buyer who is willing to pay more for the goods while the tractor and the rake are on their way to the original buyer. And now he says, well, I didn't notify the buyer that I had fulfilled all his wishes and shipped the goods on the Japanese container ship. I'm still free, I can retract my acceptance of the counter-offer. Do you really think a court would allow the seller to do that?

YOSHINO: That would be unfair.

SCHLECHTRIEM: Well we will come to that problem, I think, this afternoon in connection with my hypothetical case. Here the question is, at what point can you say, I don't want to be bound, and luckily I didn't send any notice of my acceptance so I'm still free. In that situation, I would think that there might be a damage claim.[page 209]

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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.

(...)

4. Pratt & Whitney v. Malev Hungarian Airlines, Legfelsbb Birosag, Gf. I. 31, 349/1992/9 (Dr. Laszlo Szlavnits trans., 1992), reprinted in 13 J.L. & Com. 31 (1993).

(...)


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