Larry_A_DiMatteo_-_International_Sales_Law_A_Global_Challenge-Cambridge_University_Press_2014

parties, and consisting, either in the abusive breaking off of negotiations (rupture abusive), or in the failure to provide complete and accurate information (reticence´ dolosive).16

The French model circulated extensively and was adopted with minor variations by other countries, such as Belgium, Spain, most Latin American countries, and several North African ones, including Egypt and Tunisia. The French model was also adopted in Italy in the 1865 Civil Code. The later 1942 Italian Civil Code, however, contains a provision (Article 1337) specifically devoted to the issue of the duties arising between the parties in the course of negotiations.17 The Italian provision, setting forth a general duty of good faith in the course of negotiations, was clearly influenced by §242 of the German BGB and it can be seen as a unique blend of the French and German legal traditions. However, notwithstanding the contractual basis for Article 1337,18 the prevailing view is still that precontractual liability in Italy is characterized as a liability in tort.

A very different characterization of the nature of precontractual liability prevails in Germany, where the issue is still largely influenced by the well-known theory of culpa in contrahendo first developed by Rudolf von Jhering.19 Interestingly, however, in its original version the BGB contained no provision specifically devoted to this issue, although a number of provisions – including §122 (which places liability on a party making an invalid declaration), §179 (liability of the apparent agent), §307 (affirming the liability of the party entering a contract, although the party knew that the contract was void), and so forth – suggest the existence of a general reliance-based type of liability. However, the pivotal provision is BGB §242, which sets forth a general duty to perform obligations in accordance with Treu und Glabuen (good faith). German courts have referred to that provision as early as 1911 to hold a party liable for breaking off negotiations.20 It is often maintained that the German courts have taken over and developed the doctrine of culpa in contrahendo due to the shortcomings of German tort law,21 under which pure economic loss is not recoverable unless the damage is caused intentionally.22 Accordingly, the precontractual liability under German law has always been characterized as a

16The perceived danger is the risk of too broad judicial discretion in spite of the positivistic traditional French approach, emphasizing the role of the legislature. Cf. J. Ghestin, La Formation du Contrat, 3rd ed. (1993), 232.

17See A. Musy, “The Good Faith Principle in Contract Law and the Precontractual Duty to Disclose: Comparative Analysis of New Differences in Legal Cultures,” 1 Global Jur. Adv. 1 (2001) (comparative overview of precontractual liability from the Italian perspective).

18See L. Mengoni, “Sulla natura della responsabilita` precontrattuale,” Riv.dir.comm. 361 (II-1956); F. Benatti, La responsabilita` precontrattuale (1963); F. Galgano, Diritto civile e commerciale (2011). See also, e.g., Trib. Milano, January 11, 1988, in Giur. Comm. 582 (II, 1988). For a recent Italian Supreme Court decision significantly (and surprisingly) reaffirming the contractual basis of Article 1337 Italian Civil Code (and, more broadly, the contractual nature of precontractual liability), see Cass., December 20, 2011, n. 27648, in Contratti 235 (2012).

19R. von Jhering, “Culpa in contrahendo oder Schadensersatz bei nichtigen oder nicht zur Perfection gelangten Vertragen,”¨ in Jaherbuche¨ fur¨ die Dogmatik des heutigen romischen¨ und deutschen Privatrecht, vol. 4 (1861), 1ff.

20Reichtsgericht, December 7, 1911 (Linoleum case), in RGZ 78.239 (1911); for a more recent overview of the issue, reviewing and confirming previous case law, see Bundesgerichtshof, July 10, 1970, in NJW 1840 (1970).

21A.T. von Mehren, “The Formation of Contract,” in International Encyclopedia of Comparative Law, vol. 7: Contracts in General (Tubingen,¨ 1992), Chapter 9, para. 121.

22On the contrary, under the culpa in contrahendo doctrine, German courts are open to the possibility of granting compensation relating to the positive interest; see, e.g., Bundesgerichtshof, November 25, 1992 (Olitic stones case), in NJW 520 (1993).

liability in contract,23 stemming from the breach of “protective duties” (vorvertragliche¨ Schutzpflichten), which arise from any relationship occurring as a result of willful negotiations. This approach was confirmed in the revised BGB §311(2),24 which unequivocally states that an obligation may come into existence as a result of “the commencement of contract negotiations.”

