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GUIDE TO ARTICLE 55

Comparison with Principles of European Contract Law (PECL)


Match-up of CISG Article 55 with PECL Articles 6:104, 6:105, 6:106 and 6:107

CISG Article 55

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

PECL Article 6:104 [Determination of Price]
(complete and revised version 1998)

Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price

PECL Article 6:105 [Unilateral Determination by a Party]

Where the price or any other contractual term is to be determined by one party and that party's determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted.

PECL Article 6:106 [Determination by a Third Person]

(1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it.

(2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted.

PECL Article 6:107 [Reference to a Non-Existent Factor]

Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted.


Definitions

For the PECL definition of its term "reasonableness", go to PECL Article 1:302 and the comment and notes that accompany this provision.


Remarks on whether and the extent to which the Principles of European
Contract Law (PECL) may be used to help interpret Article 55 of the CISG

dr. Andrea Vincze [*]
October 2004

  1. Introduction to the open-price contract provision in the CISG
  2. Broad and narrow interpretation of Art. 55
  3. Applicability of Article 6:104 PECL to Article 55 CISG: Determination of price
  4. Applicability of Article 6:105 PECL to Article 55 CISG: Unilateral determination
  5. Applicability of Article 6:106 PECL to Article 55 CISG: Determination by third person
  6. Applicability of Article 6:107 PECL to Article 55 CISG: Reference to a non-existent factor
  7. Conclusions

1.  Introduction to the open-price contract provision in the CISG

a.  Article 55 CISG [1] addressing the issue of open price terms is a highly debated provision in the light of Article 14(1) CISG [2] describing the requirements of an offer, yet a close link between these two provisions is evident. The main controversy concerning the interaction between these provisions and their proper application derives from the fact that, at first sight, Articles 14(1) and 55 contradict each other, therefore the application of Article 55 seemingly makes no sense. A theoretical debate between broad (e.g., Honnold) and narrow (e.g., Farnsworth) interpretation has been going on for some time but the controversy remained. This paper examines whether and the extent to which Articles 6:104, 6:105, 6:106 and 6:107 of the PECL may be used to help interpret the provision of open-price terms in the CISG.

2. Broad and narrow interpretation of Art. 55

b. Before comparing the relevant provisions of the CISG and the PECL, the problem with interpreting Article 55 CISG shall be shortly discussed. The question whether or not Articles 14(1) and 55 CISG shall be read together arose due to the fact that these two articles deal with very similar issues. Among other preconditions for concluding a valid contract, Article 14(1) implies that for an offer to be sufficiently definite, the price must be expressly or implicitly fixed or a provision must be made to determine the price. Article 55, however, seems to contradict the latter by providing that a contract may be validly concluded even without expressly or implicitly fixing or making provision for determining the price. It is important to note at this point that sales without prior fixing of a price are common in international trade.[3]

The two leading theories on interpretation are Professor Farnsworth's narrow interpretation, inferring that Articles 14(1) and 55 cannot be read together and Professor Honnold's broad interpretation, which allows for parallel application of the two provisions.

Professor Farnsworth's position is that by Article 55 expressly providing for its applicability to validly concluded contracts, the contract must have already been concluded for the price term to be supplied. Yet, under Article 14(1) a contract cannot be validly concluded without a sufficiently definite price term.[4] Therefore, following that interpretation, a "vicious circle" is present in the text of the CISG. Professor Farnsworth further contends that in spite of the latter, Article 55 is not without any use because it can be applied by countries which made a reservation under Art. 92(1) CISG excluding the application of Part II of the Convention, including the controversial Article 14(1). In such cases, and also because the CISG is generally not concerned with the validity of a contract,[5] if the contract is found valid under the domestic law of that country, a legal dispute concerning the price terms of that contract can be resolved by Article 55 of the Convention.[6] Yet, such an interpretation is disputed by several authors because "in a codified set of rules ... every effort should be made to construe seemingly incompatible provisions in order to make sense out of them"[7] and stating that Article 55 must be read in conjunction with Article 14.[8] The balance of academic opinion seems to be in favor of Professor Honnold's approach to the issue.

Professor Honnold had initially opined [9] that a contract may be validly concluded even if the price is not settled because "the term 'validity' in Article 55 relates only to requirements of validity other than the determination of price" upon which an offer indefinite with respect to the price can be interpreted in the light of Article 55. However Professor Sclechtriem,[10] in referring to that approach, contended that most commentators disagree on this point. Professor Honnold also moved away from this interpretation and expressed his disagreement to it in the later edition of his book stating that "[t]he legislative history shows that [the addition of the reference to 'validity' to the opening phrase of Article 55] was designed ... to restrict the scope of the article 'to agreements that were valid by the applicable law' – i.e. domestic law applicable under rules of private international law."

Honnold further contends that Article 14(1) deals only with the question whether a communication not stating the price, and also without making express commitment to be bound, should be regarded as an offer -- and not with the validity of an agreement not indicating the price, while Article 55 applies to validly concluded contracts to which the parties committed themselves to be bound but which did not expressly or implicitly fix the price or failed to make any provisions on determination of the latter.[11]

There are other authors representing different views based on the mainstream opinions by Professor Farnsworth and Professor Honnold. Yet, for the purposes of this editorial, emphasis shall be placed only on the latter two.[12]

c.  Upon examining the narrow and the broad interpretation of the interaction between the two relevant provisions, regard shall be paid to their legislative history, too. Firstly, the text of Article 55 (i.e., originally Article 51 of the 1978 Draft) was adopted before adopting Part II of the Convention also including Article 14(1), thus a contradiction with Article 14(1) was apparent.[13] This seems to emphasize further that saving a contract with open-price terms shall prevail over the narrow interpretation which would stop the process of contracting at the very beginning if the proposal did not fix the price or did not provide a mechanism for determining the price.

Also, it is apparently true that "[t]he adoption of art. 55 eventually responded to the desire of the Scandinavian countries to accept Part I of the Convention without Part II, and to have a provision in Part III in case the price has not been determined".[14] On the other hand, it is hard to believe that this argument would hold true with regard to the fact that such a contradictory set of rules would have been created in favor of the small number of Contracting States (ultimately, only four) that adopted the Convention without Part II, while the rest of the parties would have agreed to adopt a contradiction.[15]

d.  In conclusion, application of Professor Honnold's broad approach seems to be more pertinent when dealing with the CISG itself. However, when comparing Article 55 CISG with the similar set of rules of the PECL, applicability and contractual validity requirements of the latter shall be taken into account based on the particular context of the PECL.

e.  In the PECL there is no such contradiction as the one between Articles 14 and 55 CISG. Article 2:201(1) provides that a "proposal amounts to an offer if: (a) it is intended to result in a contract if the other party accepts it, and (b) it contains sufficiently definite terms to form a contract." Consequently, if the essentialia negotii are present then subparagraph (a) indicates that a proposal can become an offer if the parties consider to be bound by that.  Thus, the contract is concluded if the offer is accepted [16] and Articles 6:104 to 6:107 apply only to validly concluded contracts to which the parties undoubtedly intended to be bound but where the price was not agreed upon for some reason. The approach of the PECL aims at eliminating the difficulties in some legal systems where the absence or insufficiency of determination of the object causes the contract to be void; the PECL regime supports saving such contracts. Being so, it seems appropriate to follow the approach advocated by Honnold when comparing Article 55 CISG with the relevant articles of the PECL because under that view Article 55 CISG applies to validly concluded contracts, just like Articles 6:104-107 PECL, while Article 14 is applied to determine whether a communication can be regarded as an offer without the parties' intent to be bound by that, similarly to Article 2:201 PECL.  The following analysis is based on the latter approach, not denying that other interpretations are also present in practice.

