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EDITORIAL REMARKS
Filanto, S.p.A.v. Chilewich International Corp.

U.S. District Court (SDNY) 14 April 1992

EDITOR: Albert H. Kritzer

Summary remarks

As the parties were from different Contracting State, the CISG was held applicable pursuant to Article 1(1)(a).

Jurisdiction. At issue was acceptance of an arbitration clause contained in an agreement buyer had executed with its sub-purchaser, a clause buyer sought to have applied to its contract with the seller. The "overriding basis" for subject matter jurisdiction was held to be provisions of an Arbitration Convention whose application to the facts of the case is said to be "informed" by the law governing the contract. This was the court's lead in to its interpretations of the CISG.

Miscellaneous Observations of the Court

General principles (arbitration clauses)/Severability. As a general principle citing, by way of analogy, the manner in which Article 81(1) separates arbitration clauses from other clauses in the context of avoidance, the court states that "contracts and the arbitration clauses included therein are considered to be 'severable'".

Formal requirements (Statute of Frauds, parol evidence rule). Citing Articles 11 and 8(3), the court states that the CISG "essentially rejects both the Statute of Frauds and the parol evidence rule".

Pivotal Issues

Conclusion of contract/Acceptance of offer/Silence or inactivity as acceptance/Practices of the parties. The pivotal holding of the court is as stated in UNCITRAL's abstract of the case: "Although under Article 18(1) silence is not usually acceptance, the court finds that under Article 8(3) the course of dealing between the parties created a duty on the part of the [offeree] to object promptly and that its delay in objecting constituted acceptance of the . . . offer."

General principles (duty to communicate)/Good faith. Winship puts a key ruling of the court as follows: "[T]he opinion may . . . be read as saying that parties in a long-term relationship owe to each other a duty to communicate, a duty which ultimately may be derived from a duty to act in good faith" (Peter Winship, "The UN Sales Convention and the Emerging Case law", in Emptio-Venditio Internationales, Neumayer ed. (Basel 1997) 228).

Other key issues are:

Intent/Subsequent conduct of a party. Article 8(3) permits reliance upon subsequent conduct of a party as evidence of intent. The offer, acceptance of which was in dispute, contained a notice requirement as well as the arbitration clause at issue. Subsequent to the filing of the Complaint in the court proceeding, seller sent to buyer a letter asserting the notice clause as a defense to buyer's claim. The court regarded seller's acceptance of this element of the offer as acceptance of the entire offer, including its arbitration clause.

Battle of the forms/Acceptance with modifications (material modifications). The contract came about by lengthy correspondence and meetings of the parties in a situation in which it was difficult to pinpoint which of the exchanged documents was the offer and which the acceptance. This is an example of a fact pattern that does not quite fit the classic offer/acceptance pattern of the CISG's provisions on formation of the contract; a situation that leads to interpretation of these and related provisions so as to "make them fit". The holding of the court turns on assent as evidenced by circumstantial behavior. The case is also citable in the context of "battles of the forms". Relevant CISG provisions (none of which focus specifically on battles of the forms) include: Article 19 and Articles 8 and 18.

Detailed remarks

The case involves a demand by buyer for arbitration of a dispute and a motion by seller to enjoin arbitration.

The background is:

The chronology of events was:

Jurisdiction. The court stated that it "finds [an] overriding basis for subject matter jurisdiction . . . Chapter 2 of the Federal Arbitration Act, which comprises the Convention on the Recognition and Enforcement of Foreign Arbitral Awards . . . The United States, Italy and the USSR are all signatories to this Convention and its implementing legislation makes it clear that the Arbitration Convention governs disputes regarding arbitration agreements between parties to international commercial transactions. . . . [T]he narrow scope of the inquiry required by the Arbitration Convention [is] [a]ll this court need do is determine if a sufficient 'agreement in writing' to arbitrate disputes exists between these parties. . . . [T]hat inquiry is informed by the provisions of the [applicable law] . . ."