German law heavily influenced legal development in Austria, Portugal, Greece, as well as in Japan.25 The German theory of culpa in contrahendo also influenced the Dutch legal system in recent times,26 although the latter has to a large extent developed its own peculiar model, drawing inspiration also from various legal sources, including the works of Italian scholar Gabriele Faggella,27 that seem to have had an influence on the development of Dutch law in the twentieth century. Indeed, Faggella argued that precontractual liability should be based on a three-stage view of negotiations (initial, continuing, final) and that the legal consequence of breaking off negotiations would depend on the stage of the negotiations. This approach has also been adopted, first, by the Dutch Hoge Raad (at least since 1982),28 and then by the New Dutch Civil Code (Neue Burgerlijk Wetboek), which relies on a general “good faith” provision, as well as on specific rules devoted to the different stages of the negotiations. The code also imposes on the parties a duty to take into due account the interests of the other party, and a duty not to abruptly break off negotiations in the light of the reasonable reliance of the other party. Dutch courts may grant damages resulting from the breach of the aforementioned duties, including expectation damages, and there have been decisions that suggest that the remedy available to a plaintiff in a precontractual liability claim can also consist of specific performance.29

In common law jurisdictions, the situation is as diversified as in the civil law countries. The traditional view, still prevailing in England, is that freedom of contract cannot be reconciled with a doctrine of precontractual liability based on a general duty of good faith.30 Therefore, the possibility of precontractual liability is firmly rejected.31 The House of Lords in Walford v. Miles stated that “the concept of a duty to carry

23In fact, it may be argued that this solution is coherent with the fact that under German law an offer is, by default, irrevocable, thus suggesting that any declaration produces binding effects, the more insofar as it triggers reliance on the part of the addressee of the declaration.

24Law of Obligations (Gesetz zur Modernisierung des Schuldrechts) of November 26, 2001. See A. Heldrich and G.M. Rehm, “Modernisation of the German Law of Obligations: Harmonisation of Civil Law and Common Law in the Recent Reform of the German Civil Code,” in Comparative Remedies for Breach of Contract (ed. N. Cohen and E. McKendrick) (2005), 123–33.

25In 2009, the Japanese “Kaoru Commission” proposed an amendment of the Japanese Civil Code recognizing culpa in contrahendo.

26The 1838 Burgerlijk Wetboek (BW) was modelled after the French civil code and did not contain any rule specifically devoted to precontractual liability.

27G. Faggella, “Dei periodi contrattuali e della loro vera ed esatta costruzione giurica,” in Studi Giuridici in Onore di Carlo Fadda, vol. 3 269 (Naples, 1906).

28Hoge Raad, June 18, 1982, in NJ 723 (1983).

29Cf. Gerechtshof Amsterdam, May 7, 1987, in NJ 430 (1987).

30There is no general positive duty of good faith imposed on the parties to a contract in modern English law. However, it is of interest to point out that the English merchant law recognized the principle until its disappearance in the 18th-century admiralty law. Cf. J.H. Baker, An Introduction to English Legal History, 3rd ed. (1990).

31See S. Banakas, “Liability for Contractual Negotiations in English Law: Looking for the Litmus Test,”

InDret – Revista para El Analisis del Dercho 1 (2009) (overview of English law).

on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations.”32 Although most common law jurisdictions share a similar approach as to the basic general rule of no precontractual liability,33 they have recognized exceptions to that general rule.

The broadest exception is based on the equitable remedy of promissory estoppel.34 This remedy, in particular, is used by courts in the United States, to impose liability in favor of the promisee that reasonably relies on an assurance given by the promissor.35 A similar approach has been adopted by Australian courts, which have gone as far as to grant expectation damages and specific performance to the aggrieved party,36 similar to the approach adopted by the Dutch courts. Conversely, a recent attempt by the English Court of Appeal to establish the general availability of the estoppel rule in the negotiation stage37 was rejected by the House of Lords, which preferred the more limited remedy found in quantum meruit or unjust enrichment.

U.S. courts, not unlike other common law courts,38 have at times enforced a duty to disclose information by resorting to the doctrine of misrepresentation, including misrepresentation by omission,39 where the conduct of the one party is regarded as fraudulent.40

III.Cross-Border Negotiations, the Concurrence of Domestic Laws, and the CISG on Precontractual Liability

The previous part highlighted that not only are the substantive national rules on precontractual liability different as far as their contents are concerned, but that they also diverge

32Walford v. Miles [1992] 2 AC 128.

33Cf. M.G. Bridge, “Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?,” 9 Canadian Bus. L. J. 385, 426 (1984).

34See Lord Denning in Central London Property v. High Trees House Ltd. [1947] KB 130 (promissory estoppel has turned from being a shield into being a sword).

