Printed text published by Kluwer Law International

Uniform Law for International Sales under the 1980 United Nations Convention

3rd edition (1999)

John O. Honnold

Schnader Professor of Commercial Law Emeritus
University of Pennsylvania
Secretary, UNCITRAL, and Chief, U.N. International Trade
Law Branch, 1969-1974

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

Chapter 1.

The 1980 Convention: A Brief Introduction

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

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

§2 A. Primary Role of the Contract

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 In some countries protective rules inspired by the plight of consumers could be superseded by the uniform rules developed for international commerce.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

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

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

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

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

§3 B. Major Contours of the Convention

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

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

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

§4 C. Development of the Convention

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

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

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

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

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

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

§7 (b) The Representatives

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

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

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

§8 (c) The Secretariat

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

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

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

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

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

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

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

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

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

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

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

Chapter 2.

Salient Features of the 1980 Convention

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

§12 A. Scope of the Convention

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

§13 (a) Reasons for Excluding Domestic Transactions

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

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

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

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

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

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

§16 B. Interpretation of the Convention

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

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

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

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

§20 (b) "Good Faith"

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

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

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

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

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

§ 25 (a) Obligations of the Parties.

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

§26 (b) Remedies

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

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

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

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

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

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

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

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

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

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

§33 (b) The Refining Processes of International Collaboration

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

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

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

Part 1

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

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

§36 Introduction to Part I of the Convention

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

§38 B. Interpretation and Related Questions: Chapter II

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

§40 A. Basic Rules on Applicability

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

§41 (a) The Undisclosed Foreign Principal

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

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

§42 (b) Multiple Places of Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§46.1 (c) The Effect of Reservations

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

B. Alternative Approaches to Applicability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§48 C. Other Problems of Applicability

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

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

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

Article 2. Exclusions from the Convention

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

§50 A. Specific Exclusions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§56 B. "Sale of Goods"

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

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

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

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

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

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

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

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

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

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

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

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

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

Article 3. Goods to be Manufactured; Services

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

§58 A. Goods To Be Manufactured

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

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

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

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

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

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

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

§60  Contracts not Confined to the Supply of Goods

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§62 A. Obligations "Arising From" the Contract

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

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

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

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

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

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

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

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

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

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

§ 64 B. Issues Excluded from Convention

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

§ 65 (a) Remedies for Fraud

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

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

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

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

§66 (b) Competency; Authority of an Agent

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

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

§ 67 (c) Harsh, Unanticipated Applications

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

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

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

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

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

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

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

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

§71 A. Reasons for Exclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Article 6. The Contract and the Convention

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

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

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

§75 A. Exclusion or Modification

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§78 B. Agreements to Apply the Convention; Effectiveness

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

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

§80 (a) Significance of the Legislative History

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

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

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

§82 (b) Parties Located in Same State

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

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

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

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

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

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

§ 84 (d) "Mandatory" Rules

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

CHAPTER II.

GENERAL PROVISIONS
(Articles 7–13)

Article 7. Interpretation of the Convention

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

§86 A. International Character; Uniformity

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

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

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

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

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

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

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

§89 (a) Domestic Law

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

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

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

Under Article 31 of the 1969 Vienna Convention:

Article 32 adds:

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

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

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

§91 (b) Standards for Use.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§100 (b) Communications

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

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

§101 (c) Mitigation

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

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

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

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

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

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

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

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

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

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

§103 D. Special Role of the Sales Convention

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

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

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

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

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

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

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

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

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

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

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

§ 105 A. The Function and Scope of Article 8

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

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

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

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

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

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

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

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

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

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

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

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

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

§109 D. Interpretation in the Light of Surrounding Circumstances

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

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

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

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

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

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

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

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

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

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

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

Article 9. Usages and Practices Applicable to Contract

§ 112 A. The Role of Usages and Practices

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

§ 113 B. Usages and Practices under the 1980 Convention

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

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

(b) Agreement on Trade Terms

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

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

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

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

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

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

§ 118 (b) Trade Term Definitions and Usage Standards

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

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

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

§ 119 (c) Trade Usage Under the Convention

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

§ 120 (d) Usage of Trade in Domestic Law

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

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

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

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

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

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

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

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

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

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

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

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

Article 10. Definition of "Place of business"

§ 123 A. Multiple "Places of Business"

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

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

§ 125 B. No "Place of Business"

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

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

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

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

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

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

§ 127 B. The Convention

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

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

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

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

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

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

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

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

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

§ 128 A. The Conflict

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

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

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

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

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

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

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

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

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

Are the above views consistent with the following decision?

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

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

Article 13. Telegram and Telex as a "Writing"

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

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

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

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

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

Part II.

Formation of the Contract
(Articles 14–24)

Introduction to Part II of the Convention

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

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

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

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

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

§132 B. Structure of Part II

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

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

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

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

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

Article 14. Criteria for an Offer

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

§ 134 A. Indication of Intent to be Bound

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

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

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

§136 (a) "Specific Persons"

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

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

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

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

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

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

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

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

§137.3 (c) Quantity: Requirement and Output Contracts

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

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

§137.4 (a) Scope of the Problem

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§137.8 (a) Conclusion

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

(a) Prior to Delivery and Acceptance

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

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

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

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

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

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

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

(b) Goods Received; Buyer Obliged to Pay

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

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

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

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

Article 15. When Offer Becomes Effective; Prior Withdrawal

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

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

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

Article 16. Revocability of Offer

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

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

§ 140 A. Revocability Until Acceptance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§145 C. Responsibility in Tort for Reliance on Offer

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

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

§147 (a) Operative Facts That Reach Beyond Contract

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

§ 149 (a) Applicability of the Convention

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

§ 150 (b) Gap-filling

The above discussion suggests that a situation can arise where the Convention bars revocation but fails to provide an effective remedy. This invites our attention to Article 7(2), which provides that "questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based..." Does this authorize tribunals to develop a remedy under the Convention for the offeror’s wrongful revocation?

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

§ 151 (c) Remedy Supplied by Domestic Law

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

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

§153 A. Explicit Rejection

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

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

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

§ 156 C. Rejection Overtaken by Acceptance

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

Article 18. Acceptance: Time and Manner for Assent

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

§ 158 A. Criteria for Acceptance

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

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

§159 B. Indication of Assent; Communication

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

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

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

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

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

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

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

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

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

§ 161 C. Time Limits for Acceptance

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

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

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

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

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

§163 D. Assent by Performing an Act

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

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

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

Does interpreting Article 18 to require timely communication create danger for an offeree (either seller or buyer) who takes action invited by an offer before he communicates acceptance? The danger in this setting would come from the offeror’s revocation of the offer. As was noted at §163, supra, this problem is met by Article 16(2): "an offer cannot be revoked... (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer". For discussion of this provision see §144, supra.

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

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

Article 19. Acceptance With Modifications

§165 A. The Commercial Setting

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

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

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

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

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

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

§ 166 B. The Convention

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

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

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

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

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

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

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

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

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

C. Contract Formation Based on Acts of Performance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Article 21. Late Acceptances: Response by Offeror

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

§173 A. Notice Giving Effectiveness to Late Acceptance

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

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

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

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

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

Article 22. Withdrawal of Acceptance

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

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

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

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

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

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

Article 24. When Communication "Reaches" the Addressee

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

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

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

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

Part III.

SALE OF GOODS
(Articles 25–88)

Introduction to Part III of the Convention

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

§181 A. Introduction

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

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

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

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

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

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

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

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

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

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

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

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

§184 B. "Fundamental Breach" in Specific Situations

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

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

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

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

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

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

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

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

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

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

Article 26. Notice of Avoidance

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

§ 187.1 A. Departure from ULIS; Need for Notification

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

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

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

§187.2 B. The Notice: Content, Transmission

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

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

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

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

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

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

Article 27. Delay or Error in Communications

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

§189 A. Reasons for the "Dispatch" Principle

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

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

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

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

Article 28. Requiring Performance and the Rules of the Forum

§191 A. Introduction

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

§ 197 (a) Common Law and the UCC

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

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

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

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

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

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

§ 199 (b) Civil Law Systems

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

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

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

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

Article 29. Modification of Contract; Requirement of a Writing

§ 200 Agreements of Modification

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

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

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

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

§202 B. Contract Restrictions on Modification

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The rules of Article 29 permitting modification of the contract by "mere agreement", as we have seen, also collide with traditional common-law rules on "consideration" (§201 supra ). Here, too, domestic law must yield to the uniform rule of the Convention. There are a few other provisions of the Convention that might be regarded as involving a readjustment of the parties’ agreement. See Arts. 47(2) and 63(2) (effect of a notice fixing an additional period for performance), Art. 48(2) (effect of a request that a buyer make known whether it will accept delayed performance), Art. 65(1) (effect of a request to make specifications). If any of these provisions should collide with domestic rules on "consideration" the domestic rule is superseded by the uniform international rule permitting readjustment of the contract by "mere agreement".

Agreements settling disputed claims seldom present problems of "consideration" since each party usually yields some aspect of its claims. Settlement agreements probably are governed by the Convention since (Art. 4) they involve "the rights and obligations of the seller and buyer arising from" the international contract. The Convention does not state that such agreements do not require common-law "consideration"; one can imagine the drafting problem of knocking out common-law consideration for every possible application. However, on each occasion when this question came to the fore (Arts. 16, 29) the Convention rejected "consideration" as a barrier to enforcing the agreement. This policy consequently seems to quality as one of the "general principles" on which the Convention is based and therefore should be given effect under Article 7(2) (§§96–102 supra). Finally, and most important: the legal systems in much of the world have no doctrine comparable to common-law "consideration." See Zweigert & Kötz II (1987), supra note 2. Subjecting some international sales governed by the Convention to this arcane doctrine would be inconsistent with the mandate of Article 7(1) (§§85–87 supra) to interpret the Convention with regard "to its international character and the need to promote uniformity in its application."[page 235]

CHAPTER II.

OBLIGATIONS OF THE SELLER
(Articles 30–52)

Introduction to Chapter II

§ 205 Chapter II opens with a brief statement giving the essence of the seller’s obligations (Art. 30). The remaining articles of the Chapter are grouped in three sections. Two sections define the seller’s most important duties: The time and place for delivering the goods (Sec. I, Arts. 31–34) and the quality of the goods and their freedom from third-party claims (Sec. II, Arts. 34–44). The final section sets forth the basic remedies that are given to the buyer when the seller fails to perform its duties under the contract (Sec. III, Arts. 45–52).

§ 206 Article 30 introduces the reader to the scope of Chapter II and draws attention to the principal topics dealt with in the Chapter and the order of their presentation. (Chapter III—Obligations of the Buyer—has a similar chapeau (Art. 53).)

This introductory article is significant for its explicit statement of the central and unitary role that the Convention gives to the contract. The issue of a fragmented versus a unitary approach to the contract was introduced in the Overview (Ch. 2, supra at §24), and will be explored further under Article 31 at §207 and in connection with the Convention’s remedial system. (See the Introduction to Sec. III of this Chapter infra at §272; Art. 44 infra at §255.) The relation between the Contract and the Convention has been examined in the Overview (Ch. 1, supra at §2) and in the Commentary to Article 6, supra at §75.[2]

The fact that the Convention applies fully to sales of goods to be consummated by the delivery of documents is made explicit here in Article 30. See also Article 34, §§217–219, infra.[page 237]

SECTION I.

Delivery of the Goods and Handing Over of Documents
(Articles 31–34)

Article 31. Place for Delivery

§ 207 When the contract (interpreted in the light of practices and usages) does not state where the seller should deliver the goods, the question is answered by the present article.

§ 208 A. Place for Delivery in Specific Settings

All sales involve movement of goods, at the very least by the buyer’s removal of the goods he has purchased. Article 31(a), however, is applicable only to contracts that involve "carriage." This refers to transport by a "carrier" to which the seller "hands the goods over" for "transmission to the buyer." This language shows that "carrier" does not include transport facilities, such as delivery trucks, operated by the parties. (This point is developed further in connection with rules on risk of loss. See Art. 67, infra at §368.)

Normally the contract will refer to the use of a carrier; in other cases the distance that separates the parties and their practices will often show that the contract involves the use of a "carrier." In these transactions, paragraph (a) applies and the seller completes its contractual obligation with respect to delivery by "handing the goods over to the first carrier for transmission to the buyer."

As we shall see (infra at §210), the question whether a party has complied with its contractual obligation is distinct from the allocation of loss from fire, theft or other casualty. However, when the seller dispatches the goods by carrier the rules on contract performance correspond closely to the Convention’s rules on risk of loss. Thus, Article 67(1) provides: "If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer..."

These rules reflect mercantile practice. As we shall see in greater detail in the commentary to the rules on risk of loss in Chapter IV (Arts. 66–77, infra at §§360–419), even when the seller undertakes to pay the freight costs to destination under "C.I.F." and "C. & F." ("CFR") quotations, it has long been settled that the seller both completes his delivery duties and transfers risk to the buyer when the goods are (at the latest) loaded on the carrier. And the 1990 version of Incoterms reflects modern transport practices by providing that even though the seller undertakes to bear transport costs under a quotation "Carriage Paid to..." ("CPT"), the seller completes its duties as to delivery (and transfers risk to the buyer) when the seller delivers the goods "into the custody of the first carrier." A similar approach is reflected in the definition of the important term—"Free Carrier...(named place)" ("FCA").[2][page 239]

Practical considerations underlie these rules. Damage in transit usually is discovered only when the goods arrive and are unpacked; at this point the buyer (especially in international shipments) is in a better position than the seller to salvage the goods and to file a claim against the carrier or the insurer.[3] The provision that the seller’s responsibility is not discharged until he has "handed over" the goods to the carrier (as contrasted with leaving the goods on an unattended dock pending arrival of the carrier) means that the seller remains responsible until the carrier has taken possession of the goods and thereby has assumed some responsibility for them.[4]

These basic rules are also embodied in the Uniform Commercial Code. Under UCC 2–509(1):

Paragraphs (b) and (c) of Article 31 apply to a small minority of international sales—sales that do not "involve carriage" and where "the seller is not bound to deliver the goods at any particular place." These provisions are most likely to apply when the seller and buyer are relatively near each other and the buyer operates trucks that can conveniently come to (b) where the goods are or (c) to the seller’s place of business. When the contract calls for the buyer to come for the goods, the seller completes its contractual duties with respect to delivery by "placing the goods at the buyer’s disposal."[5][page 240]

Decisions: Place for Delivery: (1) Delivery to First Carrier: (1) FR. CA Grenoble #156, 29 March 1995, Camara v. Magaron. Place for delivery decisive under EC Convention on Jurisdiction (Brussels 1968) (see above).

(2) Delivery to Buyer: GER. OLG Karlsruhe. 15 U 29/92, 20 November 1992. Evidence of receipt not clear; S was denied price recovery. UNILEX D.1992–28.

(3) Buyer to Come for the Goods. GER. LG Aachen, 43 O 136/92, 14 May 1993. Buyer to receive goods at place of manufacture. CLOUT 47, UNILEX D. 1993–16.

See also: Feltham, J.D., CIF, FOB Contracts and CISG, 43 J. Bus. L. (Lon.) 413–425 (1991); Schlechtriem, Com. (1998) 226–230, 234–240.

§ 210 B. "Délivrance" in ULIS and the Contractual Approach

In ULIS the concept of "délivrance" dominated the draft’s approach to several problems, including risk of loss and the time for payment of the price. This approach could have been successful in some of these settings if the draft had used a simple definition of "delivery"—the handing over of the goods. Instead, under ULIS 19(1) délivrance "consists in the handing over of goods which conform with the contract."[6] This was a very plausible approach to the question whether the seller had performed his contractual duties but it complicated the drafting in other settings, such as risk of loss, and made this central concept so abstract (in French, délivrance as contrasted with remise) that no appropriate term could be found in English and in various other languages. ULIS was drafted in French. When, at a late stage, an English text was prepared, there was no escape from rendering délivrance as "delivery," although this led to the curious result that if the goods had a defect they were never "delivered" to the buyer while he used or even consumed the goods. More important, the use of délivrance produced untoward consequences with respect to risk of loss and payment of the price. Efforts to correct this problem were made [page 241] at the 1964 conference but délivrance was such an integral part of the draft’s structure that repairs were not feasible.[7]

In UNCITRAL it was possible to deal with this problem. The Working Group at an early stage decided that the problems of risk and payment of the price should be disentangled from délivrance, and should be handled as separate problems.[8] In addition, the provisions on Obligations of the Seller with which we are now concerned (Art. 31 and succeeding articles in the present Chapter) are stated in terms of whether the seller had performed his "obligation" with respect to delivery. The seller fails to perform his obligations if he tenders defective goods; with regard to this contractual issue it does not matter whether the buyer rejects the goods (no "handing over" or "delivery") or whether the buyer takes possession of and uses the goods, subject to a damage claim to compensate for the breach.

Thus, the Convention has no provision like that of ULIS 19(1): "Delivery consists in...." The contractual approach of the Convention is typified by the introduction to Article 31: the seller’s " obligation to deliver consists" in performing specified acts, regardless of whether "delivery" takes place. The same contractual approach is used in Chapter III— Obligations of the Buyer. E.g., Art. 60 (the buyer’s obligation to take delivery consists...).

The point deserves emphasis. Assume that the contract calls for the seller to place the goods at the buyer’s disposition at the seller’s plant by May 1 for removal by the buyer by the end of the month. If the seller on May 1 places the goods at buyer’s disposition Article 31 provides that the seller has fulfilled his " obligation to deliver" the goods. This provision does not state (and for the purposes of the Convention does not need to state) that the seller has "delivered" the goods, nor does Article 31 determine when the risk of loss passes to the buyer, for this issue is governed by the rules on risk of loss in Chapter IV. As we shall see at §374 [page 242] (Examples 69A and 69B), Article 69 provides that in the above situation risk of loss rests on the seller until the buyer "takes over" the goods; the result is different if the buyer "commits a breach of contract by failing to take delivery. E.g. If the buyer fails, as agreed, to come for the goods by May 30 risk passes to the buyer on June 1.

In short, Article 31 and the other provisions in this Chapter deal with the contractual obligations of the parties; problems such as allocation of risk are dealt with by provisions addressed directly to those problems.

§ 211 C. The Role of General Rules on Place and Time

Article 31, in addressing the question whether the seller has performed his contractual duties with respect to delivery, plays a modest role. In most cases, questions as to "place" and "time" will merge into a single issue: Did the goods get to the agreed place on time? Art. 33, infra at §216, is concerned with the time for delivery. But in most situations the combined place-time question will be answered by the contract, either in specific terms or by the meaning supplied by the circumstances mentioned in Article 8(3), by the parties’ practices (Art. 9(1) or by commercial usage (Art. 9(2)).[9]

Export Licenses and Taxes. The rules on the place for delivery can also be useful, when the contract is silent, in allocating responsibility for matters such as export licenses and export taxes. For example, assume that the contract provides that the seller will place the goods at the buyer’s disposal at the seller’s place of business. Under Article 31(b) the seller fulfills his obligation to deliver at his own factory or warehouse; the buyer has the responsibility to remove the goods and to make any arrangements for exportation. Incoterms (1990) reflects a similar approach: Under a sale Ex Works "B. The buyer must...B2. Obtain at his own risk and expense any export or import license or other official authorization and carry out all customs formalities for the exportation and importation of the goods...".[10] On the other hand, the seller must bear [page 243] these costs when the contract requires the seller to deliver the goods in the buyer’s country.[11]

When the contract calls for the seller to dispatch the goods by carrier (Art. 31(a), allocating responsibility for export licenses and taxes is less clear-cut. Modern transport procedures call for expedited carriage as soon as the carrier receives the goods; these procedures have led to practices placing the responsibility for export clearances on the seller. Thus, Incoterms (1990) provides that under the modern quotation "Free Carrier...(named place)," "(FCA)" even when the designated point is inland, "A. The seller must...A2 Obtain at his own risk and expense any export license of other official authorization and carry out all customary formalities necessary for the exportation of the goods". The same result follows under the quotation "Carriage Paid to..." ("CPT") and also under the traditional quotations "C&F" (now abbreviated "CFR") and "CIF". On the other hand, Incoterms allocates export problems to the buyer under quotations "F.A.S.", "F.O.B." and "CFR" (Cost and Freight...named port of destination).

