Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

In the area of precontractual liability, again, it is possible to discern the theoretical feasibility of a certain degree of precontractual liability under the CISG for breaking off negotiations and “breaching” precontractual agreements, however, the lack of any concrete provisions upon which to base purely precontractual liability means that such doctrinal justifications through either Article 7, Article 6, or a combination of both must be rejected, as stretching the CISG in this manner would significantly increase uncertainty.100 But this does not prevent liability in all precontractual scenarios. If no contract is formed, the party breaking off negotiations might be liable pursuant to the applicable domestic law, such as culpa in contrahendo. Alternatively, if the CISG requirements of revocability are not satisfied, the aggrieved party can accept the offer and pursue remedies under the CISG for failure to perform.101 In the latter case, again, an argument can be made that to ensure the certainty and effectiveness of the CISG, domestic remedies relating to the same event should be displaced.102 The important point for present purposes is that the choice between competing interpretations must be assessed in light of whether it clarifies CISG’s rules and their relationship with the residual law, or whether the interpretation substitutes a more comprehensive but more unpredictable solution such that the CISG becomes a less desirable choice of law.

C. Formation and Nonconformity

There are numerous examples in which economic effects of interpretations can be taken into account in determining whether a contract has been formed. Some courts and commentators have utilized relevant incentive and cost issues to support interpretative choices in this area. Rene´ Franz Henschel notes that decisions of the German Supreme Court have referred to economic grounds.103 In relation to CISG Articles 14–19 on formation, transmission of general standard terms was preferred rather than a duty on the offeree to enquire because, inter alia, the latter interpretation would lead to delays in the conclusion of contracts.104 In the New Zealand Mussels case, the German Supreme Court decided the issue of which party should bear responsibility for conformity with relevant statutory regulations, in relation to Article 35.105 The court decided that a foreign seller is not obligated to determine the conformity of the goods to the regulations and standards of the buyer’s country, unless certain circumstances exist that would give the seller insight into those regulations or standards. This ruling selects the party

100Lisa Spagnolo, “Opening Pandora’s Box: Good Faith and Precontractual Liability in the CISG,” 21 Temple Int’l & Comparative L.J. 261 (2007) (for an analysis of the various views and appropriate solutions); Spagnolo, CISG Exclusion and Legal Efficiency, Chapter 9.

101Id.; Marco Torsello, at Global Challenges of International Sales Law Conference, November 12, 2011 (similar conclusion). See infra, Chapter 39.

102This aspect is discussed at greater length in Spagnolo, CISG Exclusion and Legal Efficiency.

103Rene´ Franz Henschel, “The Use of Law and Economics Arguments in Cases Governed by CISG,” in Schwenzer and Spagnolo, Towards Uniformity, 29.

104Bundesgerichtshof [Federal Supreme Court], Germany, October 31, 2001, available at http://cisgw3.law. pace.edu/cases/011031g1.html.

105See Bundesgerichtshof [Federal Supreme Court], Germany, March 8, 1995, available at http://cisgw3

.law.pace.edu/cases/950308g3.html.

with the cheapest means of accessing the relevant rules,106 thus utilizing the least-cost avoider principle to locate the most efficient of the competing alternative interpretations. Similarly, the position that the buyer bears the burden of proof that it conformed to the notice periods for the delivery of nonconforming goods is justifiable as the most efficient rule, as generally, information regarding inspection and reasons for the time taken to give notice are within the buyer’s sphere of influence; the overall burden of proving proper notice is less costly when placed primarily upon the buyer.

VII. Limitations of the Concept of the CISG as Soft Law

There are some important provisos to the argument that the CISG can be seen as a soft or quasi-soft law. The first is an acknowledgement that this conception, though useful for the purposes of determining an interpretation that might best promote the CISG’s desirability and efficiency, should not be confused with its legal effect within contracting state courts. The CISG remains hard law in such a setting, and the court will be obliged to impose it unless parties have successfully opted out.