35See, e.g., Dixon v. Wells Fargo Bank, 2011 WL 2945795 (referring to the Restatement (Second) of Contracts to support its conclusion); Hoffman v. Red Owl Stores, 26 Wis.2d 683, 133 N.W.2d 267 (1965) (the most cited decision in the area of promissory estoppel). In scholarly writings, see L.A. DiMatteo and R. Sacasas, “Credit and Value ‘Comfort’ Instruments: Crossing the Line from Assurance to Legally Significant Reliance and Toward a Theory of Enforceability,” 47 Baylor Univ. L. Rev. 357–423 (1995).

36Cf. High Court of Australia, February 19, 1988, Waltons Stores (Interstate) Ltd. v. Maher [1988] HCA 7.

37Cobbe v. Yeomans Rowe Management Limited [2005] WHC 266 (statements made in commercial negotiations may give rise to an estoppel, if they fairly create an expectation in the mind of the claimant that he would be granted certain rights).

38See, e.g., India, where the federal law defines misrepresentation as a “Misconception of Fact,” which is dealt with under Section 90 of the Indian Penal Code.

39Cf. Associated Warehousing, Inc. v. Banterra Corp., 2008 WL 4180260, stating that to establish a claim for misrepresentation by omission, the plaintiff must allege facts sufficient to show that the defendant: (1) had a duty to disclose a material fact, (2) failed to disclose that fact, (3) which induced the plaintiff to act, and

(4) the plaintiff suffered actual damages as a result.

40English courts with respect to precontractual liability have referenced the law of tort. The Israeli 1973 Contract Law seemed to indicate that culpa in contrahendo constituted a tertium genus, but subsequent case law has characterized the matter as a form of extracontractual (tortious) liability. In Canada, the Supreme Court in 2000 rejected a general characterization of culpa in contrahendo as falling under tort law.

in nature. The nature of such claims can be found in specific contract doctrines, in tort, or in a tertium genus, such as a claim for unjust enrichment. Such variations cause a great deal of uncertainty in cross-border negotiations. For example, the characterization of the claim is important in order to select the appropriate conflict-of-law rules to be applied in determining the proper court and the applicable law. Moreover, characterization is also essential to address the question as to whether the issue is covered by the CISG (which seems to govern at least some preliminary agreements) or by domestic law.

The complexity of determining the jurisdiction and applicable law and finding precontractual liability is illustrated by Fonderie Officine Meccaniche Tacconi v. Heinrich Wagner Sinto Maschinenfabrik (Tacconi),41 where the European Court of Justice (ECJ)42 decided that, in circumstances relating to a precontractual dispute, which were characterized by the absence of any obligation freely entered into by the parties to negotiations and by the possible breach of rules of law, in particular a duty to negotiate in good faith, an action founded in precontractual liability was a matter relating to tort, delict, or quasi-delict for the purposes of Article 5(3) of the Brussels Convention.43 However, the Tacconi decision provides a solution to the issue of jurisdiction in precontractual liability cases only within the European Union (EU). Furthermore, the decision was limited to the issue of determining jurisdiction. It did not provide guidance on how claims should be characterized in general or as to the content of the rules applicable to precontractual liability.

As far as the law applicable to precontractual liability is concerned, Article 12 of the Rome II Regulation44 provides as a general rule that “the law applicable to a noncontractual obligation arising out of dealings prior to the conclusion of a contract, regardless of whether the contract was actually concluded or not, shall be the law that applies to the contract or that would have been applicable to it had it been entered into.”45

41Fonderie Officine Meccaniche Tacconi v. Heinrich Wagner Sinto Maschinenfabrik, ECJ, September 17, 2002, case C-334/2000, ECJ Reports I-07357 (2002).

42On January 23, 1996, Tacconi brought an action against HWS before the District Court of Perugia for a declaration that HWS was to be held liable for damages (resulting from Tacconi having already entered into a financing agreement in view of the perspective contract with HWS) resulting from HWS’s breach of its precontractual duties. In its defence, HWS pleaded, among others, that the Italian court lacked jurisdiction because Article 5(1) of the Brussels Convention (on the jurisdiction of courts in matters related to contracts) was applicable, thus leading to the jurisdiction of German courts (as the products would have been delivered in Germany under the contract).

43See Frignani and Torsello, Il contratto internazionale, 167.

44Regulation (EC) of June 17, 2008, no. 593/2008 of the European Parliament and of the Council on the law applicable to non-contractual obligations, O.J. L 199/40 of July 31, 2007. According to the Recitals (30) “Culpa in contrahendo for the purposes of this Regulation is an autonomous concept and should not necessarily be interpreted within the meaning of national law. It should include the violation of the duty of disclosure and the breakdown of contractual negotiations.”