In short, the "delivery" concept does not avoid doubt over who has the responsibility for export licenses and export taxes; the parties should deal specifically with this question in the contract.[12] When the contract is silent, modern practices governing export sales often indicate that the seller’s responsibility to dispatch goods to a foreign destination calls for him to deal with export licenses and export taxes.[13][page 244]

Article 32. Shipping Arrangements

§ 212 As we have just seen, in international sales the seller usually completes his obligations with respect to delivery of the goods by "handing over the goods to the first carrier for transmission to the buyer." Art. 31, supra at §208. Any provision of the agreement (including usage and any practice between the parties) is decisive; to the extent that there is no agreement with respect to shipping arrangements, Article 32 applies.

§ 213 A. Identification of the Shipment

This identification usually is effected by naming the buyer in the documents issued by the carrier—the consignment note or bill or lading; where possession of the shipping document controls the delivery of the goods (e.g., the shipping document is an "order" or "negotiable" bill of lading) the document will normally give the buyer’s name as the person the carrier is to notify concerning arrival of the shipment. Even if the shipping document does not connect the buyer and the goods, this may be done by identifying marks on the goods. If the goods are not clearly identified in one of these ways, under Article 32(1) "the seller must give the buyer notice of the consignment specifying the goods."[2]

What are the consequences of failure by the seller to give such a timely notice of the consignment? If the goods are lost or damaged before the goods are identified to the contract, the consequences can be serious by virtue of the rules on risk of loss in Chapter IV. (See Arts. 67(2) and 69(3), infra at §363 and §373.) The seller’s failure to comply with the identification or notice provisions of the contract or of Article 32(1) will, of course, constitute a breach of contract. The remedies for the breach depend on its seriousness. In any event, the seller will be liable to the buyer for damages that result (Arts. 45 and 74); if the seller’s breach is "fundamental" (Art. 25, supra ), the buyer may be able to "avoid the contract" (Art. 49)— i.e., he may reject the goods.[3][page 246]

§ 214 B. Transportation Arrangements

Paragraph (2) applies whenever "the seller is bound to arrange for carriage of the goods." The contract may call for the seller to make shipping arrangements even though, under the contract, the buyer bears the risk of increase in freight rates or of the unavailability of shipping space. Article 32(2) merely articulates the seller’s duty to make appropriate "arrangements"—arrangements for the type and means of transport and the terms of the contract with the carrier. As was noted with respect to paragraph (1), above, failure to perform these duties is a breach of contract; the remedy depends on the seriousness of the breach.[4] Unless the contract or usage (Art. 9) provides otherwise the seller’s duty to "arrange" for shipping does not make the seller liable if space or facilities for carriage are unavailable.

§ 215 C. Information Necessary for Insurance

Paragraph (3) articulates a duty of cooperation that, in most cases, probably could be established as an aspect of applicable usages or practices. Cf. (U.S.A.) UCC 2–311; Options and Cooperation Respecting Performance; UCC 2–319(1)(c) and (3) (buyer’s duty to give needed instructions to seller); (U.K.) SGA (1893) 32(3).[5][page 247]

Article 33. Time for Delivery

The statement in paragraph (a) that the seller must act in conformity with the contract reinforces the general rules of Articles 6 and 30, supra at §§74 and 206. Most articles of the Convention do not reiterate the parties’ obligation to comply with the contract but in a few places where detailed provision is made for points that are usually covered by contract it seemed advisable to underscore the dominant role of the contract. (Arts. 34, 35(1), 41.) The number of these references was minimized to avoid giving the impression that the contract controls only when it is specifically invoked.[2]

Subparagraph (b) applies when contracts provide a period within which delivery shall occur but do not state whether the seller or the buyer has the choice as to the precise time within the period. The presumption that the seller may choose the date reflects the seller’s more complex duties—procurement or production, packaging and other arrangements for delivery. We have just seen illustrations in Article 32 of shipping arrangements that may need to be made by the seller.[3] The buyer’s duty to take delivery is governed by Articles 53 and 60, §§322, 341–343, infra.[page 248]

Article 34. Documents Relating to the Goods

§ 217 A. The Commercial Setting

When the seller lacks sufficient knowledge of the buyer to justify a delivery on credit, an exchange of goods for the price can be efficiently arranged by the use of a document that controls delivery of the goods, such as a negotiable or "order" bill of lading. See Art. 58, infra at §333. Such documentary exchanges are accepted by standard statements of trade practice and by domestic law.[1] Even when the seller delivers on credit, the contract (including practices or usage) may require the delivery of additional documents such as an insurance policy and invoices.

§ 218 B. The Convention

In the preparation of ULIS and in UNCITRAL this question arose: When the law refers to the delivery or handing over of "goods," should the law also refer to delivery effected by "documents of title?" It was found this would have called for many references to delivery by documents; the first sentence of the present article was included to provide a simpler and less cluttered text. This sentence merely states that the seller must perform the contract—a statement that would have been unnecessary but for the drafting problem arising from references to delivery of "goods."[3]

The second and third sentences of Article 34 were added at the 1980 Diplomatic Conference to make clear that the seller’s right to "cure" a defective delivery of goods extended to the delivery of documents. As we shall see (Art. 37, infra at §244), a seller who has made a defective delivery before the date of delivery may deliver a "missing part" or "make up any deficiency in the quantity of the goods" or "deliver goods in replacement" or "remedy" (repair) the lack of conformity. This language dealt so specifically with the special problems of "goods" that it seemed hazardous to rely on the assumption that references to delivery of "goods" extended to "documents." The second and third sentences of Article 34 were modelled closely on the "cure" provisions of Article 37. The discussion of Article 37, infra at §244, will be generally applicable to the provisions of Article 34 with respect to "cure" of defects in documents.[4] Cure of documents after the date for delivery is considered at Article 48, §295, infra.[page 250]

Section II.

Conformity of the Goods and Third Party Claims
(Articles 35–44)

§ 221 Introduction to Section II

§ 222 A. The Role of Rules about Quality

Most sales controversies grow out of disputes over whether the goods conform to the contract. In many cases these disputes present only a question of fact: What was the condition of the goods? Disputes over quality, however, cannot always be resolved simply by measuring the goods against the specific terms of the contract. When an order is routine and calls for speedy shipment the parties may not even attempt to articulate the expectations that are associated with transactions in such goods. Even a carefully prepared contract will often fail to express the most basic expectations—that a machine will operate or that a steel girder will be structurally sound—because the parties assume that these points are so obvious that they "go without saying." (Compare the implied obligation that the seller will deliver goods that "are free from any right or claim of a third party," Art. 41, §§262–266, infra.) Consequently, courts and codifers have had to try to describe, in general terms, those understandings that would have been written into the contract if the parties had drafted a contract provision to deal specifically with the question that led to dispute.[1]

Domestic legal systems address this problem in various ways. In United States law, the seller’s obligations as to quality are referred to as "warranties", and are dealt with under three headings: (1) "express warranties", (UCC 2–313); (2) an implied warranty of merchantable quality (UCC 2–314); and (3) an implied warranty of fitness for a particular purpose (UCC 2–315). The (U.K.) Sale of Goods Act (1893), in general, leaves the parties’ express statements to the general law of contracts but in Sec. 14 establishes implied "conditions" and "warranties" of quality [page 252] and fitness.[2] Other legal systems use different concepts. Codes based on the French pattern tend to deal with questions of quality with a light touch that is directed to the distinction between latent defects (vices cachés) and apparent defects (vices apparents). This brief approach has been supplemented by other doctrines such as erreur; students of the civil law report that the result is complex and unclear.[3]

§ 223 B. The Convention

Paragraph (1) emphasizes a point that could go without saying: the parties must comply with their contract. (See the discussion of Art. 33(a), supra at §216; and Arts. 6 and 30, supra at §274 and §206.) [5] The Sales Article of the (U.S.A.) Uniform Commercial Code also emphasizes the importance of the contract. Section 2–313 (Express Warranties by Affirmation, Promise, Description, Sample) carried forward a provision, drafted by Professor Williston for the Uniform Sales Act (1906), that was designed to nullify decisions that had hesitated to give contractual effect to the seller’s "representations" and "affirmations" (as contrasted with "promises") and also to overturn decisions that had insisted on evidence that the seller "intended to be bound" by statements concerning the quality of the goods.[6]

The technical distinctions in these early cases have been softened by more recent case law.[7] In any event, these distinctions are not useful in deciding what quality is "required by the contract" under Article 35(1). As we shall see, Article 35(2)(a) gives effect to the expectations latent in any "description" of the goods. And the basic rules on contract interpretation in Article 8 do not draw any technical distinction between different [page 254]types of "statements" and emphasize the "understanding" that statements produce in a reasonable person. (See Art. 8, supra at §105 and §109.) [8]

The basic standard in paragraph (2)(a) is similar to the warranty of "merchantable quality" developed in early English case law incorporated in the Sale of Goods Act (1893). However, the meaning of "merchantable quality" was left to case law. The basic ideas developed by the cases were [page 255] used by the (U.S.A.) Uniform Commercial Code in defining "merchantable quality." Under Section 2–314(2), "goods to be merchantable" must "(a) pass without objection in the trade under the contract description" and "(c) are fit for the ordinary purposes for which such goods are used."[9]

Some writers have felt that it is necessary to give a general answer to the following question: Does subparagraph (2)(a) refer to the understanding of the contract description of the goods that prevails at the seller’s place of business or at the place where the buyer intends to use the goods? Writers have disagreed over the choice between these two places.[10]

It should not be necessary to answer this question if one accepts the view, suggested above (§222), that the role of Article 35(2) is to aid in construing the agreement of the parties. The question is this: What was the parties’ understanding of the contract provision describing the goods? More precisely (in the language of Article 35(2)) what was their understanding of the "purposes for which goods of the same description would ordinarily be used"? Since the problem concerns fitness for the "ordinary" use of goods described in the contract, serious misunderstandings should be infrequent; in domestic law disputes under this test usually arise out of a question of fact: Were the goods subject to defects that were abnormal for goods sold under the description?

If the parties do have different understandings of the connotations of the agreed description, the problem needs to be resolved pursuant to the Convention’s rules for interpreting sales contracts. These rules are set forth in Article 8, §§104–111, supplemented by the practices of the parties and trade usages Article 9, §§112–222. Under these rules the relevant facts are: Which party drafted the description? (This may be either the seller or buyer.) What, under Article 8(2), would be "the understanding [page 256] that a reasonable person of the same kind as the other party would have had in the same circumstances"? To ascertain this understanding Article 8(3) directs attention to all relevant circumstances including "the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."

In sum, under the Convention problems of contract interpretation are to be solved on the basis of the facts of each transaction and not under a general legal rule specifying that the seller’s (or buyer’s) region controls the parties’ understanding.

Decisions; Conformity: Standards in Buyer’s State; Compliance Required:   (1) FR. CA Montpelier, 15 April 1993. Excessive sugar basis for rejection; confirmed: C. de Cass. (Sup.Ct.) 173P. 23 January 1996. CLOUT 150, UNILEX D. 1996–2.  (2) FR. CA Grenoble, 48992, 13 September 1995, Ciato v. SFF. S knew that the cheese was to be resold in France; French standards were required. UNILEX D. 1994–24, CLOUT 202.  (3) GER. LG Ellwangen, 1 KfH O 32/95, 21 August 1995. Paprica from Spain did not conform to German food standards; B avoided contract. UNILEX D.1995–20.  (4) FR. C. de Cass. (Sup. Ct.), Ceramique v. Musgrave, 2205D, 17 December 1996. C. de Cass. reversed lower courts because, inter alia, French rules on vice cache were applied in stead of CISG 35(2)(a). UNILEX D. 1996–11.   See also: MEX. ARB: COMPROMEX, M/21/95, 29 April 1996. S (Argentine via Chile) shipped defective canned fruit. Deterioration in transit was S’s responsibility. UNILEX D.1996–3.5.

Compliance with Standards Satisfied or not Required. GER. OLG Frankfurt a M., 13 U 51/93, 20 April 1994, confirmed by BGH (Sup. Ct.), VIII ZR 159/94, 8 March 1995. Claim that calcium of shellfish exceeded German standards; claim rejected. S can not be expected to observe standards or regulations in B’s State unless they are the same as in S’s State or B has informed S. CLOUT 84, UNILEX D.1994–10, D. 1995–9 (BGH).

Comments: Veneziano, A., Current Case Law, 1 Int. Bus. L. J. 39–65 (1997); Goto, K., Warranties, 3 Studies in L. & Econ. (Kyushu Int. U. Assn. L. & Econ. 40 (1991); Zamir, 52 La. L Rev. 1–90 (1991); Bonell/Liguiri, ULR (1997–3) 590–592, n.91–102 (numerous cases); Schlechtriem, Com. (1998) 276–284 (Schwenzer).

§226 (b) Fitness for Particular Purpose

The role of Article 35(2)(b) may be illustrated as follows:

Reliance on Seller’s Skill and Judgment. The structure of paragraph (2)(b) may lead tribunals to conclude that the buyer makes a prima facie case by showing that the seller knew of the buyer’s particular purpose at the time of the conclusion of the contract and that the goods were unfit for that purpose; the seller then has the burden to show that "the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgment."[11]

In Example 35A, Seller would find it difficult to disprove reliance by Buyer. Seller, the manufacturer of the drills, would know more about their cutting qualities than Buyer, and Buyer relied on the Seller to select a drill that would cut through carbon steel, or inform Buyer that Seller had no such drill. Indeed, the crux of Article 35(2)(b) is the buyer’s known reliance on the seller to select and furnish a commodity that will satisfy a stated purpose.[12]

Decision; Fitness for Purpose.   FR. CA Grenoble, RG 93/4879, 26 April 1995, M. Roque v. SARL. Purpose of hangar made known to S (Art. 31(b)); S was responsible for repairs . . . UNILEX 1995–14, CLOUT 152.

§ 227 (c) Goods Held Out as Sample or Model

Where the seller has "held out" goods to the buyer "as a sample or model" he has created an "understanding" (Art. 8) that the goods would conform to the sample or [page 258] model. Thus, paragraph (2)(c) of Article 35, even more clearly than paragraph (2)(b), articulates contractual understandings that are given effect by paragraph (1). Such is the approach of Section 2–313(1)(c) of the (U.S.A.) Uniform Commercial Code: "Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model." See also the (U.K.) Sale of Goods Act Sec. 15. All of these provisions are of modest value to a tribunal that is equipped to give full effect to the contract made by the parties.[13]

§ 228 (d) Packaging

On occasion advocates for sellers have gone so far as to argue that implied obligations ("warranties") with respect to the quality of "goods" do not extend to the container or package. Whether the packaging is part of the goods is a false issue; the relevant question is whether the seller’s contractual duty extends to packaging. This question is answered by Article 35(2)(d): The goods shall be "contained or packaged in a manner usual for such goods.... " The reference to what is "usual" gives effect to reasonable expectations, and is consistent with the approach of Article 35(2)(a) (ordinary use) and the Convention’s general rules for interpretation of the contract. See Articles 8(3) and 9(2), supra at §104 and §112.

The corresponding provision of the 1978 Draft Convention did not include the concluding clause: "or, where there is no such manner, in a manner adequate to preserve and protect the goods." At the Diplomatic Conference it was suggested that the Draft failed to deal with contracts for new types of commodity for which no "usual" manner of packaging had yet developed; language was added to assure that in such cases packaging should be "adequate." In considering this proposal it was noted that this new language should not be construed to require packaging where packaging was not usual (e.g., new cars; bulk shipments of coal or ore). Nor was it contemplated that packaging must be able to withstand unprecedented shocks and hazards; what is required is the degree of protection that is usual for goods of comparable fragility.[14][page 259]

The case that will fall most clearly within paragraph (3) is the sale of a specific, "identified" object (e.g., a secondhand lathe) that the buyer inspects and then agrees to purchase. Paragraph (3) provides that in such cases the seller is not liable under the implied obligations of paragraph (2) for those facts of which "the buyer knew or could not have been unaware." Paragraph (3) does not affect the obligations "required by the contract" under paragraph (1).[15]

"Could not have been unaware." Paragraph (3) is applicable when the buyer "could not have been unaware" of the condition of the goods when he made the contract. Is this different from knowledge?

The Convention differentiates among: (A) facts that a party "knows" or of which he is "aware"; (B) facts of which a party "could not have been unaware"; and (C) facts that a party knew or "ought to have known."[16]

The facts one " ought to have known" include those facts that would be disclosed by an investigation or inquiry that the party should make. But an obligation based on facts of which one "could not have been unaware" does not impose a duty to investigate—these are the facts that are before the eyes of one who can see. This expression is used at various places in the Conventions slightly to lighten the burden of proving that facts that were before the eyes reached the mind. However, since a tribunal would normally draw this inference, there is little practical difference between the provisions that refer to facts that a party "knows" and provisions that refer to facts of which a party "could not have been unaware."[17] This [page 260] choice of language significantly narrows the impact of paragraph (3) on the buyer’s protection afforded by paragraph (2).

§238 (C) Domestic Rules Based on Innocent Misrepresentation as to Quality; "Mistake"

We now meet another significant question concerning the boundary-line between domestic rules and the uniform law of the Convention. Under Article 5, §§72–73 supra, we met this question in relation to domestic rules, such as "product liability", that apply to the same facts as those governed by the Convention but under a label such as "tort" rather than "contract". The commentary to Article 4, supra at §64, noted that domestic remedies for international fraud would remain in full force but that further attention would be given to domestic remedies for innocent but erroneous statements regarding the quality of the goods.

It is not feasible to describe the various rules of domestic law that might be encountered under headings such as "rescission for innocent misrepresentation" or "mistake" (erreur). Instead, our discussion will address a concrete factual situation in which such domestic remedies might arguably be applicable.

Example 35B. Seller made the following offer: "I have purchased a cargo of 200 bales of No. 1 quality Manilla hemp now en route from Singapore to Liverpool. I offer you this cargo ex ship Liverpool, at £100 per bale." Buyer accepted this offer and paid the agreed price. When the hemp arrived in Liverpool it was discovered that, prior to the shipment from Singapore and prior to the sale to Seller, the hemp had been so seriously damaged by water that it graded No. 6 rather than No. 1 and was unfit for the purposes for which Manilla hemp was normally used.[25] Seller did not know and could not have known of the poor condition of the hemp.

Assume that the sale was subject to the Convention but that under domestic law, selected by conflicts rules, the buyer’s only remedy is to rescind the contract for innocent misrepresentation or for "mistake" (erreur).[26][page 261]

One should not hastily decide to apply a dividing line like that suggested by the above domestic statutes to international sales governed by the Convention.[28] It is true that one of the objectives of these domestic statutes was to provide uniform law, and that this is the dominant purpose of the Convention. But each of these domestic laws was prepared with an eye to domestic rules that were familiar to the domestic parties and their advisors.

The unifying role of the Convention is more dominant and more difficult; as we have seen in various settings, this role would be crippled by domestic rules that govern the same situations and issues as those governed by the Convention.[29] To cope with this problem it is necessary to ask a pointed question: Does the Convention address the situation presented by Example 35B?

In Example 35B, the seller made an innocent but important mistatement that the hemp was "No. 1 quality." This statement must be regarded as part of his contract with the buyer for reasons discussed supra at §224. In addition, this statement was a "description" which, under Article 35(1) and (2)(a), is given legal effect as part of the seller’s contract. Indeed, such statements are indistinguishable from the other aspects of the seller’s obligation as to quality specified in Article 35.

When (as in Example 35B) the goods do not conform to the contract, the Convention provides a full battery of powerful remedies prepared specifically for international sales. See Articles 45–50, §§272–313, infra. Hence the buyer’s rights resulting from innocent misrepresentation of the type presented in Example 35B should be derived only from the Convention.[30] Of course, other types of representations by the seller [page 262] (such as his identity and similar statements by the buyer) may not be addressed by the Convention; in this event the line of analysis suggested above may call for the application of domestic law. The important point is to focus on whether the Convention addresses the situation in question; if so, the uniform international rules should not be displaced merely because of the labels attached to various doctrines of domestic law.[31][page 263]

Article 36. Damage to Goods: Effect on Conformity

§ 241 Goods arrive in poor condition because of damage in transit. Does it follow that they fail to conform to the contract? Paragraph (1) of Article 36 sets forth a general rule; paragraph (2) deals with modifications of that rule that result from breach of the seller’s obligations.

