Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

The problem is which of the standard forms tendered by both parties during the negotiation stage are considered to be part of the eventual contract. The appeals court in Koblenz expressed succinctly that “the contract is more important to the parties than the diverging clauses.”5 The court noted:

[I]t seems more necessary than before to take into consideration the reality of business dealings. In this respect, experience shows that the contractual partners normally do not want to have the conclusion of the contract fail due to a missing agreement on colliding standard terms. Thus the collision problem is often intentionally left open. Only if difficulties arise during the performance, do the parties return to the point in order to strengthen their own legal position. Therefore, simple and qualified defense clauses in standard terms also serve the purpose to possibly deliver arguments in those cases.6

Despite being a German domestic case, the observations of the court are also valid in relation to the CISG and standard term contracts. It is for this reason that special attention must be directed to the formation of contracts governed by the CISG without losing sight of the overarching purpose of a contract, namely, to regulate business activities.

In its simple form, the solution is obvious and does not create undue problems; an offer is followed by a counter offer, which can be accepted by both parties as the governing contractual document. However, in many cases the resolution of what constitutes an acceptance is complicated and hence rules governing the formation of contracts are needed to provide an answer.

II. Formation of Contracts

At the outset it must be noted that the CISG does not provide any specific rules in relation to the treatment of standard form contracts. The incorporation of standard terms is a matter to be determined under the offer–acceptance rules of Part II of the CISG in conjunction with Article 8. The incorporation of standard terms as part of the formation of contracts comes within the scope of the CISG and “contrary to some courts’ decisions, the incorporating of standard terms is not an issue of validity” delegated to domestic national law.7

The subjective intent approach of Article 8(1) has led some courts to interpret the use of a foreign language as meaning that there is no such intent to be obligated to terms provided in that language. In the German Knitware case, the court held that since “the [buyer] did not state that it had included an Italian translation of its Terms for Purchasing, the language in this case was not German [and therefore,] the General Terms of Business written in German did not become part of the contract.”8 Another German court, in the Vacuum cleaners case, further elaborated on this point by stating:

5Peter Schlechtriem, “Battle of the Forms in International Contract Law Evaluation of Approaches in German law, UNIDROIT Principles, European Principles, CISG, UCC Approaches under Consideration,” available at http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem5.html.

6OLG Koblenz WM 1984, 1347 et seq.

7Camilla Anderson, Francesco Mazzotta, and Bruno Zeller, A Practitioner’s Guide to the CISG (Juris, 2010), 199.

8Germany, October 6, 1995, Lower Court Kehl (Knitware case), available at http://cisgw3.law.pace.edu/ cases/951006g1.html.

[S]tandard terms in the German language may apply to a foreigner if German is the language of both the contract and the negotiations. For the present dispute, this means that Dutch would have to have been the language of the contract and the negotiations – as expounded above, this language was not Dutch, but German. The standard terms are therefore not incorporated under German law.9

These decisions ought to be the exception rather than the rule. Only in cases where it is proven that one party ought to have known that the other party is not in a position to understand the other’s language should nonincorporation be justified. Otherwise, the party receiving a foreign language contract has to use due diligence (such as translation into native language) before signing the contract. The U.S. court in MCC Marble held that:

[W]e find it nothing short of astounding that an individual purportedly experienced in commercial matters, would sign a contract in a foreign language and expect not to be bound simply because he could not comprehend its terms. We find nothing in the CISG that might counsel this type of reckless behavior and nothing that signals any retreat from the proposition [under domestic law] that parties who sign contracts will be bound by them regardless of whether they have read them or understood them.10

In sum, terms written in a foreign language are valid and applicable unless it can be shown differently under Article 8. In the end, it is the application of Articles 14 and 18 that decide whether a contract has been concluded and which standard terms, if any, were validly incorporated into the contract. The German Federal Supreme Court confirmed this view by noting:

According to the general view, the inclusion of general terms and conditions into a contract that is governed by the CISG is subject to the provisions regarding the conclusion of a contract (CISG Articles 14 and 18); recourse to the national law that is applicable based on a conflict of laws analysis is generally not available. The CISG does not, however, contain special rules regarding the inclusion of standard terms and conditions into a contract. This was not deemed necessary because the Convention already contains rules regarding the interpretation of contracts.11

It follows that an examination of Articles 14, 18, and 19 in conjunction with Articles 8 and 9 is the means to a solution. Key factors include whether standard terms are tendered correctly and at what stage of the negotiation process this occurs. Furthermore, the question of how the terms are made available will need to be resolved with the assistance of Article 8.