45See, generally, P. Franzina, “Il regolamento no. 864/2007/Ce sulla legge applicabile alle obbligazioni extracontrattuali (Roma II)”, Nuove leggi civ. comm. 971 (2008); P. Hay, “Contemporary Approaches to Non-Contractual Obligations in Private International Law (Conflict of Laws) and the European Community’s ‘Rome II’ Regulation,” Chinese Yearbook Private Int’l L. & Comparative L. 33 (2008); T. Hartley, “Choice of Law for Non-Contractual Liability: Selected Problems under the Rome II Regulation,” 57 Int’l & Comp. L. Quarterly 899 (2008); Joubert Corneloup, Le reglement` communautaire “Rome II” sur la loi applicable aux obligations non contractuelles (2008); Kadner, “Le nouveau droit international prive´ communautaire en matiere´ de responsabilite´ extracontractuelle (reglement` Rome II),” Rev. critique dr. int. prive´

Again, however, notwithstanding the great value to be attached to the harmonization of conflict-of-law rules on precontractual liability, the Rome II Regulation does not apply outside the borders of the EU, nor does it lead to harmonization as regards the characterization of the claim or to the substantive rules of conduct, the breach of which can result in liability.

It is apparent that the mere characterization of an issue as precontractual proves unsatisfactory and misleading, in that it does not provide the interpreter with the tools necessary to deal with the issues presented by party misconduct. It is also inaccurate to make any general statement as to whether the CISG governs issues of precontractual liability.46 Indeed, the proper way to address that question is to take as a starting point the various circumstances in which a claim for precontractual liability can be brought, and then to evaluate whether the situation falls within the scope of the CISG, and only after determining otherwise to resort to domestic law.

As noted previously, the CISG does not establish rules for the precontractual stage,47 although it expressly attaches some significance to the negotiations when it instructs the interpreter, under Article 8, to take them into account in order to interpret the parties’ statements and conduct.48 The CISG does deal with the process of contract formation,49 which inherently or indirectly relates to the parties precontractual relationship.

It is therefore appropriate to make a distinction between at least four different situations leading to a claim for damages relating to occurrences in the course of negotiations. The four situations include:50 (1) damages to protected assets, such as personal injury and injury to property; (2) damages due to fraudulent conduct; (3) damages related to the breaking off of contractual negotiations; and (4) damages caused by misleading information or by a failure to provide information that the other party possessed.

The first situation, personal injury and property damage, is outside the scope of the CISG, not only with respect to damages consisting of the death or personal injury of the claimant, which are explicitly excluded under CISG Article 5,51 but also with respect to damages to other protected assets.52 This area is dealt with under applicable domestic law and in most cases the situation will be characterized as falling under the law of torts.

(2008), 445; T. Kadner Graziano, “Das auf außervertragliche Schuldverhaltnisse¨ anzuwendende Recht nach Inkrafttreten der Rom II-Verordnung,” RabelsZ 1 (2009); Wagner, “Die neue Rom II-Verordnung,” IPRax 1 (2008); A. Dickinson, The Rome II Regulation (2008).

46In general terms, on the possibility of unintended contractual liability arising under the CISG, see L.A. Di Matteo, “The CISG and the Presumption of Enforceability: Unintended Contractual Liability in International Business Dealings,” 22 Yale J. Int’l L. 111–70 (1997).

47See I. Schwenzer and P. Hachem in Commentary on the UN Convention on the International Sale of Goods (CISG), 3rd ed. (ed. P. Schlechtriem and I. Schwenzer) (2010), Article 4, p. 81.

48Cf. M. Schmidt-Kessel in Schlechtriem and Schwenzer, Commentary, Article 8, pp. 160–3.

49See, generally, F. Ferrari, “Formazione del contratto,” in Commentario del Codice Civile Scialoja-Branca (ed. F. Galgano) (2006).

50See also U.G. Schroeter in Schlechtriem and Schwenzer, Commentary, “Introduction to Articles 14–24,” 248ff.

51Cf. J. Lookofsky, The 1980 United Nations Convention on Contracts for the International Sale of Goods

(2000), 46.

52See also M.J. Bonell, “Vertragsverhandlungen und culpa in contrahendo nach dem Wiener Kaufrechtsubereinkommen,”¨ RIW 700 (1990).