3.  Applicability of Article 6:104 PECL to Article 55 CISG: Determination of price

f.  Regarding Article 6:104 PECL, the wording of the relevant provisions of the PECL,[17] as stated above, and the Comments on the PECL [18] assume that the parties intended to conclude a contract, i.e., there is no doubt that they intended to be bound, but they did not agree on the price. The same is substantiated with regard to Article 55 CISG, a further proof of which, besides the above argumentation, is that "UNCITRAL in 1977 changed the opening clause ... to read 'If a contract has been validly concluded ...' [in order 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."[19]

g.  The basic condition of having failed to fix the price itself or the method for determining the price is provided for in the same way in the compared provisions. Therefore, the condition is met if the price is not fixed either directly or indirectly, explicitly or implicitly. Concerning implicit determination in the PECL, usages and practices established between the parties must be taken into account, which is also applicable with regard to Article 55 CISG.[20] Similarly, references to list prices, stock market or market prices, to commercial most-favored-party clauses or to the determination of the price by an expert is sufficient;[21] furthermore, the price is implicitly fixed not only when for example the buyer knows that the seller sells the goods according to price lists but also when the buyer should know about that.[22]

h.  When not even an implicit provision on the price can be found, the PECL clarifies the meaning of Article 6:104 by suggesting that it seems better to save a contract not specifying the price in several exceptional cases like when (a) the goods were needed urgently and there was no opportunity to agree on the price,[23] (b) it is not the custom to ask the price in advance, (c) the obligor leaves it to the obligee to fix the price (e.g., when an opinion is sought from a professional person).[24] This seems to be helpful in interpreting Article 55 CISG as well, supporting the principle of saving open-price contracts.

i.  In the absence of any indication of the price, the PECL and the CISG provide for the application of different substitutes, the former for "reasonable price",[25] the latter for "the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned".[26] The wording in the CISG also refers to some kind of reasonable price which should also be "general" at the time of the conclusion of the contract (i.e., the seller will not enjoy later increases and the buyer will not enjoy later reductions,[27]) for "goods sold under comparable circumstances" (i.e., taking into account commercial terms, territorial criteria, quantity, periods of order, special needs, terms of payment etc.[28]) and in "the trade concerned".

j.  Yet, determining the price under Article 55 CISG may involve uncertainties, e.g., special items or a certain product which is only made by one company, etc.[29] We can contend that it is appropriate to apply the "reasonableness" standard of the PECL to interpret the similar and, at first glance, more detailed definition of the CISG. Although the reasonableness standard is not expressly dealt with by the CISG, the definition in the PECL fits the manner in which this concept is used in the CISG. Therefore, reasonableness requirements of the PECL can be applied to the interpretation of Article 55 CISG.[30]

If we look only to the CISG, Article 8 provides for a reasonable person standard in determining how to understand statements made by and other conduct of a party, in which due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties. The CISG lists only three of the "all relevant circumstances"; therefore, and also because the PECL concept of reasonableness fits to that of the CISG, other relevant circumstances included in the PECL can be taken into consideration in a case governed by the CISG. Therefore, some other factors to be taken into account when determining the price under Article 55 CISG are: the nature and purpose of the contract, comparable contracts made in analogous situations, the status of the parties and any usages and practices established not only between the exact parties but also those within the trade or profession concerned.[31]

k.  There is one further significant proviso concerning the applicability of Article 55 CISG which is that it is inapplicable if there is any indication to the contrary, i.e., to the fact that, for example, the contract is to be formed only where there is agreement on the price, or if there is no generally calculable price for the goods concerned.[32] Such a situation is not covered by Article 6:104 PECL either. Although there is no express provision for that in the PECL, the Comments on the PECL deal with the question as follows: Article 6:104 PECL is not applicable if the parties failed to agree on the price – for instance, because the parties could not reach an agreement on it during the negotiations, or they left the question open for future negotiation which was also unsuccessful. Yet, even in such cases, Article 6:104 can be applied if the subsequent behavior of the parties indicates that they did intend to enter into contractual relations.[33]

The latter approach might help interpret Article 55 CISG, especially with regard to the fact that Article 8 CISG provides for the determination of the parties' intent. Consequently, it is evident that if the parties failed to agree on the price for any of the reasons above, in all likelihood, a specific price would have been intended. Therefore, if the parties failed to agree upon it, there was no contract either, except when the subsequent behaviour of the parties indicates that they did intend to enter into a contractual relationship (e.g., when the buyer placed a further offer with the seller). Of course, this approach adds nothing new to Article 55 CISG if we were to follow Professor Honnold's view, according to which that provision is only applicable to validly concluded contracts.

4. Applicability of Article 6:105 PECL to Article 55 CISG: Unilateral determination

l.  Article 6:105 PECL deals with the situation where a unilateral determination of the price [or other contractual terms] by one of the parties has been made but it is grossly unreasonable.[34] Applicability of this PECL provision to the CISG depends on the question whether Article 55 CISG allows for unilateral determination of the price by one of the parties. Professor Schlechtriem contends that "one-sided privilege to determine the price can neither be developed from general principles of the Convention, nor arrived at by recourse to internal law via the rules of private international law in order to apply the domestic right to determine the price ... [t]his, however, is bound with the risk ... that the courts will use the unavoidable degree of leeway in the consideration of evidence to the benefit of the home party".[35]

In theory, at least, the scope of providing for the method of determining the price would not be restricted in such a way. Also in some civil law systems contracts of sale with open-price terms are viewed with hostility, particularly when the unilateral fixing of the price works to the disadvantage of the weaker party.[36]

To the contrary, Enderlein and Maskow opine that it should "be admissible that reference be made to a price which a party, in practice particularly the seller, has to fix individually, i.e. not on the base of generally applicable lists. [...] Even when no reservation is made in this context, e.g. that the price is reasonable, that it is the usual price on the market, etc. and that there has to be a reasonable proportion between the price and the seller's prime costs, the fixing of an unjust price would nevertheless not be binding. This can be inferred from Articles 7, 8 or 9."[37]

m.  Perhaps it is precisely Article 6:105 PECL which helps resolve this controversy by limiting prospective "home-field advantage" and also automatic lack of binding force of unilaterally fixed prices only to the case when the latter is "grossly unreasonable". Finding a unilaterally fixed price grossly unreasonable (e.g., clear mistake of arithmetic or grossly wrong evaluation) instead of simply unreasonable, requires a higher level of unfairness whereby one should refer again to the applicability of the reasonableness standard of the PECL which has been discussed above. Those circumstances relevant in determining reasonableness or unreasonableness shall be applied in this case as well.

All in all, Article 6:105 PECL seems to help interpret Article 55 CISG, even though unilateral determination of the price is not expressly provided for in the CISG.