§242 A. Conformity as of Time When Risk Passes

By virtue of Article 36(1), Seller complied with the contract since the goods conformed to the contract when risk passed to the Buyer. On the [page 264] other hand, if the contract had placed transit risks on Seller (e.g., " Ex Ship Bombay") Buyer’s claim based on non-conformity of the goods would have been correct.[2]

Provisions similar to Article 36(1) appear in some Continental statutes; under common law formulations the result is the same as a necessary implication of the rules on risk of loss.[3]

The language of paragraph (1), making the seller responsible "even though the lack of conformity becomes apparent only after" the time when risk passes, would protect the buyer when a latent defect appears at a later date, including a failure to comply with the requirement of Article 35(2)(a) that the goods be "fit for the purposes for which goods of the same description would ordinarily be used." This interpretation is supported by the action at the 1980 Conference to delete "express" from paragraph (2) (of draft Article 34) and thus to give effect to expectations of durability implied under Article 35(2) of the Convention.[4] Stale claims may, however, be barred by applicable rules on limitation or prescription of actions. The UNCITRAL Convention on the Limitation Period in the International Sale of Goods is introduced at §§254.2 and 261.1, infra.

§243 B. Effect of Contractual Guarantee

Paragraph (2) reflects the fact that some warranties include undertakings that extend after delivery. Examples include a contract to service the goods for a designated period, or a guarantee that the goods will perform for a specified period— e.g., two years, 10,000 miles, or the like. Under some of these warranties, the buyer would not be required to prove that there was a non-conformity when risk passed (e.g., on shipment of the goods or delivery to the buyer). However, the effect of paragraph (2) depends on the contract. One would not expect to find a guarantee that protects a buyer from his failure to maintain and protect the goods; thus, in [page 265] substance, the guaranty applies only when a failure of performance results from a defect in materials or workmanship. Compare Article 80, infra at §436 (failure of performance by one party caused by the other party’s act or omission).

A special provision on express guarantees might not have been necessary in view of the general rule of the Convention giving effect to the agreement of the parties. Article 36(2) underscores the importance of the contract and may avoid doubt concerning the seller’s responsibility under the Convention when the seller’s failure properly to service the goods causes damage or deterioration.

See: Schlechtriem, Com. (1998) 290–299 (Schwenzer).[page 266]

Article 37. Right to Cure Up to the Date for Delivery

§ 244 Destruction of contract rights involves hardship and economic waste. Suppose that the seller has manufactured a complex machine to meet the buyer’s special requirements and there is a minor or correctable defect in the goods: May the buyer "avoid" the contract? In the Commentary to Article 25, supra at §181, we saw that in most situations "avoidance of the contract" (Arts. 49, 51, 64) must be based on a "fundamental breach." "Avoidance" may also be prevented by curing a defect in performance. The Convention has two "cure" provisions. Article 37 permits cure until the date for delivery; Article 48, infra at §292, in limited circumstances authorizes cure after the date for delivery.

§ 245 A. Types of Non-Conformity Subject to Cure

As we have seen, Article 34, §220, in language similar to Article 37, gives the seller the right to cure any lack of conformity in documents.

Article 37 applies to various types of non-conformity in the goods. For example, the seller may supply missing goods, including a missing part [page 267] of a machine. Non-conformity of the goods may be cured by "replacement" or by "remedying" the lack of conformity by repairing a defective part. None of these measures is available when cure would "cause the buyer unreasonable inconvenience or unreasonable expense." For example, the buyer should be able to reject a proposal to repair a machine in its place in the buyer’s assembly line when that would seriously interfere with assembly operations; in these circumstances only a prompt replacement of the machine might be permitted. Of course, when the buyer has immediately reshipped an early delivery, cure under Article 37 would usually be impractical; however, under these circumstances it may be possible to cure pursuant to Article 48, §292 infra.

"Date for Delivery". Contracts often provide a period (e.g., "during June") within which the seller may deliver. Suppose the seller delivers on June 10: Does Article 37 permit cure (e.g.) on June 20 if (as Article 37 requires) this "does not cause the buyer unreasonable inconvenience or unreasonable expense"? The answer should be Yes: In Article 37 "date for delivery" refers to the date after which delivery becomes a breach of contract—in this case, June 30. The more strict rules of Article 48 governing cure "even after the date for delivery," with liability for damages, refer to cure after (e.g.) June 30. There must, of course, be no gap in the periods covered by these two interlocking provisions.

There are situations in addition to those specified in Articles 34, 37 or 48 in which cure may be useful. In connection with Article 41, §226 infra, attention is drawn to the awkward problems that may arise in an international sale when a third party claims an ownership interest in the goods. Similar problems may arise under Article 42, §§267–270 infra, from a third-party claim based on intellectual property such as a patent, copyright or trademark. When the buyer notifies the seller of the claim (Art. 43(a)) the seller may be able promptly to solve the problem by satisfying an outstanding lien or other security interest, by settling with a patent or trademark claimant, or by obtaining an injunction against pressing a groundless claim.

There is no indication that providing for cure of defective documents (Art. 34) and non-conforming goods (Arts. 37 and 48) was intended to foreclose the seller’s opportunity to use this efficient remedy in analogous situations. If such a gap had been suggested during the legislative process it is unlikely that the framers would have chosen either to (1) reject [page 268] the possibility of cure or (2) remit the problem to the vagaries of domestic law. See the provision in Article 7(2) for settling matters "in conformity with the general principles on which [the Convention] is based...", §§96–102, supra.[2] This approach is supported not only by the provision for cure in Articles 34, 37 and 48, but also by the emphasis in the Convention’s remedial provisions on avoiding the waste that results from needless destruction of the contract. See Art. 25, §§181–186: definition of "fundamental breach"; Arts. 49 and 64, §§301–308, 353–356: avoidance of contract by buyer and seller; Art. 77, §§416–419; mitigation of damages; and Chapter VI, Preservation of the goods, Arts. 85–88, §§453–457.

§246 B. Effect of Cure on Avoidance

The above-mentioned provision concerning unreasonable inconvenience or expense is the only restriction on the seller’s right to cure defects before the date for delivery. The right to cure extends to serious deficiencies or defects that (in the absence of cure) would constitute a "fundamental breach." Consequently, unless it is clear that the seller will not cure, the buyer may not effectively avoid the contract until the date for delivery has passed.[3] (This question will be explored more fully in connection with Article 48 in the more complex situation in which the buyer, after the date for delivery, notifies the buyer of avoidance. See §296, infra.)

On the assumption that the non-conformity of the one bag was not a "fundamental" breach Buyer could not have rejected the entire shipment ("avoided the contract" under Art. 49) if this had been the initial tender. See Art. 51(2) §317, infra. On the other hand, if the May 25 delivery could have been rejected (the contract "avoided") as an initial tender there would be no doubt as to Buyer’s right to reject such goods when delivered as a "cure."

The language of Article 37 and its legislative history do not clearly answer the question whether the cure must be perfect. However, the sweeping language of the Article allowing the seller to remedy "any" deficiency or lack of conformity unless this causes "unreasonable" inconvenience or expense, and the last sentence of the Article preserving the buyer’s right to claim damages, indicate that perfection with respect to the second tender may not be required.

Any inconvenience in receiving the May 15 delivery and in exchanging that shipment for the May 20 delivery and any burden of disposing of (or rejecting) the one bag of No. 2 sugar will be relevant in determining whether the cure will "cause the buyer unreasonable inconvenience or unreasonable expense." But if this restriction does not apply, it seems that Article 37 empowers Seller to make the second delivery described in Example 37A.[4] Of course, Buyer has the right to recover damages for any expense in making the exchange and for the non-conformity of the one bag of sugar.[5] See also: Schlechtriem, Com. (1998) 295–299 (Schwenzer).[page 270]

Article 38. Time for Examining the Goods

§ 249 A. Significance of the Time for Examination

Article 38 provides rules on how soon the buyer "must examine" the goods. These rules are given legal effect by other provisions: Article 39(1) cuts off the buyer’s rights if it fails to notify the seller of a non-conformity within a reasonable time after the buyer "ought to have discovered" it. (Cf. Art. 44, infra at §254.) Under Article 49(2)(b) the buyer loses its right to avoid the contract a reasonable time after it "knew or ought to have known of the breach." Under these provisions Article 38 is important in fixing the time when the buyer ought to have discovered the defect.

§ 250 B. Legislative Background: ULIS

The 1964 Hague Convention on Sales (ULIS 38) stated rules on the time for examination that proved to be too rigid. Their most serious flaw was the requirement that the buyer must examine the goods at the place of "destination" unless the goods were redispatched " without transshipment." When a buyer purchases goods in sealed cans or cartons for resale in chain transactions employing containerized transport and, in general, whenever efficient [page 271] distribution calls for rapid transshipment of large quantities of goods, there would be no practical opportunity to inspect the goods (as ULIS required) at the initial terminal. As a result, the buyer’s time for giving notice of defects could expire and the buyer could be deprived of its rights before it had a fair opportunity to discover the defect. Efforts were made at the 1964 Hague Conference to correct the problem but to no avail. In the UNCITRAL proceedings it was possible to make the rules on examination of goods more flexible and consistent with current commercial practices.[2]

§ 251 C. Time for Examination under Article 38

All of Article 38 is subject to the standard set forth in paragraph (1): The examination must be made "within as short a period as is practicable in the circumstances." This standard was designed to stress the importance of timely inspection, a necessary step towards the timely notification of defects required by Article 39, infra. Timely notice may be needed to enable the seller to take samples or take other steps to preserve evidence of the condition of the goods. In some cases timely notice may enable the seller to cure defects (Arts. 37, 48) or make a price allowance or other adjustment to meet the buyer’s complaint. See also §255, infra.

The phrase "as short a period as is practicable in the circumstances" embodies nuanced responses to the interests of both parties. ULIS 38(1) stated that the buyer "shall examine the goods... promptly "—a standard that might not permit consideration of circumstances that would require delay. (See §250, supra, and the legislative history collected in [page 272] notes 2 and 5.) On the other hand, it was concluded that the need for inspection called for greater urgency than was suggested by the "reasonable" time standard established in many other provisions. See Arts. 33(c), 39(1), 43(1), 47(1), 48(2), 49(2), 63(1), 64(2)(b), 65, 75, 79(4), 88(1). Where extreme urgency is required and is feasible the Convention calls for "immediate" action: Under Art. 71(1) a party suspending performance "must immediately" give notice of the suspension. Setting a rigid time limit for inspection (6 days, 2 weeks) is, of course, impractical; the most that a law can do is to call for action "within as short a period as is practical in the circumstances".

Local standards. Another step towards flexibility was the omission of ULIS 38(4) which stated that, in the absence of agreement, methods of examination were governed "by the law or usage of the place where the examination is to be effected." This provision was omitted because of concern that it might invoke practices designed for local transactions in contrast to practices and usages applicable to international trade. See Article 9, §§112–122, supra: "usage...in international trade".[3]

Example 38A. A sales contract called for the delivery to Buyer of 500 gallon cans of chlorine in sealed metal containers; when the seal is broken the chlorine must be used promptly or it will evaporate. On June 1 a shipment under this contract was delivered to Buyer. Buyer stored the containers in his warehouse without counting the number of cans or testing the contents. On September 1 Buyer notified Seller that he had just opened the containers to use the chlorine in his chemical processes, and found that there were only 400 containers, and that 200 contained chlorine that did not meet the contract specifications.

In these circumstances, one might well conclude that Buyer failed to check the number of cans within the required period but that the contents were examined as soon as "was practicable in the circumstances."[4]

The general standard of practicability set forth in paragraph (1) remains applicable under paragraph (2) when the contract involves carriage of the goods. The fact that in such transactions the risk of loss normally shifts to the buyer under Article 67(1) "when the goods are [page 273] handed over to the first carrier" (§§363–367 infra) is irrelevant; in the absence of agreement to the contrary (Art. 6), Article 38(2) defers the examination "until after the goods have arrived at their destination". The basic rule of "practicality" in Article 38(1), the language of Article 38(2) and the legislative history all reject rules that turn on risk in transit and technical concepts such as an "agency" status of the carrier.[5]

Decisions on Timeliness: Examination was Timely.   (1) GER. LG Düsseldorf, 31 O 231/94, 23 June 1994. Delay in examination and notice was reasonable, since machinery had to be set up for testing. UNILEX D.1994-16.  (2) Redispatch: GER. OLG Köln, 22 U 202/93, 22 February 1994. Delay reasonable since redispatch before examination was expected. UNILEX 1994-6, CLOUT 120.

Examination not Timely: B’s Claim of Non-conformity Rejected.   (1) GER. LG Duisburg, 14 (19) O 80/94, 17 April 1996. Examination and notice of defects in textiles: not in as short a time as was available. UNILEX D. 1996-5.  (2) NETH. Rb Roermond, U-1991-14, 19 December 1991. Although cheese was frozen, sample could have been thawed for inspection. UNILEX D. 1991-14.  (3) SWITZ. Pr. Locarno, 6252, 27 April 1992. Defects in furniture easy to discover; inspection should have been made on delivery. UNILEX D.1992-10.  (4) GER. OLG Saarbrücken, 1 U 69/92, 13 January 1993. B’s storing goods in warehouse for resale does not invoke redispatch exception under Art. 38(3); claim of defects rejected. UNILEX D. 1993-2.1.  (5) SWITZ. OG Luzern, 11 95 123/357, 8 January 1997. Delay in inspection and notification based on redispatch of medical devices (Arts. 38(3), 39) led to loss of claim for defects; B had redispatched only a small quantity of delivered goods. The court noted the variations in the periods for notification allowed in different jurisdictions: German—short, e.g., eight days after discovery, compared with Anglo-American and Dutch—sometimes several months. The court settled on a compromise: one month after delivery. UNILEX D.1997-2, CLOUT 192.

See also: Bonell/Ligouri, ULR (1996-2) 360-362, (1997-3) 592–593; Schlechtriem, Com. (1998) 303–308.[page 274]

Article 39. Notice of Lack of Conformity

Article 40. Seller’s Knowledge of Non-Conformity

Article 44. Excuse for Failure to Notify

§ 254 A. Introduction: Notice Requirements in Two Settings

The Commentary on Article 38, supra at §249, showed that the period within which the buyer must examine the goods is closely related to the buyer’s obligation to notify the seller of nonconformity—an obligation that is governed by Articles 39, 40 and 44. Article 39 states general rules on the time for notification and the consequences of failure to comply with this requirement. Articles 40 and 44 contain special exceptions from the general rules of Article 39.[page 275]

These three articles embody a delicate compromise of views that were vigorously pressed during the UNCITRAL proceedings and at the 1980 Diplomatic Conference. Indeed, this is one of the few points where perceptions of differing regional and economic interests came to the fore. Representatives of several industrial States, primarily of the Continent of Europe, stressed the importance of maintaining the strict notice requirements embodied in their domestic rules. This position was opposed primarily by representatives of developing States. This opposition reflected fears that defects in heavy machinery might appear long after the machinery is delivered and put into use and that purchasers might be unaware of the drastic effects of delay in giving notice. The evolution of provisions designed to reconcile these views will be described infra at §§256–261.

§ 254.2 (a)  Notice Requirements and Limitations for Legal Proceedings

We need to distinguish two types of rules that relate to delay: (1) Rules, like Articles 39, 40 and 44, requiring timely notice to the other party, and (2) Rules setting time limits for bringing legal action. Rules of the second type are not included in the Sales Convention and are the subject of a closely-related Convention on the Limitation Period in the International Sale of Goods (1974 and 1980 Protocol of amendment). The Limitation Convention will be introduced at §261.1, infra.

Following are the three articles (Arts. 39, 40, 44) of the first type—rules requiring notice to the other party of lack of conformity of the goods.

§ 255 B. Seller’s Need for Notice; Domestic Rules

Let us assume that the buyer receives goods and, without objection, retains the goods and uses or resells them, but later declines to pay or claims damages on the ground that the goods were defective. If the seller learns of the claim after the goods have been used or after a period during which the goods could have deteriorated, it will be difficult to ascertain whether the buyer’s claim is just. The seller’s responsibility was to provide goods that conformed to the contract when the risk of loss passed to the buyer (Art. 36(1), supra —normally when the seller shipped or when the buyer received the goods. Art. 66–70, infra at §§360–383). If the buyer notifies the seller promptly, the seller can inspect and test the goods to ascertain whether a claim is justified. Moreover, when the inspection shows that the goods are defective, the seller may be able to exercise [page 277] its right to cure the defect (Art. 37, supra at §244; Art. 48, infra at §292).[2]

§ 256 C. The Occasion, Time and Contents of Notice

Do these notice requirements apply to defects in documents, such as a misdescription in a bill of lading, inspection certificate or invoice? Article 39 refers to a lack of conformity "of the goods." However, the Convention is drafted on the assumption that goods will often be delivered by way of documents; in such deliveries supplying the correct documents is part of the seller’s obligation to deliver the goods. (See Art. 34, supra at §217.) Moreover, the provision in Article 34 allowing the seller to cure a defect in documents would be of little value unless the seller is notified of the defect.[3.]

(a) Specificity

Article 39(1) states that the buyer must give notice " specifying the nature of the lack of conformity". Questions as to what the notice must say should be answered with regard for the functions served by the notice. As was noted at §255, the principal functions are to give the seller an opportunity to obtain and preserve evidence of the condition of the goods and [page 278] to cure the deficiency (Arts. 37 and 48). See the Secretariat Commentary on draft Art. 37 (para. 4), O.R. 35, Docy. Hist. 425. A notice that said no more than "goods defective" usually would not give the seller all the information the seller needs for the above purposes and (as Article 39(1) requires) would not specify " the nature of the lack of conformity". (In an age of electronic communication, a seller who wanted to know more might be expected to inquire.

Decisions on Specificity: Inadequate:   (1) GER. OLG Frankfurt a M., 5 U 261/90, 13 June 1991: Failure to specify precise defects in textiles. CLOUT 1, UNILEX 1991-5.  (2) GER. LG München, 17 HK 03726/89, 3 July 1989. B’s notice: shoes had bad fit and workmanship, was not sufficiently detailed. CLOUT 3, UNILEX D.1989-2.  (3) GER. OLG München, 7 U 2070/97, 9 July 1997. Notice that the goods "did not conform to our specifications and cannot be sold to customers" and "250 items were badly stamped" were not sufficiently specific under CISG 39(1). UNILEX D. 1997-11. (Other German decisions to similar effect.)  (4) Cf. Switz. T. Can. Valais, CI 97-167, 28 October 1997. Inadequate notice. CLOUT 219.

Query. Do the decisions give adequate weight to the language of Article 39(1) which calls for "specifying the nature of the lack of conformity"? If S is in doubt about the precise nature of B’s complaint, would S normally ask B for more details? See: Bonell/Ligouri, ULR (1997-3) 595 n. 14–16; Schlechtriem, Com. (1998) 314–316.

§ 256.1 (b) Delivery of "Different" Goods (Aliud)

Suppose that in a contract calling for cans of soybean oil the buyer discovers that the cans contain mineral oil or fish oil or some other liquid quite different from that specified in the contract. Does Article 39 require the buyer to notify the seller of "a lack of conformity of the goods"?

The German Bundesgerichtshof (Sup. Ct.) rejected the "aliud" concept in the setting of the Sales Convention. VIII ZR 51/95, 3 April 1996. UNILEX D.1996-4.