A. CISG Article 14

Article 14 notes that a proposal for concluding a contract, once accepted, binds the offeror. Often, the offeror simply accepts the offer, or he or she makes a counteroffer. The first situation is of no interest to this chapter, as the only question is whether the

9Germany, September 2, 1998, Appellate Court Celle (Vacuum cleaners case), available at http://cisgw3. law.pace.edu/cases/980902g1.html.

10MCC-Marble Ceramic Center v. Ceramica Nuova D’Agostino.

11Germany, October 31, 2001 Supreme Court (Machinery case), available at http://cisgw3.law.pace.edu/ cases/011031g1.html.

stated terms form part of the contract. However, a battle of the forms scenario is created when both parties indicate that their standard terms are applicable.

To resolve this question, an initial analysis starts with Article 14. According to the German Supreme Court,12 two requirements need to be fulfilled: “Firstly the offeror intention to incorporate its standard terms must be apparent to the recipient; this will generally require a clear and understandable reference to those standard terms. Second the offeror must transmit the text of the standard terms to the recipient or make it available otherwise.”13

Article 14 does indicate that a proposal addressed to a specific person can only be considered an offer if it is “sufficiently definite and indicates the intention of the offer.”14 The definition of what is “sufficiently definite” requires the naming of the goods (description) and making provisions for determining the price and the quantity.15 Article 14 does indicate that an offer must make the intentions of the offeror clear, including his or her intentions as to the terms to be incorporated into the contract. The German Supreme Court was asked whether standard terms attached to the confirmation of the offer were validly communicated. The court noted:

An effective inclusion of general terms and conditions thus first requires the intention of the offeror that he wants to include his terms and conditions into the contract be apparent to the recipient of the offer. In addition, as the Court of Appeals correctly assumed, the Uniform Sales Law requires the user of general terms and conditions to transmit the text or make it available in another way.16

Therefore, the terms need to be made available to the offeree and a mere reference to the terms might not be sufficient. But how does one define “making the terms available?” The responses have ranged from the need to actually include the terms in the contract to simply referring to a party’s website where the terms are readily available. Article 8 assists in answering this question. Article 8(2) mandates that “the reasonable person” test is applied. The statements and conduct of the parties are interpreted from a position of whether “the other party knew or could not have been unaware what the intent was.”

A reasonable businessperson would understand the other party’s statement to “please consult webpage for terms” as something that ought to be investigated. In such a case, the risk has passed to the receiving party, who would be bound by the standard terms. In sum, any indication especially in writing that standard terms will apply suffices to alert the other party to exercise due diligence. The party attempting to incorporate its standard terms needs to show that the other party knew or ought to have known its intent to incorporate the standard terms into the contract. Because the battle of the forms is characterized by an exchange of terms, would-be acceptances are, in reality, counteroffers governed by Article 18. Once an offer is made, the question becomes whether there is an acceptance under Article 19.

12Id.

13Peter Huber, “Standard Terms under the CISG,” 13 13 Vindobona Journal of International Commercial Law & Arbitration (1/2009) 123, 127.

14CISG, Article 14(1) CISG.

15Id.

16Germany, October 31, 2001, Supreme Court (Machinery case), available at http://cisgw3.law.pace.edu/ cases/011031g1.html.