5. Applicability of Article 6:106 PECL to Article 55 CISG: Determination by third person

n.  Article 6:106 PECL addresses two issues concerning determination of the price [or other contractual terms] by third persons: first, the situation where the third person cannot or will not do so and, second, if its determination is grossly unreasonable.[38] Applicability of this provision to Article 55 CISG, again, depends on the admissibility of determination of the price by third parties in the CISG.   It is acknowledged that in determining the method of fixing the price it is sufficient to refer to determination by an expert [39] and also that the relationship between Articles 14 and 55 CISG would not seem to pose any problems "when the parties have agreed, explicitly or implicitly, that the price may be fixed by a third party".[40]

o.  Applicability of Article 6:106(2) raises no problems in the meaning that it provides for the substitution of a reasonable price if the third party determined a grossly unreasonable price.[41] The same applies to this situation, as stated earlier when examining Article 6:105.

p.  However, it is not certain that Article 6:106(1) would be also applicable. Although this provision of the PECL was designed to save the contract,[42] it cannot be inferred from the wording in the CISG that failure or inability of the third person to determine the price would entitle a court or arbitral tribunal to appoint another person to determine it.[43]

It seems more appropriate to conclude that, in that case, the general provision of Article 55 CISG is applicable, whereby the court or arbitral tribunal would determine the price generally charged in the relevant circumstances which are also specific upon the special nature of originally having appointed an expert third person.[44]

6. Applicability of Article 6:107 PECL to Article 55 CISG: Reference to a non-existent factor

q.  Article 6:107 PECL provides that "[w]here the price [or any other contractual term] is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted". This is a unique provision because national laws vary on this point, either opting for modification of the contract by substituting an existing factor,[45] or termination of the contract, depending on the interpretation the parties' intent.[46]

A similar provision cannot be found in the CISG; however, as the CISG is also aimed at saving the contract, it is arguably appropriate and useful to apply the PECL rule in connection with Article 55. If we contend that Article 6:107 might help interpret Article 55 CISG, regard is to be had of to Articles 8 and 9 CISG, i.e., intent, usages, practices, negotiations and subsequent conduct of the parties, so that a non-existent factor be replaced by another one which fits into the particular contractual relationship.

r. Yet, one should not forget two things. Firstly, that "[i]n the interpretation of this Convention, regard is to be had to its international character".[47] Secondly, that the PECL were designed to "be applied as general rules of contract law in the European Communities which is applicable not only to international commercial contracts for the sale of goods, but to all contract transactions -- contracts for services as well as goods and domestic as well as international contracts, including contracts with consumers".[48]

Concerning the international character of the CISG, the issues of choice of law and the applicable law come into question and may limit the applicability of Article 6:107 to Article 55 CISG. Therefore, a substituting factor should be adjusted to the requirements of the Convention, it should have a very close connection to the law applicable to the contract and it should be a factor which is applicable to international sales.

On the other hand, we should not forget that Article 6:107 PECL applies to all contracts, not only to sale of goods contracts. Therefore, its applicability is limited again – it is not clear whether such a provision would have been incorporated into a similar legal instrument dealing exclusively with the principles of the law of sale of goods.

7. Conclusions

On the various approaches concerning the relationship between Articles 14 and 55 CISG, it is not always evident that even similar provisions of the PECL would be applicable to interpret Article 55 CISG. The present analysis is based mainly on Professor Honnold's theory of broad interpretation,[49] which allows for parallel application of the two provisions of the Convention, whereby the following consequences could be drawn.

Applicability of 6:104 PECL to Article 55 CISG

Article 6:104 PECL provides good interpretative guidance to Article 55 CISG in terms of the exact and practical meaning of the provision, carefully taking into account the conditions of applying the PECL.

Applicability of 6:105 PECL to Article 55 CISG

Although there is no express provision in the CISG regarding unilateral determination of the price, applying Article 6:105 PECL to interpret Article 55 CISG in that manner seems to be helpful in balancing the controversial views concerning the admissibility of unilateral determination of the price under the CISG.

Applicability of 6:106 PECL to Article 55 CISG

Article 6:106(1) PECL seems to be inapplicable to Article 55 CISG because it cannot be inferred from the wording in the CISG that failure or inability of the third person to determine the price would entitle a court or arbitral tribunal to appoint another person to determine it. However, Article 6:106(2) PECL, similarly to what is stated with regard to the applicability of Article 6:105, can help interpret Article 55 CISG.

Applicability of 6:107 PECL to Article 55 CISG

As no similar provision exists in the CISG, the applicability of Article 6:107 PECL seems to be disputed. Applicability of the PECL provision would serve the aim of saving the contract, but its practical execution could cause uncertainty and probably also resistance by the contracting parties.

[See also commentary by the author on this subject in: John Felemegas ed., An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge University Press (2006) 419-429.]


FOOTNOTES

* Master of Laws (in Hungarian law), University of Miskolc, Hungary, 2002. Ph.D. candidate at the Department of European Law and Private International Law, University of Miskolc, specializing in international business and investment law and international commercial arbitration. She is working on her Ph.D. thesis on jurisdictional issues in ICSID arbitration.

1. Article 55 CISG reads: "Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned".

2. Article 14 (1) CISG reads: "A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price".

3.  As stated by the ICC Tribunal in ICC Arbitration 9819 of September 1999, see <http://cisgw3.law.pace.edu/cases/999819i1.html>.

4. E. Allan Farnsworth, Formation of Contract, in International Sales: The United Nations Convention on the Contracts for the International Sale of Goods § 3.04 [1], at 3-8 (Nina M. Galston & Hans Smit eds., 1984), also cited by Paul Amato, U.N. Convention on Contracts for the International Sale of Goods – The Open Price Term and Uniform Application: An Early Interpretation by the Hungarian Courts, available online at <http://cisgw3.law.pace.edu/cisg/biblio/amato.html>.

5. Art. 4 reads: "This 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. In particular, 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 or of any usage;  (b) the effect which the contract may have on the property in the goods sold."

6. Farnsworth, supra note 4; John E. Murray, Jr., An Essay on the Formation of Contracts and Related Matters Under the United Nations Convention on Contracts for the International Sale of Goods, 8 J.L. & COM. 11 (1988), available online at <http://cisgw3.law.pace.edu/cisg/biblio/murray.html>, cited by Paul Amato, supra note 4; Phanesh Koneru, The International Interpretation of the UN Convention on Contracts for the International Sale of Goods: An Approach Based on General Principles, available at  <http://cisgw3.law.pace.edu/cisg/biblio/koneru.html>; Official Records of the United Nations Conference on Contracts for the International Sale of Goods (O.R.) 45.

7. Alejandro M. Garro, Reconciliation of Legal Traditions in the U.N. Convention on Contracts for the International Sale of Goods, available at <http://cisgw3.law.pace.edu/cisg/text/garro14,55.html>; Carlos A. Gabuardi, Open Price Terms in the CISG, the UCC and Mexican Commercial Law, at <http://cisgw3.law.pace.edu/cisg/biblio/gabuardi.html#23. See also Fritz Enderlein & Dietrich Maskow, International Sales Law, at <http://cisgw3.law.pace.edu/cisg/biblio/enderlein-art55.html>.

8. Jacob S. Ziegel, Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods, at <http://cisgw3.law.pace.edu/cisg/text/ziegel55.html>; Leif Sevón, Obligations of the Buyer under the UN Convention on Contracts for the International Sale of Goods at <http://cisgw3.law.pace.edu/cisg/biblio/sevon1.html>. See also Peter Schlechtriem, Uniform Sales Law – The UN Convention on Contracts for the International Sale of Goods, available online at  <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem-55.html>; and Koneru, supra note 6.