The second proviso relates to the setting in which interpretation is done. Scholars have found law and economics arguments useful in justifying their views, and this has occurred to a limited degree within CISG scholarship.107 However, law and economics arguments are sometimes criticized as being inadmissible in legal argument, even though, arguably, they underpin many legal policies, and are frequently inseparable from legal arguments.108

This concern need not present an insurmountable hurdle to the use of such arguments in court in the case of the CISG. It has been often observed that CISG Article 7 encourages the use of scholarship in interpretation of the CISG as a tool in achieving a uniform and international interpretation. Apart from jurisdictions in which reference to academic works within judicial reasoning is prohibited,109 use of law and economics arguments can therefore be indirectly used in application of the CISG by reference to academic works that take economic policy into consideration. Reference by courts to the CISG’s traveaux preparatoires also reveal that economic policy considerations were taken into account in the drafting and negotiation of the CISG.110

VIII. Conclusion

The operational softness of the CISG reminds us of the fragility of its existence as a practical force for improving efficiency in international sales transactions. While the

106See also Henschel, “The Use of Law and Economics Arguments,” 39; Gillette and Ferrari, “Warranties and ‘Lemons,’” 6 (stating that this approach is consistent with placing quality warranties upon sellers only when sellers enjoy an informational advantage).

107Id., 37.

108Id., 44.

109See, e.g., judgments rendered by Italian courts cannot cite scholars: Giuseppe F. Ferrari and Antonio Gambaro, “The Italian Constitutional Court and Comparative Law: A Premise,” 1 Comparative L. Rev. 1, 3–4, available at http://www.comparativelawreview.com/ojs/index.php/CoLR/article/viewFile/3/7, citing Article 118 Civil Procedure Code, implementing provisions and customary practice since the eighteenth century). Naturally, this inability to cite scholarly works does not prevent the latter from influencing court decisions.

110Though in a limited and usually nonspecific manner: Spagnolo, CISG Exclusion and Legal Efficiency, Chapters 2 and 3.

CISG is applicable law ipso jure, it remains applicable only when parties have not chosen to opt out; conversely, in cases where it does not apply ipso jure, it will be applied only where adjudicators find it of value as evidence of international commercial usages or principles, or parties consider it as a desirable and efficient choice of law. The CISG is hard in legal nature, but it behaves like soft law in an operational sense, since it too depends on the preferences of those who engage in trade for its practical impact in achieving uniformity and efficiency, despite its status as a convention. It is therefore submitted that, irrespective of the doctrinal attraction of a particular interpretation, where there are two reasonable competing interpretations of the CISG the best interpretation is that which better promotes acceptability and efficiency.

The fact that there is a “soft side” to the CISG does not mean that soft law instruments and market forces will solely drive the future harmonization of commercial law.111 The dominant advantage of the CISG over other harmonization instruments has been the hard law foundation upon which it stands. The application of the CISG in cases where parties have not selected any choice of law has helped create of a large body of case law. It is hoped that over time this will increase base-level familiarity with the CISG, ultimately making it even more popular in the future. As envisaged by its drafters, the fact that the CISG is an opt-out system has made a difference to its practical impact compared with opt-in schemes.112

It is also important to note the ease with which parties can and do exclude the application of the CISG. This softer quality reminds us of the value of linking interpretation more closely with its original underlying and fundamental aim – the promotion of efficiency in trade. As demonstrated, it is the acceptance of a law by potential users due to its perceived economic value, not its hardness, that determines whether and to what extent it will be effective in achieving its ends. In other words, the CISG’s relevance depends on economic and market forces, not its legal form. This justifies reference to the relative economic efficiency of various interpretations of CISG rules and consideration of how contemplated interpretations impact the frequency of the use of the CISG as a choice of law.

A hard law that is never applied in practice fails to achieve its harmonizing purpose. Similarly, a hard law that is applied in practice but without consideration of its underlying policies is doomed to stray from its original aims. Ironically, an interpretation that recognizes the quasi-soft nature of the CISG, and which is therefore sensitive to the economic impact likely to flow from alternative interpretations, can ensure that the CISG not only continues to be applied in a practical sense, but also remains capable of achieving its original purpose.

111See Herbert Kronke, “International Uniform Commercial Law Conventions: Advantages, Disadvantages, Criteria for Choice,” 5 Uniform L. Rev. 13, 20 (2000) (stating it would be a “misconception to envisage a future of harmonization and unification of commercial law solely driven by the market operators and loosely framed by soft law instruments”).

112See School of International Arbitration at Queen Mary, International Arbitration Survey, supra note 46.