B. CISG Article 19

Article 19, by implication, reflects the mirror image rule, in which a reply to an offer containing “additions, limitations or any other modifications is a rejection of the offer and constitutes a counteroffer.”17 Article 19 relies on the traditional concept that there has to be a meeting of the minds before a valid contract can be formed. In effect, “adopting the common law mirror image rule the CISG’s approach to contract formation . . . allows the offeror to be master of the offer.”18 In practice, the mirror image rule will often lead a court or tribunal to the last-shot rule, where the terms of the counteroffer prevail if there is a subsequent acceptance, generally by conduct, by the other party. The German Supreme Court stated that:

[T]he partial contradiction of the referenced general terms and conditions of [buyer 1] and [seller 1] did not lead to the failure of the contract within the meaning of Articles 19(1) and 19(3) CISG because of the lack of a consensus. [The] appraisal, that the parties have indicated by the execution of the contract that they did not consider the lack of an agreement between the mutual conditions of contract as essential within the meaning of Article 19 CISG, cannot be legally challenged and is expressly accepted by the appeal.19

Article 19(2) though indicates that the mirror image rule is not fixed, as there are exemptions, namely, additions that do not materially alter the offer. An acceptance therefore can contain additions or modifications that are not considered to be material and therefore do not convert the acceptance into a counteroffer. Furthermore, Article 19(3) lists the terms that materially alter an offer. The construction of Article 19(3) makes it clear that the list is not an exhaustive one. Therefore, the facts of each case must be examined in order to decide what terms are to be considered as material terms. For example, courts have found that changing the time of delivery20 or shipping terms does not materially alter the offer.21 However, most standard terms are likely to be considered as material given the breadth of Article 19(3)’s definition, therefore, standard form contracts cannot be considered to be exceptions pursuant to Article 19(2).

If the terms are materially different, does that mean there is no contract to be enforced? Most of the rulings on the battle of the forms conclude that a contract was formed due to the parties’ subsequent performances.22 Karollus argues correctly that “in the absence of evidence that clearly shows at least one party did not want a contract without particular terms, the formation of the contract should be indisputable.”23 However, care must be

17CISG, Article 19(1).

18Henry Gabriel, “A Primer on the United Nations Convention on the International Sale of Goods: From the Perspective of the Uniform Commercial Code,” 7 Indiana Int’l & Comparative L. Rev. 279–310 (1997), 281.

19Germany, January 9, 2002, Supreme Court (Powdered milk case), available at http://cisgw3.law.pace.edu/ cases/020109g1.html.

20China, June 10, 2002, CIETAC Arbitration Proceeding (Rapeseed dregs case), available at http://cisgw3. law.pace.edu/cases/020610c1.html.

21Germany, April 27, 1999, Appellate Court Naumburg (Automobile case), available at http://cisgw3.law. pace.edu/cases/990427g1.html.

22See, as an example, Germany, January 9, 2002, Supreme Court (Powdered milk case), available at http:// cisgw3.law.pace.edu/cases/020109g1.html.

23M. Karollus, “Judicial Interpretation and Application of the CISG in Germany 1988–1994,” Cornell Review of the Convention on Contracts for the International Sale of Goods 51 (1995), 62.

taken, as contracts can be modified or terminated at a later stage by a mere agreement of the parties pursuant to Article 29. A U.S. Court of Appeal correctly noted the difference between modification pursuant to Articles 19 and 29:

Nothing in the Convention suggests that the failure to object to a party’s unilateral attempt to alter materially the terms of an otherwise valid agreement is an “agreement” within the terms of Article 29. The court took into account the various circumstances recommended in Article 8(3) to determine the parties’ intent, but concluded that there was no evidence or conduct that indicated the party had agreed to the modifications added to the invoice.24

If it has been established that only a counteroffer exists, then a court or tribunal needs to determine if a contract has been formed pursuant to Article 18.

C. CISG Article 18

It has been pointed out previously that in an exchange of the forms, standard terms must be communicated before an acceptance of those can be recognized. The Regional court in Trier noted:

The provisions of Article 14 et seq. CISG do not allow the mere reference to existing standard terms to lead to their binding incorporation into a contract. It is in no way sufficient that the [seller]’s standard terms were only ever mentioned on the invoices, since at the time the invoices are sent the contracts are already concluded.25

It is obvious that if either party objects to the inclusion of the other’s boilerplate, the relationship never progresses past the negotiation stage. When an offer has been followed by a counteroffer and no clear acceptance of the counteroffer can be found, the parties’ subsequent performance must be investigated.