9. John Honnold, Uniform Law for International Sales § 87 (1987), cf. § 325.3 of the 1999 3d ed. of that text.

10. Peter Schlechtriem, Uniform Sales Law – supra note 8.

11. See Carlos A. Gabuardi, supra note 7; also supported by Martin Karollus, Judicial Interpretation and Application of the CISG in Germany 1988-1994 at <http://cisgw3.law.pace.edu/cisg/text/karollus14,55.html>. See also Koneru supra note 6, commenting on Entreprise Veyon v. Societé Ambrosio, Court of Appeals Grenoble, 26 April 1995, available at <http://cisgw3.law.pace.edu/cases/950426f1.html>, where the court did not even address the question whether the missing price affects the validity of the contract.

12. Some authors state that without a fixed price there is no offer under Article 14, therefore no delivery can be taken and there is no contract, resulting that provisions dealing with the substance of the contract, i.e. neither Article 55, cannot be applied. Others claim that the validity of the contract in this case shall be determined solely under national law (see Enderlein & Maskow, supra note 7, at para 2). Further commentators assume that once a contract is concluded, the offer becomes irrelevant and the conclusion of the contract itself proves that the offer was sufficiently definite, irrespective of whether a provision was made for determining the price (see Garro, supra note 7, at supra 95).

13. Comment by Mr. Loewe (Austria), Official Records of the United Nations Conference on Contracts for the International Sale of Goods (O.R.), Vienna 10 March-11 April 1980, A/CONF. 97/19.

14. See Alejandro M. Garro, supra note 7 at supra 18.

15. See Gabuardi, supra note 7. The four countries opting out Part II were Denmark, Finland, Sweden and Norway.

16. Articles 2:204-2011 PECL.

17. Articles 2:201 and 6:104-107 PECL.

18. Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 307-314; also available online at <http://cisgw3.law.pace.edu/cisg/text/peclcomp55.html>.

19. John O. Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention, 2nd ed., Kluwer 1991, p. 201.

20. See Article 9 CISG. See also Enderlein & Maskow, supra note 7 at para 2; Sevón at supra note 8. In Adamfi Video Production v. Alkotók Stúdiósa Kisszövetkezet, Metropolitan Court Budapest, 24 March 1992, <http://cisgw3.law.pace.edu/cases/920324h1.html>, the court held that quality, quantity and price were all fixed by practices between the parties. See also Koneru supra note 6.

21. Schlechtriem, Uniform Sales Law – The Experience with Uniform Sales Laws in the Federal Republic of Germany, at http://cisgw3.law.pace.edu/cisg/text/schlechtriem14,55.html; Enderlein & Maskow supra note 7 at para 4. Leif Sevón even suggests that an invoice sent in advance which is not objected to by the buyer could mean his agreement with the price indicated therein (see Sevón, supra note 8).

22. Enderlein & Maskow supra note 7. An interesting interpretation of the Austrian courts can be found in the "chinchilla pelts case" where the buyer ordered pelts of middle or better quality at a price between 35 and 65 German Marks per piece. The Court of Appeal found that such an "agreement as to the price range did not preclude the valid conclusion of a contract since under Article 55 of the Convention, if the price is not explicit or implicit in the contract, the parties are considered to have agreed on the usual market price". Later the Supreme Court confirmed this decision but by applying Article 14 instead of 55 CISG. It was held that the order was sufficiently definite to constitute an offer under article 14 CISG, since it could be perceived as such by a reasonable person in the same circumstances as the seller (Article 8(2) and (3) CISG). Also, the Supreme Court took into consideration the behaviour of the Austrian buyer who accepted the delivered goods and sold them further without questioning their price, quality or quantity. In particular, the price was found to be sufficiently definite, so as to make the application of Article 55 CISG unnecessary. See the online presentation of the case at <http://cisgw3.law.pace.edu/cases/941110a3.html> and comments on it in Willibald Posch & Thomas Petz, Austrian Cases on the UN Convention on Contracts for the International Sale of Goods, in: 6 Vindobona Journal of International Commercial Law and Arbitration, 2002, p. 1-24, available online at <http://cisgw3.law.pace.edu/cisg/biblio/posch-petz.html>.

23. The situation described in para (a) is commonly mentioned with regard to the CISG. It reflects a very unique situation where the parties, pursuant to Article 6 CISG, derogate from Article 14 and intend to conclude a binding contract without providing for the price.

24. Excerpt from Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 307-314, available at <http://cisgw3.law.pace.edu/cisg/text/peclcomp55.html>; see also Peter Schlechtriem, Uniform Sales Law – The Experience with Uniform Sales Laws in the Federal Republic of Germany, at <http://cisgw3.law.pace.edu/cisg/text/schlechtriem14,55.html>.

25. Article 6:104 PECL.

26. Article 55 CISG.

27. Enderlein & Maskow supra note 7, at para 7. See also Veyron v. Ambrosio, supra note 11, where the commercial agent asserted that his successor benefited from lower prices than those charged to him and requested the court to reduce accordingly the debt claimed by the seller, referring to Article 55 providing for the price generally charged in the relevant circumstances. The court found this argument inadmissible because it is overridden by a contrary agreement between the parties governing the totality of the provisions of the CISG.

28. Enderlein & Maskow supra note 7, at para 10. See Russian Federation arbitration proceeding 99/1994 of 22 November 1995, available online at <http://cisgw3.law.pace.edu/cases/951122r1.html>.

29. See also Peter Schlechtriem (ed.), English Commentary on the UN Convention on the International Sale of Goods (CISG), Comment on Art. 55 by Günter Hager, Oxford 1998, p. 462; CENTRAL List of Lex Mercatoria Principles, Rules and Standards, No. IV.5.1., available at <http://tldb.uni-koeln.de/TLDB.html> under 'List of Lex Mercatoria Principles', Chapter IV 'Contract', Section 5 'Contractual Obligations', No. IV.5.1. That link leads to the Transnational Law Database of the Centre for Transnational Law (CENTRAL), which is maintained by the University of Cologne, Germany, and provides the "world's first online code for transnational law, the new lex mercatoria." The CENTRAL list of lex mercatoria principles includes in Chapter IV, Contract, Section 5, Contractual Obligations, No. IV.5.1. "Subsequent fixing of contract price", the following principle: "If the contract does not contain a provision fixing the price or a method for determining it, the parties are to be treated as having agreed to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned, or, if no such price is available, to a reasonable price."

Hager and Enderlein & Maskow are in favor of objectivization of the price determination. While Hager explains that using the term "average price" would be more appropriate, Enderlein & Maskow, without wishing to change the wording of the CISG, interpret the "general price" term as meaning (a) a uniform price level if there is such in the relevant trade, or (b) an average price if the prices in the trade differ but such a price can be calculated on the basis of prices used by representative sellers. Eörsi even suggests that, in case of doubt, the world market price shall prevail. Cf. Enderlein & Maskow, who instead of the latter, opine that a price typically agreed upon between partners from the countries where the parties have their place of business should be agreed upon.