Article 39(1) requires that notice be given "within a reasonable time after [the buyer] has discovered [a lack of conformity] or ought to have discovered it." Article 38, in fixing the time when the buyer must inspect the goods, is useful in determining when the buyer "ought to" discover a non-conformity. Of course, the buyer is bound only to discover those defects that a normal examination would reveal. (See Art. 38 and Example 38A, supra at §252.) Thus, examination at the point of destination would normally show the number of containers and the apparent condition of goods that are open to inspection, but the contents of sealed containers and the inner workings of machinery may not be discoverable until later. The determination of the "reasonable period" for notice following the time when the buyer discovers (or ought to have discovered) the non-conformity would be influenced by a wide range of factors. Considerations indicating the need for speed include the perishable nature of the goods, the need for impartial sampling or testing, and the possibility of cure by the seller.[4]

Decisions: Claim Barred by Delay in Notice: (1) NETH. Rb Roermond, 920150, 6 May 1993. B lost claim for delay of three months after discovering defects in electric kettles; "reasonable time" means "as soon as possible". UNILEX D. 1993–14.  (2) SWITZ. HG Zürich, HG930/38, 9 September 1993, excessive delay in giving notice of defects in furniture. CLOUT 97, UNILEX D.1993–22.  (3) ITALY. TC di Cuneo, S.H.Culet v.L et F.45/96, 31 January 1996. Because of easy discovery of defects in sporting clothes, notice 22 days after delivery was excessive. UNILEX D. 1996–3.  (4) HUNG. ARB. C. of Comm. 5 December 1995. Excessive delay in notice; repainting of waste containers. UNILEX D.1995–29.  (5) GER. OLG München, 7 U 3758/94, 8 February 1995. Delay of 2 months in reporting [page 280] defects in chemicals; 8 days a normal limit. UNILEX D.1995–29.  (Many more German cases: delay in B’s notice barred recovery.)

See also: Bonell/Ligouiri, ULR (1996–2) 362–363, (1997–3) 593-594 (citing cases); Schlechtriem, Com. (1998) 319.

§ 258 (b) The Two-Year Limit

Some legal systems simply require notice within a "reasonable time" and do not specify an outer time-limit. (See (U.S.A.) UCC 2-607(3), Art. 38, supra at §253.) Others specify cut-off periods of one year or less. ULIS 49(1) set a cut-off limit of one year. The two-year period in paragraph (2) Article 39 was part of an overall compromise.

Paragraph (2) opens with the phrase "in any event"; the notice must be given within the two-year period even though a defect is discovered subsequent to that period, and even though a later notice would satisfy the general standards of Article 39(1) and Article 44.

The exception at the end of paragraph (2), for cases where the two-year limit "is inconsistent with a contractual period of guarantee", meets a problem that could arise, in rare instances, when the contract guarantees performance for a period of two years or longer. (See Art. 36(2), supra at §243). Suppose that a contract guarantees performance for a period of two years, and the goods break down at the very end of the two-year period. In this situation the two-year cut-off could be "inconsistent with [the] contractual period of guarantee" so that a later notice would be effective.

The cut-off period of paragraph (2) starts to run only when the goods are "actually handed over to the buyer." This emphatic reference to the physical act of actually handing over the goods to the buyer was designed to prevent transit-time from eating into the two-year period, regardless of whether the buyer bore the risk of loss during carriage.[5] The 1964 Convention on the Limitation Period in the International Sale of Goods similarly provides (Art. 10(2)) that the 4-year limitation period for a claim arising from lack of conformity commences when the goods "are actually handed over to, or their tender refused by the buyer." This language was also selected to avoid shortening the period while goods are in transit.[6][page 281]

§ 259 D. Consequence of Failure to Give Notice

Article 39 states that if the buyer fails to notify the seller within the prescribed period he "loses the right to rely" on the non-conformity. This language, standing alone (but see Art. 44, §261 infra), would bar the full range of remedies: a claim for damages (Art. 45(1)(b) and 74–77), requiring performance by the seller (Art. 46), avoidance of the contract (Art. 49) and reduction of the price (Art. 50). Under this language a seller’s action to recover the price would not be subject to a set-off or counterclaim based on a defect which the buyer knew or ought to have discovered if the buyer fails to notify the seller within the periods stated in Article 39.[7] However this rigorous rule is subject to exceptions, to which we now turn.

Article 40, quoted supra at §254, relieves the buyer of these notice requirements when a lack of conformity relates to facts of which the seller "knew or could not have been unaware." Such a rule appears in ULIS (Art. 38) and calls for little comment.[8]

Decision on Knowledge; See, e.g., GER. LG Trier, 7 HO 78/95, 12 October 1995. S could not object to B’s delay in giving notice since S "could not have been unaware" of watering of wine. UNILEX D.1993-28.  See: Schlechtriem, Com. (1998) 321–323.

§ 261 (b) Excuse for Failure to Notify: Article 44

There was no provision like Article 44 in the 1978 Draft Convention that was submitted to the Diplomatic Conference. Efforts to relax the notice requirements of Article 39 had failed by narrow margins and it seemed that the question [page 282] had been resolved. Thereafter, informal discussions revealed that some developing countries were seriously dissatisfied by this result; representatives of industrial countries that had strongly resisted relaxation of the notice requirements proposed that the issue be reopened so that a compromise solution could be developed. This led to the addition of Article 44, quoted supra at §254.[9]

Article 44 relieves the buyer of some of the consequences of failing to give notice within a "reasonable time" under Article 39(1) when the buyer "has a reasonable excuse for failing to give the required notice." (It is important to note that this excuse is limited to failure to comply with paragraph (1) of Article 39 and does not affect the two-year cut-off period of Article 39(2).)

The "reasonable excuse" for a failure to give notice in conformity with Article 39(1) needs to be understood and applied in the light of its legislative history. At the Diplomatic Conference several representatives, primarily from developing States, objected that consequences imposed by Article 39(1) were too drastic: The provision that "the buyer loses the right to rely on a lack of conformity of the goods" means (inter alia) that one could be required to pay the full price for defective goods. Concern was also expressed that it would be especially difficult to ascertain defects in complex industrial machinery typical of imports to developing areas, and that their importers might be unaware of the Convention’s notice requirement and the drastic consequences of failure to comply.

Against this background the use of the expression "reasonable excuse " indicates the applicability of more individualized considerations than would otherwise be relevant under Article 39(1). Thus, Article 44 might countenance difficulties encountered by the individual importer, or at least by importers of the region, that might not be relevant under the more objective standard of Article 39(1).[10]

The "excuse" provisions of Article 44 do not preserve all of the buyer’s remedies—only reduction of the price (Art. 50) and recovery of [page 283] damages other than loss of profit (Art. 74). Consequently, a buyer who fails to give notice within a "reasonable time" (Art. 39(1)) may not require performance (Art. 46), avoid the contract (Arts. 49 and 73; cf. Arts. 75–76) or rely on the non-conformity as a basis for delaying the passage of risk of loss (Art. 70).[11]

Professor Schlechtriem raises interesting questions concerning problems that may arise when a buyer qualifies for the limited "excuse" provided by Article 44. Suppose that the seller would have been able to cure the lack of conformity (Arts. 37, 48) and thereby avoid damages if the buyer had notified the seller of the non-conformity within the "reasonable time" required by Article 39(1). Under these circumstances may the seller invoke Article 77 calling for measures to mitigate loss (§§416–419) infra) and thereby reduce the buyer’s claim for damages? A second query: Article 44 states that the buyer may "claim damages" when excused from the notice requirement of Article 39(1) but provides no excuse from Article 38 regarding timely inspection; failure to comply with Article 39(1) might give the seller a damage claim.[12]

This writer sees force in the suggestion concerning mitigation of avoidable damages based on Article 77 but is concerned lest other suggestions undermine the hard-fought "excuse" provided by Article 44. Surely the seller may not claim damages for the lack of notice that Article 44 excuses. Suppose that a buyer does not inspect within the period specified in Article 38 but by some other means learns that the goods are defective and notifies the seller within the "reasonable time" specified in Article 39; only unusual circumstances would justify a claim against the buyer for breach of an independent duty to inspect.

The "excuse" provision of Article 44 was drafted hastily at a late stage of the Diplomatic Conference and consequently is not well integrated with the notice provisions developed in UNCITRAL, but the problems it poses for sellers can easily be overstated. The sanction imposed by Article 39(1) that the "buyer loses the right to rely on a lack of conformity of the goods" is severe and significant sanctions are preserved against even a buyer who qualifies for "excuse" under Article 44. Consequently buyers are not likely to refrain from making a prompt complaint when they [page 284] receive defective goods.[13] In any event, an undue delay in asserting a defect will continue to militate against the credibility of the claim. Moreover, even in areas with stern rules like Article 39(1), contracts often include precise rules on timely notification of defects; as we have seen (Art. 6, §74–81, supra) the Convention does not interfere with the parties’ freedom to make their own rules.[14]

Decisions on Excuse: (1) GER. OLG München, 7 U 3758/94, 8 February 1995. B delayed 2 months in notifying S of defects in chemicals. B’s claim for excuse under Art. 44 was rejected. The court noted that the normal limit for durable goods was 8 days. B’s business was fast-paced; it would be easier to allow excuse to a "single trader or artison". UNILEX D. 1995–4.  (2) Cf. ARB. ICC (Paris) 7331/1994 (1994). B delayed 30 or more days in notifying S of defect. B’s plea for excuse under Article 44 was rejected. UNILEX D. 1994–33.  On excuse (Art. 44): Schlechtriem, Com. (1998) 348–354.

§ 261.1 E. Time Limits for Legal Proceedings—Statutes of "Limitation" or "Prescription"

Technically distinct from notice requirements are limits on the time for instituting legal proceedings. Such domestic rules on "Limitation" or "Prescription" very widely on the length of time limits for legal action and also on whether these limits are rules of "procedure" or of "substantive" law—a difference in theory that leads to divergent rules of private international law. These difficulties led to an early decision by UNCITRAL to prepare uniform rules that were finalized in the Convention on the Limitation Period in the International Sale of Goods (New York, [page 285] 1974).[15] The Convention entered into force on August 1, 1988 and (as of writing) is in force in twenty-three States.[16]

The 1974 Convention sets a general limitation period of four years (Art. 8) from "the date on which the claim accrues" (Art. 9–1). A claim for lack of conformity of goods accrues when "the goods are actually handed over to, or their tender is refused by, the buyer" (Art. 10–2).

The Limitation Convention (Art. 1–1) does "not affect" time limits for giving notice, such as those imposed by CISG 39 or 43, supra. Consequently, a buyer who fails to comply with these requirements for giving notice will have lost "the right to rely" on the provisions of CISG 35, 41 or 42 relating to defects in the goods or third-party claims even though the limitation period for instituting legal action has not expired. Conversely, a buyer who has promptly notified the seller may be barred from instituting judicial or arbitral proceedings after expiration of the four-year period provided by the 1974 Limitation Convention.[page 286]

Article 41. Third-Party Claims to Goods

§ 262 A. Scope of the Article: Buyer’s Rights Against Seller

One of the limits on the scope of the Convention is set by Article 4: "...this Convention...is not concerned with...(b) the effect which the contract may have on the property in the goods sold." Suppose that a third person claims to own goods that B purchased from S: The question whether the buyer is protected, as a bona fide purchaser, against that third-party claim is not governed by the Convention but is left to applicable domestic law.[1]

The Convention addresses this question: When the seller supplies goods that are subject to a third-party claim, what are the rights of the buyer against the seller? This question is treated in Article 41; related questions that arise when a third-party claim is "based on industrial property or other intellectual property" (e.g., a patent or copyright) are dealt with in Article 42, infra at §267.

Under this article (as under Art. 35, §223 supra ) the seller "must deliver" goods that meet the prescribed standard; the seller’s knowledge of the defect is irrelevant. (Contrast Art. 42, §269 infra.) The buyer’s obligation to notify the seller of a third-party right or claim under Articles 41 and 42 is dealt with in Articles 43 and 44, infra.

Decision on Third-party Claim: AUSTRIA, OGH (Sup. Ct.) 10 Ob 518/95, 6 February 1996.  B (Germany) claimed damages for failure of S (Austria) to deliver propane gas. One of S’s defenses was that S’s supplier had prohibited deportation to Benelux countries. The court rejected this argument, noting that under CISG 41 the "seller must deliver goods that are free from any right or claim of a third party", unless "the buyer agreed". B had not agreed to this restriction; B’s damage claim was sustained. UNILEX D. 1996-3.1.  See: Schlechtriem, Com. (1998) 326–333.

§ 264 C. The Contested Third-Party Claim

Example 41A. After Buyer received goods from Seller, Claimant brought an action to recover the goods from Buyer and asserted that Claimant, rather than Seller, was the owner.[4] Buyer immediately informed Seller of the claim; Seller replied that Claimant’s assertions were false. Claimant, however, brought legal proceedings to recover the goods. Buyer successfully defended the action but suffered losses of $5,000 because the litigation prevented the prompt use of the goods. In addition, Buyer had to pay $1,000 in legal fees which were not recoverable from Claimant. Has Buyer any redress against Seller?

The Convention provides that the seller has an obligation to deliver goods that are free from "any right or claim of a third party"—language that should protect the normal expectation of a buyer that he is not purchasing a lawsuit.[6] In international sales, the third-party claim is likely to [page 288] involve the domestic rule of the State where the seller has its place of business; it would often be difficult and costly for the buyer to evaluate and contest such a claim.

A third-party claim contested by the seller can present awkward problems but they can be minimized by careful handling. Article 43(1), infra at §271, requires the buyer to notify the seller of a third-party claim "within a reasonable time."[7] When the claim is petty, such as an encumbrance to secure a small debt owed by the seller, one could expect the seller quickly to remove the encumbrance. When the claim is frivolous, such as one based on an encumbrance for a debt that has been paid but not discharged in the public records, the seller could often immediately secure clarification of the record. When the defense of the claim calls for substantial litigation and the buyer desires to keep the goods, effective protection for the buyer would require the seller to take over the defense of the action.

The seller would be obliged to reimburse the buyer for any expense or loss caused by the claim.[8] But if the seller quickly and effectively resolves the problem, the seller’s breach may not be "fundamental" (Art. 25, supra at §181) and the buyer could not avoid the contract (Art. 49(1)(a), infra at §301). But a third-party claim might well involve such detriment to the buyer that would authorize avoidance, and the threat of this drastic remedy should stimulate the seller to take effective action.[9][page 289] The seller’s obligation to take over defense of the claim will be explored further in connection with Article 42, §270.1 infra.

§ 266 D. "Nullity" of the Contract under Domestic Law

Suppose that domestic law states that the sale of goods the seller does not own is "void" and gives the buyer remedies that are different from those provided by the Convention.[10] The Convention (Art. 4, §64 supra ) states that it "is not concerned with (a) the validity of the contract...". Does it follow that, in an international sale otherwise subject to the Convention, a rule of domestic law that the sale is "void" will displace the rights given the buyer by Article 41 and the rules of the Convention that implement this provision?[11]

Examples of the Convention’s rules in the area include: the buyer’s obligation to notify the seller, Arts. 43 and 44 (§§261, 271); the buyer’s right under Article 46 (§§279–285) "to require performance by the seller of his obligations..." including its obligation under Article 41 to "deliver goods which are free from any right or claim of a third party (e.g. by removing the defect in title or delivering substitute goods); the buyer’s right under Article 45(1)(b), when the seller breaches any of his obligations, to "claim damages as provided in articles 74 to 77"—including the right under Article 74 to recover "the loss, including loss of profit, suffered as a consequence of the breach".

The suggestion for displacing the provisions of the Convention should be rejected. As we have seen in connection with Articles 4 and 5 (§§66, 72–73), supra), giving effect to the labels that are attached to domestic rules could undermine the rules of the Convention which Contracting States have engaged to apply in lieu of the diverse rules of domestic law. The purport of Article 4(a) is to prevent the Convention from authorizing transactions and contract provisions that domestic law prohibits. Here the Convention and domestic law have the same objective: to provide a remedy when the seller fails to transfer ownership to the buyer; however, the Convention provides a battery of remedies that are appropriate for international commercial transactions and, more particularly, are designed to achieve uniformity in international trade.[12][page 290]

The legal issue, of course, is the proper interpretation of the Convention. When Article 4(a) is read in the content of the Convention as a whole the statement in Article 4(a) that the Convention "is not concerned with (a) the validity of the contract" can not be read to mean that the Convention is not concerned with problems (like the seller’s lack of title) that the Convention does directly address in Article 41.[13][page 291]

Article 42. Third-Party Claims Based on a Patent or Other Intellectual Property

§ 267 A. Infringement Claims in Multi-State Settings Patent Claims

(4) The above three situations involve an infringement claim based on a patent registered in the state of use or resale. However, in the setting described at (2) above, the patent on which Claimant relies may have been registered initially in Seller’s State (State S) (or in a third State (State T)) but claims under the patent may be recognized by the courts of the Buyer’s State (State B) based on rules of private international law or on a treaty providing for the international recognition of patent rights.[1][page 292]

§ 268 B. Evolution of Article 42

The 1964 Sales Convention (ULIS) did not address these questions. Article 52 of ULIS (placed in a section entitled "Transfer of Property") gave the buyer protection where "the goods are subject to a right or claim of a third person." Although this language would appear to apply to a "right or claim" based on patents or other types of intellectual property, the preparatory papers and Prof. Tunc’s commentary discuss this provision in terms of third-party ownership claims; on the other hand it has been concluded that an injunction preventing use of the goods violates the buyer’s right under ULIS 33(1)(d) that the goods "possess the qualities necessary for their ordinary or commercial use."[2] However, if infringement claims were decided under such rules relating to the conformity of the goods, whimsical results would flow from the provision of ULIS 35(1) that conformity is to be decided by the condition of the goods "at the time when risk passes." If the goods are subject to a patent restriction only in Buyer’s state (State B), Seller would seem to be responsible under terms quoted "Ex Ship," but not under terms quoted "F.O.B. Port of Loading."

In short, the 1964 uniform law did not face problems of considerable importance and difficulty. Certainly the drafters did not consider the problems that could arise (as in paragraph (3), supra at §267) if the buyer takes the goods to a third State (State T) and encounters difficulties under a patent registered only in that State.

These problems were confronted at a late stage in UNCITRAL’s work. In 1976 the Working Group tentatively excluded from the Convention problems arising from "rights or claims which relate to industrial or intellectual [page 293] property or the like."[3] The Comments and proposals that were submitted to UNCITRAL’s tenth session (1977) called for further attention to the problem [4] and a special working group was appointed to deal with the problem. A consensus developed that the ULIS approach was not adequate and that the problem was too important to be left to diverse national rules and to the uncertainties of private international law.[5] A draft prepared during UNCITRAL’s tenth session led to the following provision of the Convention:

§ 270 C. Responsibility of Seller

The seller’s responsibility is limited by this general rule: Under Article 42(1) the buyer is protected with respect to only those rights or claims of which "the seller knew or could not have been unaware" when the contract was concluded.[7] "Could not have been unaware" seems to set a standard close to actual knowledge, in contrast to "ought to have known" which can imply a duty to inquire. (See the fuller discussion of these standards at §229, supra.)[8] The seller’s responsibility for defects in the goods under Article 35 (§§223–225 supra) and for third party claims to the property under Article 41 (§262 supra) is subject to no comparable restriction: Under these articles the seller’s lack of knowledge of the defect in the goods or of the third-party claim is irrelevant.

The protection that Article 42 affords to buyers is also restricted since the seller may only be responsible for rights or claims that are based on the law of specified places. Under paragraph (1)(a), if the parties contemplated that the goods would be resold or otherwise used in a specified State the seller may be responsible only for a right or claim asserted under the law of that State. If the transaction did not contemplate where the resale or other use would occur, under paragraph (1)(b) the seller may be responsible only for a right or claim asserted under the law of the State where buyer has its place of business. In the usual (but possible) situation in which the parties contemplate that a foreign buyer will resell or otherwise use the goods in the seller’s State, limiting the seller’s responsibility to claims of which "the seller knew or could not be unaware " seems surprising and, in view of the unusual nature of the case, may have been unintended.

Paragraph (2) adds further restrictions but these are of less importance. Sub-paragraph (2)(a), denying protection to a buyer "who knew or could [page 295] not have been unaware of the right or claim", is similar to Article 35(3), supra at §222. Sub-paragraph (2)(b), relieving the seller of responsibility where the buyer furnishes the specifications, is of limited scope and calls for little comment. A similar restriction appears in (U.S.A.) UCC 2-312(3). A statutory provision of reasonable length can scarcely deal adequately with claims based on the various types of industrial or intellectual property in all of the legal settings that may arise in an international sale. In situations where patent, copyright, or trademark claims can be expected, the parties would be well advised to provide specific answers to the problem in the contract.

Article 42, like Article 41 (§§264–266, supra) provides that the buyer is entitled to receive goods that "are free from any right or claim of a third party", and thus protects the buyer from both rightful and contested claims. Litigation problems in connection with contested ownership claims (Art. 41) were considered supra at §266. Similar problems are generated by third-party claims based on patents or other types of intellectual property.