In the area of fraudulent conduct on the part of the defendant in the course of the negotiations, two different issues arise. On the one hand, the fraudulent conduct could support a claim that the resulting contract is invalid53 under applicable domestic law, in the light of the exclusionary provision contained in CISG Article 4. On the other hand, however, the fraudulent conduct could also be invoked as a breach of contract to claim damages under the CISG.54 The issue that arises is whether the claimant can rely on domestic damages rules on the basis of fraud, as well as making a claim under the CISG; the crucial point, in this regard, is that the CISG does not address factual situations involving fraud.55 If the claim is based in fraud, then the damage claim falls outside the scope of the CISG.56

A claim for precontractual liability connected to the formation of a contract to fall under the CISG must be treated in a way other than the breaking off of contractual negotiations.57 Because CISG Articles 15 and 16 deal with the issue of revocability of an offer it implies that the issue is covered by the CISG without providing for damages as a possible result of the revocation. The point is that under the CISG, if an offer is irrevocable the remedy available to the offeree is that, notwithstanding the revocation, he or she can accept the offer and conclude the contract. However, the revocation does not allow for a claim for damages.58 Therefore, to the extent that a potential contract falls within the scope of the CISG, the application of concurrent domestic rules setting forth liability for breaking off negotiations is precluded.

In practical cases, however, it is difficult to conclude whether the contract under discussion will be of a kind governed by the CISG. Consider, for instance, the situation where it is unclear whether the contract will be performed by the seller through its place of business located in a noncontracting state, or by a place of business located in a contracting state. In the former case, the CISG would likely not apply, whereas it would apply in the latter. Moreover, claims relating to a future contract for sale of goods, coupled with a sale of services, will be excluded under Article 3 CISG, insofar as the preponderant part of the obligation is the supply of services, an aspect of the transaction that may be unclear at the stage of negotiations.59

In the aforementioned case scenarios, it is unclear whether the CISG is applicable law. If not, then recourse may be made under applicable domestic law on liability for the breaking off of negotiations. If this is the case, the question then arises as to how to determine the domestic law applicable to the matter. Within the member states of the EU, the solution is provided by Article of 12 of the Rome II Regulation.60 In cases involving non-EU parties, the predictability of the outcome of the conflict-of-law analysis

53Schwenzer and Hachem in Schlechtriem and Schwenzer, Commentary, 90.

54Cf. Miami Valley Paper, LLC v. Lebbing Engineering & Consulting GmbH, WL 2924779 (S.D. Ohio 2006).

55See Schroeter in Schlechtriem and Schwenzer, Commentary, 249.

56Cf. J. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention (1999), Article 4, para. 65.

57Cf. U. Magnus in Julius von Staudinger Kommentar zum Burgerlichen¨ Gesetzbuch mit Einfuhrungsgesetz¨ und Nebengesetzen, 12th ed. (ed. J. von Staudinger) (1993), Article 4, para. 14.

58See F. Ferrari in Kommentar zum Einheitlichen UN-Kaufrecht – CISG, 5th ed. (ed. P. Schlechtriem and I. Schwenzer) (2009), Article 5, para. 46.

59See Torsello, “Preliminary Agreements,” 191.

60See supra note 42 and accompanying text.

decreases significantly partly because of the uncertainties as to how to characterize the claim in question.61

Finally, the analysis may differ in the situation where damages are suffered due to misleading information provided by a party during the negotiations, or by a failure to provide material information. Insofar as the misleading information is provided fraudulently, the remedy would be provided under domestic law. Some domestic courts – in particular in the United States62 – provide remedies also where the information was provided negligently.63 However, whenever the misleading information relates to the goods, the situation falls within the scope of CISG Article 35 CISG, so that the application of concurrent domestic rules should be precluded.64 A similar analysis applies to the situation where the claim for damages is brought under domestic law on the basis of an alleged breach of a precontractual duty to disclose information. The claim under domestic law may concur with an action brought under the CISG only insofar as the duty to disclose pertains to matters outside the scope of the CISG. Again, to the extent that the concurrent application of the CISG and of domestic remedies proves possible, the puzzling problem arises as to what domestic law is to be applied, as the duty to disclose information cannot easily be traced back to a contractual one and, in fact, it is in most cases established by law.65

IV. Assessing Precontractual Liability: Contents and Purposes of Preliminary

Agreements

The analysis presented in the previous section suggests that parties entering a crossborder negotiation should agree rules to regulate the course of their negotiations. The optimal solution to the uncertainty of precontractual liability is that the parties enter into a “preliminary agreement,” determining by contract the rules of conduct and duties of the parties during their negotiations.

Commercial experience shows that operators entering a commercial relationship are inclined, at some point before the final contract is concluded, to agree to the framework for their future agreement.66 Commercial contractors are inclined to conclude preliminary agreements due to their use as negotiating strategies, as well as to their responding to certain behavioral and cognitive needs. These behavioral and cognitive needs result in legal and economic implications. The relationship between the uses of preliminary

61For a decision dealing with the conflict-of-law analysis in promissory estoppel cases relating to negotiations, see, e.g., Executone of Columbus, Inc. v. Inter-Tel, Inc., Ohio, 665 F.Supp.2d 899 (2009) (“a promissory estoppel cause of action is governed by the law of the state that has the most significant relationship to the dispute”).