See also the much debated decision in United Technologies International, Pratt & Whitney v. MALÉV Hungarian Airlines, Legfelsöbb Bíróság, Gf. I. 31, 349/1992/9, also available online at <http://cisgw3.law.pace.edu/cases/920925h1.html>. The Hungarian Supreme Court reversed the decision of the Metropolitan Court Budapest by stating that the price of an additional Boeing engine, which was added to the contract later, was not fixed and that the price of the Airbus engine, which Malév did not choose, did not cover additional accessory equipment, meaning that the proposal did not include a sufficiently definite price, therefore it did not qualify as an offer and there was no contract. The Supreme Court further held that Article 55 CISG was not applicable because "jet engines have no market price". The term "sufficiently definite price" was obviously misinterpreted, which has been confirmed by several authors and several national laws would find the decision strange, too. Firstly, because Article 8 was completely disregarded by the court and instead, domestic law was applied, secondly because there was enough information in the communications which would have allowed for finding an implicitly fixed price. On the other hand, the court's reasoning concerning a non-existent market price is also questionable with regard to the possible methods of determining the price detailed above. The Hungarian Court made a mistake with regard to thte interpretation of Article 55 CISG by viewing it as a method for determining the price and created a questionable link between the possibility to cure the lack of price term in the offer, an existing market price and acceptance. Yet, the Court failed o clarify the relationship between the elements of Articles 14 and 55. In consequence of all criticism concerning the decision of the Supreme Court, its applicability to further legal disputes is questionable. It would mean to dismiss the requirements of Article 7 CISG concerning uniform interpretation. However, it should not be forgotten that the Malév decision was a very early interpretation of the CISG by Hungarian courts.

For further comments on the Malév decision, see Amato supra note 4; see also Koneru supra note 6; see also Harry M. Flechtner, The Several Texts of the CISG in a Decentralized System: Observations on Translations, Reservations and Other Challenges to the Uniformity Principle in Article 7 (1), available at <http://cisgw3.law.pace.edu/cisg/wais/db/editorial/flechtner920925h1.html>; Claude Witz, The Interpretive Challenge to Uniformity, at   <http://cisgw3.law.pace.edu/cisg/wais/db/editorial/witz920925h1.html>.

See also the following decisions: Oberlandesgericht Frankfurt am Main, 4 March 1994 (Germany) where the Court found that an offer is not an offer unless it conteins all essential elements of Article 14 and that Article 55 is only applicable incases where there is performance of the contract; Bezirksgericht St. Gallen, 3 July 1997 (Switzerland) where the court mistakenly considered that the invoice price was to be interpreted as the price generally charged under comparable circumstances in the trade concerned; Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry, 3 March 1995 (Russia) where the tribunal ruled that the agreement of the parties to agree on the price in the future was not a valid method for determining the price, therefore found Article 55 inapplicable. For deeper analysis see comments by Pilar Perales Viscasillas in The Draft UNCITRAL Digest and Beyond: Cases, Analysis and Unresolved Issues in the U.N. Sales Convention – Papers of the Pittsburgh Conference Organized by the Center for International Legal Education (CILE), Franco Ferrari, Harry Flechtner & Ronald A. Brand eds., Sweet & Maxwell, Thomson, Sellier, 2004, p. 271-281.

30. The universality of the reasonableness standard is evidenced by the fact that regardless of reasonableness being a common law institution, it is also an attribute to civil law systems where 'bonus pater familias' or 'good businessman' standards are used. See Overview Comments on Reasonableness, Albert Kritzer, available online at <http://cisgw3.law.pace.edu/cisg/text/reason.html>: "Reasonableness is specifically mentioned in thirty-seven provisions of the CISG and clearly alluded to elsewhere in the Uniform Sales Law. Reasonableness is a general principle of the CISG." S ee also comments by Jelena Vilus, available online at <http://cisgw3.law.pace.edu/cisg/text/reason.html#vilus; Ziegel supra note 8.

31. See Kritzer at supra note 30, citing Ole Lando & Hugh Beale supra note 18 at 126-128.

32. Enderlein & Maskow, supra note 6 at para 5.

33. Ole Lando & Hugh Beale, supra note 17.

34. Article 6:105 PECL: "Where the price or any other contractual term is to be determined by one party and that party's determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted."

35. Peter Schlechtriem, 50 Years of the Bundesgerichtshof [Federal Supreme Court of Germany] – A Celebration Anthology from the Academic Community – Uniform Sales Law in the Decisions of the Bundesgerichtshof at II., at <http://cisgw3.law.pace.edu/cisg/biblio/schlechtriem3.html>. See also the Malév decision at supra note 29.

36. Garro supra note 7.

37. Enderlein & Maskow supra note 7, at para 4. Unilateral determination is allowed e.g. in the German BGB, the Greek CC, the Portuguese CC, the Danish, the Swedish and the Finnish Sale of Goods Act or in England. Limited unilateral determination is allowed in the Austrian ABGB. The Spanish CC, the Italian CC, French, Belgian and Luxembourg law do not permit unilateral determination of the price for sale of goods contracts.

38. Article 6:106 PECL provides: "(1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it. (2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted."

39. See supra note 21 and accompanying text.

40. Sevón supra note 8; see also Enderlein & Maskow supra note 7, para 4.

41. The reasonable price can be fixed by the court in Germany (under BGB § 317 (1)), Greece (under CC Art. 371), Italy (CC Art. 1349 (1)) and Portugal (under CC Art. 400). Even judicial revision of the price determined by the third person is also available in Italy and Germany. Fixing of a reasonable price by the court is not permitted in France and Luxembourg, for example (see, e.g., French Cour de Cassation, Civ. 2, 6 June 1950, Bull. II no. 205, p. 141). All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

42. For example, Art. 1592 (1) of the French CC and Section 9 of the UK Sale of Goods Act 1979 provide that the contract disappears in such cases. All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

43. Yet, this is the case in Dutch (BW arts. 6:2 and 6:248) and Belgian law (see M.L. and M.E. Storme TPR 1985, 732 Nos 15 and 16). All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

44. The German BGB, the Greek, the Italian and the Portugal CC provide that if the third person fails to act, the court will act for him. (For references see supra note 41.) However, in some legal systems, the contract is void if the third person fails to determine the price, e.g., in the French and Luxembourg CC arts. 1592, the Austrian ABGB (Arts. 1056 and 1057), in the Spanish CC (Art. 1447 (2)) for sale of goods, in England and Scotland under the Sale of Goods Act 1979 (s. 9(1)). All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

45. For example, Denmark, Germany (BGB § 242) or The Netherlands (BW Art. 6:258). All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

46. In French and Luxembourg law the contract is terminated in such cases. But nowadays French law is more in favor of interpreting the intents of the parties (see Cass.Civ.2, 18 July 1985, Bull II no.113 p. 84)). The same applies to Belgium (see Cour de Bruxelles 29 Oct. 1962, JT 1963 102), Portugal (CC Art. 239), Greece (CC Art. 200), Spain (CC Art. 1158) and Austria (ABGB § 194). All references to sources of law are taken from Ole Lando & Hugh Beale, supra note 18.

47. Article 7 (1) CISG.

48. See Predrag Cvetkovik, Remarks on the manner in which the PECL may be used to interpret or supplement Article 14 CISG, available online at  <http://cisgw3.law.pace.edu/cisg/text/peclcomp14.html#er>.

49. For the reasons, see paras. [a]-[d], infra.


Comment and notes on PECL 6:104, PECL 6:105, PECL 6:106, and PECL 6:107

Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, are presented below. The source of this material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 307-314.