As has been noted (§266), when the buyer does not find it desirable or practicable to escape from the difficulty by avoiding the contract, the only effective protection for the buyer will be for the seller to take over the responsibility and expense of resisting the claim. The seller may voluntarily do this because of its interest in the further salability of its product. If the seller should fail to respond the buyer will need to consider the resources provided by the remedial provisions of the Convention and by domestic procedural law.

A strong premise for effective legal action is provided by CISG 46(1): "The buyer may require performance by the seller of his obligations...". As has been noted, vindication of the buyer’s right to protection from third-party claims may require defense of the claim by the seller. The buyer would hope that the seller has sufficient commercial contacts with the State of the forum in which the third party claim is brought so that this forum has jurisdiction to require the seller to defend the action. If jurisdiction may not be based on such contacts the buyer will wish to explore whether the forum has rules like those developed by common law courts to deal with similar problems presented by the large number of separate jurisdictions in the United States.[9] This common-law procedure was broadened and codified by the Uniform Commercial Code, Section 2–607:[page 296]

In important transactions in which third-party claims are possible, the buyer should insist on contract provisions that clearly state the protection that the seller provides in the case of third-party claims (for the limitations on this protection see §270, supra), including the responsibility to defend (or "hold the buyer harmless" from) such claims. See the Annotated Export Contract, Art. 10—Patent Indemnity, Kritzer Guide 570 (also gives buyer stronger substantive protection than Article 42 of the Convention. See also Kritzer Manual, Ch. 12 (explanation and alternative forms).

Decision on Intellectual Property: (semble): NETH. Arr. Rb. Zwolle, HA ZA 92-1180, 1 March 1995. Claim by Dutch B v. Italian S, based on suit by third party (T) against B, claiming that textiles S had delivered to B violated T’s copyright on the design of the textiles. The court: CISG 42 required that B prove that S "knew or could not have been unaware" of T’s intellectual property rights. (Basis not clear.) UNILEX D.1995–7.1.

See: Schlechtriem, Com.(1998) 334–343 (Schwenzer).[page 297]

Article 43. Notice of Third-Party Claim

§ 271 Article 39 required the buyer to notify the seller of "a lack of conformity of the goods." (See Arts. 39, 40 and 44, supra at §256.) Under Article 43 the buyer must also notify the seller of third-party claims for which the seller may be responsible under Articles 41 and 42, supra.

The notice requirement under paragraph (1) is comparable to the "reasonable time" requirement in Article 39(1); no cut-off period is specified comparable to the two-year limit set in Article 39(2).

Paragraph (2) dispenses with the notice requirement if the seller "knew" of the right or claim. This corresponds to Article 40, except that the present article omits the phrase "or could not have been unaware and which he did not disclose to the buyer." Article 43(2) needs to be considered in relation to Article 41, which denies protection to a buyer who "agreed to take the goods subject to" a third-party claim of ownership, and also Article 42(2)(a) which denies protection with respect to third-party claims based on intellectual property where the buyer "knew or could not have been unaware of the right or claim."

See: Schlechtriem, Com.(1998) 343–347 (Schwenzer).[page 298]

Article 44. Excuse for Failure to Notify

Discussed with Arts. 39 and 40, supra at §261.

Section III.

Remedies for Breach of Contract by the Seller
(Articles 45–52)

Introduction to Section III

§ 272 A. A Bird’s Eye View of the Section

§ 273 B. Relationship to Other Parts of the Convention

§ 274 C. The Remedial System of ULIS: Criticism and Reform

Some of the delegates to the 1964 Hague Conference (including the present writer) were concerned lest the complexity of the rules on remedies would stand in the way of adoption of the 1964 Convention but it was not feasible to recast the basic structure of the law during the three-week diplomatic conference.[1]

UNCITRAL was able to deal with this question. A report of the Secretary-General analyzed the problems that resulted from this fragmentation and proposed a plan for a unified remedial system which the Working Group implemented—a step that simplified the law and reduced its length by one-fourth.[2] In addition, a unified remedial system strengthened the Convention’s unitary approach centering on the contract. (See the Overview, Ch. 2, supra at §24.)[page 300]

Article 45. A Round-up of Remedies Available to Buyer

§ 275 Article 45 sums up the remedies granted to the buyer in various parts of the Convention and indicates the relationship between them.

§ 276 A. The Range of Remedies

Paragraph 1 serves as a useful index to the Convention’s remedial provisions but it does a bit more. The opening language: "If the seller fails to perform any of his obligations under the contract and this Convention, the buyer may ..." has legal bite. Some of the cited articles do not expressly state that they are available for breach; articles 74–77 state how damages are to be measured but do not expressly state that damages are to be awarded. Article 45 also emphasizes the unitary approach and strength of the remedies for breach of contract. (See Arts. 30 and 31, supra at §206 and §210.)

This approach is emphasized by paragraph (1)(b), which announces a principle that is more important than may be evident at first sight: the buyer may "claim damages" if the seller "fails to perform any of his [page 301] obligations under the contract or this Convention." By this language the Convention rejects the view that one who fails to perform his contract is not responsible in damages unless he has been negligent—an approach with an uneasy history in domestic law. Some legal systems that have espoused this doctrine have seen the principle become eroded and unclear. Other legal systems reject the "negligence" principle. In preparing uniform rules for international trade it was important to make a clear choice among these divergent approaches; that choice is expressed in the above-quoted language of Article 45(1)(b).[2]

§ 277 B. Cumulation v. "Election" of Remedies

In domestic law the question whether recourse to one remedy excludes others has also been haunted by confusion. Case law and statutory rules in the common law world at an early stage denied the buyer compensation for damages if it rescinded the contract— e.g., by requiring the seller to take back defective goods. This approach may have been useful to defeat "rescission" (or rejection) based on a trivial grounds. But when the seller’s breach was serious, the buyer had to choose between forfeiting the right to damages or bearing the burden of disposing of seriously defective goods—a choice that in some cases pressed towards the rejection of goods which the buyer could salvage more efficiently than a distant seller. The early rules imposing such choices have been eroded or abandoned.[3]

The Convention’s approach is stated in paragraph (2) of Article 45: "The buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies." Thus, a buyer who requires the [page 302] seller to perform (Art. 46) may also recover damages (Art. 74) for the loss resulting from the delay or other deficiency in the seller’s performance. Similarly, a buyer who avoids the contract (Art. 49) may also claim damages (Art. 74) for the loss suffered as a consequence of the breach.[4]

§ 278 C. Grace Period Granted by Tribunal

Article 45(3) (and a parallel provision in Article 61(3)) bars recourse to tribunals for a "period of grace" for performance. Judicial intervention to provide a "period of grace," available in some jurisdictions,[5] was rejected as impractical for international trade. In the Convention protection against destruction of the contract on insubstantial grounds is provided by the opportunity to "cure" defects (Arts. 34, 37, 48) and by rules governing avoidance of the contract (Arts. 49, 64). See also Art. 51 (avoidance as to the nonconforming part of a delivery).[page 303]

Article 46. Buyer’s Right to Compel Performance

§ 279 As we have seen (Art. 28, supra at §196), domestic legal systems follow varying practices concerning "requiring performance" (in common law parlance, "specific performance"). The result has been a series of delicate adjustments and compromises. We have already seen a concession to domestic practice in Article 28 which carves out an exception from the right to "require performance" that is given to the buyer in Article 46 and to the seller in Article 62. The general rule on the buyer’s right to require performance is as follows:

§ 280 A. The General Rule for "Requiring" Performance

Paragraph (1) of Article 46 lays down the general rule that the buyer may " require performance" by the seller; the seller’s package of remedies (Ch. III, Sec. III) has a parallel rule (Art. 62) that the seller may "require the buyer to pay the price." Both articles reflect the principle, embedded in civil law theory, that an aggrieved party may "require" the other party specifically to perform its contractual obligations.[2]

The rule of paragraph (1) that the buyer may require the seller to perform its "obligations" may be invoked in a wide variety of circumstances. The most common example is when the seller fails to procure or produce the goods or to deliver them at the place (Art. 31) or date (Art. 33) provided by the contract. In addition, subject to restrictions stated in Article 46(1) & (2) (§§283–284 infra), a buyer may require the seller to deliver goods that are in conformity with the contract (Art. 35). Under Article 46(1) the seller may also require the seller to perform its obligations under Articles 41 and 42 to deliver goods free from any right or claim of a third party; we have considered (§270.1 supra) the use of Article 46 to require the seller to remove such claims or to defend them on behalf of the buyer. It is not possible to itemize all of the applications of Article 46 (or of the seller’s parallel remedy under Article 62) since these provisions apply generally to the parties’ "obligations" under the Convention and the contract (Arts. 6, 30, 53).

§ 281 B. The Concession to the Rules of the Forum: Article 28

Article 28, supra at §194, states that even though the Convention’s general rules provide that a "party is entitled to require performance," a court "is not bound to enter a judgment for specific performance unless the court would do so under its own law in respect of similar contracts of sale not governed by this Convention." As was noted under Article 28 (§§191, 195, supra), this concession to the procedures of the forum was granted by ULIS (1964) in response to the objection that common-law systems compelled ("specific") performance only when alternative remedies ( e.g., damages) were not adequate. Comparative research also revealed that some civil law systems would not always compel [page 305] performance by the coercive measures, such as imprisonment for contempt, that may be available in "common law" systems; as a consequence flexibility based on Article 28 is not confined to common law jurisdictions.

"Common law" restrictions on requiring (specific) performances of sellers’ obligations are sometimes exaggerated. It is true that common law courts will not ordinarily compel a seller to deliver goods that the buyer can readily acquire; common examples are standard raw materials—wheat, cotton or the like. In these cases the courts usually find that the buyer’s only loss is the added cost of purchasing the goods—a loss that can readily be ascertained and compensated by awarding damages. However, if substitute goods can not readily be obtained because of shortages or their unique character the buyer’s loss may not be readily measured or compensated by a damage-award. Other examples include a seller’s repudiation of a long-term contract; in this and similar situations the buyer’s loss may be difficult to ascertain. In these and many other situations where damages do not fully compensate the buyer one may expect a favorable response to an action to require ("specific") performance.[3]

§ 282 C. Limits on Compelling Performance Under Article 46

Paragraph (1) of Article 46 withdraws the right to compel performance when "the buyer has resorted to a remedy that is inconsistent with this requirement." For example, the buyer loses the right to compel delivery when the buyer takes the position that it will not accept the goods— e.g., by declaring the contract avoided (Art. 49(1)). The basic inconsistency between these remedies is made explicit in Article 81, infra at §439:[page 306] Avoidance "releases both parties from their obligations under [the contract] subject to any damages that may be due."

§ 282.1 (a) Inconsistency: Form and Substance

Inconsistency between avoidance and requiring performance is evident when the buyer declares the contract avoided (E.g. "I avoid: Don’t ship the goods") and later demands performance: "Ship the goods". Indeed, the rule of Article 46(1) that a buyer may not "require performance" if it "has resorted to a remedy that is inconsistent with this requirement" serves a policy that is deeper than the logic (or esthetics) of inconsistency—the likelihood of reliance on the buyer’s declaration by stopping production, reselling the goods, or canceling the reservation of shipping space.

In examining the Convention’s rules on risk of loss (Article 70, §382.1, infra) it may be relevant to consider whether a buyer who has received seriously defective goods may concurrently: (A) under Article 49(1)(a) declare the contract avoided ("I avoid: Take back the goods") and also (B) under Article 46(2) require the seller to deliver substitute goods. Whether the remedies are inconsistent calls for comparing their impact in specific situations. Both call for the buyer to return the goods. Article 82(1) (§§445–448, infra) provides: "(1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods " if the buyer can not return the goods. The remedies are consistent in other respects such as requirements of notification (Arts. 46(2), 49(2)(b)) and recovery of damages (Arts. 45, 74, 81(1)).

In sum, the two remedies do not violate Article 46(1)’s prohibition of "inconsistent" remedies when they are exercised concurrently; indeed, a buyer’s reference to "avoidance" in connection with a demand under Article 46(2) for substitute goods is redundant since it repeats one aspect of the buyer’s rights under Article 46(2)—the buyer’s right to require the seller to take back the defective goods. On the other hand, inconsistency may arise if the buyer declares that the contract is avoided under Article 49(1) or 46(2).

It is not feasible here to explore questions of inconsistency of remedies in the various settings in which they may arise. This discussion is designed to suggest that applying the rule prohibiting inconsistent remedies calls for attention to their impact in specific situations.

Paragraph (2) of Article 46 governs the scope of specific performance when the seller tenders goods that do not conform to the contract. When [page 307] the non-conformity is unimportant, compelling a second delivery may impose burdens that are out of proportion to the buyer’s needs; hence this remedy is available "only if the lack of conformity constitutes a fundamental breach of contract...."[4]

Example 46A. Seller delivered goods that were seriously defective—i.e., a "fundamental breach" under Article 25. Buyer telexed, "Rejecting shipment for the following serious defects [specifying them]. Demand prompt delivery in conformity with the contract". Seller replied, "Your rejection of the goods avoided the contract which (CISG 81) releases both of us from our obligations under the contract".

Seller’s point based on Article 81 ("avoidance...releases both parties from their obligations...") is, of course, in error for it fails to note that Article 46(2) makes a special and narrow exception from the general rule on avoidance in Article 81; both provisions must be given effect whereas Seller’s argument would nullify Article 46(1).

Could Seller have invoked the above rule on avoidance in Article 81 if Buyer had telexed: " Avoid contract for the following serious defects... Demand prompt delivery...(etc.)". The ill-advised use of words referring to "avoidance" should not prejudice the buyer: Under Article 46(2) the buyer was entitled to refuse the goods for fundamental breach and demand substitute goods; the buyer’s position was clear in spite of the improper language. (The above example may help to expose the snares concealed in the phrase "avoidance of the contract". The implications of the "avoidance" remedy are articulated in Articles 47–49, 51, 72, 73, 81 and 82.)

Example 46B. A contract called for a shipment of 100 X-type machines. Seller shipped the 100 machines but inspection on arrival showed that 10 were defective. This defect was so serious that if all of the machines had been subject to this defect there would have been a "fundamental breach" of the contract: Buyer could have rejected the entire shipment (Arts. 25 and 49(1)(a), §304 infra). However, the defect in the ten machines did not interfere with Buyer’s use or marketing of the other 90 machines. Under Article 46(2) may Buyer, by appropriate notice, require Seller to deliver (a) ten conforming machines to substitute for the defective ones or (b) a new shipment of one hundred conforming machines?

As we shall see, Article 51 addresses this question (§§316–317 infra). Article 51(1) states that "if only part of the goods delivered is in conformity [page 308] with the contract, articles 46 to 50 apply in respect of the part ...which does not conform." Thus, the answer to the first question is Yes: By virtue of Articles 46(2) and 51(1) Buyer may require Seller to substitute ten conforming machines for the defective units. Under Article 51(2) (§317 infra) the answer to the second question is probably No: If it is feasible to deal separately with the conforming and non-conforming units and the defects in the ten machines are not a "fundamental breach" of the entire contract, Buyer may not require Seller to deliver an entirely new shipment. (See Flechtner, Pittsburgh Symposium 53, 86–87.)

Under paragraph (3) the buyer’s right to "require the seller to remedy the lack of conformity by repair" is slightly stronger than the buyer’s right under paragraph (2) to require "delivery of substitute goods." Requiring the delivery of substitute goods—a new shipment of a raw commodity or the substitution of a new machine—might involve transportation costs that would be unreasonably onerous when the non-conformity is insubstantial. Repair of the goods—which might merely involve a mechanical adjustment or replacing a defective part—usually is more efficient; the buyer may require the seller to "repair" even when the breach is not fundamental. However, repair may not be required when this remedy would be "unreasonable having regard to all the circumstances." At the Diplomatic Conference in the course of framing paragraph (3) it was noted that some minor repairs could be made more readily by the buyer, particularly when the seller’s facilities for repair are in a distant country. The statutory language was designed to encourage a reasonable and flexible approach to such cases.[5]

§ 285 D. Limits Set by Other Parts of the Convention

The discussion of Article 28, supra at §193, mentioned other provisions of the Convention that, in some situations, would restrict actions to compel performance. The Convention’s rules on the obligation to preserve and dispose of goods (Arts. 85, 86, 88(2)), and on the duty to mitigate loss (Art. 77) in some settings may bar specific performance; the reasons will be examined in the commentaries to these articles. As was mentioned in discussing the "good faith" principle of Article 7, supra at [page 309] §95, that principle may call for a restrained interpretation of the Convention’s provisions on compelling performance when a party seeks this remedy only after a delay that permits him to speculate at the expense of the other party—as when a buyer seeks to compel delivery (rather than damages) only after a sharp rise in the market, or when a seller seeks to require specific performance (rather than damages) only after a market collapse.[6]

As we have seen, Article 46(2) provides that in specified circumstances the buyer may require the seller to deliver "substitute goods" (§183, supra) and Article 46(3) specifies the circumstances in which the buyer may require the seller to "repair" defective goods (§184, supra ). Do domestic rules of the forum accepted by Article 28 supersede those of Article 46(2) or (3)? [7]

The problem needs to be broken apart. Suppose that a buyer, invoking the law of the forum, seeks to require a seller to deliver substitute goods even though the lack of conformity is not a fundamental breach as required by Article 46(2). Or suppose that a buyer, invoking the law of the forum, seeks to require the seller to repair the goods even though, pursuant to Article 46(3), under "all the circumstances" requiring the seller to repair "is unreasonable". In these cases the buyer’s attempt to invoke domestic law is untenable: Article 28 applies only when the buyer " is entitled to performance" in " accordance with the provisions of this Convention ". A less technical but more substantial reason is that the international community decided that it would be appropriate to require substitute delivery and repair only under the conditions specified in Article 46(2) and (3).

Now let us suppose that domestic law of the forum would not require the seller to deliver substitute goods or repair non-conforming goods in [page 310] cases where the conditions specified in Article 46(2) and (3) were satisfied. Does Article 28 authorize the court to apply its domestic rules in place of those of the Convention?

Article 28, standing alone, seems to say that domestic law will prevail but this conclusion would overlook the specificity and nuanced character of the rules of Article 46(2) and (3) governing these precise situations. In the absence of evidence that UNCITRAL and the Diplomatic Conference faced this problem and evidenced a decision to give an unqualified reading to Article 28, Articles 46(2) and (3) should be regarded as lex specialis qualifying the general provisions of Article 28. Indeed, it seems out of keeping with the spirit of fairness that was characteristic of UNCITRAL and the Diplomatic Conference to conclude that, in facing these specific cases, the law-makers would decide to restrict the grounds for relief in some jurisdictions without requiring liberalization of the grounds in others.[8]

§ 286 E. Evaluation

It is true that meager returns can be expected from a damage claim against a seller who faces financial failure or is in the course of liquidation [page 311] or reorganization. Theoretically, the buyer’s position would be improved by forcing the seller to perform the contract. However, the recovery of penalties, like damages, would be subject to similar difficulties of collection. Can this problem be solved by harsher penalties such as committing the seller to prison for contempt of court? Domestic rules on bankruptcy and creditors’ rights may well bar the draconian allocation of the scarce resources of a failing debtor to a single creditor. And such domestic rules would not be supplanted by the Convention’s rules on "requiring performance": The rights of third parties are at stake while the Convention’s rules are confined to "the rights and obligations of the seller and the buyer" (see Art. 4, supra at §70).[9]

See: Schlechtriem, Com.(1998) 376–393 (Huber).[page 312]

Article 47. Buyer’s Notice Fixing Additional Final Period for Performance

§ 287 A. Relationship to Rules on Avoidance of Contract

As we shall see more fully in examining Article 49, infra at §301, that article provides two grounds for avoiding the contract—(1) when the seller commits a "fundamental breach of contract" (Art. 25, supra at §181) and (2) when the seller fails to deliver the goods "within the additional period of time fixed by the buyer in accordance with paragraph (1) of Article 47...." The provision for fixing an additional final period for delivery is as follows:

§ 288 B. Notice as a Step Toward Avoidance

Article 47(1), read in isolation, seems to empower the buyer to fix an additional final period for the seller to perform any of its obligations. However, the only teeth for the provision are those provided by Article 49(1)(b): "(b) in case of non-delivery, if the seller does not deliver the goods ..." within the time fixed by the buyer under Article 47, the buyer may declare the contract avoided. The notice-avoidance procedure thus applies only to non-delivery.[2][page 313]

In UNCITRAL and at the Diplomatic Conference proposals were made to extend the notice-avoidance procedure to cases where the seller delivers goods that fail to conform to the contract. UNCITRAL rejected these proposals on the ground that the notice-avoidance procedure could be abused to convert a trivial breach into a ground for avoidance. For instance, a buyer who wishes to escape from his contractual obligations—e.g., after a price-collapse—might notify the seller that it has a specified time to correct specified minor defects in the goods although the distance separating the parties makes it impractical for the seller to comply with the notice. This understanding of the decisions taken by UNCITRAL was confirmed at the Diplomatic Conference by the rejection of proposals to broaden the scope of notice-avoidance to include non-conformity; in addition, to avoid any possible misunderstanding, the Diplomatic Conference added the words "in case of non-delivery" at the beginning of the notice-avoidance provision in Article 49(1)(b).[3]

A notice like that sent by Buyer on June 2 should not be held to "fix an additional period of time...for performance," and should not provide the basis of avoidance under Article 49(1)(b). Such a notice gives no warning that a deadline has been "fixed." Indeed, a communication that invites performance without making clear that a final deadline has been set could mislead the seller into an attempt at substantial performance. An effective notice under Article 47(1) should make clear that the additional period sets a fixed and final limit on the date for delivery: E.g., "The last date when we can accept delivery will be July 1."[4]

Suppose that the buyer sends the seller the following ominous notice: "Your delivery is late. We shall be forced to reject the goods and avoid the contract if they do not arrive promptly." This notice does not comply with Article 47(1) since it does not "fix" a "period." The consequences of the notice avoidance remedy are serious; unless the buyer sends a notice of the clarity required by Article 47(1) avoidance must be based on fundamental breach.[5]

The notice under Article 47(1) must fix an additional period "of reasonable length."[6] The Convention uses flexible language; different periods of time could be "reasonable." Within this leeway the choice is given to the buyer—the innocent party who faces breach by the seller. Indeed, respect must be given to the buyer’s discretion in setting the "reasonable" period if the notice-avoidance procedure is to serve its purpose—reducing uncertainty concerning the right to avoid the contract. (The risk of delay or loss of the notice is discussed under Article 63 at §352, n. 2, infra.)