Assent as such is not defined in the CISG, but Article 8 may be consulted for assistance.26 Under Article 8, performance may by implication be construed as consenting to be bound by the counteroffer. The initial argument that performance is tantamount to acceptance is confirmed in Article 18(1), which states that “a statement made by or other conduct of the offeree indicating assent to an offer is an acceptance.” Furthermore, Article 18(3) indicates that “the offeree may indicate assent by performing an act such as dispatching the goods or payment . . . [and] the acceptance is effective at the moment the act is performed.” In Golden Valley Grape Juice and Wine, LLC v. Centrisys Corporation,27 a U.S. court noted that:

Pursuant to the CISG, acceptance does not require a signature or formalistic adoption of the offered terms. Pursuant to Article 18(3), “the offeree may indicate assent by performing an act, such as one relating to the dispatch of the goods or payment of the

24Chateau des Charmes Wines Ltd. v. Sabate´ USA, Sabate´ S.A, ___ 328 F.3d 528, 531 (9th Cir) available at http://cisgw3.law.pace.edu/cases/030505u1.html.

25Germany, January 8, 2004, District Court Trier (Synthetic window parts case), available at http://cisgw3. law.pace.edu/cases/040108g1.html.

26Andersen et al., A Practitioner’s Guide to the CISG, 175.

27Golden Valley Grape Juice and Wine, LLC v. Centrisys Corporation et al. (E.D.Cal, No. CV F 09– 1424 LJO GSA, January 22, 2010 (9th Cir. 2010, unreported), available at http://cisgw3.law.pace.edu/ cases/100121u1.html.

price, without notice to the offeror, the acceptance is effective at the moment the act is performed.” The evidence establishes that at the time STS sent its sales quote to Centrisys, it contemporaneously sent its General Conditions as part of the attachments. By adopting the terms of the sales quote, Centrisys accepted the terms upon which the centrifuge had been offered, including the General Conditions. Thus, Centrisys accepted the General Conditions.28

If no clear acceptance can be found, nevertheless the parties engage in a transaction, then “the principle of party autonomy, which enables the parties to form the procedure of contract conclusion and to deviate from Article 19” controls.29 If no agreement pursuant to Article 18 is reached, no contract is formed and hence the question of the battle of the forms does not arise. It is argued that the issue of the battle of the forms is in effect restricted to situations where there is an exchange of different sets of standard terms, creating several counteroffers.

Under this scenario, under Articles 18(1) and 18(3), performance creates the acceptance and thus “permits the coming together by conduct independent of the declarations of offer and acceptance as well as the waiver of present conditions of their validity.”30 If the argument is advanced that the counteroffer was never really accepted, then no contract would come into existence under the mirror image rule. The stronger argument is that both parties accepted the performances, hence, by implication and pursuant to the principle of party autonomy, and Article 8, a contract must be presumed. Because the formation of contracts and the incorporation of standard terms are within the scope of the CISG, a solution to the issue of the existence of additional terms in a would-be acceptance must be found within the CISG. The best solution is one that recognizes performance as tantamount to acceptance. This argument is supported by a case decided by the Lower Court in Kehl:

Assuming that [seller] had sent its General Terms of Business to the [buyer], this would have constituted a counter-offer in the sense of CISG Article 19(1). However, based on the realization of the contract, both parties were in agreement about the essentialia negotii, and it must be assumed that they waived the validity of their conflicting Terms of Business or that they derogated from the application of Article 19, taking advantage of their autonomy pursuant to Article 6. In this case, the contract would have been entered into in accordance with the terms of the CISG.31

It follows that the courts are obliged to “reconstruct” the contract instead of dismiss cases based upon Article 19(3). The task therefore is what clauses or terms are applicable to the contract. Peter Schlechtriem correctly points out that in the reconstruction of a contract, no differentiation should be made between substantial and unsubstantial terms.32 The rationale for this approach is that the differentiation between Articles 19(2) and (3) needs to be explained as only Subsection 2 affects the mirror image rule and the validity of the offer and acceptance. Also, Article 8(3) is required to interpret the

28Id. at slip op 5.