62Sky Cast, Inc. v. Global Direct Distribution LLC, WL 754734 (E.D. Ky. 2008).

63Cf. M. Bridge, “A Comment on ‘Towards a Universal Doctrine of Breach: The Impact of the CISG,’ by Jurgen¨ Basedow,” 25 Int’l Rev. L. & Econ. 510 (2005). Cf. Schroeter, in Schlechtriem and Schwenzer, Commentary, 251 (critical of common law approach because it does not consider to which facts the alleged misrepresentation pertains).

64The situation is, of course, different if the misleading information relates to an issue not covered by the CISG.

65For instance, European Commission, Proposal for a “Regulation of the European Parliament and the Council on a Common European Sales Law,” contains several provisions devoted to the parties’ duties to disclose information in the course of negotiations.

66See A. Schwartz and J.C. Watson, “The Law and Economics of Costly Contracting,” 20 J. L. Econ. & Org. 2 (2004).

agreements to meet these needs has not been fully explored in scholarly writings,67 notwithstanding their growing practical importance.68

Evidence of the need for further research is the uncertainty that characterizes the legal significance of instruments such as preliminary agreements, letters of intent, memorandum of understandings, heads of agreements, protocols, and others that are used interchangeably, thus leading to a great deal of confusion. Of course, the label used (nomen juris) does not in itself bear any legal consequences. The enforceability of such instruments is dependent on their contents and the intention of the parties.

The purposes for using such instruments vary. First, the parties may simply want to memorialize the state of their negotiations, without any further commitment. In many circumstances, however, the parties may want to create some sort of reciprocal obligations, not necessarily legal ones. The bases of nonlegal obligations include the bonding effects of commercial reputation, the parties making relation-specific investments, or the disclosure of confidential information. If done reciprocally, the parties create a “mutual hostage” situation that aligns their interests in continuing the negotiation. At a more advanced stage of the negotiations, the parties may want to bind themselves to concluding a future contract, some marginal aspects of which have not yet been agreed upon, or to the conclusion of a fully agreed-upon future contract that only needs to be formalized.69

An English court described a preliminary agreement entitled a “Gentlemen’s Agreement” as “an agreement which is not an agreement, made between two persons, neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all.”70 This sarcastic definition captures the kind of agreements

67See, e.g., D. Henrich, Vorvertrag, Optionvertrag, Vorrechtsvertrag: Eine Dogmatisch-Systematische Untersuchung der Vertrag-Lichen Bindungen vor und zu einem Vertragschluss (1965); R. Rascio, Il Contratto Preliminare (1967); C.L. Knapp, “Enforcing the Contract to Bargain,” 44 N.Y.U. L. Rev. 673 (1969); J.M. Mousseron, “La Duree´ dans la formation des contrats,” in Etudes offertes a` Alfred Jouffret (1974), 509ff.; A.M. Dugdale and N.V. Lowe, “Contracts to Contract and Contracts to Negotiate,” J. Bus. L. 28 (1976); M. Fontaine, “Les Lettres d’intention dans la negociation´ des contrats internationaux,” 3 Dr. Pr. Comm. Int. 73 (1977); C.F. Trower, “Enforceability of Letters of Intent and Other Preliminary Agreements,” 24 Rocky Mtn. Min. L. Inst. 347 (1978); M. Lutter, Der Letter of Intent (Cologne, 1983); E.A. Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations,” 87 Colum. L. Rev. 217, 249ff. (1987); A. Chianale, “Contratto preliminare in diritto comparato,” in Digesto Sez. Civ., vol. 5, pp. 290ff. (1989) (comparative overview); Precontractual Liability: Reports to the XIIIth Congress of the International Academy of Comparative Law (ed. E.H. Hondius) (1991); A. Schwartz and R.E. Scott, “The Law and Economics of Preliminary Agreements,” 120 Harv. L. Rev. 661 (2007) (law and economics perspective).

68See also J. Schmidt, “Preliminary Agreements in International Contract Negotiation,” 6 Houston J. Int’l L. 37 (1983–1984).

69See also E.A. Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations,” 87 Colum. L. Rev. 217, 249–50 (1987) (broad notion of preliminary agreements). Farnsworth notes: “Parties that wish to avoid some of the uncertainties of the regime of negotiation without moving immediately to the regime of ultimate agreement often make preliminary agreements. I shall use the term ‘preliminary agreement’ to refer to any agreement, whether or not legally enforceable, that is made during negotiations in anticipation of some later agreement that will be the culmination of the negotiations. Such agreements are particularly common in situations in which the investment of at least one party becomes substantial in relation to the deal as a whole and cannot be spread over other similar deals, and yet the parties cannot escape from the regime of negotiation by moving to that of ultimate agreement. They appear under a variety of names, including ‘letters of intent,’ ‘commitment letters,’ ‘binders,’ ‘agreements in principle,’ ‘memoranda of understandings,’ and ‘heads of agreement.’”