In determining whether the period the buyer fixes is "reasonable" the dominant consideration is the buyer’s need for delivery of the goods without further delay. (Impediments that prevent or delay performance are dealt with in Article 79, infra §§423, 435: temporary impediment.) On the other hand, since the seller’s failure to comply with the period fixed by the buyer empowers the buyer to avoid the contract (Art. 49(1)(a), §305 infra), the reasonableness of this period should be considered in the light of the basic policy decision, embodied in Articles 25, 49 and 64, that contracts should not be avoided on insubstantial grounds.[page 315]

Relation between "Nachfrist" Notice and Avoidance: GER. OLG Celle. 20 U 76/94, 24 May 1995. S delivered only 3 of 6 contracted items of printing machinery. After the expiration date for delivery of these items, B fixed an additional period of eleven days for delivery of the missing machines. On S’s failure to comply with this "Nachfrist" notice made under Art. 47(1), B declared the balance of the contract avoided, pursuant to Art. 49(1)(b). The court sustained B’s action. CLOUT 136, UNILEX D.1995-16. See: Schlechtriem, Com. (1998) 394–400 (Huber).

Query: Have some courts overlooked the independence of the two grounds for avoidance under Article 49? E.g.: (I) Avoidance under Article 49(1)(a) for fundamental breach, as defined in Article 25, supra; and (II) Avoidance under Article 49(1)(b) for failure to comply with the "Nachfrist" notice provided in Article 47(1).

§290 C. The Role of Notice-Avoidance: Analogies in Domestic Law

Domestic legal systems have not developed clear or uniform rules on whether a delay in performance empowers the other party to reject performance. (The issue is expressed in many different ways—rescission, repudiation, cancellation, avoidance.) Sometimes the rule is put in terms of whether time is "of the essence." The (U.K.) Sale of Goods Act states that unless a different intention appears, the time of payment is not "of the essence"; as concerns delay in delivery: "Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract."[7]

The notice-avoidance approach of Articles 47 and 49(1)(b) of the Convention was inspired by a provision of German law that, on default by one party:

If performance is not made in due time, the person who gave the above notice (often termed a Nachfrist) may "withdraw from the contract."[8][page 316]

Other aspects of the German Nachfrist were not employed in the Convention. As has been noted, under the Convention when the seller commits a breach that is fundamental the buyer may declare the contract avoided (Art. 49(1)(b)) without giving the seller an "additional period of time of reasonable length." However, the opportunity by advance notice to clarify the situation for both parties has received widespread international approval; the basic utility of this legal tool was never seriously questioned in the UNCITRAL proceeding or at the Diplomatic Conference.

§291 D. Obligation to Accept Requested Performance

Paragraph (2) of Article 47 reflects a principle that might have "gone without saying": A party may not refuse performance that he has invited. The other party can be expected to rely on the invitation; domestic law would bind a party to accept the requested performance by doctrines such as waiver, estoppel or election. Paragraph (2) avoids the uncertainties of recourse to domestic law. (In addition, paragraph (2) may provide an instance of a "general principle" that, by virtue of Art. 7, could be applicable in other similar situations. See supra at §96.)

Paragraph (2) also provides that the buyer’s demand that the seller perform within a fixed period does not relieve the seller of responsibility for damage resulting from the late performance, including damages resulting from delay during the "additional period" fixed in the notice. This result is consistent with the general rule of Article 45(2), supra at §275, that preserves the buyer’s right to recover damages when (for example) he compels performance under Article 46. (The scope of the "election" principle was discussed under Article 45 supra at §277.) Thus, a notice under Article 47(1) can foreclose an argument that the buyer has agreed to a modification of the contract or has waived or otherwise forfeited a claim for damages resulting from late delivery.

These modest consequences based solely on Article 47 apply generally to a notice fixing an additional period for the seller’s performance "of his obligations". On the other hand, the more serious consequence of avoidance under Article 49(1)(b) based on an Article 47 notice is restricted to cases of "non-delivery" (§§288, 305).[page 317]

Article 48. Cure After Date for Delivery; Requests for Clarification

§292 A. Tools for Cooperation

Two articles deal with the cure of defective performance. Article 37, supra at §245, gives the seller the right to cure defective performance up to the date for delivery; the present Article gives the seller a more restricted right to cure defects in performance after the date for delivery.

§ 295 B. Cure and Delay in Delivery

Paragraph (1) provides that "even after the date for delivery" the seller may remedy " any failure to perform his obligations." This language is broad enough to include a defect in documents. Cf. Art. 34, §220, supra. If the seller tenders delivery either (a) after a delay that constitutes a fundamental breach or (b) after the expiration of a period fixed by the buyer under Article 47 (supra at §287) the buyer may "declare the contract avoided" under Article 49(1), infra at §303. Time that has passed cannot be recalled; "remedy" is intrinsically impossible. On the other hand, if the seller’s delay in delivery does not fall under either (a) or (b), above, the buyer must accept the delivery; there is no need for "cure."

In sum, paragraph (1) addresses the seller’s right to remedy defects or deficiencies in goods that have been tendered—by substituting conforming goods for defective goods or by repairing (or replacing) a defective component part. (As we shall see, paragraphs (2)–(4) are not so limited and apply to a seller’s inquiry as to whether the buyer will accept a late delivery. See infra at §297.)

§ 296 C. Cure and Advance for Fundamental Breach

The relationship between cure and remedies based on "fundamental breach" has already been introduced in connection with the definition of "fundamental breach." (See Article 25, supra at §184.) The issue is important and merits attention in the present setting; the following illustration will recall Example 25A, supra at §184.

Example 48A. Seller delivered a machine to Buyer. When Buyer tested the machine a defect in one of the component parts prevented the machine from operating. Only Seller had replacement parts for the machine. Buyer notified Seller that the machine had failed to operate. Seller offered immediately to replace the defective part but Buyer refused this offer [page 319] and declared that the contract was avoided. The time required for replacing the defective part was not important to Buyer; his contention was that the machine had failed to function and that this constituted a fundamental breach of the sales contract (Art. 25) empowering him to avoid the contract (Art. 49(1)(a)).

In the 1978 Draft Convention, the provision allowing a seller to cure after the date for delivery (Art. 44(1) which became Art. 48(1) in the Convention) opened with these words: "Unless the buyer has declared the contract avoided in accordance with article 45 [now article 49]...." At the Diplomatic Conference several delegates expressed their concern that, in situations like Example 48A, this "Unless" clause might be construed to authorize avoidance of the contract that would frustrate the seller’s right to cure. There was widespread agreement that whether a breach is fundamental should be decided in the light of the seller’s offer to cure (Art. 25, supra at §184) and that the buyer’s right to avoid the contract (Art. 49(1)) should not nullify the seller’s right to cure (Art. 48(1)). However, it was difficult to find language that would clearly express the proper relationship between avoidance and cure. Finally, the Conference adopted a joint proposal prepared by delegates who had been anxious to protect the seller’s right to cure. Under this proposal, the "Unless..." clause of the 1978 Draft was deleted and replaced by the present cross-reference to Article 49.[5]

In cases like Example 48A, the seller’s right to cure could not have been frustrated even under the 1978 version that included the "Unless" clause; any other result would have nullified the Convention’s narrow and specific provision authorizing cure.[6]

The amendment to Article 48(1) leaves little room for doubt. The [page 320] seller’s right to cure should also be protected if, in cases like Example 48A, where cure is feasible, the buyer hastily declares the contract avoided before the seller has an opportunity to cure the defect. As was noted under Article 25, supra at §181, whether a breach is "fundamental" should be decided in the light of all of the circumstances. In cases like Example 48A, where cure is feasible and where an offer of cure can be expected, one cannot conclude that the breach is "fundamental" until one knows the answer to this question: Will the seller cure?

Professor Will in an incisive analysis of this problem (B-B Commentary 349–352) rightly emphasizes the buyer’s need for a prompt and clear answer to the above question: "Will the seller cure?" Will suggests (p. 351) that the buyer should not be required to delay avoidance of the contract unless the answer to the above question is "Yes" based on the buyer’s "actual knowledge (good experience with the seller, and ad hoc commitment, the underlying conditions of sale)...". Fortunately, the parties can avoid doubt by communicating with each other.

The first step normally must be taken by the buyer since the defect usually comes to light during inspection or testing at the end of transport. Let us suppose that, in a case like Example 48A, on June 1, shortly after arrival of the goods, Buyer telexed: "Machine does not operate apparently because of a defect in Part X. Will you remedy the defect? Must have machine in working order by June 20 or will be forced to avoid contract and obtain machine elsewhere. Need to know by June 10 what you plan to do with respect to arrival of your engineer and plans for repair."

Such a telex would respond to the parties’ normal commercial interests to maintain a productive business relationship. In addition, the telex lays the foundation for protecting Buyer’s legal rights if (contrary to normal practice) Seller should fail to cooperate: (1) The telex satisfies the buyer’s obligation under Article 39 to notify the seller of the lack of conformity. (2) Since the seller has the "obligation " to supply the buyer with goods that conform to the contract (Art. 35), the telex constitutes a Nachfrist notice under Article 47 fixing "an additional time of reasonable length for performance by the seller of his obligations"; until the seller refuses or the fixed time expires the time does not run on the period within which the buyer may take further steps such as avoidance for fundamental breach. (Art. 49(2)(b)(ii)). (3) This advanced stage of the relationship between the parties, with the buyer in possession of defective goods shipped by the seller, leads to the conclusion that the seller also has the "obligation" to respond to the buyer’s request for early information regarding the seller’s plans concerning cure. (See §100 supra, on the "general principle" (Art. 7(2)) to communicate information needed by [page 321] the other party derived (e.g.) from Articles 19(2), 21(2), 26, 39(1) and, in a closely-related setting, Articles 47(2) and 48(2).) On this assumption the buyer’s request for early (June 10) information about the seller’s plans may also be supported by the notice-avoidance provisions of Articles 47(1) and 49(1)(b).

The buyer’s inquiry need not follow the style or approach of the above example. Moreover, in normal business relationships the Convention’s sanctions for failing to reply to the buyer’s inquiry will be irrelevant: When cure of a defect is feasible the seller will be anxious to effect the cure to preserve good business relationships and also to minimize the loss resulting from avoidance of the contract. The point of the above example is to suggest that the buyer need not be consumed by doubt over whether the seller will cure the defect; a simple inquiry will provide the answer.

Decisions: Examples of "Cure":   (1) FR. CA Grenoble, RG 93/4879, 26 April 1995, Roque v Sarl. B claimed that hangar delivered by S was defective; S’s repairs barred B’s attempt to avoid contract. CLOUT 152, UNILEX D. 1995-14.  (2) SWITZ. Pr. Locarno-C., 6252, 27 April 1992. S delivered furniture to B, who claimed that the cushions were defective. S offered to replace the cushions. B rejected S’s offer and claimed avoidance of the contract. Held: Under Art. 48, B should have accepted S’s offer to cure. UNILEX D. 1992-10.  (3) GER. OLG Koblenz, 2 U 31/96, 31 January 1997. B notified S that acrylic blankets S delivered did not conform to contract. S offered to remedy the non-conformity; B rejected the offer and declared avoidance of the contract. Held: S’s offer to cure made the breach not fundamental, as required for avoidance. UNILEX D.1997-4. (Note also the relation between cure and avoidance in §295, supra.)

Comments on Cure: Ahdar, R.J., Cure by Seller, (1990) (Lloyd’s) M. & C. Comm. L. Q. 364–382; Schneider, E.C., 7 Ariz. J. Int. & Comp. L 69-103 (1989); Schlechtriem, Com. (1998) 402–413 (Huber).

§ 297 D. Requests for Clarification

As was suggested supra at §292, a modern sale involves a relationship that may require cooperation. This calls for open lines of communication between the parties so that each knows what to expect from the other. In business practice this is taken for granted; paragraphs (2)–(4) of Article 48 give legal effect to this expectation. We shall first examine a proposal to cure a failure of performance under paragraph (1) and then consider the applicability of paragraphs (2)–(4) in other situations.[page 322]

We must assume that paragraph (2) of this article does not merely duplicate paragraph (1). Hence, the rule of paragraph (2) that when the buyer fails to respond "the seller may perform within the time indicated in his request" is not confined to the circumstances for cure stated in paragraph (1). For example, if the seller’s request proposes to cure the defect within two weeks, the buyer who fails to respond may not contend that cure within the two-week period is barred as an "unreasonable delay" under paragraph (1). Here, again, the Convention gives effect to the parties’ duty to communicate—in this setting to prevent avoidable expense. See §§100, 292, and 296, supra.

As was noted at §295, the provision on cure in paragraph (1) extends to " any failure" by a seller to perform its obligations—language that literally includes a late delivery, although it is difficult to envisage a way to "remedy" a delay that has occurred. This difficulty, however, does not extend to the provisions on communications in paragraphs (2)–(4).

Example 48C. The contract for the sale of a machine called for delivery to Buyer on June 1. Seller fell behind schedule and on May 31 he sent Buyer the following wire: "Regret cannot deliver machine until June 10. Will you accept delivery on that date?" Buyer did not respond; Seller delivered the machine on June 10. Buyer refused to accept the delivery and [page 323] declared the contract avoided on the ground that the delay in delivery constituted a fundamental breach.

Seller’s inquiry of May 31 was authorized by Article 48(2): the wire requested Buyer to "make known" whether he would "accept performance." Seller needed this information before laying out the funds necessary to complete the machine and transport it to Buyer. Buyer had a duty to respond; as a result of his failure "the seller may perform within the time indicated in his request." In short, Buyer lost any right he might have had to avoid the contract because of the delay specified in Seller’s communication of May 31. (Of course, Seller is liable for any damages. Art. 48(1).)[7]

Article 27 laid down the general rule that a party discharges its duty to notify by dispatching a notice "by means appropriate in the circumstances"; under this rule the risks of delay or non-transmission fall on the addressee. Paragraph (4) reverses this rule for communications under paragraphs (2) and (3). Here the one giving the notice is in breach of contract; a seller who has deviated from the contract may not impose on the buyer a duty to respond to an inquiry that he did not receive. (See Art. 27, supra at §190.) On the other hand, if the aggrieved buyer dispatches an objection to the proposed cure and the message fails to arrive, Article 27 provides that such a failure of transmission "does not deprive [the buyer] of the right to rely on the communication." In sum, the exception to the general "dispatch" rule carved out by Article 48(4) applies only to the request by the seller—the party who is in breach of contract. See Secretariat Commentary Art. 44, para. 15 O.R. 41, Docy. Hist. 431.[page 324]

Article 49. Buyer’s Right to Avoid the Contract

§301 A. The Problem of Avoidance in Domestic Law Avoidance of Contract

The common law initially found it difficult to release a party (Party A) from its promise because of breach by the other party (B), unless the promises of the two parties were linked by some verbal formula such as: " A promises in exchange for B’s delivery of first-quality hemp, to pay..." Late in the eighteenth century this technical approach was relaxed by the judicial creation of rules that performance by B could be an implied "condition" of A’s duty of performance; under some of the case law, whether B’s breach released A depended on questions of degree such as the seriousness of the breach.[1]

However, some of the more technical case law was frozen into statutory form in the (U.K.) Sale of Goods Act. These technicalities were criticized by the Ontario Law Reform Commission, which proposed that the question whether the buyer had the right to reject should be answered in terms of one general standard: Was the seller’s breach "substantial?"[2]

The (U.S.A.) Uniform Commercial Code created a somewhat different set of distinctions. In an earlier study, this writer found these provisions to be casuistic and unresponsive to commercial practice and the significant interests of the parties.[3][page 325]

§302 B. The Convention’s Rules on Avoidance for Breach

We have encountered the Convention’s rules on avoidance of the contract in connection with several provisions—the definition of "fundamental breach" (Art. 25); the rule that a declaration of avoidance is effective "only if made by notice to the other party" (Art. 26), an approach that rejected the ULIS system of ipso facto avoidance (§187 et seq., supra); the right of the seller to cure defects in performance (Arts. 37 and 48); and the buyer’s power to fix an additional final period for performance (the Nachfrist notice; Art. 47). All of these provisions relate to the following general basic rules on avoidance of the contract:

§304 (a) Avoidance for Fundamental Breach of Contract

The Convention avoids the distinction that the (U.K.) Sale of Goods Act (1893) made between conditions and warranties—a distinction that is softened by the broad scope given to "conditions" and by modern case-law.[4] One general rule applies to non-performance by the seller of "any of his obligations." The buyer may avoid the contract if the seller’s breach is "fundamental." The application of this rule was explored in discussing the Convention’s definition of "fundamental breach" (Art. 25, supra at §183).[5]

In brief, a breach of contract by one party (A) is "fundamental" if it results in such "detriment" to the other party (B) as to "substantially" deprive B of what B is entitled to expect under the contract. The framing of this text was based on the conclusion that international contracts usually are of a complexity and importance to the parties that avoidance should not be available for trivial departures that may readily be redressed by damages (Art. 74).

The rejection of trivial grounds for avoidance necessarily led to a test that is based on degree. Application of this test requires attention to the aggrieved party’s need for this remedy in the light of all the facts. Situations that were discussed under the definition in Article 25 included the [page 327] effect of an offer to cure (§184, supra ) and the adequacy and assured availability of an adjustment of the price or other compensation (§185).

Decisions on Avoidance for Fundamental Breach.  (1) FR., C. de Cass. (Sup.Ct.) 173 P/B 93-16.542, 23 January 1996. S’s wine was adulterated by excess sugar, increasing the degree of alcohol. B’s avoidance by lower court was affirmed. UNILEX D. 1966-2.  (2) IT. Pr. di Parma-Fidenza, 77/87, 24 November 1987. S did not deliver goods by the contract date. B repeatedly requested delivery, without response. B’s cancellation of order and avoidance: sustained. UNILEX D.1987–7, CLOUT 90.  (3) GER. OLG. Frankfurt a M., 5 U 164/90, 17 September 1991. S exhibited shoes with restricted trade-mark, contrary to contract. Avoidance sustained. CLOUT 2, UNILEX D.1991–9.  (4) Strict Standard: GER. BGH (Sup.Ct.) VIII ZR 51/95, 3 April 1996. Cobalt sulphate, contracted to be of British origin, did not meet specifications and originated in South Africa. Avoidance of contract denied: B failed to show that the material was substantially different from what was contracted; B can resell in Germany or abroad, or use the material. CLOUT 171, UNILEX D. 1996–4.