Part III Interpreting the CISG’s Substantive

Provisions

a Korean buyer (buyer), and Cedar, an American petrochemical trader (seller), entered into twenty transactions over a six-year period. In each of the twenty transactions, the parties formed contracts under the same procedure. First, buyer would submit a “bid” to seller for a given petrochemical at a given quantity and price. Seller would accept buyer’s bid, forming what the parties describe as a “firm bid,” or an agreement regarding product, quantity, and price. Following formation of the firm bid, seller would transmit a package of contract documents to buyer, which were meant to incorporate and finalize the contract terms. The buyer would do one of three things – he would countersign and return the contract sheet, accepting seller’s terms; modify the contract sheet, and then sign and return it for seller’s consideration; or not sign at all. On three occasions, buyer modified the contract sheets by adding a different choice of law to govern the contract. Whenever buyer modified the contract sheets and sent them back to seller, seller did not object to the changes – including buyer’s choice of law provision – but also failed to countersign the modified contract. On all twenty occasions, on completion of this process, Cedar and Hanwha both performed their obligations under their contracts.

The dispute relates to the parties’ attempt to form a twenty-first contract. The buyer submitted a bid for the purchase of 1,000 metric tons of the petrochemical toluene at $640 per metric ton, the market rate at the time. The seller accepted the bid, thus creating a firm bid for the purchase and sale of the toluene. The “bid” was addressed to a specific addressee and contained the necessary terms in conformity with the requirements of CISG Article 14(1). In conformity to the acceptance rule of CISG Article 18, the acceptance of the “bid” by seller indicated assent and mirrored the terms of the offer. Consequently, under CISG rules a contract was concluded at the time the acceptance of the “bid” under CISG Articles 23 and 24. But did the buyer and seller intend to be bound by their “bid” (buyer’s offer) and the seller’s “acceptance”? Based on the facts of the published text of the decision it seems doubtful whether a common intention was given. First, the use of the word “bid” instead of “agreement” or “contract” indicates that the parties or at least one of the parties still were in the phase of consideration and negotiations. Second, the expression “firm bid” could more reasonably point to the fact that a “firm offer” (compare U.S. UCC Art. 2–205) or a “binding offer” had been made in which case the parties merely have derogated from CISG Article 16(1) but not concluded a sales contract.

The seller followed up its acceptance of the bid by sending the buyer, via e-mail, a signed contract sheet and a document setting forth seller’s usual standard terms and conditions including a choice of law term. The buyer did not immediately respond to the contract documents but engaged with seller in preparing a bill of lading and nominated a vessel for the ocean carriage. Neither the “bid” by buyer nor the “acceptance” of seller contained the standard terms. Based on prior practice, the terms of the contract were sent afterwards. Such established practice, under CISG Article 9(1), has the potential of a binding effect. If, according to CISG Article 8, both parties had a de facto intention to be bound in their first exchange of communications (“bid” and “firm bid”), the contract would be concluded at this earlier point in time. Subsequently, the documents sent by Cedar came under the CISG formation rules ex post after the contract formation and would raise the question of a possible contract modification. Since buyer did not immediately react to what amounted to a confirmation and did engage in a common preparation of the contract performance, an expectation and reliance of seller were created that perhaps could lead to a contract being concluded on the terms of the

confirmation (firm bid) under the CISG rules. However, if there was no intent to be bound at that stage, the “signed contract sheet and the document setting seller’s usual standard terms and conditions” could be regarded as either an offer (CISG Article 14) or a modified acceptance (counteroffer) under CISG Article 19(1). Under this latter scenario, the communications leading to the “firm bid” were merely an exchange of information creating a basis for further negotiations.

The later scenario of continued negotiations, however, contradicts the presumption of a common intent to enter into a contract based on an objective (reasonable man) interpretation (Article 8(2)). Presuming that a common intention could not be established or that the traditional offer and acceptance model of the CISG was derogated from, the issue becomes whether the modified acceptance nonetheless created a contract. This depends on whether it materially altered the offer pursuant to Articles 19(2) and 19(3).

Additional facts in the case provide a tentative answer. Approximately a week after seller had sent the contract documents for the toluene sale to buyer, the buyer returned them in a modified form. The buyer’s contract sheet crossed out the bid’s (offer) choice of law clause selecting New York law and its Uniform Commercial Code as governing law, leaving only the provision that Incoterms 2000 were to govern the contract. Buyer also provided a new set of “standard” terms and conditions; in relevant part, the buyer’s new set of conditions provided that Singapore law would govern the contract.