COMMENT AND NOTES: PECL Article 6:104: Determination of Price

Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price.

Comment

A. Introduction to Articles 6:104-6:107

Article 6:104 and the articles which follow it are intended to govern cases in which there is no doubt that the parties intended to be bound by the contract, but some element of it is not determined sufficiently precisely for it to be performed. The Articles create rules which can be used to "save" the contract in those cases in which it seems reasonable to do so because it is probable that the parties meant there to be a binding contract.

The commonest case is where the price, that is, a counter-performance to be paid in money, is not fixed, and it is this which is covered by Article 6:104. Other terms may also be missing; these may be supplied under Article 6:102 above.

The approach taken by the Principles abandons the traditional, rigorous attitude of some legal systems, under which the absence or insufficient determination of the object necessarily means that the contract is void or is discharged. Rather than take such a dogmatic attitude it seems better to empower the court to save the contract. [page 307]

As far as quality is concerned, Article 6:108 of the Principles provides that, if the quality of a performance to be rendered is not defined by the contract, it must be of at least average quality. The provisions are clearly not intended to exclude the possibility of the court resorting to the implication of terms in other circumstances.

B. The presumption in Article 6:104

Article 6:104 assumes that, on the one hand, the parties intended to conclude a contract and, on the other, that they did not agree on a price. It may have been an emergency.

Illustration 1: A helicopter carrying urgently needed medical supplies has to land after having engine trouble. The carrier telephones the helicopter manufacturer and asks for a repairman to be sent as soon as possible. Nothing is said about the price. The contract is valid nonetheless and is considered to be one for a reasonable price.

In some other contracts it is not the custom to ask the price in advance; or the [obligor] leaves it to the [obligee] to fix the price (e.g. when an opinion is sought from a professional person).

To avoid all dispute about the validity of a contract which does not contain a price, the Article creates a presumption that the parties intended the normal price. Thus there will nearly always be some price, through either express or implicit agreement of the parties or according to the presumption. The presumption will cease to apply if the parties have tried to fix a price but did so in such an uncertain manner that the price is neither determined nor determinable. In such a case there will be no contract.

C. Conditions of application

It is important to note the precise conditions under which this Article will apply.

Firstly, the provisions cannot apply unless the parties themselves have not fixed the price, directly or indirectly, explicitly or implicitly. Usages and any practices established between the parties must be taken into account. Thus if it is customary for a contract with an architect to be at the scale fee established by the architects' professional association, the price is already determinable.

Secondly, Article 6:104 may not be used to allow the court to intervene when the parties had failed to agree; if, for instance, during the negotiations the parties have been unable to come to any agreement over the price. Similarly, if the parties left the question open for future negotiation and when this took place they were unable to reach an accord, the court may not intervene to fix a reasonable price. However, the subsequent behaviour of the parties may show that they did intend to enter contractual relations. In this case, the rule created by Article 6:104 can be applied to fill the gap.

Illustration 2: Construction Company A normally hires the cranes it uses for its works from Company B. The latter informs A that it is increasing its prices "to a figure to be agreed by the parties". Before any agreement on the price has been reached A orders a further crane. The crane is delivered and put into use. The contract may be considered as concluded at a reasonable price. [page 308]

On what constitutes a reasonable price, see Article 1:302.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Agreement on subject matter

Parties who wish to make a contract must determine its subject matter; they must agree on what is to be performed. All the laws agree on that. Several of the legal systems call this subject matter the "object" (objet) of the contract and insist that the object must be possible and lawful. See Note to Article 2:103.

2. Price as a requirement

Systems also differ as to whether the price must be determined by the parties, or be determinable, in order for the contract to be valid. In some of the systems this question is linked to the object.

The laws of the countries which do not apply the concept of object do not require the parties to have agreed on the price of a party's performance. The law will decide which price is to be paid, see below. Even some of the systems which require an object will make exceptions as far as the price is concerned, see ITALIAN CC art.1474(1) for the sale of goods, art.1657 for supply of work and materials, art.1709 for mandate, art.1733 on factorage and art.2233 for professional services; PORTUGUESE CC art.883 for sale of goods and art.1211 for work and materials; and SPANISH CC art. 1447 for sale of goods, arts. 1543 and 1547 for locatio conductio rei, art. 1589 for work contracts and art. 1711 for mandate.

The FRENCH courts have been strict in their requirement on the agreement on the price, notably in sales contracts, see for instance Cass.com. 1 October 1978, D 1979 135, note Houin. The "Alcatel" case (Ass. Plén. 1 December 1995, J.C.P. 1995.II.22.565, note J. Ghestin) has changed the position of French Law by deciding first that CC art. 1129 (on the determintation of the object) does not apply to the price and secondly that when an agreement provides for the conclusion of further contracts (framework contract), the non-determination of the price in the initial agreement does not affect its validity, the abusive fixation of the price opening only the right to terminate or to obtain damages. The exact significance of this case has yet to be clarified. BELGIAN case law has also been ready to infer a reference to the current price, though sometimes the absence of an agreed price has been taken to mean that one party may determine it unilaterally: M.E.Storme, TPR 1988, 1259, no. 29ff.. The LUXEMBOURG courts have been exacting in exclusive supply agreements which have been held void for lack of determination (Cass. 27 Sept. 1989, No.10470) but have been less severe as regards contracts for exclusive dealership, which were held valid (Cass. 26 Oct. 1988, No.9804) and other framework contracts, which need not fix the terms of the contracts to be made under them (Cour d'appel (commercial), 2 October 1996, Pasicrisie 30, p. 145). SPANISH courts favour a flexible approach under CC arts. 1539 and 1711: the court may fix the price according to the market price, uses or, preferably, the specific circumstances of the contract (See TS 21 May 1983, 12 June 1984, 16 January 1985 and 21 October 1985).

3. What price?

Those States which do not require an object and those which make exceptions as far as the price is concerned have often provided in their laws that if the parties have not agreed upon the price it is the one which is usually charged: see for AUSTRIA, ABGB § 1152 on labour contracts; for GERMANY BGB § 612(2) on labour relationships, § 632(2) on supply of work and materials and § 653(2) on agents' commissions; for PORTUGAL and ITALY see the provisions cited above; and for the NETHERLANDS see BW art. 7:4 on sales, 7:405(2) on mandate and 7:601(2) on deposit. Under Dutch sales law, where the price has not been determined a reasonable price may be charged. In deciding what is reasonable regard shall be had to the seller's customary charges. In mandate and deposit the rule is reversed: the customary price may be charged unless it is unreasonable.

Under several provisions the parties are taken to have agreed upon a price which is fair and reasonable, and this seems to have been accepted as a general principle: see GERMAN BGB § 315 and GREEK CC art.371, which applies to specific contracts as well. Under the DANISH Sale of Goods Act § 5 the price is the one charged by the seller unless it is unreasonable, and this rule applies to other contracts as well. § 45 of the FINNISH and SWEDISH Sale of Goods Acts provides that if the price is not determinable from the contract, the buyer shall pay what is reasonable with regard to the nature and condition of the goods, the current price at the time of the conclusion of the contract and other circumstances; § 47 treats the buyer as accepting the price stated on the seller's invoice if it is not unfair and he does not object to it within a reasonable time. In AUSTRIAN law [page 309] the parties are taken to have agreed a reasonable price only if there is some indication that this was what they intended: Rummel (-Aicher) ABGB § 1054 NO. 10.