Comments: Speidel, R.E., B’s Rights of Rejection and Cancellation, CISG & UCC, 6 J. Contract L., 91–140 (1993); Miniter, F.A., B’s Right of Rejection, 13 Georgia L. R. 805–898 (1997); Reitz, J.C., "Cut-off Rules", History & CISG, 36 Am. J. Comp. L. 437–472 (1998); Schlechtriem, Com. (1998) 416–421.

The buyer’s remedy of avoidance is made more flexible by Article 51, §§314–317, infra. Article 51(1) states that if "the seller delivers only a part of the goods" or if only "a part of the goods" conforms to the contract, "articles 46 to 50" (note the inclusion of Article 49) "apply in respect of the part which is missing or which does not conform ". See §§314–316 infra.

Under these circumstances Buyer may avoid as to the 20 defective computers (Art. 51(1)) and, of course, also recover damages (Arts 45,[page 328] 74–76, 81(1)). Article 51 opens up other remedies. For example, on these facts the breach with respect to the defective computers was "fundamental"; under Article 46(2) the buyer "may require delivery of substitute goods" to replace the defective computers. (Combining (A) avoidance (Art. 49) and (B) requiring delivery of substitute goods (Art. 46(2), was examined at §282.1.)

§ 305 (b) Non-delivery within Time Fixed by Nachfrist Notice

This second ground for avoidance has been examined in the setting of Article 47(1), which authorized the buyer to "fix an additional period of time of reasonable length for the performance by the seller of his obligations" (§287). This " Nachfrist " notice provides a basis for avoidance without proof that delay beyond the "additional period" fixed in the notice constitutes a "fundamental breach." The point that deserves emphasis here is that the seller’s failure to comply with this notice is a basis for avoidance only when the seller has failed to deliver the goods. This point was reemphasized at the diplomatic conference by adding at the outset of Article 49(1)(b) the words "in case of non-delivery." When buyer sets an additional final period "of reasonable length" this (in common law parlance) makes this period of time "of the essence." Of course, if the circumstances make any delay in delivery a fundamental breach (as when prices for the goods are subject to sharp fluctuations) the buyer may avoid the contract under paragraph (1)(a) without giving additional time to the seller. The reasons for limiting avoidance under paragraph (1)(b) to late delivery were explained in the debates at the Diplomatic Conference. O.R. 354–356, Docy. Hist. 575–577. See also UNCITRAL (1977) VII Y.B. 46, Docy. Hist. 339. These debates showed adherence to UNCITRAL’s decision that the special circumstances of international trade (the importance of the typical contract and the waste resulting from reshipment and redisposition after shipment abroad) called for limiting avoidance of the contract to substantial breach. See also Article 51, infra, and Example 46B, §283, supra.

Decision on Nachfrist and Avoidance. GER. OLG Celle, 20 U 76/94, 24 May 1995. Seller failed to deliver part of the printing machinery called for in the contract. B notified S that the missing machinery must be delivered within eleven days. On S’s failure to comply with B’s notice, B declared the contract avoided. Held: B’s notice was effective; the contract was avoided. UNILEX D.1995-16, CLOUT 130. See: Schlechtriem, Com. (1998) 421–426 (Huber).[page 329]

§ 307 (b) The Convention’s Rule on Time

The fact that the buyer may defer avoidance for late delivery until after delivery (Art. 49(2)(a)) does not, of course, prevent a waiting buyer from avoiding more promptly. When the delay constitutes a fundamental breach the buyer may thereupon declare the contract avoided (Art. 49(1)(a)). If the buyer is uncertain as to whether the breach is fundamental, or if the buyer wishes to give the seller a last chance to deliver, the buyer may give the seller a Nachfrist notice under Article 47(1); if the [page 330] seller fails to deliver within the reasonable additional period set in the buyer’s notice the buyer may thereupon declare avoidance under Article 49(1)(b) (§305, supra).

A seller who finds that his delivery will be late may need to know whether to lay out funds for packing and shipping. Uncertainty over whether the buyer will accept usually can be removed by communications between the parties. And any danger that the buyer would refuse to clarify his position until the goods have arrived is met by Article 48(2)-(3), supra at §292, which gives the buyer a duty to reply to a request that he "make known whether he will accept performance" within a specified time; if the buyer fails to respond "the seller may perform within the time indicated in the request."

Paragraph (2)(b) of Article 49 applies "in respect of any breach other than late delivery"—typically the arrival of goods that fail to conform to the contract. The basic rule is that avoidance must occur "within a reasonable time (i) after [the buyer] knew or ought to have known of the breach." The time when the buyer ought to know of the breach would be influenced by Article 38, supra at §249, which governs the period within which the buyer "must examine the goods." The length of a "reasonable time" for declaring an avoidance is necessarily determined by a wide variety of circumstances such as whether the goods are perishable or are subject to price fluctuations.

The remainder of Article 49, perhaps unnecessarily, spells out the effect of certain important communications between the parties. For example, let us assume that a buyer, pursuant to Article 47(1), informs the seller that the goods are defective but that within one month the seller may cure the defect by replacement or repair. Article 49(2)(b)(ii) provides that the buyer’s time for declaring avoidance does not start to run until the one-month period expires. Paragraph (2)(b)(iii) gives similar effect to a seller’s request under Article 48(2) that the buyer "make known" whether he will accept a cure of a defect in the goods.[6][page 331]

Decision: Time Limits for Avoidance. (1) SWITZ. HG Zürich, HG 920670, 26 April 1995. Four weeks after delivery of tank, B discovered leaks, and four weeks later declared the contract avoided. Held, both avoidance and damage claim (Art. 39(1)) were too late. UNILEX D.1995-15.1 [See cases on delay at §§256, 257–261, supra.] See: Schlechtriem, Com. (1998) 426–435 (Huber).

Interesting questions arise concerning the extent to which the Convention’s requirements that a buyer notify the seller (e.g.) of defects in the goods apply to the buyer’s right to avoid the contract.

As we have seen, notice requirements are imposed in two settings.  (1) Article 39(1) provides that the buyer "loses the right to rely on a lack of conformity of the goods" if the buyer does not give the seller notice of the lack of conformity within a specified period. See the combined discussion of Articles 39, 40 and 44, §§254–261, supra.   (2) In a different setting, Article 43(1) provides that the buyer "loses the right to rely on the provisions of Article 41 or 42" protecting the buyer against third-party claims if the buyer fails to give the seller notice of the claim within a specified period (§271, supra ). Both of these drastic rules nullifying the buyer’s substantive rights are subject to exceptions, one of which is that a seller may not rely on these provisions if the seller knew of the defect of which the buyer was otherwise required to give notice.

Suppose that a seller knows of the defect of which the buyer would otherwise be required to give notice: Does the seller’s knowledge excuse the buyer from the provisions of Article 49(2) that the buyer "loses the right to declare the contract avoided: unless the buyer avoids the contract within "a reasonable time"? Professor Will, in his excellent analysis of Article 49, suggested that the seller’s knowledge of the non-conformity or the third-party claim removes the time limits with respect to avoidance of the contract. Although the exemptions based on the seller’s knowledge (Articles 40 and 43(2)) refer only to the requirement that the buyer notify the seller of the non-conformity (as contrasted with the decision to avoid the contract), it was suggested that it would be "absurd" to permit such a seller to invoke the limits on avoidance stated in Article 49(2), supra.[7]

The present writer has some hesitation about this conclusion. The problem is complex and may not arise often. However, the question may [page 332] be worth discussing to explore the differences between the two distinct remedies—damages and avoidance. As was noted (§255 supra) the seller needs to know of a claim of defects in the goods so he can take samples or inspect the goods to ascertain the facts before the evidence is lost; the seller also needs prompt notice of a claim in order to exercise his rights to cure the defect (Arts. 37, 48). However, Articles 40 and 43(2) recognize that it would be monstrous to apply these drastic sanctions (loss of all substantive rights) because a buyer fails to give the seller facts that the seller already knew.

Requiring a buyer to communicate its decision to avoid the contract within "a reasonable time" is based on different reasons than requiring notice of defects. As has been noted (§306, supra), undue delay in declaring avoidance of the goods creates risks of needless cost and risk with respect to the care and return of the goods and, when the goods are subject to market fluctuations, may give the buyer a chance to speculate at the seller’s risk. Unless the "reasonable time" limit of Article 49(2) is preserved a buyer presumably could delay a decision on avoidance for the full limits of the period of limitation (prescription) which, under some domestic system can be a decade or more and under the 1974 U.N. Convention on the Limitation Period in the International Sale of Goods is four years.

The rules on notice of defects differ from the rules on time for avoidance (Art. 49(2) in yet another respect; a buyer who waits beyond a "reasonable time" in declaring avoidance is not deprived of other remedies, such as the right to damages (Arts. 45(2), 81(1); a buyer who fails to give the required notice of defects, unless excused (Arts. 40, 43(2), 44), loses all substantive and procedural rights. The Convention recognizes this difference: Article 44 provides that a buyer who has "a reasonable excuse for failing to give" the notice of defects required by Articles 39(1) and 43(1) can still reduce the price (Art. 50) or claim damages (Art. 74); Article 44 does not extend this excuse to restrictions on avoidance of the contract.

In sum, it seems difficult to conclude that the seller’s knowledge of a defect in the goods removes the "reasonable time" limit on avoidance set forth in Article 59(2).

Article 49 bases the right to avoid the contract on a failure by the other party "to perform " its "obligations under the contract"; avoidance does not depend on liability to pay damages for breach. As we shall see, Article [page 333] 79 in specified circumstances (cf. force majeure ) provides that a party is exempt from damages for "failure to perform" its obligations and adds (paragraph (5)): "Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention". In other words, exempting a party from damages does not prejudice the other party’s right to avoid the contract. The underlying reason is compelling: a buyer is not required to pay for goods the seller can not deliver. Indeed, when Article 79 exempts a party from damages for failure to perform, the appropriate remedy is usually avoidance of the contract. See §423 infra.[page 334]

Article 50. Reduction of the Price

§309 This article’s special role is to determine how much the buyer owes the seller for non-conforming goods when special circumstances relieve the seller of liability for "damages.

§310 A. The Special Role of "Price-Reduction"

Article 79, infra at §424, provides that a party is excused from liability for "damages" when his failure to perform is "due to an impediment beyond his control." (Under domestic law the grounds for exemption may be referred to as "impossibility," " force majeure " or "Act of God.") In the circumstances described in the example, we may assume that the unexpected hostilities constituted an "impediment" that excused Seller from "damages." (See §433 n. 17.) Buyer could have avoided the contract (Arts. 25, 49(1), 79(5)) but he elected to accept the cheese. How much must he pay?

In all three cases we are assuming that under Article 79, infra at §423, the impediment that prevented the delivery of No. 1 quality cheese excused Seller from liability for "damages" for breach of contract. For reasons that will be explained more fully, infra at §313, "price reduction" under Article 50 has its principal significance when the buyer accepts defective goods under circumstances in which (as in Examples 50A-50C) the seller is not liable for "damages." However, Article 50 does not confine "price reduction" to cases where sellers are excused from liability for damages, and in some cases buyers who accept defective goods may [page 337] have a choice between two remedies—price reduction under Article 50 and a claim for damages under Article 74, infra at §403.

It is difficult at this point to compare results under Articles 50 and 74. In brief, if buyer suffers "no consequential" damages (such as shutdown losses), the allowance for defects in the goods will normally be the same under Articles 50 and 74 when (as in Example 50A) there is no change in the market level.

When the price-level rises (as in Example 50B), a buyer normally will claim damages under Article 74, since this approach protects his contractual "expectation interest." Thus, in Example 50B, the right to damages under Article 74 protects the buyer’s right to receive No. 1 cheese that, on the market was worth $200,000 at the time for delivery. Since in Example 50B he received cheese worth only $40,000, a claim for damages might amount to $160,000—a much more favorable result than the price-reduction of $80,000 to $20,000 allowed by Article 50.

The situation is quite different when the price-level falls. As has been noted, in cases like Example 50C the buyer would seldom accept the goods and hence could not use the price-reduction formula of Article 50. However, if he should accept the goods, price-reduction under Article 50, in some situations, would provide more compensation for the non-conformity than would damages under Article 74. As we have seen, in Example 50C the buyer could reduce the price from $100,000 to $20,000, a reduction of $80,000. Under Article 74, the difference between the value of conforming goods at the low price-level ($50,000) and the value of the goods received ($10,000) would give buyer a damage claim of $40,000, which is less favorable than the price-reduction of $80,000 allowed by Article 50. However, if the buyer has also suffered "consequential" loss (such as a plant shutdown), he may find it more advantageous after all to claim damages under Article 74. (As we have seen, there is no provision for "damages" in the price-reduction approach of Article 50.)

Difficult problems can arise in integrating price-reduction under Article 50 with the general rule on damage-measurement in Article 74, §§403–408, infra. Suppose that a buyer notifies the seller of price-reduction under Article 50 and later seeks to prove a more generous measure of the loss available under Article 74. (See Example 50B and the favorable protection under Article 74 for the buyer’s "expectation interest" when the market price rises between the making of the contract and delivery of the goods). The Convention does not seem to deal with this question of election of remedies. Article 45(a) and (b) does indicate that "rights provided in articles 46 to 52" (note the inclusion of article 50) do not bar damages under Article 74. On this basis the buyer could claim [page 338] both price reduction and consequential losses—e.g. delays in production because of defects in the goods. See Nicholas, 105 L.Q.R. 201, 226 (1989). In any event, Article 45 should not be construed to permit double recovery based on the reduced value of the goods. Perhaps the buyer should be held to have elected the price-reduction formula of Article 50 only if this had been part of an agreement to settle damages or if the seller had changed its position relying on the seller’s notification.

§313 B. Genesis and Evolution of "Price-Reduction"

One can only appreciate Article 50 when it is seen in historical perspective—as a vestige of an important tool designed to cope with a traditional civil law doctrine (eroded but not abandoned) that a seller is liable for "damages" caused by defective goods only when he is guilty of fault or fraud. However, at an early stage in the development of the civil law it was decided that even though the seller was not liable for the buyer’s damages it would be unjust for the seller to receive the full price for defective goods; such is said to be the basis in Roman law for the buyer’s right to reduce the price to the degree of the deficiency—the actio quanti minoris.[2]

The traditional role of this special price-reduction mechanism was removed by the Convention’s adoption of a unitary contractual approach. Under Article 45(1), supra, "If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may...(b) claim damages as provided in Articles 74 to 77." Common law observers saw little reason to retain this venerable legal tool. The lack of such a provision in their statutes had not led to difficulties; in rare cases like Example 50A, where force majeure relieves the seller from damages for the delivery of defective goods, the question of how much the buyer should pay if it retains the defective goods could be handled under domestic rules providing for restitution to avoid unjust enrichment (cf. Art. 81(2), infra at §439). Ernst Rabel, writing in 1952, doubted the current utility of the actio quanti minoris, but in the Hague and UNCITRAL proceedings most representatives from civil law systems insisted on retaining this feature [page 339] of their legal heritage.[3] And a common lawyer must concede that Article 50, by providing a solution for cases like the above examples, will avoid the uncertainty and disunity of recourse to domestic rules on restitution.

In the 1978 Draft, as in ULIS 46, the formula for price-reduction was based on the ratio between the value of non-conforming and of conforming goods "at the time of the conclusion of the contract. " At the Diplomatic Conference the reference-point was changed to the time for delivery. This change avoided constructing a theoretical value for defective goods that might not exist at the time of the contract.[4]

The work in UNCITRAL on "price-reduction" was complicated by a failure to appreciate the traditional role of this legal tool.[5] Until 1976 the draft lacked the phrase "whether or not the price has already been paid"; until this lack was corrected in 1976, the provision that "the buyer may reduce the price" was understood by some to be addressed to the amount that the buyer should remit to the seller as a result of set-off.[6]

The final sentence of Article 50, in denying price-reduction to a buyer who refuses to allow the seller to exercise his right to cure, underscores the pervasive significance of the duty to mitigate damages. (See the discussion of "general principles" under Art. 7, supra at §101 and Art. 77, infra at §418.) See also Schlechtriem, 1986 Commentary 79.

Decisions: Examples of Price-Reduction.  (1) HUNG. ARB. C of Com., VB/94131, 5 December 1995. S contracted to produce and deliver waste-containers to B. Two of the containers were not water-tight. S offered to repair the containers on B’s payment of the price. S insisted that the price must be paid first; B then obtained repairs from another firm. Held: B’s refusal [page 340] to accept repair on S’s terms did not bar reduction of the price, which was granted in proportion to B’s expenses for repair. UNILEX D. 1995-29.  (2) SWITZ. Pr. de Locarno, 6252, 27 April 1992. B received furniture from S that needed, and received, repair. Under Art. 50 the price was reduced in proportion to the cost of repair. UNILEX D. 1992-10.  (3) GER. OLG München, 7 U 4419, 2 March 1994. S delivered coal to a third party (T) designated by B. T’s complaints of poor quality were promptly relayed by B to S. S sued for the price; B requested price reduction under Art. 50. This request was denied: B had not made a "declaration" on price reduction. [Note, at §313.2, deletion from Article 50 of language requiring a declaration.] UNILEX D. 1994-7. See: Schlechtriem, Com. (1998) 439–444.

§ 313.1 C. Field of Application

Article 50 states that price-reduction is available when the "goods do not conform with the contract"—an area which the Convention distinguishes from other types of breach such as the place and time for delivery of goods and documents (Arts. 31–34), existence of third-party claims (Art. 41, 42) and other obligations imposed by contract (Art. 30).[7] Nevertheless, questions have been raised as to whether price-reduction under Article 50 (as contrasted with the rules governing "damages" in Article 74, §§403–408, infra ) applies to other types of non-performance such as delay, delivery at the wrong place, defects in documents and the like. At the Diplomatic Conference Norway proposed an amendment that the right of price-reduction should apply when the goods are subject to third-party rights or claims. The proposal attracted conflicting views; Norway withdrew the proposal.[8] On the other hand, Article 44, a compromise developed late in the Diplomatic Conference to meet objections to the notice requirements of Article 39(1) (conformity of goods), includes references to the notice requirements of Article 43(1), and adds that these requirements do not prejudice the buyer’s rights to various remedies, including [page 341] Article 50.[9] However, nothing in the legislative history indicated that Article 44 was understood to amend Article 50. Indeed, the debate that led to the failure of the Norwegian proposal (note 8 supra ) recognized the difficulty of applying the price-reduction formula of Article 50 outside of its stated sphere—claims of non-conformity. Nor is there need to stretch Article 50 beyond its stated scope. As we shall see, Article 74’s general provisions on the measurement of damages provide a flexible measure of the buyer’s loss in diverse circumstances (§§404–408, infra) and in most situations are more appropriate than the formula stated in Article 50. (Recourse to Article 50 is, of course, optional.)

Language in earlier versions of Article 50 ("the buyer may declare the price to be reduced") might have been construed to give special weight to the buyer’s declaration. (Contrast the Nachfrist notice under Article 47, §289 supra.) To prevent this interpretation the Diplomatic Conference deleted the above language.[10]

May a buyer who receives non-conforming goods reduce payment of the price only by virtue of Article 50? Does the buyer have a similar right under Articles 45(1)(b) and 74? The answer depends on rules such as set-off and counterclaim. Under procedural systems with which this writer is familiar a buyer with a damage claim based on non-conformity of the goods will have an opportunity to establish that claim as a set-off or counterclaim to an action for the price; payment and settlement practices reflect this legal right.[11][page 342]

Article 51. Non-conformity of Part of the Goods

The problems addressed by Article 51 can be exposed by a simple illustration:

Example 51A. A sales contract calls for the delivery of 100 bales of cotton. On delivery, 10 of the 100 bales prove to be so seriously defective that they cannot be used.

There are two distinct problems: (1) May the buyer reject the 10 defective bales and accept the rest? (In legal language—May the buyer "avoid the contract" as to only some units?) (2) May the buyer reject the delivery of 100 ("avoid" the entire contract) when only 10 units are defective? (Similar problems arise when the seller delivers only 90 bales instead of 100.)