70Bloom v. Kinder [1958] T.R. 91, quoted in D.K. Allen, “England,” in Precontractual Liability: Reports to the XIIIth Congress of the International Academy of Comparative Law (ed. E.H. Hondius) (Deventer, 1991), 125, 138.

that are considered in this chapter, although no negative implications are involved here that are at times attached to the notion of gentlemen’s agreements.71 Under such instruments the parties are not contractually bound to each other; instead, they merely want to memorialize the points that have been agreed upon and those still unsettled or unaddressed. The instrument used for this purpose is commonly called a “Memorandum of Understanding.” At the most, the parties may merely intend to bind each other on the nonlegal basis of reputation,72 which, in fact, is often effective in preventing a party from stepping out of the negotiations.73

The lack of legally binding effects, at least under contract law, makes it clear that these types of agreements are non-contractual,74 hence, the application of the CISG is precluded. Nor can such agreements be interpreted as an offer directed from one party to the other. This conclusion can be drawn on the basis of the language of CISG Article 14, which requires an offer to take the form of a proposal whereby the offeror indicates, among other things, his intention “to be bound in case of acceptance.” It is safe to assume that the binding effect referred to in Article 14 requires a legal intent to be bound.75 Therefore, these nonlegal instruments may result in liability in domestic law under the theory of culpa in contrahendo.76

In practice, however, letters of intent and similar documents generate great uncertainty and concern as to whether or not enforceable obligations have been formed.77 The intent of the parties governs the situation and the CISG has a role to play in this respect. Indeed, whether or not a contract exists is often to be assessed on the basis of the CISG, in particular by resort to the rules on contract formation in Articles 14 to 24,78 and the

71The pejorative meaning of the term “Gentlemen’s Agreement” in the United States is pointed out by H. Bernstein and J. Zekoll, “The Gentlemen’s Agreement in Legal Theory and in Modern Practice: United States,” 46 Am. J. Comp. L. 87, 87 (1998).

72See L. Bernstein, “Merchant Law in a Merchant Court: Rethinking the Code’s Search for Business Norms,” 144 U. Pa. L. Rev. 1765, 1789 (1996) (strength of reputation in commercial agreements).

73In practice, businesspersons often undertake legally binding contractual obligations by signing preliminary documents named without being fully aware of their enforceability. Cf. R.G. Shell, “Opportunism and Trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action,” 44 Van. L. Rev. 221, 221ff. (1991). This is particularly the case with respect to Letters of Intent, which in commercial practice are used not only to indicate nonlegally binding agreements, but also to indicate agreements that create binding obligations to be discussed later in this chapter. See R.B. Lake and U. Draetta, Letters of Intent and Other Precontractual Documents: Comparative Analysis and Forms (Salem, 1994), 221ff. Nonetheless, the focus here shall be on the contents, rather than the names, of the agreements. Cf. W.H. Holmes, “The Freedom Not to Contract,” 60 Tulane L. Rev. 751, 752ff. (1963).

74See Bernstein and Zekoll, “Gentlemen’s Agreement,” 88 (use the expression “deliberate no-law”).

75See Bundesgericht, Switzerland, April 5, 2005 (IHR 204 (2005), available at http://cisgw3.law.pace.edu/ cases/050405s1.html; Oberlandesgericht Hamburg, Germany, July 4, 1997, available at http://cisgw3.law. pace.edu/cases/970704g1.html; Landgericht Munchen,¨ Germany, February 8, 1995, available at http:// cisgw3.law.pace.edu/cases/950208g4.html (buyer unsuccessfully made an attempt to hold that the parties’ declarations merely indicated details of a contract to be concluded at a later time, without expressing the intention to be legally bound).

76See G.A. Pietrafesa, “The Law Governing Letters of Intent and Other Preliminary Agreements,” 225 Dec N.J. Lawyer 35, 35ff. (2003).

77See also L.A. Bebchuk and O. Ben-Shahar, “Precontractual Reliance,” 30 J. Legal St. 423 (2001).