Under the COMMON LAW the price to be charged in the absence of an agreement is the reasonable price, see U.K. Sale of Goods Act 1979, s.8 and British Bank for Foreign Trade Ltd. v. Novinex Ltd. [1949] 1 K.B. 623; SCOTS Law, Avintair Ltd v. Ryder Airline Services Ltd 1994 SLT 613; IRISH Sale of Goods Act 1893, s.8; U.S. UCC § 2-305 and Restatement 2d § 204.

4. International instruments

A rule similar to the one stated in Article 6:104 is to be found in Art.6 of the EC Directive on the Co-ordination of the Laws of Member States Relating to the Self-employed Agent of 18 Dec. 1986 (OJEC No. L 382/17). CISG art.14 makes a fixed or determinable price a necessary element of the offer. Where a contract is nonetheless concluded without such a price, Art. 55 makes reference to the price generally charged for similar goods, see Honnold, §§ 137.4-137.8 and 324-325. Under the Unidroit Principles art 5.7 (1) the parties are considered to have made reference to the price generally charged for such performance in comparable circumstances in the trade concerned, and if no such price is available, to a reasonable price.

See generally Zweigert & Kötz 383-386; Tallon chap.1; Nicholas 49-50.

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COMMENT AND NOTES: PECL Article 6:105: Unilateral Determination by a Party

Where the price or any other contractual term is to be determined by one party and that party's determination is grossly unreasonable, then notwithstanding any provision to the contrary, a reasonable price or other term shall be substituted.

Comment

The text first of all recognises that the parties may leave the price to be determined unilaterally by one of them. This determination must be made in a reasonable manner. If it is not, the court may intervene to protect the [obligor] against the [obligee] fixing the price abusively. Thus if a broker were to fix its commission at a grossly unreasonable level, the court could reduce it to a reasonable level.

The rule may work the other way round if it is the [obligor] who is to fix the price. The court could then increase an unreasonably low price.

The operation of this Article cannot be excluded by contrary agreement; any clause (which might be a standard clause) which purported to exclude the jurisdiction of the court to review a price fixed unilaterally will be void.

It should be noted that, to prevent abuse of this section, the section stipulates that the price or other term fixed must be grossly unreasonable.

As to what is reasonable, see Article 1:302.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Unilateral determination allowed

Most of the Member Sates allow agreements whereby a party may unilaterally determine a contractual term, and therefore also the price: see GERMAN BGB §315; GREEK CC arts.371 and 372; PORTUGUESE CC art.400; DANISH Sale of Goods Act, § 5; FINNISH AND SWEDISH Sale of Goods Acts, § 45; and Gomard, Obligationsret I, 34. The term must be reasonable and is subject to the court's control. The latter rule also applies to those countries where in principle a unilateral determination is not allowed (see below) but where exceptions are made, e.g. on excessive charges by agents (mandataires) in FRANCE, Cass.req. 29 Jan. 1897, DP 1897 1 153. AUSTRIAN ABGB [page 310] § 1056 provides expressly only for determination of the price by a third party, but unilateral determination is permitted provided the price fixed is reasonable: See OGH 10 July 1997 JBI 1980, 151; 10 July 1991 SZ 64/92, F. Bydlinski, JBI 1975, 245; Krejci, ZAS 1983, 204; Bürge, JBI 1989, 687. In the DUTCH BW there are no provisions which expressly allow unilateral determination, but one will be set aside by the courts only if it is unreasonable and unfair, BW art. 6:248(2). The same is true for BELGIAN law: M.E.Storme, TPR 1988, 1259; FINNISH law, see Wilhelmsson, Standardavtal 147; SWEDISH law, Ramberg, Köplagen 485. See also Unidroit art 5.7(2)

In ENGLAND May & Butcher Ltd v. R. (1929) [1934] 2 K.B. 17n. contains a dictum to the effect that the price may be left to the determination of one party. However there is no authority to the effect that the determination must be reasonable, nor does any such rule exist in SCOTTISH law or IRISH law, see Tradax (Ireland) v. Irish Grain Board [1984] I.R. 1.

2. Unilateral determination allowed in certain cases

Some legal systems only admit the validity of a contract which allows the price to be fixed by one party alone only in certain circumstances. Thus SPANISH CC art. 1449 forbids unilateral determination in the sale of goods context, but the rule has been construed narrowly in order to preserve the general principle stated in art. 1256: unilateral determination is allowed if accepted ex post by the other party or if related to objective circumstances such as prices in reasonably competitive markets (arts. 1447 and 1448). FRENCH sales law did not even permit a reference to published tariffs; BELGIAN law applies the same rule but with greater flexibility, but French law has now changed with the Alcatel Case, above notes to Article 6:104. LUXEMBOURG law does not permit one party to fix prices in a sales contract, CC art.1590, but does in a service contract. French, Belgian and Luxembourg law have long accepted judicial reduction of excessive charges by mandataires, see note 1 above.

3. Unilateral determination not allowed

In ITALY CC arts. 1349 and 1473 allow determination by a third person; the implication is that determination by a party is not permitted. See Sacco 553ff.

See generally Tallon § 2.2.1.15.

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COMMENT AND NOTES: PECL Article 6:106: Determination by a Third Person

(1) Where the price or any other contractual term is to be determined by a third person, and it cannot or will not do so, the parties are presumed to have empowered the court to appoint another person to determine it.

(2) If a price or other term fixed by a third person is grossly unreasonable, a reasonable price or term shall be substituted.

Comment

A. Term to be fixed by court

Using a variety of forms and types of clause, it is common practice in international contracts for the price or part of it to be fixed by a third person chosen by the parties.

It may be that the price for a work of art is to be fixed by an "expert opinion". The whole or a fraction of the price may be left to be determined either as at the date of the contract or later. For example in the FIDIC Conditions for Engineering Work it is provided that the engineer will fix the price for, among other things, additional work. If he does not do so, or does not do it properly, the contract is not void : the contractor is entitled to a reasonable sum.

Frequently the third person is in a contractual relationship with one of the parties. He still acts as a third person if he is to act independently (for example, the consulting engineer under the FIDIC conditions). [page 311]

The purpose of the Article is to save the contract in the case where the third person chosen cannot carry out his task (for example because he has died) or refuses to do it. Of course, the parties may agree on a replacement, but it can happen that one refuses to do so in order to escape a contract which has turned out to be disadvantageous to it.

One solution would be to hold that the contract disappears (French CC art. 1592(1); UK Sale of Goods Act 1979, Section 9). It seems better to treat the parties as having given the court power to replace the third person.

It is, however, only a rebuttable presumption. The parties may expressly or implicitly agree that the third person shall be irreplaceable, for instance when an expert is chosen intuitu personae. In this case, if the third person does not act, there is no contract.

B. Term fixed by third person unreasonable

If the price or other term fixed by the third person is grossly unreasonable, it seems coherent, particularly in the light of Article 6:105 which allows for the revision of a price fixed unilaterally by one party, to give the court power to avoid an unreasonable valuation. However, taking into account that the parties in choosing valuation by a third person have taken the risk of errors, judicial intervention is only permitted under this Article when the error is manifestly unreasonable, such as a clear mistake of arithmetic or a grossly wrong valuation.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Determination by third person

All the legal systems permit the parties to appoint a third person to determine the price or any other contract term. However, they differ as to what will happen if the third person fails to fix the price or the term.