29Schlechtriem, “Battle of the Forms.”

30Id.

31Lower Court Kehl (Knitware case).

32Schlechtriem, “Battle of the Forms.”

meaning of the parties’ intentions, which will embrace both minor and major terms, hence a distinction is not very practicable.33

III. Battle of the Forms

Where there is an offer, counteroffer, and acceptance by performance, the battle of the forms never eventuates, as only one set of standard terms is present. The problem becomes complicated if many forms containing different terms are exchanged. However, the basic principle as noted earlier remains the same. The court or tribunal starts from the premise that a valid contract is in existence, as the contract has been executed either partially or fully. What is left is to decide is which terms form the contract. Where there are multiple forms, it is obvious that each party has not accepted the other party’s terms but nevertheless has opted to perform the contract. Courts and tribunals have several tools at their disposal to construct the terms of the contract.

The first option is simply to see whether the CISG can supply the answer by applying contract theory within the four corners of the CISG. However, the “pure” contract theory approach contains elements of the “last-shot rule” and the “knock-out rule” under Article 8. The next two sections examine the arguments in favor of and against these two rules.

A. Last-Shot Approach

As noted previously, the first step is to examine the offer. The question the court needs to address is whether the standard terms were brought to the attention of the offeree. More specifically, were they made available in a form whereby both parties knew or should have known that the standard terms were included in the offer? If the answer is negative, that is, the parties were not aware of this fact, then the acceptance needs to be examined and the question will need to be addressed by the court. If performance follows the counteroffer, then the issue is twofold: First, is there a contract? And second, which terms apply to the contract?

Once the court or tribunal is satisfied that a contract exists, the last-shot rule recognizes the terms of the counteroffer as being the ones governing the contract. The last-shot rule is a clinical determination of the terms of the contract, is noted by its simplicity, and arguably is based on the application of the plain reading of Article 19. The court of appeal in Saarbrucken noted that:

[Buyer] did, however, implicitly accept [seller]’s standard conditions of sale under Articles 8(2), 18(1) first sentence, 19(1) CISG, as it accepted the first delivery of [seller], which was made in accordance with the confirmation of order, and subsequently placed further orders with [seller]. Each confirmation of such order made reference to the standard conditions of sale on the front page and were printed on the reverse side.34

Arguably, the last-shot approach is dictated in this case as the buyer, through repeated orders, affirmed his assent, real or otherwise, and therefore the seller could not have been left in doubt as to the acceptance of the terms contained in the confirmation notices.

33Id.

34Germany, January 13, 1993, Appellate Court Saarbrucken¨ (Doors case), available at http://cisgw3.law. pace.edu/cases/930113g1.html.

It can also be argued that the last-shot approach relies heavily on the timing and mode of performance.

The last-shot approach relies heavily on a determination of when the contact has been concluded or performance started. The time of the acceptance is an important determination, as the parties are likely to continue their communications (negotiations) past the time of acceptance. Once a contract is concluded, then Article 8 will guide the court to establish the terms of the contract through the conduct of the parties. In Filanto

v.Chilewich,35 the court put it succinctly by stating that the:

[The buyer’s] Agreement, as noted above, specifically referred to the incorporation by reference of the arbitration provision in the Russian Contract; although Filanto, in its August 7 letter, did purport to “have to respect” only a small part of the Russian Contract, Filanto in that very letter noted that it was returning the March 13 Memorandum Agreement “signed for acceptance.” In light of Filanto’s knowledge that Chilewich had already performed its part of the bargain by furnishing it the Letter of Credit, Filanto’s characterization of this action as a rejection and a counteroffer is almost frivolous.36

The court relied heavily on Article 8(3) in determining that the applicable terms were those of the second communication:

The Sale of Goods Convention specifically directs that “in determining the intent of a party . . . due consideration is to be given to . . . any subsequent conduct of the parties,” Sale of Goods Convention Article 8(3). In this case, as the letter post-dates the partial performance of the contract, it is particularly strong evidence that Filanto recognized itself to be bound by all the terms of the Russian Contract.37

In sum, courts and tribunals applying the last-shot rule rely heavily on the conduct of the parties pursuant to Article 8. The conduct of a party will determine which standard terms are incorporated into the contract. The conduct (performance) prevents a party claiming that they did not accept what was in effect a counteroffer. Once performance of the contract has been detected by a court it can be equated to an acceptance of the other party’s terms: “The last shot-doctrine thus provides for outcomes that may be predictable for the courts and tribunals, but are merely coincidental for the parties.”38 It is important to note that the majority of courts and commentators apply the last-shot approach but there are a growing number of courts that have adopted the knock-out approach,39 arguing that it better reflects the intentions of the parties.