Paragraph (1) of Article 51 addresses the first question that was stated under Example 51A: May the buyer reject only the defective goods? Paragraph (2) addresses the second question: May the buyer reject all of the goods when only a part of the goods are defective? It may help to apply these provisions in the light of the reasons for Article 51.

§ 315 A. Rules About "Goods" v. "Avoidance" of Contract

Attempts to answer the two problems posed by Example 51A have been encumbered by using overly-abstract concepts such as "rescission" or "avoidance" of the contract. Merchants ordinarily do not think in [page 343] terms of avoiding a contract; they think about what they may do with particular goods. It is no compliment to legal science to discover that the merchants’ mode of thought is more precise. The concept of "avoidance" is misleading: "avoidance" does not destroy the contract: the party whose breach leads to "avoidance" remains contractually liable to compensate the aggrieved party for its loss. (See Art. 81(1), infra at §439.)

In most parts of the Convention the necessity to draft in terms that could be translated and understood in different linguistic and legal settings produced down-to-earth language that was clearer than that of the traditional domestic codes; here tradition was too strong to permit a fresh start. Article 49, supra at §302, provides that a buyer who encounters serious non-performance "may declare the contract avoided." When the seller’s breach involves only part of the goods this broad rule has to be refined; this is done in Article 51.

The first question raised by Example 51A is this: What may Buyer do with respect to the 10 defective bales? Article 51(1) provides that the battery of remedies set forth in Articles 46 to 50 may be applied to the "part" of the delivery that fails to conform to the contract. Consequently, Article 51(1) gives Buyer these options—he may (i) require the seller to deliver substitute goods (Art. 46(2)), or (ii) "avoid the contract" (i.e., reject) with respect to the defective units (Art. 49(1)(a)), or (iii) accept the defective goods and reduce their price (Art. 50) or claim damages (Art. 74). Article 51(1) also assures Seller of the right to cure under Article 48 (§§292–300, supra) with respect to the 10 defective bales.

Assume that in this contract for 100 bales Seller delivered only 90 bales, all of which conformed to the contract. If Buyer fixes "an additional period of time of reasonable length" for delivery of the 10 bales (Art. 47(1)) and Seller fails to comply with this demand, or if any delay in delivering the missing bales constitutes a fundamental breach, Buyer may "declare the contract avoided" with respect to the 10 missing bales (Art. 49(1)(a) & (b).); in other words, Buyer’s duty to accept the remaining units has come to an end.[2]

Decision: Avoidance of Part.  (1) ARB. ICC (Paris), 8128 (1995). In a contract for chemical fertilizer to be delivered in installments,[page 344] S was unable to assure B that a conforming first installment would be delivered by the time for B’s resale of the materials. Avoidance by B for this installment was sustained pursuant to Articles 53(1) and 73(1) (contracts for delivery by installments); see Art. 73, infra. UNILEX D. 1995-34.  (2) ARB. ICC (Paris), 7660/JK, 23 August 1994. In a contract for delivery of 3 pieces of assembly-line machinery, B declared avoidance of one piece that was defective. B’s avoidance was sustained since the lack of conformity related to an independent part of the delivery, and was replaceable without prejudice to the working of the other machines. UNILEX D. 1994-20.  (3) GER. LG Berlin, 52 S 247/94, 15 September 1995. Non-conforming part of delivery of tiles made the entire shipment unusable. Avoidance of the entire shipment was granted. CLOUT 50, UNILEX D. 1991–7. See: Schlechtriem, Com. (1998) 445–448.

One of the purposes of paragraph (2) of Article 51 is to make clear that paragraph (1) does not force the buyer to sort out the non-conforming goods for separate handling. The buyer may "avoid" (reject) as to the entire delivery if the breach as to part causes detriment that is so substantial as to constitute a "fundamental breach" of the contract as a whole. The definition of "fundamental breach" in Article 25, supra at §181, calls for close examination of the facts of the case in relation to the policies served by avoidance. One factor of special significance with respect to a partial avoidance is whether the nonconformity of some of the goods interferes with the use or salability of the remainder.[3]

Subsection (2) makes an additional point in stating that avoidance of the entire contract may "only" be based on fundamental breach. Let us suppose that in Example 51A, above, only 90 bales were delivered and the buyer makes a Nachfrist demand that the seller deliver missing units within a fixed additional period (Art. 47(1), supra at §287) and the seller fails to comply. As we saw at §316, the seller’s failure to comply with the notice empowers the buyer to avoid as to the missing units; the buyer need not show that the breach was fundamental (Art. 49(1)(b)). However, the buyer may not base avoidance of the entire contract on the failure to [page 345] comply with the Nachfrist notice, but must show that the breach was fundamental as to the entire contract (Arts. 49(1)(a), 51(2)).[4]

To sum up with respect to Buyer’s right to avoid the entire contract: Under Article 51(2) Buyer may "declare the contract avoided in its entirety" (all 100 bales) only if the breach was "fundamental" with respect to the contract as a whole. Factors that bear on this issue include: (1) A timely offer by Seller to "cure" (Arts. 37, 48) by replacing the 10 defective bales; (2) The feasibility of separate action with respect to the 10 defective bales; (3) If separate avoidance of the 10 bales is not feasible, does acceptance of the entire shipment and redisposition of the 10 defective bales (subject to a claim for damages for the deficiency) (Art. 25) "substantially...deprive [the buyer] of what he is entitled to expect under the contract..."? As has been noted under Article 25, at §185, supra, Buyer probably needs the remedy of total avoidance if Seller demands the full price in exchange for the delivery; Buyer’s need for avoidance would be reduced if Seller offers to reduce the sum Buyer must pay by an amount adequate to compensate Buyer for the reduced value of the 10 bales and any other loss (Art. 74) resulting from the breach of contract.[page 346]

Article 52. Early Delivery; Excess Quantity

Paragraph (1) of this article deals with a situation that seldom causes serious difficulty—the enthusiastic seller who delivers too soon; paragraph (2) addresses the more complex consequences of delivering an excess quantity.

§319 A. Early Delivery

The buyer’s option to refuse an early delivery need not be based on a showing of inconvenience or "fundamental breach" (Art. 25). However, the buyer could gain little by an unreasonable refusal to take an early delivery. The option that Article 52(1) gives the buyer is not avoidance of the contract but the right to refuse the early delivery; the seller may retender the goods at a date that is authorized by the contract. (Similarly, under Article 37 the seller may cure defects in delivery "up to" the date for delivery.) [2][page 347]

§320 B. Excess Quantity

Under these circumstances the seller’s demand for cash outlay of more than that called for by the contract would probably be a "fundamental breach." Payment of $60,000 followed by a rejection of the 200 excess bags and a claim for the refund of 10,000 may subject the buyer to hazards with respect to the seller’s financial responsibility and the burdens and delays of litigation. See Art. 25, supra at §181.[3] On the other hand, the buyer may be obliged to accept the tender when the excess in quantity is trivial or is consistent with the practices established by the parties or usage (Art. 9), or when the seller does not demand full payment in exchange for delivery.

Of course, parties who are acting in good faith can normally make an arrangement that would meet the needs of both. The seller could wire authorization for reduction in the draft or for delivery to an intermediary (e.g., a sugar dealer at the point of destination) who, after satisfying the bank’s interest in the draft, could take delivery of the shipment and permit the buyer to take the agreed quantity in exchange for the appropriate payment. A seller’s refusal to make a reasonable arrangement would give the buyer reason for concern about a prompt refund and would be an added reason supporting rejection of the entire shipment.[page 348]

CHAPTER III.

OBLIGATIONS OF THE BUYER
(Articles 53–65)

Introduction to Chapter III

§ 321 The structure of Chapter III is similar to that of the preceding chapter on Obligations of the Seller.  Two sections state the buyer’s duties: to pay the price (Sec. I, Arts. 53–59) and to take delivery (Sec. II, Art. 60).  The final section defines the remedies that are available to the seller when the buyer fails to perform these duties (Sec. III, Arts. 61–65). These remedies given the seller (like those given the buyer (Arts. 45–52) in Chapter II) are supplemented by general rules on remedies in Chapter V (Arts. 71–88).

§ 322 Chapter II opened with a brief summary of the seller’s obligations. The present chapter opens with a similar summary of the buyer’s obligations.

Article 53, like Article 30, emphasizes the role of the contract in defining the parties’ obligations—a point that was discussed under Article 30 at §206 and need not be repeated here.[page 350]

Section I. Payment of the Price
(Articles 54–59)

Article 54. Enabling Steps

§323 The Convention at many points responds to the fact that consummating an international sale calls for cooperation; each party must take steps that are related to corresponding steps by the other.[1] The present article reflects the importance of preliminary steps by the buyer that are necessary for timely payment of the price, such as arranging for the issuance of a letter of credit and applying for governmental authorization to transmit funds to the seller.

The above steps are a part of the buyer’s "obligation to pay the price." This language is important. Under Article 63(1), infra at §350, the seller "may fix an additional period of time of reasonable length for performance by the buyer of his obligations"—the seller’s corollary of the buyer’s Nachfrist notice (Art. 47(1), supra at §288). Under Article 64(1)(b), infra at §353, if the buyer does not "perform his obligation to pay the price" within the additional period fixed by the seller’s notice the seller may declare the contract avoided. Consequently, if the seller gives the buyer an appropriate notice providing a final additional period for taking one of the required steps for price payment such as obtaining the issuance of a letter of credit by a specified date (Art. 54), avoidance by [page 351] the seller need not be based on proof that the buyer’s failure to comply is a "fundamental breach" (Arts. 25 and 64 (1)(a)).

In addition, the failure to take one of the required steps "to enable payment to be made" (Art. 54) itself constitutes a breach of contract (Arts. 53 and 54). If the seller can show that this breach is "fundamental" he may declare the contract avoided (Arts. 25 and 64(1)(a)) without first giving a Nachfrist notice fixing "an additional period of time."[3]

Article 71, infra at §385, authorizes a party under some circumstances to suspend performance if "it becomes apparent that the other party will not perform a substantial part of his obligations." This authorization applies even when the other party has not yet committed a breach of contract; consequently the grounds for suspension are circumscribed. (See the discussion under Art. 71, infra at §385.) Under Article 71, "a serious deficiency" in the buyer’s "ability to perform" may, in some circumstances, authorize the seller to "suspend" his own performance. In contrast, as we have seen, the buyer’s failure to take one of the steps required by Article 54 is a breach; the seller need not rely on the "suspension" provisions of Article 71 and may employ the remedies provided for breach of contract—the Nachfrist-avoidance remedy (Arts. 63(1) and 64(1)(b)) and avoidance for fundamental breach (Arts. 25 and 64(1)(a)). These remedies respond to the expenses a seller may need to incur in preparation for delivery (e.g., producing, procuring or packing the goods)—expenses that, as a practical matter, the seller may not be able to recoup or recover when the buyer is derelict in making arrangements for payment.

Decision: Steps to Assure Payment.  RUSS. FED. Arb., Trib. of Internat. Comm, 123/1992, 17 October 1995. S delivered equipment to B, who failed to pay because of bank’s lack of convertible currency. Held: B was obligated to pay since, inter alia, under Art. 54 B should have taken measures to assure payment.  CLOUT 142, UNILEX D. 1995–28.1.  (See also cases under Arts. 64(1)(b), 71, 72, and 73: B’s failure to provide security for payment, by bank guarantee or letter of credit, and Art. 79 (claims for excuse because of lack of convertible currency). See: Schlechtriem, Com. (1998) 456–459 (Hager).[page 352]

Article 55. Open-Price Contracts

§ 324 A. Interplay of Rules on Formation and on Price-Determination

We have already considered open-price contracts in examining the criteria for an offer stated in Article 14; there we met conflicting views over whether the parties may make a contract without determining the price. At the Diplomatic Conference, the final decisions on this issue involved both Article 14 and Article 55. For this reason, both Articles were considered in detail in connection with Article 14, supra at §§134–137.6; that discussion is a necessary part of the present examination of Article 55.

The relevant provisions are as follows:

§325 B. Proposals and Agreements that do not State the Price

In examining the relationship between Articles 14(1) and 55 we need to recall the central points of the discussion of Article 14(1), at §§132.1, 133 and 137.4, supra. That discussion is summarized under headings (1) and (2), which follow.

The Introduction to Part II—Formation (§132.1 supra) noted that the Convention’s rules on "offer" and "acceptance" are addressed to situations in which the only relevant facts are two communications: one that may (or may not) be an "offer" and a reply that may (or may not) be an "acceptance". While situations with this limited setting are not typical of contract-formation in international trade the offer-acceptance rules are useful; serious problems develop only if one leaps to the conclusion that no contract is formed if an "offer" and "acceptance" cannot be isolated from a flow of communications that mature into agreement, or if the parties’ decision to make a contract becomes clear only as a result of conduct such as the shipment of goods and their acceptance.

The discussion (§170, supra) of Article 19 had to face a similar issue: Delivery and acceptance of goods often follow the exchange of forms that include material inconsistencies; after the transaction has been consummated the question is not "Was there a contract?" but "What were its terms?" On the other hand, when the only basis for finding a contract is the exchange of communications, the rules on contract formation are (and should be) strict. The following example provides one of many possible illustrations.

Example 55A. On June 1, Buyer telexed Seller, "Can you ship me 1,000 bales of No. 1 Cotton?" Seller replied, "Accept your offer. Cotton at $110 per bale will be shipped July 1". Buyer responded, "My telex was only an inquiry: Cannot agree to your terms". Seller answered, "Accepted your offer and will hold you to the contract."

The parties are not bound by contract. Under Article 14(1) Buyer’s "proposal" may not be construed as an "offer": it was not "sufficiently definite" because it did not "expressly or implicitly" fix or make "provision for determining...the price".

The reasons for this strict rule for construing proposals were explored in discussing Article 14 and Example 14A, §137.4 supra.[page 354]

Is the provision on price in Article 14(1) a rule for the construction of "proposals" or is it a rule of validity that nullifies an agreement in which the parties show that they intend to be bound? Reasons for the former conclusion were developed in discussing Article 14 at §137.5, supra. This question of validity under Article 14 (unlike the question of validity under domestic law to be discussed next) is of great importance; at stake is the freedom to contract in all international sales governed by Part II of the Convention; also at stake is the applicability of the uniform substantive rules of Part III. The dimensions of the problem were explored in greater detail under Article 14 at §§137.5–137.6.

This language emerged during UNCITRAL’s 1977 review of the Working Group’s "Sales" Draft (VIII YB 48–49, Docy. Hist. 341–342) and responded to concerns of some delegates that the Convention should not disturb the rule of their domestic law that provision for the price in an agreement was a requisite for a valid contract.[2] This concern was aggravated by the fact that the draft then provided that, in the absence of agreement, the buyer must pay "the price generally charged by the seller", a provision that could be abused by the seller.[3] This view persisted and, at [page 355] the Diplomatic Conference the reference to "the price charged by the seller" was replaced by "the price generally charged."[4]

A second aspect of this 1977 review was the addition of the reference to "validity" to the opening phrase of Article 55. The legislative history shows that this amendment was designed (in the words of the Commission’s decision quoted more fully in note 2, supra) 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. See Article 14, supra, at §137.6.

This departure from uniformity is unfortunate but is of acceptable proportions. The rule of "validity" is rejected by the (U.K.) Sale of Goods Act (the pattern for most of the common-law world), by the (U.S.A.) Uniform Commercial Code, and also by many code systems that on this point do not follow French law.[5] The practical consequence of the Convention’s concession to domestic law is that, in making agreements with parties with places of business in States that retain the strict "validity" rule, the parties must exercise no less (and no more) care than formerly to comply with this feature of domestic law. (The serious consequences, including total loss of protection under the Convention, were analyzed under Article 14, supra, at §137.7.)

As we have seen, some domestic "validity" rules responded to concern that, in the absence of a contract provision, the seller would set the price. In view of the deletion of the reference in the UNCITRAL draft to "the price generally charged by the seller..." in favor of the reference in Article 55 to "the price generally charged",[6] some domestic systems may wish to consider whether their traditional rule has become unnecessary for international trade. See e.g., Fortier, supra n.3 at 387–388.

Some delegates from Eastern European countries with planned economies also noted that a contract that did not state the price would be inconsistent with the formality of their foreign trade agreements. (This outlook had also generated objections to Article 11 which rejected domestic formal requirements; to meet this concern Articles 12 and 96 authorized reservations to Article 11. The "validity" exception in Article 55 seems functionally similar to the provision allowing a reservation to Article 11.) In any event, these formal foreign trade agreements are not [page 356] likely to fail to provide for the price, and will avoid the question posed by Articles 14 and 55.[7]

Definiteness of Price; Validity. Decisions on these issues were collected in the combined consideration of Articles 14 and 55 at §§137.4–137.8. Attention was paid to redrafting CISG at the Diplomatic Conference to establish rules of validity concerning definiteness of the price, with special reference to French law. Against this background, the following decision, although not definitive, may be of interest.

Decision: FRANCE, CA (Paris), 22 April 1992, affirmed by the Cour de Cassation (Sup. Ct.) 4 January 1995, S. Faube F.FDIS v. Fujitsu. A French buyer ordered electric components from a German seller. The parties exchanged messages on price, subject to later increases or decreases in market price. S shipped goods which B rejected on the ground that a fixed price had not been determined. Both the Court of Appeal and the Cour de Cassation rejected this ground for rejection, and required B to pay for the goods. UNILEX D.1992–9.1, D.1995–1, CLOUT 158.

Comments: Adami, F., "Open Price", 2 Int. Bus. L.J. 103–120 (1993); Amato, P., 13 JLC 1–29 (1993); Murray, D.E., "Open Price": Worldwide Setting, 89 Comp. L. J. 491–800 (1984); Schlechtriem, Com. (1998) 460–462 (Hager). See also references and cases at Article 14.[page 357]

Article 56. Net Weight

This Article, inherited from ULIS, is unimportant, but on occasion may be useful to help determine the price in the absence of evidence as to the practices of the parties or usage of trade (Art. 9). The express statement that the rule applies only "in case of doubt" emphasized its subordinate role.[2][page 358]

Article 57. Place of Payment

§ 329 This is the first of three articles addressed to the manner of payment. The modalities for payment include place (the present Article) and time (Arts. 58 & 59).

§330 A. Significance of Place for Payment

§331 B. The Convention; Policy Considerations

Paragraph (1)(a) points to the "seller’s place of business,"[2] a choice that responds to the fact that in some circumstances payment at the buyer’s place of business would be of little value to the seller. The buyer is entitled to goods that are usable (Art. 35(2)(a)); the present Article gives the seller similar protection with respect to the price.[3] The rule that, when the parties have not agreed otherwise, the buyer must pay at the seller’s place of business is consistent with standard contract practices applicable to international trade.[4]

Decisions: Applications of Art. 57(1)(a).   AUSTRIA, OGH (Sup. Ct.), 2 Ob 547/93, 10 November 1994. In the absence of agreement, the price was to be paid at seller’s place of business. CLOUT 106, UNILEX D.1994–29. See: Schlechtriem, Com. (1998) 464–469.

Application to Overcharge.  FR. CA. Grenoble, 23 October 1996, SCEA Gaec...v. Teso. A French buyer of industrial equipment sued in France to recover an overcharge paid to a German seller. Although CISG Art.57(1)(a) called for payment at the seller’s place of business, the underlying principle was that payment should be made at the creditor’s place of business, in this case the place of business of the French buyer. UNILEX D. 1996–10. (On jurisdiction for suit, see §332, infra.) See: Schlechtriem, Com. (1998) 466–467 and notes 21–27.

Under Article 57, the only exception from the norm calling for payment at the seller’s place of business is that of subparagraph (1)(b). This exception applies only "if the payment is to be made against the handing [page 360] over of the goods or of documents." If, pursuant to the contract, the seller ships the goods to the buyer and in the buyer’s country tenders documents controlling the goods, this contractual arrangement overrides the general rule of paragraph (1)(a) that the buyer must pay "at the seller’s place of business." Accord: Maskow, B–B Commentary 413.

Article 58, infra, in defining the time for payment, provides in paragraph (2) that "the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price." As we shall see, this provision permits but does not require the seller to arrange for the payment only after arrival of the goods. See Art. 58, infra at §§336–337.