(a) Third person replaced

The solution adopted by Article 6:106, leaving it to the court to appoint another person to determine the price or the term in all cases where the third party fails to do so or fixes an unreasonable price or term, is in accordance with DUTCH law, see BW arts. 6:2 and 6:248, and BELGIAN law: there the judge will appoint another third person to act unless the parties agree that the court should act for him (M.L. and M.E.Storme TPR 1985, 732 Nos. 15 and 16). It is probably not found in the other Member States.

b) Court determination

In GERMANY, BGB § 317(1), GREECE, CC art. 371, ITALY, CC art. 1349(1) and PORTUGAL, CC art. 400, there is a presumption that the third person was appointed to fix a reasonable price. If he fails to act the court will act for him and fix a reasonable price (see, for GREECE, Full Bench of Areios Pagos 678/1977, NOB 26 (1978) 360-361). In ENGLAND, where the agreement is generally avoided if the third party fails to fix the price, see below, the court will nevertheless fix the price or the term provided that the third party provision is subsidiary and inessential, and only made to provide a machinery for fixing a reasonable price or term, see Chitty, § 2-094 and Sudbrook Trading Estate Ltd v. Eggleton [1983] A.C. 444 (H.L.); similarly for IRELAND, see Cotter v. Minister for Agriculture (High Court, 15 Oct. 1991, unrep.).

Under Unidroit art. 5.7(3) where the price is to be fixed by a third person, and that person cannot or will not do so, the price shall be a reasonable price. This means that in cases where the parties cannot agree on what is a reasonable price the court may have to decide it.

(c) Contract void

Several legal systems treat the contract as void if the third person fails to determine the price: FRANCE and LUXEMBOURG CC arts.1592; AUSTRIA, ABGB §§ 1056, 1057; ENGLAND [page 312] and SCOTLAND, Sale of Goods Act 1979, s. 9(1) (but see above); SPANISH CC art. 1447(2) for sale of goods, though the rule has been construed strictly in order to preserve the contract if possible. See further Tallon § 3.3.2.01 ff. The same rule applies in GERMANY under BGB § 319(2), GREECE under CC art. 373 and ITALY, CC art.1349(2), and BELGIUM in cases where the third person has a free discretion as to how to determine the price or term.

2. Determination by third person unreasonable

If the price or term fixed by the third person is unreasonable the court will fix a reasonable price or term in GERMANY, GREECE, ITALY and PORTUGAL, see note 1(b) above. In ITALY a revision by the court is also possible if a third person who has unfettered discretion acts in a way which is contrary to good faith, and in GERMANY, if the third party's determination is contrary to law or good morals; but GREEK case law does not permit judicial intervention in such cases: AP 217/1974, NoB 22 (1974) 1164. In DENMARK, FINLAND and SWEDEN the general fairness clause in Contract Act § 36 would apply in this situation.

FRENCH and LUXEMBOURG law do not permit the court to fix a reasonable price or term in case the one fixed by the third person is unreasonable. "Having left the decision to fix the price to a third person in accordance with Art.1592 of the Civil code the parties have given his decision the force of law. The judge may not by modifying this decision impose upon the parties a contract different from their agreement": FRENCH Cour de Cassation, Civ. 2, 6 June 1950, Bull. II no. 205, p.141. (The rule may differ in respect of service contracts.) ENGLISH law takes a similar attitude, see Collier v. Mason (1858) 25 Beav. 200.

See generally Tallon § 3.3.2.01ff.

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COMMENT AND NOTES: PECL Article 6:107: Reference to a Non-Existent Factor

Where the price or any other contractual term is to be determined by reference to a factor which does not exist or has ceased to exist or to be accessible, the nearest equivalent factor shall be substituted.

Comment

In periods of inflation it becomes common practice to use price fluctuation clauses. But it can happen that the index of prices selected as the basis of the clause ceases to be available, perhaps because the organisation which published it stops doing so or because the components of the index are changed so that it no longer complies with the clause. It is not easy to determine the consequences of the disappearance of the index and thus of the indexation. Does the contract continue at a price fixed in accordance with the last price published in the index? Or does it cease to be enforceable? It seems preferable in this situation to use the nearest equivalent index, which if necessary can be determined by the court, so that the contract can continue more or less as intended by the parties.

Illustration 1: In a long-term lease the rent is indexed by reference to the index of construction costs published by the Academy of Architects. The latter discontinues publications of the index. The index of construction costs published by the National Statistical Institute may be substituted.

The rule can apply to factors necessary to determine other terms than price.

Illustration 2: An employment contract provides for holidays in accordance with the nationally agreed terms of employment of a certain category of employees. [page 313] When this category of employees ceases to exist, there is no longer such an agreement. The nationally agreed terms on holidays for the nearest equivalent category of employees may be substituted.

Notes [Match-ups with Continental and Common Law domestic rules, doctrine and jurisprudence]

1. Modification of the contract

When the price or another term is to be determined by reference to a factor and this factor proves not to exist or disappears, some of the legal systems provide for a modification of the contract. Thus in DENMARK the situation has been considered a "failure of assumptions" (see note to Article 4:103), in GERMANY a Wegfall der Geschäftsgrundlage, see BGB § 242, and in the NETHERLANDS an unforeseen contingency under BW art. 6:258. In these countries the contract is modified and the missing factor is replaced by the nearest equivalent one, see eg DENMARK, Supreme Court 15 June 1977, UfR 1977 641 and Gomard, Kontraktsret 79. See also Unidroit art 5.7(1). In contrast, in ITALY CC art. 1467 allows the plaintiff to obtain termination unless the defendant offers a fair modification.

2. Interpretation

The disappearance of a factor is in FRANCE and LUXEMBOURG considered to put an end to the contract because the objet (price) has disappeared. Some FRENCH decisions have followed this rule and have not allowed a modification. Other more recent decisions have, however, used the rules on interpretation. Relying on the presumed intention of the parties they have modified the contract, see e.g. Cass. Civ.2, 18 July 1985, Bull. II no.113 p. 84. The BELGIAN courts have taken the same attitude, see Cour de Bruxelles 29 Oct. 1962, JT 1963 102. Similar methods are used in PORTUGAL, GREECE and SPAIN where the courts may resort to the presumed intention of the parties and the good faith principle, see Portuguese CC art. 239; Greek CC art. 200; Spanish CC art. 1158. A similar approach may be taken by the AUSTRIAN courts on the basis of ABGB § 194. In ENGLAND it is thought that the court would hold the contract to have become of no effect unless it is decided that the reference to the factor was merely a way of fixing a reasonable term or price, in which case the court would presumably either substitute an equivalent index or fix the reasonable price or term itself, see Note 1(b) to Article 6:106. SCOTTISH law seems to be to this effect. In Wight Civil Engineering v Parker (O.H.), 1994 S.L.T. 140 the contract referred to interest fixed in accordance with the Minimum Lending Rate published by the Bank of England. When this ceased to be published the Average Base Lending Rate of four leading banks was substituted. [page 314]

See generally Rodière & Tallon § 3.1.2.01 and Tallon 191f.

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© Pace Law School Institute of International Commercial Law - Last updated January 8, 2007
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