Applicability. The court stated: "[T]he 'general principles of contract law' relevant to this action do not include the Uniform Commercial Code; rather the 'federal law of contracts' to be applied in this case is found in the United Nations Convention on Contracts for the International Sale of Goods (the [CISG]) . . . FN5. This Convention . . . is a self-executing agreement which entered into force between the United States and other signatories, including Italy, on January 1, 1988. . . . [A]bsent a choice-of-law provision, and with certain exclusions not here relevant, the Convention governs all contracts between parties with places of business in different nations, so long as both nations are signatories to the Convention. [CISG] Article 1(1)(a). Since the contract alleged in this case most certainly was formed, if at all, after January 1, 1988, and since both the United States and Italy are signatories to the [CISG], the court will interpret the 'agreement in writing' in light of and with reference to, the substantive international law of contracts embodied in the [CISG]."

FN5 "[T]he [CISG] is also 'state law'. U.S. Const. art. VI cl. 2 . . . ('[T]he Constitution, laws, and treaties of the United States are as much a part of the law of every state as its own local laws and constitution')."

Severability. The court stated that "contracts and the arbitration clauses included therein are considered to be 'severable', a rule that the [CISG] itself adopts with respect to avoidance of contracts generally. [CISG] Article 81(1)."

Formal requirements. The court stated that, "in provisions potentially relevant to this [proceeding], the [CISG] essentially rejects both the Statute of Frauds and the parol evidence rule. [CISG] Article 11; Article 8(3)."

Conclusion of contract/Acceptance, criteria for/Silence or inactivity as acceptance/Acceptance with modifications/Intent/Practice of the parties/Subsequent conduct/Battle of the forms. The court summarized the contentions of the parties and ruled as follows:

BUYER'S POSITION. "[Buyer] contends that the Memorandum Agreement dated March 13 . . . was an offer. [Buyer] then argues that [seller's] retention of [that], along with its subsequent acceptance of [buyer's] performance under the Agreement -- the furnishing of the . . . letter of credit [in May] -- estops it from denying its acceptance of the contract. Although phrased as an estoppel argument, this contention is better viewed as an acceptance by conduct argument, e.g., that in light of the parties' course of dealing, [seller] had a duty timely to inform [buyer] that it objected to the incorporation by reference of all the terms of the Russian Contract. Under this view, the return of the Memorandum Agreement, signed by [seller], on August 7, was ineffective as a matter of law as a rejection of the March 13 offer, because this occurred some five months after [seller] received the Memorandum Agreement and two months after [buyer] furnished the letter of credit. Instead, in [buyer's] view, this action was a proposal for modification of the March 13 agreement. [Buyer] rejected this proposal, by its letter of August 7 to [its agent] and the August 29 fax by [its agent] . . . which communication [seller] acknowledges receiving. Accordingly, [seller] under this interpretation is bound by the written terms of the March 13 Memorandum Agreement; since that agreement incorporates by reference the Russian Contract containing the arbitration provisions, [seller] is bound to arbitrate."

SELLER'S POSITION. "While [seller] apparently agrees that the March 13 Memorandum Agreement was indeed an offer, it characterizes its August 7 return of the signed Memorandum Agreement with the covering letter as a counter-offer. . . . [U]nder [seller's] analysis, Article 19(1) of the [CISG] would apply. That section, as the Commentary to the [CISG] notes, reverses the rule of Uniform Commercial Code Section 2-207, and reverts to the common law rule that 'a reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. [CISG] Article 19(1). Although the [CISG], like the Uniform Commercial Code, does state that non-material terms do become part of the contract unless objected to, [CISG] 19(2), the [CISG treats inclusion (or deletion) of an arbitration provision as 'material', [CISG] 19(3). . . . The August 7 letter, therefore, was a counter-offer which, according to [seller], [the buyer] accepted by its letter dated September 27, 1990. Though that letter refers to and acknowledges the 'contractual obligations' between the parties, it is doubtful whether it can be characterized as an acceptance."