The case presents the issue of the legal consequence of a party’s silence or inactivity after receipt of confirming documents that contain conflicting standard terms. Part II of the CISG, unfortunately, does not provide specific rules dealing directly with the incorporation of standard terms into contracts. CISG Article 18(1) simply states that “silence or inactivity does not in itself amount to acceptance.” It does not expressly settle the question of the incorporation of standard terms. Article 19 provides a limited rule, in the context of the battle of the forms, allowing a purported acceptance to incorporate additional, nonmaterial terms.

Seller refused to accept buyer’s terms, and sent buyer an e-mail conditioning contract formation on buyer’s acceptance of seller’s original terms. The e-mail asked buyer to sign and return an unaltered version of the contract documents. In the meantime, the parties agreed on the details of the letter of credit for the transaction. Buyer provided an acceptable letter of credit on June 10, 2009. However, the next day, June 11, 2009, seller advised buyer that due to its failure to sign the unaltered version of its offer, no contract had been concluded between the parties, and that seller retained the right to sell the toluene to another party. The price of toluene as of that date, June 11, 2009, had risen from $640 per metric ton to $790.50.

Hanwha v. Cedar illustrates how a relatively simple framework of offer-acceptance rules can become convoluted in application when faced by the complexity of modern transactions, involving numerous communications and exchanges of forms. The serial battle of the forms outlined above ended with the seller’s “rejection” being the “last shot” in the cycle. At this stage, there was a dissens between the parties concerning the contract terms and standard forms but simultaneously a common intention of the parties, based upon their conduct. If the parties had proceeded with the ongoing performance, as they had done twenty previous times, a contract would have been formed due to the subsequent conduct of both parties under Article 8(3), but the content of the contract would have been in dispute. In the present case, it turned out differently. Seller did not deliver according to the alleged contract and buyer sued for breach of contract.

The case sets out a dilemma between the traditional model of offer and acceptance and alternative means of contract formation, including possible derogation of the CISG offer and acceptance rules – silence on the part of the buyer (first, one week after receipt of additional terms, and second, after receipt of the last email request) and parallel conduct of both parties in preparing for performance on the contract, all of which were embedded in an established practice between the parties in a longstanding business relationship. The U.S. court held that the question of contract formation was to be decided by the CISG, that, with reference to the course of dealing between the parties, there was no opting out of the CISG as neither of the parties’ standard terms were incorporated into the alleged contract and, moreover, there was no conclusion of the twenty-first contract.

This case demonstrated the complexity of transactions, and indicates that the CISG formation rules may be ill-equipped to render uniform, predictable, and just decisions in certain cases. A more detailed review of the CISG contract formation regime will follow. The focus will thereby be on the overall functioning in practice of the contract formation regime in Part II of the CISG.

A. The CISG as a Dynamic Instrument of Unification

The late Professor Schlechtriem wrote in his introductory note to his CISG commentary that:

Codifications and Conventions age from the moment the draftsman lays down his pen and often become buried under layers of case law and scholarly exegeses. It is unnecessary to remind the reader of this in regard to a text drafted only in 1980. But the basic structure of the CISG [is] much older, and in its detailed solutions the Convention has sometimes laid down rules based on knowledge and legal experience which today may seem somewhat antiquated, if not outdated. A more important example is the emphasis on offer and acceptance as the sole tools of contracting, which not only neglects other forms of reaching consensus, but also can offer only the inadequate rules of Article 19 for the problem of the battle of forms.3

To overcome the unavoidable problem of obsolescence, the CISG must be interpreted autonomously and through its “reasonableness standards” dynamically in order to respond to novel changes in sale of goods transactions. The CISG must – like other formal instruments of commercial law – be seen as a “living law” capable of a further development.4 The dynamic nature of the CISG is seen in its mandate for international (autonomous) interpretations pursuant to CISG Article 7(1). However, a dynamic interpretation lies in the borderland between interpretation and law-making. It has rightly been stated that the “fabrication of law is not within the mandate of the CISG.”5 Nonetheless, some scholars and courts have been creative in their interpretation and extension of CISG provisions, in particular with regard to CISG contract formation in Part II.

3Peter Schlechtriem in Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd English ed. (ed. P. Schlechtriem and I. Schwenzer) (Oxford, 2005), 8–9.

4See the contributions in Uniformity and Harmonization of International Commercial Law: Interaction or Deharmonization? (ed. Morten M. Fogt) (The Hague: Kluwer Law International, 2012).

5Bruno Zeller, “The Black Hole: Where Are the Four Corners of the CISG?,” 7 Int’l Trade & Bus. L. Ann. 251, 257 (2002).