B. Knock-Out Approach

The knock-out approach takes a pragmatic view. Courts and tribunals start from the traditional point of view that negotiations culminate into agreements, which are then executed. However, in many sales transactions the terms of the contract can be found

35Filanto v. Chilewich, ___U.S. District Court, Southern District of New York, 789 F.Supp. 1229, available at http://cisgw3.law.pace.edu/cases/920414u1.html.

36Id., 1240.

37Id.

38Ingeborg Schwenzer and F. Mohs, “Old Habits Die Hard: Traditional Contract Formation in a Modern World,” Internationales Handelsrecht 239, 244 (2006).

39K.A. Stemp, “A Comparative Analysis of the ‘Battle of the Forms,’” 15 Transnational Law & Contemporary Problems 243, 262 (2005).

“scattered” throughout the negotiations and communications between the parties. When these communications produce varying terms, the courts need to determine which of the terms are included in the contract. Two approaches of knocking out terms can be applied. The first holds that the contract is valid, but the standard terms are disregarded and replaced by the gap-filling provisions of the CISG. The problem with this approach is that the intent of the parties is not taken into consideration. Both parties introduced their standard terms into the negotiations, which is a clear indication that they did not want the default rules of the CISG to be applied in the areas covered by the standard terms.

A better approach is to apply the additional terms (counteroffer) that do not favor one party over the other. The German Federal Court recognized this problem and noted that “under the point of view of good faith and fair dealing (Article 7(1) CISG), the seller should not have assumed that the question whether certain provisions of the opposing terms and conditions contradicted its own could be answered in isolation for individual clauses with the consequence that the individual provisions that were beneficial to it would apply.”40 The real question becomes which standard terms of the parties ought to be made part of the “reconstructed” contract. The German Supreme Court stated that:

The question to what extent colliding general terms and conditions become an integral part of a contract where the CISG applies, is answered in different ways in the legal literature. According to the (probably) prevailing opinion, partially diverging general terms and conditions become an integral part of a contract (only) insofar as they do not contradict each other; the statutory provisions apply to the rest. Whether there is such a contradiction that impedes the integration, cannot be determined only by an interpretation of the wording of individual clauses, but only upon the full appraisal of all relevant provisions.41

The point is that the standard terms that are similar in both parties’ forms should be part of the contract. All the conflicting terms, on the other hand, where by implication no consensus has been achieved, are simply “knocked out,” or cancelled.

Like the last-shot rule, it can be argued that the court artificially constructs the contract where it in reality should have deemed the contract invalid because the last counteroffer was not expressly accepted. As already indicated, the CISG under Article 8 has recognized that many contracts are a culmination of negotiations. Therefore, the intent and behavior of parties are taken into consideration when constructing the contract. The knock-out rule simply puts the courts into the shoes of the parties. Using the principles of party intent and good faith, the court finds an agreement by eliminating conflicting terms that are not a product of mutual consent.

The knock-out rule follows the fact that “business people rarely read the ‘boilerplate’ language on purchase forms and that both parties rely on the existence of a contract despite the [existence of conflicting] forms.”42 Additional support comes from the UNIDROIT Principles of International Commercial Contracts (Article 2.1.22), as well as the Principles of European Contract Law (Article 2:209), which have adopted the knock-out rule.

40Germany, January 9, 2002, Supreme Court (Powdered milk case), available at http://cisgw3.law.pace.edu/ cases/020109g1.html.

41Id.

42Gabriel, “A Primer on the United Nations Convention on the International Sale of Goods,” 284.