SUMMARY. Winship's summary of the offer-acceptance issues present is: "The parties presented the case within an offer-acceptance paradigm: Did the communications exchange by [buyer] and [seller] constitute an enforceable contract? [Seller] argued that its August 7 letter was a rejection of the March 13 memorandum agreement and therefore a counteroffer. This counteroffer was allededly accepted by a subsequent letter from [buyer]. These arguments . . . relied upon the Sales Convention, which, as [seller] pointed out, differed from domestic U.S. law found in the Uniform Commercial Code. . . . [Buyer], on the other hand, asserted that [seller's] August 7 letter was not an effective rejection but rather a proposal for modification of an agreement reached earlier on the terms of the March 13 memorandum agreement - a proposal rejected by [buyer]. [Buyer] argued that the earlier agreement resulted from [seller's] failure to respond promptly to [buyer's] offer. [Buyer] characterized this failure as 'estopping' [seller] from denying that an agreement had been reached. The judge suggested, however, that a more accurate characterization would be that [seller] had accepted the March 13 memorandum agreement by its conduct " (Peter Winship," Emptio-Venditio Internationales, Neumayer ed (Basel 1997) 229).

RULING OF THE COURT. "[T]here was indeed an agreement to arbitrate between these parties.

"There is simply no satisfactory explanation as to why [seller] failed to object to the incorporation by reference of the Russian Contract in a timely fashion. . . . [Buyer] had . . . commenced its performance under the Agreement, and the letter of credit it furnished [seller] on May 11 itself mentioned the Russian Contract. An offeree who, knowing that the offeror has commenced performance, fails to notify the offeror of its objection to the terms of the contract within a reasonable time will, under certain circumstances, be deemed to have assented to those terms [citations to U.S. domestic law provided: "compelling arbitration since party who failed timely to object to sales not containing arbitration clause deemed to have accepted its terms"; holding that "party who failed to object to inclusion of arbitration clause in sales confirmation agreement bound to arbitrate"]. The [CISG] itself recognizes this rule: Article 18(1), provides that 'a statement made by or other conduct of the offeree indicating assent to an offer is an acceptance.' Although mere 'silence or inactivity does not constitute acceptance', [CISG] Article 18(1), the court may consider previous relations between the parties constituted acceptance, [CISG] Article 8(3). In this case, in light of the extensive course of prior dealing between these parties, [seller] was certainly under a duty to alert [buyer] in timely fashion to its objections to the terms of the March 13 Memorandum Agreement -- particularly since [buyer] had repeatedly referred it to the Russian Contract and [seller] had had a copy of that document for some time.

"There are three other convincing manifestations of [seller's] true understanding of the terms of this agreement.

"This letter must be regarded as an admission in law by [seller] . . . A litigant may not blow hot and cold in a lawsuit. The letter of June 21, 1991 clearly shows that when [seller] thought it desirable to do so, it recognized that it was bound by the incorporation by reference of portions of the Russian Contract, which, prior to the Paris meeting [that occurred during the weekend of September 14, 1990], it had purported to exclude. This letter shows that [seller] regarded itself as the beneficiary of the claims adjustment provisions of the Russian Contract. This legal position is entirely inconsistent with the position which [seller] had professed prior to the Paris meeting, and is inconsistent with its present position. Consistent with the position of the [buyer] in this action, [seller] admits that the other relevant clauses of the Russian Contract were incorporated by agreement of the parties, and made a part of the bargain. Of necessity, this must include the agreement to arbitrate in Moscow. In the June 21, 1991 letter, [seller's Chief Officer] writes: 'The April Shipment and the September Shipment are governed by the [Russian Contract]. The [Russian Contract] provides that claims for inferior quality must be made within six months of the arrival of the goods at the USSR port'. . . ."

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Pace Law School Institute of International Commercial Law - Last updated August 11, 1999
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