78See, e.g., G. Eorsi,¨ “Problems of Unifying the Law on the Formation of Contracts for the International Sale of Goods,” 27 Am. J. Comp. L. 311, 311ff. (1979); G. Eorsi,¨ “Formation of Contract,” in Schweizerisches Institut fur¨ Rechtsvergleichung, Wiener ubereinkommen¨ von 1980 uber¨ den internationalen Warenkauf. Lausanner Kolloquium (Lausanne, 1985), 43ff.; J. Lookofsky, “Alive and Well in Scandinavia: CISG Part II,” 18 J. L. & Comm. 289, 289ff. (1999); M. Perales Viscasillas, “Comments on the Draft Digest Relating to Articles 14–24 and 66–70,” in The Draft UNCITRAL Digest and Beyond: Cases, Analysis and Unresolved

interpretation of the parties’ intent and conduct under CISG Article 8,79 which prevail over any domestic rules dealing with those issues.80

Under a different scheme, in the course of the negotiations the parties may decide to enter a legally binding agreement in order to prevent one of the other parties from stepping out of the negotiation.81 This proves to be of particular importance when either one or both of the parties are required to make relation-specific investments.82 The parties thus bind themselves to conduct negotiations over a certain period of time, under an “agreement to negotiate.”

The rationale for entering a binding agreement is to lock in parties to negotiate (in good faith) because the common economic benefits of a final contract are still uncertain.83 However, the parties do not want to be subject to liability in the event the venture proves not to be profitable. In many agreements of the kind in question, the parties set a timetable for the negotiations.

The legally binding nature of these agreements is undisputed in most civil law jurisdictions,84 whereas it has proved to be somewhat problematic in common law legal systems.85 As a result, the choice of the competent forum and of the applicable law play an important role in determining the enforceability of the agreements. The best interpretation of these agreements is that they are not governed by the CISG, although one may argue to the contrary on the basis of the fact that the agreement in question constitutes a preparatory act in view of a final contract falling within the scope of the CISG. This ex post analysis should be rejected on the basis that the core concept of sale under the CISG, which requires an exchange (of goods for money), is not established in such agreements. The preliminary agreement only binds the parties to negotiate; this

Issues in the U.N. Sales Convention (ed. F. Ferrari, H.M. Flechtner, and R.A. Brand) (2004), 259, 259ff.; M. Perales Viscasillas, “Contract Conclusion under CISG,” 16 J. L. & Commerce 315, 315ff. (1997); E.A. Farnsworth, “Formation of Contract,” in International Sales: The United Nations Convention on Contracts for the International Sale of Goods (ed. N.M. Glaston and H. Smit) (New York, 1984), 3, 3.1ff.; S. Patti, “Silenzio, inerzia e comportamento concludente nella Convenzione di Vienna sui contratti di vendita internazionale di beni mobili,” 1991 Riv. Dir. Comm. Dir. Gen. Obbl. 135, 135ff. (1991); F. Ferrari, “A Comparative Overview of Offer and Acceptance Inter Absentes,” 10 Boston U. Int’l L. J. 171, 171ff. (1992) (comparative overview).

79See M.P. van Alstine, “Consensus, Dissensus, and Contractual Obligation through the Prism of Uniform International Sales Law,” 37 Va. J. Int’l L. 58, 58ff. (1996); F. Ferrari, “Interpretation of Statements: Article 8,” in Ferrari et al., The Draft UNCITRAL, 172, 172 ff.; A. Luderitz¨ and A. Fenge, “Article 8

¨

CISG,” in Burgerliches¨ Gesetzbuch mit Einfuhrungsgesetzen¨ und Nebengesetzen, vol. 13: Ubereinkommen der Vereinten Nationen uber¨ Vertrage¨ uber¨ den internationalen Warenkauf (CISG) (2000); A. Kaczorowska, “Regles` uniformes d’interpretation´ d’un contrat international,” Rev. Dr. Int. Dr. Comp. 297, 297ff. (1991); A.E. Farnsworth in Commentary on the International Sales Law: The 1980 Vienna Sales Convention (ed. C.M. Bianca and M.J. Bonell) (1987), Article 8, pp. 95, 95ff.

80See Landgericht Hamburg, Germany, September 26, 1990, available at http://cisgw3.law.pace.edu/cases/ 900926g1.html.

81Cf. Farnsworth, “Precontractual Liability,” 250; Knapp, “Enforcing the Contract,” 673 ff.

82See A.W. Katz, “When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations,” 105 Yale L. J. 1249, 1249ff. (1996).

83Cf. Schmidt, “Preliminary Agreements,” 39, according to which, “when parties think it useful to obligate themselves to negotiate a future contract, it is generally because they wish in this way to increase the chances of concluding the contract.”

84See also id., 40.

85See Lord Denning in Courtney & Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., 1 W.L.R. 297 (1975) (under the English common law these kinds of preliminary agreements have often been considered unenforceable).